November 2010 Clinical Laboratory News: The Send-Out Testing Boom

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November 2010: Volume 36, Number 11

The Send-Out Testing Boom
How Can Labs Take Control?

By Bill Malone

The growth of molecular diagnostics and other esoteric tests has been a high-profile trend in laboratory medicine, as labs have expanded their menus to meet the demands of clinicians requesting new tests with the power to potentially improve patient outcomes. However, for hospital lab directors working in an environment of high-pressure cost containment, this new era of testing has also meant a ballooning reference lab bill, with send-out costs growing exponentially even as these tests remain a relatively small percentage of a lab’s overall volume. Adding to this dilemma is the fact that many labs have trouble bringing some of these complicated tests in-house, and gaps in a lab’s management of referral testing often equal lost opportunities to save money in this area.

Yet taking full advantage of new and advanced testing does not have to break a lab’s budget, said Anne Daley, senior consultant with Chi Solutions, a lab consulting firm. “It continues to astonish me just how many labs fail to monitor their referral testing utilization and end up wasting a lot of money,” she said. “This is a time where everyone is charged with cost reductions, so labs need an organized and systematic approach to handling reference laboratory work. Those that don’t will really struggle financially.”

Onslaught of Proprietary Tests Drives Growth

In addition to the overall surge in molecular testing, new business models for marketing proprietary and exclusive testing services, such as Genomic Health’s Oncotype DX test for breast cancer recurrence, have added to the financial burden of send-outs, noted Daley. “I think the biggest driver in cost for send-out tests is the increased number of proprietary tests available in the marketplace. Many of them are very expensive,” she said. “It’s a growth tactic for some of these commercial laboratories.”

Daley also believes that another trend has contributed to the high cost of send-out tests: large reference labs buying up smaller diagnostic firms to boost their menu of esoteric tests, a core business strategy that puts the focus on low-volume, high-cost tests. In September, for example, LabCorp snatched up Genzyme Genetics, a business unit of Genzyme Corporation, in a deal valued at $925 million. Genzyme was known for offering an expansive menu of complex tests, ranging from maternal serum screening and prenatal diagnostics to carrier screening and postnatal testing services, the kind of high-value tests many reference labs are focusing on. “This acquisition will substantially expand our capabilities in reproductive, genetic, hematology-oncology, and clinical trials central laboratory testing,” said David King, chairman and CEO of LabCorp in a statement. “The acquisition of Genzyme Genetics provides us with an unprecedented opportunity for revenue growth in our key strategic focus areas of esoteric testing and personalized medicine.”

Another, less well-documented factor driving the growth of tests that carry a hefty price tag comes from more educated and information-saturated consumers, Daley pointed out. “The consumer today is a lot more informed through the Internet, where they can type in whatever potential disease state they might have, and then find a test they want and go ask their doctor to order it,” she said. “Because the doctor is afraid of a malpractice lawsuit or is just making sure the patient gets everything possible they need, there is overall increased utilization of testing.”

While lab directors and their colleagues in the vitro diagnostics industry clearly see the potential of advanced tests both for patient outcomes and the vitality of the diagnostics market, in many cases labs have been quick to take advantage of these new technologies but slow to learn how to manage the impact to their bottom line. Part of the cause for this gap comes from the complexity of how reference lab testing is handled by hospital administration, Daley said.

“In my experience with labs, there are many hands involved when it comes to reference testing services. Purchasing may handle the contract, but another department pays the bills. A lot of these activities occur outside of the laboratory, so the lab director may not see the big picture,” she explained. “There needs to be a designated person with some contract savvy, as well as control over how many reference labs are used. If a hospital lacks policies and procedures for how to handle a test that’s not on their charge code, or with setting up a new send-out test, then they’re losing control.”

Kent Lewandrowski, MD, says that hospitals increasingly are looking at reference lab testing as not just a line item on their budget, but as a major part of their overall activity. In 2004 and 2007, Lewandrowski published studies documenting the mounting swell in send-out testing at Massachusetts General Hospital in Boston (See Box, right). “Following the trends in our published research, reference lab tests are now around two percent of our volume, 20 percent of our cost, and close to 70 percent of our menu,” he said. “Most of these are very esoteric specialized tests, so hospitals are paying more attention to it, and big hospitals such as our own are even appointing directors to oversee the reference lab activity.” Lewandrowski is a pathologist and associate chief for clinical services in the department of pathology at Massachusetts General Hospital and associate professor of pathology at Harvard Medical School in Boston.

Top Send-Outs Evolve Over Time

In 2004 and 2007, Kent Lewandrowski, MD, and his colleagues at Massachusetts General Hospital in Boston published two of the few studies available on send-out testing. In both papers, the authors observed a dramatic increase in send-out testing volume and expense over time. The 2004 study found a greater than four-fold increase in the cost of reference laboratory services from 1995–2002, as well as an increase in send-outs as a percentage of the lab’s total budget, from 4.8%–12.4% (Clin Lab Manage Rev 2004;18:216–219).

The description of the massive jump in send-outs is even more dramatic in the 2007 paper: over a 12-year period, send-outs increased in volume by 383%, and went from 4.8% of the lab’s total budget to 12.4%, an almost seven-fold rise (Lab Medicine 2007;38:472–475). The current percentage is approximately 20%, according to Lewandrowski.

In addition to the uptick in volume and cost, the list of top send-out tests also has changed, influenced by both new tests being developed and by the lab’s in-sourcing some of the more established tests.

The Key: Managing Utilization

When it comes to coping with a growing list of expensive send-outs, at the top of the list should be careful attention to utilization, something that should be a priority for labs anyway, suggested Daley. “The number one strategy that labs are starting to look at is that anytime a test is ordered that is referred outside the system that costs more than a certain amount of dollars, the laboratorian handling that order must refer it to a manager or pathologist for review,” she said. “This way the order can be reviewed for appropriateness and the need for the test can be verified rather than just sending it out automatically.” When the lab makes it a habit to check with clinicians, they often find that the clinician may think he or she is ordering one thing, but the test might actually be used for something else. Rather than slow the ordering process, this dialogue actually creates a healthy exchange and increases communication between laboratorians and clinicians, Daley emphasized. In her experience as a hospital consultant, she finds that many will require review of send-out tests over a few hundred dollars, but each institution will need to determine a threshold that works best.

Another way of managing utilization is to compare test orders against a patient’s diagnosis code to ensure that testing on inpatients—which isn’t eligible for Medicare reimbursement—only focuses on the actual reason that the patient is hospitalized. This way, non-essential tests, especially genetic tests, can be performed on an outpatient basis when the lab can seek payment outside Medicare’s diagnosis-related group (DRG) reimbursement system.

In Lewandrowski’s research on Mass General’s send-out testing, he calculated that even a modest transfer of the inpatient send-out tests, which made up about 20% of total send outs, would significantly improve hospital reimbursements. “One strategy is that hospitals could attempt to transfer as much esoteric testing as possible into the outpatient setting. Importantly, these tests are often not essential to the acute admission but more essential to long-term clinical follow-up, and as such, are more appropriately ordered as outpatient tests,” the authors wrote (Lab Medicine 2007;38:472–475).

Since documenting the opportunities to deal with send-outs more efficiently, Lewandrowski’s lab has concentrated its efforts on proactive programs designed to take control of utilization. One priority has been developing practice standards for genetic tests by meeting with pediatric geneticists and performing physician profiles. “Physician profiling isn’t finger pointing, but showing a physician that perhaps they’re the only person who’s ordering a certain test, and yet sees the same types of patients as other physicians. So we aim for balance to establish standards of care, which has helped quite a bit,” he said.

Another project Lewandrowski and his colleagues are working on is setting up a formulary for the lab. “This is similar to a pharmacy formulary, where for instance, if I tried to order brand-name Prozac from our pharmacy, they’d say ‘we don’t carry it, we’ve only got the generic’,” he explained. “Now we’re setting up a formulary for some of these esoteric lab tests where either they could not be ordered, or they could only be ordered by a limited number of sub-specialists.” So far, most physicians have been fairly receptive to the idea, but it’s all a matter of how the lab approaches them, he said. “Our general approach is to say that we all know that hospitals have to contain their budgets, we all know that the healthcare system is getting very, very expensive, and we have to be more thoughtful about it. The best approach is to do it in a collegial manner. The vast majority of doctors nowadays really get that costs are a problem and that we have to work together more to control them.”

Getting Smarter with Reimbursement

Although a big benefit of better send-out utilization management comes when a non-essential inpatient test can be shifted to the outpatient arena, these tests may only be reimbursed for only a fraction of what the hospital lab ends up paying the reference lab. In response, some labs are now choosing to tackle reimbursement head-on and advocate third-party billing whenever possible.

“Part of the reason that labs are just getting killed on reimbursement is that a test they send out might be reimbursed by Medicare for $15, but a reference lab might charge $50. So the lab is losing money because they have no choice but to pay the reference lab bill and they can’t collect the full amount,” said Daley. “Some labs are now getting smart and working to get the referral testing lab itself to bill the insurance company or the patient directly.”

Surprisingly, many reference labs will work with a lab on third-party billing if asked, especially the larger commercial reference labs, noted Lewandrowski. “Usually you encounter the least flexibility from labs in academic medical centers, whereas the commercial laboratories, for the most part, are willing to do this if their tests have been approved for reimbursement for Medicare or insurance,” he said. “We’ve had a lot of success with third-party billing, and I think we could exploit that even further than we already have.”

But sometimes third-party billing is easier said than done, Lewandrowski warned. “You have a complex mix of payors—Medicare, Medicaid, private insurance, self-pay—all different types of plans, all of which have their own reimbursement systems, tests they’ll approve, tests they won’t pay for, and so forth. So it is something that requires a great deal of careful analysis.”

Daley also counsels lab directors to work more closely with their reference labs, paying closer attention to contracts and managing discounts like hot lists, a common type of program where the lab gets to choose a certain number of tests to receive a special discount. “For one client I worked with, the purchasing department had worked out the contract, so no one in the lab was minding the hot list. When they finally reviewed it, something like 30 percent were tests they already had in-house,” she said. “They were essentially given a special coupon and no one was using it.”

Over the last few years, some reference labs have become more proactive in this regard, offering their clients utilization reports and other services. For example ARUP Laboratories in Salt Lake City offers its Insource Advantage analytical service to help labs with make-versus-buy decisions and the ARUP Consult service, an online reference tool aimed at helping clinicians with test selection and interpretation. Clinicians can even access ARUP Consult on their mobile phones.


Besides taking advantage of opportunities to control utilization and step up reimbursement for send-outs, many lab directors are looking to innovations from diagnostics manufacturers to bring new generations of tests in-house, both for economic reasons and to boost turnaround time. This move is strongly supported by diagnostic companies, who see additional clinical benefits for labs that shift more testing to in-house kits rather than send-outs.

“Performing molecular testing locally helps create local molecular diagnostic experts who can provide clinicians with a local lab resource for consultation,” says Bryan Moore, PhD, group marketing manager, virology, for Roche Diagnostics. “The need for local molecular experts should only grow in the future as complex molecular-based oncology tests become more and more critical to patient care.”

“From our perspective, getting molecular tests through FDA review and available to our customers is a key part to our business strategy,” said Alan Garrett, group marketing manager for reagents at Roche Diagnostics. “The other part is that we’re very focused on automating those technical tasks involved in molecular testing. So, clearly we’re attempting to drive more and more automation of molecular testing, and we’re also planning to drive a larger menu of FDA-cleared tests. That’s where we see the biggest areas of improvement for helping labs with molecular send-out testing over the next few years.”

As Roche and other companies work on helping labs to in-source more tests, they have focused on three main areas, Garrett said. “First is menu. Right now we’re working really closely with our customers to make sure that we are developing those tests that are driving send-out costs,” he said. “The second then becomes testing efficiency. Is it cost-effective to bring that test in-house? In other words, on-board stability, cost-per-test, and kit size—these are the factors that will allow the lab to bring the test in and get the most savings.”

Roche’s third area of focus is analyzer growth capacity. “A lot of times, we run into labs that are using their analyzer to full capacity and just don’t have the channels available to in-source a test,” Garrett said. “So it’s really key, especially from our view of the market, to work with your partner laboratories to have a growth strategy and to have a platform that allows you to grow with the customer as testing volume increases, and as menu increases. You want to be able go in and easily put in a new analyzer or add to the analyzer that’s in place by adding channels or volume capacity. If you’re not focusing on those things, you’re missing this really vital initiative on being able to grow with in-sourced testing.”

Despite manufacturers’ efforts to help labs bring more tests in-house, the make-versus-buy analysis quickly gets complicated, especially with methods that require more capability from the lab’s staff, noted Lewandrowski. “Molecular diagnostics still remains an area of testing that requires a great deal of expertise—it’s not something that any lab technologist out there can just pick up and start doing. You need technologists who are skilled enough to handle those more complex, manual technologies.” In his own lab, Lewandrowski has now begun targeting genetic tests for in-sourcing, most recently a comparative genomic hybridization microarray, a test costing more than $1,000 that’s now frequently offered to children who are diagnosed with mental retardation, dysmorphic features, and autism.

Daley noted that there are often hidden costs in sending tests out. “Often people don’t factor in the cost of handling specimens and results,” she said. “When you send a test out, you have handling issues, specimen integrity issues, and you have to figure out how to get that result into the patient’s medical record. The latter is especially tricky if it’s electronic. So whatever you think you’re paying for a test, you probably have to add a few dollars for all the handling and the general hassle factor.”

Future Trends

While no one expects the growth of new tests to slow down any time soon, labs may eventually pass a threshold where the growth in send-outs reaches a balance with the growth of labs’ in-house menus, Lewandrowski predicted. “The diagnostics suppliers have a vested interest in having their products placed in many hospitals. So as soon as any test starts to become significant in volume, they start trying to develop kits that they can sell to their customers,” he said. “I think it will eventually reach an equilibrium, where as fast as the reference labs are adding new, sexy genetic tests, we’re in-sourcing the old, used-to-be-sexy genetic tests of five years ago that have become mature and now have platforms available to perform them.”

According to Garrett, there is plenty of room for labs to beef up their in-house menus now, especially in areas like tumor markers. He offered the example of cancer antigen 15-3, a tumor marker for monitoring response to treatment for breast cancer. “Tests like that are opportunities for labs to review their menu and figure out if they can get a patient result back faster and save money by bringing it in,” he said. “Another area is infectious disease testing. I just went through the process of evaluating our hepatitis C assay with a customer —a very expensive send-out test for that lab—and now they’re getting ready to implement our solution. It’s going to save them quite a bit of money per year as a result of having that test available in-house. Others send-outs being adopted in-house by labs are thyroglobulin and other thyroid markers,” he said.

Garrett also forecasted that in the near future there will be a push to bring vitamin D testing into more labs. “Almost any lab that you go into today and ask to look at their send-out list, vitamin D is number one,” he said. “Will that testing evolve over time? I think so. But I think clearly our goal is that within a few years, we want to be able to support laboratories running that test in-house.”

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