To Outsource or Not to Outsource

In an era of declining reimbursement for laboratory services, hospitals have tough decisions to make when it comes to their inpatient, outpatient, and outreach lab businesses. Their options include keeping lab management in-house; outsourcing to a third party, such as one of the large national commercial labs; or selling their outreach business and focusing only on inpatient and outpatient testing.

While outsourcing appears to have increased in recent years, it still represents a relatively small piece of the overall hospital lab market, according to Dennis Weissman, an industry thought leader and president of Weissman and Associates in Washington, D.C., a laboratory consulting company. For hospitals deciding whether or not to sell their outreach lab businesses, key factors include where the facility is located and how competitive the market is in that region. “Are there several other hospitals or health systems competing for the same business? If you are the only hospital or health system in town, you should be able to capture all the outreach business,” Weissman said. “But if your market is highly competitive, you might not be able to capture the majority of testing.”

Quest Diagnostics and LabCorp in recent years have purchased and integrated into their operations a growing number of hospital outreach labs from capital-constrained hospital health systems. Currently, Quest Diagnostics manages about 120 hospital laboratories, and LabCorp manages about 50, though both have “strategic relationships” with many more.

While hospital outreach labs typically cannot hold sway on price with the large national labs, they can perform well on other crucial metrics, including quality, turnaround times, and goodwill in the community, Weissman emphasized. “If the overriding issue is cost, hospital labs can’t compete with Quest and LabCorp,” he said. “But if you take a wide view and look at patient and physician satisfaction, the answer is a little less clear. Hospitals might have the edge there.”

Pros and Cons of Outsourcing

The benefits of outsourcing hospital lab management services or monetizing lab outreach are many, said Jon Cohen, MD, senior vice president and group executive of diagnostics solutions for Quest Diagnostics. Hospital lab outreach is typically defined as testing done by a hospital lab on specimens from people who are not patients of the hospital (i.e., specimens drawn at physicians’ offices or patient service centers). This testing might be performed in the hospital lab or at an outside lab affiliated with the hospital.

Hospitals can benefit from diagnostic expertise at commercial labs and save 10%–20% annually by outsourcing their hospital lab management services, according to Cohen. In the past, hospitals received higher payment than independent labs for their outreach and outpatient work, but that is changing as insurers become more aware of this disparity and reduce their reimbursement rates.

New Medicare payment rates for clinical laboratory testing anticipated in January 2018 are likely to put even more pressure on hospital labs. “Financial pressures are driving a lot of the outsourcing by hospital labs,” Cohen said. “They’re not making the profits they used to make.”

However, hospitals must consider important downsides to outsourcing as well, according to Jeff Osborne, president and CEO of Accumen, a consulting company that works with hospitals to help them improve their lab operations. Potential disadvantages include longer turnaround times and quality that might not match that of the hospital’s. Efficiently run outreach programs that keep an eye on the financial bottom line can be profitable, Osborne emphasized.

“There’s still a lot of runway left in the outreach business,” Osborne said. “We advise hospitals that they need to play offense with their labs—they have to get ahead of the cost curve. Reimbursement pressures are creating an urgency to have cost-reduction strategies in place, which is a good thing.” Accumen helps hospital labs determine which tests should stay in-house and which should be sent to reference labs, and assists with renegotiating contracts with vendors and reducing labor costs. “We can help them save 20% on costs,” Osborne said. “So if a lab has excess capacity, it can bring in outreach testing and the cost is minimal. It’s a tremendous play. The ones who have done it well love it.”

While average revenue per lab outreach test has been declining since 2011, the average hospital lab outreach program has actually grown in size in the past 15 years, from $10.6 million in the early 2000s to $24.9 million in 2016, according to Chi Solutions, Inc., an Accumen company. Unfortunately, many laboratories do not run their outreach programs like a for-profit business, and fail to track billing and collections as well as profit and losses, according to a recent Chi survey. Only 26% of survey participants said their lab outreach program’s profitability is analyzed, while 39% were unsure, and 35% knew with certainty it has not been analyzed.

Many hospital lab outreach programs have other weaknesses, too: Fewer than half have in-office phlebotomists, many do not have full-time sales representatives, and nearly half have ineffective IT connectivity with physician offices, according to the survey.

Quest’s partnership agreements range from full management of the hospital lab, in which all personnel are employed by Quest, to a lab management partnership, to what the company calls “lab management lite,” in which the hospital maintains all lab employees but testing goes to Quest. In some cases, Quest manages only inpatient testing; in others, it manages outpatient and outreach testing. For example, under a deal inked in January with Montefiore Health System in the Bronx, New York, Quest will handle much of the low-complexity testing—both inpatient and outpatient—while Montefiore will keep high-complexity testing.

Major medical centers are not the only institutions seeking partnerships. Charlotte Hungerford Hospital, a community hospital in rural Torrington, Connecticut, decided to outsource its inpatient lab operations to Quest in 2014. “We were stagnant,” John Capobianco, vice president of operations, told CLN. “We were losing volume, and we didn’t have the resources to invest in new technology. Quest was our biggest competitor, so it just made sense to approach them with the idea of a partnership.”

Under the agreement, Charlotte Hungerford sends esoteric testing to Quest’s Marlborough, Massachusetts, laboratory, while routine testing is performed in-house. Because the hospital lab had excess capacity, Quest performs some routine testing for its physician clients there. Charlotte Hungerford did not lay off any lab employees—instead, the staff became Quest employees. Though Quest runs the lab and performs the testing, the hospital still handles billing.

While hospital executives expected to save 6%–7% by outsourcing, savings are actually in the range of 15%–17% due primarily to lower costs per test, according to Capobianco. Moreover, the arrangement has enabled Charlotte Hungerford to add additional high-complexity tests to its menu. “There was a bit of a learning curve since hospital labs are a little different than independent labs,” Capobianco explained. “We have people relying on us twenty four hours a day, seven days a week. But the turnaround times are at least as good now as they were before.”

While for some hospitals it makes sense to outsource or sell their lab outreach, others have found they can grow outreach and reduce costs just by revamping their business operations. Mount Carmel West hospital in Columbus, Ohio, for example, has increased total outreach testing volume by about 20% in the last 2.5 years while increasing net revenue by 23% and reducing costs, according to the hospital’s president, Sean McKibben. Mount Carmel West is one of four hospitals in the system, which is part of Trinity Health. “We knew we needed to focus more on the growing of our outreach program, so we partnered with Chi about three years ago,” McKibben said. “We did a market assessment and put together a focused approach to sales and service.”

This focused approach, which includes a standalone financial statement for the program and monthly meetings to review performance, already has reduced cost per test by 5%. McKibben expects to bring this figure down even more, a critical metric that will become more vital as reimbursement shifts from fee-for-service to a value model tied to population health and outcomes. “Having that control internally on the cost and quality side is very important to us as we look at the future of healthcare delivery and reimbursement,” he said. “We have a lot of capacity in the lab, so when we look at variable cost per unit, we feel we are the best at driving that down. In a capitated environment, it’s paramount that we have the lowest cost per test.”

In the end, the decision about how to manage or monetize their laboratory services is one that hospital executives must arrive at after taking a hard look at the hospital's local marketplace and reputation, while also carefully considering the lab’s financials and excess capacity. “It’s a strategic decision that each hospital has to make,” Weissman said.

Kimberly Scott is a freelance writer who lives in Lewes, Delaware. +Email: [email protected]