Healthcare is under great pressure to control costs, and clinical laboratories are no exception. One cost containment strategy laboratories have undertaken is to bring in to their operations tests that previously have been sent out to reference labs. However, determining which tests to bring in house is a complicated question that does not always have a straightforward answer.
Typically, labs begin performing tests themselves because of clinical need, strategic direction, financial benefit, or a combination of these considerations. Cost reduction and fulfillment of clinical needs to offer patients the latest and best possible tests with reduced turnaround time, make powerful arguments for bringing tests in house. Performing testing in one’s own lab also increases the level of control over the sample handling process and decreases transcription errors and sample losses. In addition, performing testing in house develops expertise within the lab, enabling it to become a local reference lab with the potential to bring new revenue streams to the institution.
Strategic direction is another important factor in the decision to bring tests in house. For instance, if an institution would like to become a leading organization in a research clinical field—such as genetics testing or clinical mass spectrometry—efforts and resources need to be allocated accordingly to build the infrastructure and bring the appropriate tests in house. Eventually, the appropriate financial considerations are needed to justify these efforts.
Often, the decision to bring a test in house rests on the financial benefits of doing so. The following simple formula expresses the return on investment (ROI) as a way of quantifying the financial impact of in house testing:
ROI = (return-cost of investment) X 100%
(cost of investment)
Although the concept is simple, determining ROI is not necessarily straightforward. First, not all benefits (or returns) can be reflected monetarily. Reduced turn-around time, increased control over sample handling, and reduced transcription errors all can improve patient care, but capturing these elements as a financial benefit to the institution is difficult. In addition, clinical laboratories are considered cost centers within most hospital financial systems, making it a challenge to capture overall revenue from clinical tests.
Generally speaking, we estimate return by comparing the total sendout cost versus the operating cost of performing the test(s) in house. The sendout cost is simple to calculate based on the charge per test, the sendout test volume, and related personnel and shipping and handling expenses. The operating cost can be estimated based on the additional full-time equivalent staff required and other related operating expenses such as reagents, proficiency testing, quality control, and service contracts. Given the structure of contract and institution-specific regulations, some costs, such as for service contracts, might be considered part of initial investment. Labs also should contemplate potential new business expected from acting as reference labs after they bring tests in house.
The denominator in the ROI equation—cost of investment—can vary significantly depending on whether or not capital investment is required. If a test can be performed on an existing platform with in house expertise, the cost will be minimal and mainly reflect the effort involved in developing and validating the test(s). Of particular note, the walls between laboratories such as chemistry and virology might need to be broken down—literally or figuratively—to fully utilize existing capital equipment.
If new capital equipment like a mass spectrometer is required to bring the tests in house, the initial investment calculation is generally beyond the capital cost of the instrument itself. It should also include the cost for space renovation, personnel training, required information technology support, and infrastructure requirements. The latter encompasses items like a dedicated electric system and uninterrupted power supply, gas supplies, and ventilation. Discussions with colleagues and the equipment manufacturers are a good way to understand these requirements. Leasing versus paying upfront for the capital equipment can make a big difference on the final financial return, and as a result, capital investments might be considered as operating costs. These two choices should be considered carefully.
While ROI is a commonly used indicator, another way to assess the value of investment is the payback period—the time required to recover the investment after adjusting for inflation or discount rate. The payback period varies from institution to institution, but 2 to 3 years is a good goal.
In summary, bringing tests in house is a major undertaking. Several factors related to benefits and costs must be considered during this process. Careful planning and execution are required to overcome the challenges, but the benefits to patients and institutions alike make the effort worthwhile.
Yan Victoria Zhang, PhD, DABCC, is an assistant professor of pathology and laboratory medicine, director of the clinical mass spectrometry and toxicology lab, and asssociate director of the hematology and chemistry lab at the University of Rochester Medical Center in Rochester, New York.