“How much does that test cost?” It’s a seemingly simple question. In reality the answer can be bewildering, with a large number of possible answers depending on one’s perspective and what is meant by “cost”. For the exact same test, the answer can range from under one dollar (if measuring only reagent usage) to over $100 (if quoting a hospital chargemaster).
For the purposes of this article we’ll focus on actual cost from the laboratory’s perspective rather than insurance or billing markups. Costs associated with a test are often grouped into two categories: variable and fixed. Variable expenses scale as test volume increases or decreases. Fixed expenses exist independent of test volume. At the simplest level, the cost of a test could be considered to consist of the reagent and supplies consumed in obtaining a result for that particular specimen. However, this narrow view of cost is misleadingly low for most applications, and we need to “load” this cost with additional factors in order to get a more complete answer.
First, let’s consider additional expenses associated with each run of tests. In manufacturing terms, these are often referred to as the “batch” or “setup” costs. This includes calibrators, controls, and all of the reagents and supplies necessary to test those materials. Divide these costs out across each of the patient specimens that are part of the batch to gain a more complete understanding of the supply costs for a test. If the assay typically requires some percent of specimens to be repeated, adjust the cost upwards to reflect this as well.
Next, let’s consider labor. While laboratory staff may be considered a fixed expense if adding a small amount of additional testing, at some point more staff need to be added to accommodate increased volumes. Like many expenses, staff are “step-wise” variable, meaning if a sufficiently large increase or decrease in testing volume occurs then the expense behaves in a variable manner. Labor expenses can be added to the cost analysis by estimating how much time staff spend working with each specimen. Make sure to allow some time for front-end processing as well as verification if the test must be manually verified. Most organizations can provide a labor rate average for different job categories which can be used to convert these time estimates into costs.
Combining these supply and labor costs gives us the variable cost per test. This is a good answer to the question “how much it does it cost the lab to perform this test?”, but for applications such as determining retail pricing overhead costs should also be taken into account. These include the fixed costs of running the laboratory, such as supervisors and support staff, as well as the depreciation from capital equipment. Divide the sum of these expenses across all of the test volume performed within that lab or cost center to factor in these expenses. Some laboratories will weight these costs depending on the complexity of the test – more overheard is likely to be required for each molecular test versus automated chemistry test, for example. Finally, laboratory or health system administration may allocate overhead costs that originate outside the performing laboratory. HR, rent, janitorial, and other fixed expenses are sometimes allocated out to tests. While it can be helpful to account for these overhead expenses in the test cost, it is important to understand they exist largely independent of the testing itself. If testing is outsourced for example, overhead expenses are unlikely to change and in fact are now spread out over a smaller number of remaining tests, resulting in higher costs on a per-test basis. Conversely, bringing in additional test volumes has the ability to lower the cost per test, especially if that cost includes overhead expenses.
Understanding these cost distinctions is critical to selecting the right calculation for a given situation and ultimately in providing competitive laboratory services to stakeholders and patients.
REFERENCES
- Paxton, A. (2001, June). Bean Counting Basics for Laboratories. CAP Today. Retrieved from http://www.captodayonline.com/Archives/feature_stories/feat1_0601.html
- Young, J. (2019, September 14). Unit Cost. Retrieved from Investopedia: https://www.investopedia.com/terms/u/unitcost.asp