The pandemic has driven a huge surge in lab testing. How hospitals are navigating in-house capabilities with outsourced solutions.
March 2022 – The Journal of Healthcare Contracting
By Daniel Beaird
The largest nonprofit health system in the U.S. agreed to a deal in February with Labcorp for its hospital-based laboratories to be managed by Labcorp in 10 states. St. Louis-based Ascension is the latest partner in a trend for outside clinical laboratory networks with health systems. Labcorp also acquired select assets of Ascension’s outreach laboratory business in the transaction that’s expected to close in the first half of this year.
The deal applies to Ascension’s hospital laboratories in Alabama, Florida, Kansas, Maryland, Michigan, New York, Oklahoma, Tennessee, Texas and Wisconsin. But there’s significant room to scale as Ascension’s 142 hospitals deliver care in nine more states.
Outsourcing functions like laboratory services to companies like Labcorp has become increasingly popular for health systems, especially after the pandemic turned testing upside down.
“Labcorp is going to continue to look for opportunities to acquire laboratories,” said Akiva Faerber, senior principal, advisory services for laboratory and blood consulting at Vizient, Inc. “The same is true for Quest Diagnostics. This isn’t a secret. Covid was an opportunity for them.”
Building better, stronger in-house laboratories
Vizient has been asked by some hospitals to reduce costs and identify new opportunities to build better and stronger in-house laboratories to represent to hospital administration.
“If a hospital doesn’t know its true unit costs and hasn’t done a good job of building coding and compliance, then they’re doing work but not capturing revenue,” Faerber said. “They aren’t aware of what their costs should be, and they aren’t working on reducing them where appropriate, and that puts them in a vulnerable, compromised position.”
Faerber said in-house laboratories have better turnaround times, closer relationships with clinicians and, under normal circumstances, should be able to deliver the best quality and service, including constructive feedback for clinicians. “A great laboratory not only gives you the test result but says to the clinician, in the future don’t do tests A, B, C and D. Just do test D and we’ll get you an answer pronto and you can start treating immediately,” he said.
Running tests A, B, C and D can mean unnecessary overlap and costs. Labs should be focused on resulting tests as soon as possible so the clinician can treat the patient as quickly as possible, according to Faerber. “If a lab focuses there, they’re doing their job. But if they don’t understand their unit costs and they’re sourcing things that they should truly outsource and they don’t understand their reimbursement and aren’t paying attention to every test that’s been resulted, then they have all this unnecessary spend.”
When this occurs, labs aren’t making money and outside diagnostics companies may look like an attractive alternative to the hospital administration. “The outside diagnostics companies will go to the CFO and ask them about their volume, their tests and their spend, and they’ll come back to them with a deal,” Faerber said. “Vizient, as a whole, is working to help educate hospital administrators and CFOs. We can get them to the point of proving they’re cash neutral or cash positive and no longer vulnerable to outsourcing,” he said.
He reiterates that diagnostic companies like Labcorp and Quest are good labs and can be important partners, but he believes that only one of every 50 hospital labs needs to be outsourced because in-house labs can fix cost issues and improve efficiencies themselves.
Large diagnostic companies have licensed tests, large volumes of supplies, lean staffing, huge platforms and plenty of capacity. They consolidate as much work as possible and drive operational efficiency and cost efficiency. “They need a good courier service, a good lab information system and a good customer service department because samples need to be tracked. And if they can get a lab’s unit costs down and keep them there, then it’s a proper deal.”
Being committed: Understanding the unit costs, billing, coding and compliance
Labs must know their unit costs, billing, coding and compliance, and make sure they’re squeezing out as much reimbursement as possible. “Labs must know what to send out for the right price and what to do in-house at a lower cost. There’s a fine line,” Faerber said. “The lab won’t be successful if it does everything itself. But it won’t be successful if it gives everything away either and believes that clinicians will get the same turnaround time from an outside lab.”
An in-house lab owns its data, and it can use it for utilization and quality reviews, reducing the number of days in the hospital for patients, according to Faerber. He gives an example of a large health system and Vizient member not giving up on its labs, but consolidating and standardizing them. “They’re doing the work on unit costs and billing. They want our help on utilization. Their heart is in it to prove they can build a better lab and their administration supports them.”
Today’s automation era helps. Almost every area of the lab is automated, according to Faerber. There are huge platforms and front-end automation. “Once you make sure the test is in the computer, you put it on the chain [go through the sample process] and send it down. The technology is there. You can do a great job with it,” he said.
The pandemic has driven a huge surge in testing demand and companies like Labcorp and Quest have benefited from it. But expansion of capability has helped hospital labs get a handle on this demand and return their focus to their primary goal of conducting the work themselves.
“A lab needs to understand its primary goal and what clinicians want. Get the sample from a clinician, run the test, and result the test as quickly as possible so the clinician knows the answer and can treat the patient,” Faerber said. “As a laboratorian, I’d never give a test away unless I’m positive I don’t have the skillset, capital or expertise, or I can’t be competitive. But if I have those things, I’m not outsourcing.”