Look Before You Leap!
Should You Sell Your Laboratory Outreach Business?
April 15, 2021
Before hospital executives make a decision about outsourcing or selling lab services to a commercial vendor, here are a few thoughts worth considering.
Outsourcing laboratory services can and does produce short-term cost savings, but these savings don’t come without tradeoffs. When a commercial lab manages a hospital lab, it typically moves 20% to 30% of tests off-site to centralized testing facilities. Studies have shown that the hospital subsequently cuts costs by approximately 20%. However, the unintended consequence is the immediate impact on cost to perform testing on inpatients, which increases significantly. The lab still requires the same equipment and a similarly sized staff, despite lower volume. Because hospital labs have relatively high fixed costs and low variable costs, they're difficult to downsize. Moreover, the commercial lab typically reduces laboratory staff to drive cost additional savings, but the unfortunate downside is loss of experienced personnel that are difficult, and sometimes impossible, to replace.
The second point to think about is the impact of outsourcing on quality, service, and outcomes. Once lab services are outsourced, the hospital no longer has direct control over the quality of testing services or customer service. Rather than performing testing close to patients, the more complex assays are routed to remote testing locations. Turn-around times, error rates, and lost sample rates may increase. As this happens, hospital-physician relationships erode, resulting in leakage of inreach testing to competing labs. When specimens are lost or compromised, the impact on patients can range from the inconvenience of having specimens recollected to cancellation of an outpatient visit resulting in potential delays in diagnosis and treatment. Further, some specimens cannot be recollected resulting in serious harm to the patient from the absence of potentially critical laboratory information.
With respect to outreach, the latest national survey indicates that an average hospital-based outreach program generates approximately $19 million in annual net revenue, with profitability close to 30%. When you consider this in combination with the relatively small cost of the laboratory service line to the hospital’s budget (typically 3%-4%), CFOs would be hard-pressed to cite another service line that comes close to laboratory services in terms of cost versus benefit or comparable margin contribution.While revenue is a good thing, it’s crucial to view laboratory services and outreach programs with a broader lens. The clinical laboratory is strongly positioned to help clinicians do a better job of diagnosing, treating, and managing their patients. Ordering providers want a one-stop shop that offers easy, quick access to high-quality laboratory data on all patients, regardless of location. There is no laboratory, save the hospital lab, that has this capability. Getting test results quickly in the hands of diagnosticians supports an early, accurate diagnosis, helps shorten length of hospital stay, reduces unnecessary readmissions, and ensures the most effective treatment options are available. In short, laboratory data on inpatients, outpatients, and outreach patients is essential to support the continuum of care and drive down the cost per episode of care.
Finally, consider both immediate and long-term implications of outsourcing on quality of testing, customer service, staff retention, and most importantly, patient care. Is the trade-off with short term financial gain worth long-term challenges in quality and service? Your thoughts?