Transforming the Hospital Laboratory into a Profit Center

Hospital and health system executives are missing an opportunity to maximize revenue cycle and operational success by viewing the hospital laboratory as a cost, rather than profit, center, explained Charles Wilson, MHA, Vice President of Operations at Robert Wood Johnson University Hospital.

“There really isn’t as much support for the lab as there is for other services in the hospital,” he recently explained to RevCycleIntelligence.com. “That’s because most people view and envision the laboratory as a service. That’s where I send my blood samples to get tested. It’s a commodity that we budget a certain amount for and that’s it.”

Hospital laboratories are so low on the priority list that many organizations did not bother to purse claim denials stemming from the lab.

“Most hospitals in the country do not work laboratory denials at all,” he remarked. “Lab denials are small margin, low dollars, and extremely high volume. So, with the limited resources the finance folks have in the denials office, they’re not going to put them on working on $15 to $20 CBCs [complete blood counts]. They’re going to work on the inpatient admissions, the radiology, the PET scans. So, that’s how the laboratories more or less get pushed to the side.”

But hospital laboratories have the potential to significantly decrease healthcare costs and boost revenue through laboratory outreach programs in which hospitals sell testing and other lab services to local physician practices or provider organizations like commercial labs do for providers.

“The good thing about laboratory outreach is that as your test volumes grow, your unit price per test decreases because you’re able to generate economies based on higher volumes,” he stated.
“That helps not only with your outreach work, but with your inpatient and your outpatient testing as well, because now that your volumes have increased, you have more leverage to negotiate better pricing on items and other services that you use to run your lab.”

Yet fewer hospitals are operating laboratory outreach programs despite its financial benefits and the feasibility of implementing a program.

About 92 percent of hospitals operate their own laboratory and almost all of these hospitals have at least some capacity to increase their test volumes, the most recent National Hospital/Health System Laboratory and Outreach Survey showed.

Despite room for volume growth, the number of hospitals and health systems running an outreach program dropped from 80 to 76 percent in the last year.

“Most people view and envision the laboratory as a service.”

Hospital and health system executives are increasingly selling their outreach programs to national commercial laboratories. Stories like Quest Diagnostics acquiring the laboratory outreach operations for two hospitals of the Hartford Healthcare system and LabCorp finalizing the purchase of Henry Mayo Newhall Hospital’s outreach program are becoming more common.

The National Hospital/Health System Laboratory and Outreach Survey projected the number of hospital laboratory outreach programs to drop more in subsequent years as executives view the programs as too labor-intensive and too risky, or that the program cannot compete with national commercial laboratories.

However, these are misconceptions. The survey showed that the average annual net revenue from a hospital laboratory outreach program was almost $25 million, more than double the annual net revenue from outreach programs in the last ten years.

Hospital laboratory outreach programs were also more profitable than national labs. The average hospital lab contribution margin was nearly 33 percent, three to four time that of national commercial laboratories.

Hospitals and health systems are missing a revenue-generating opportunity because lab directors were not equipped with the right data or health IT systems to make a business case for an outreach program to hospital executives, who rarely see the lab as a profit center, explained Wilson.

“If it’s not being viewed that way by the administrative leadership of the hospital, you’re going to fall very short of getting the necessary resources you need to really drive performance,” he said.

“There are far too many laboratories throughout the country that are in that boat now,” he continued. “They’re not getting access to the technology that they need. And as you know, the technology is really important in terms of support for the various service lines that the hospitals want to produce. If you aren’t able to develop the technology, then you fall into the realm of increasing your reference lab work. So, you’re sending it out to all these other labs to do, which is very expensive.”

Without the financial data to make a business case for viewing the laboratory as a profit, rather than cost, center, hospitals also run the risk of selling their outreach programs or outsourcing lab services to commercial companies.

“Increasingly, what we’re seeing is the commercial labs coming to the hospitals,” he said. “They walk right by the laboratory leadership and they go right to the C-suite. They start talking to the executive people about margins, revenues, and costs. And the language that the folks in the laboratory speak is turnaround times and quality.”

Commercial labs can then use their financial data and shared language to present a business case for outsourcing lab work or selling an outreach program. These companies then explain how their management of the hospital laboratory can save millions. 

“If it’s not being viewed that way by the administrative leadership of the hospital, you’re going to fall very short of getting the necessary resources you need to really drive performance.”

“But that is a poor decision to make because you don’t want to look at it as what you can save me in regards to what my costs are,” he explained. “You should be looking at it as to the potential for revenue generation by this laboratory. I can tell you right now, no commercial lab is going to come in and manage you and generate revenue for the hospital because the commercial labs that are primarily doing that, they also do outreach testing for physician offices as well. They’ll tell you the same thing, ‘I may manage your lab, but I’m also competing with you if you’re doing outreach.’”

Wilson recognized that implementing an analytics-driven hospital laboratory outreach program could actually save the hospital and add to its revenue.

“The labs that I worked in were looked upon as cost centers,” he said. “I would look at the work that we were doing. I would look at the work that the commercial labs did. And say, “Wow. It’s a business for them. But for us, it’s a service.’ So that never really sat right with me.”

He partnered with XIFIN to implement a laboratory-specific revenue cycle management and data analytics platform at Robert Wood Johnson University Hospital. The platform gave Wilson and his laboratory directors insights into the revenue cycle of the laboratory and its potential to up profitability.

“The revenue cycle management service is much more than just a financial service,” he stated. “XIFIN, as many of the other RCMs out there, give you immediate access to your volumes by client, your volumes by test type, activity at all of your offices, payer information, and payer mix. it really becomes a management system as well.”

The real-time access to financial and revenue cycle data enabled the laboratory to instantly correct issues with services and claims.

“If you notice declines in a particular office or declines from a particular payer, you’re able to drill down at your fingertips and really get to the bottom of what’s going on from that perspective,” he continued. “Before we had that, you would find issues somewhere between 30 and 60 days later because that’s when the hospital would give you a finance report from the previous month. Oftentimes, it was just too late. You found out that Dr. Smith was upset because someone lost his specimen and he left. It was just too late to get him back.”

The sooner that laboratory directors could identify an issue with a claim or service the better. “We’re able to see all of this in real time and to manage the program much more effectively,” Wilson said.

“You would find issues somewhere between 30 and 60 days later because that’s when the hospital would give you a finance report from the previous month. Oftentimes, it was just too late.”

A laboratory-specific platform was also key to handling a large number of claims being created through the outreach program, Wilson stated.

“As you start to add up all of those high volume, low margin denials, you find out that that is a whole lot of money,” he remarked. “It’s imperative, in my opinion, that hospital laboratory outreach programs partner with a revenue cycle management company that exclusively deals with laboratory reimbursements for several reasons. One, they are more able to deal with the high volume via the systems that they have set up to support it. Two, they are much better able to stay on top of the numerous coding changes that the laboratories endure each and every year.”

“Many hospitals fall way behind on that. That just adds to their losses in regards to not being able to get paid for the business that they do.”

Armed with the financial information about hospital laboratory and outreach profitability, laboratory directors should take those insights to hospital leaders.

“It is imperative that people in position of leadership in laboratories, lab directors, in particular, have to become more willing to balance their scientific and business knowledge,” he explained. “There’s nothing I enjoy more than doing laboratory testing. However, I understand that if I had not demonstrated some business and financial acumen, the laboratories that I governed were certainly going to go downhill. It’s imperative that laboratory directors stretch out a little bit and demonstrate that business acumen.”

The business knowledge paired with laboratory expertise can gain directors a seat at the executive’s table.

“One of the things that I had experienced as a laboratory director at several laboratories is that it was becoming increasingly difficult to obtain the limited resources or the shrinking resources that most hospitals were having to deal with,” he said.

“But, when it’s looked at as a revenue-producing center, it actually gives you a lot more clout,” he added. “You have earned a seat at the table to negotiate much more effectively for the limited resources that we talked about earlier. That is absolutely important. Hospitals that have been effectively able to institute laboratory outreach programs have awoken the sleeping giant.”

And that sleeping giant will help to maximize revenue for hospitals through a service line that was once regarded only as a cost generator.