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Is the value of hospital lab outreach underrated?

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Ron Shinkman

December 2016—Hospitals across the nation have been selling their laboratory outreach operations to national laboratories, which have been snapping them up from community hospitals and larger enterprises. Take Henry Mayo New-hall Hospital in California (LabCorp) and Hartford HealthCare in Connecticut (Quest Diagnostics) this year, for example, and MemorialCare in California (Quest) in 2015.

Management executives at many hospitals and health systems have said their impetus to sell is to focus on what they consider more profitable parts of their operations. And observers say such transactions are likely to continue.

But what if it turns out that selling those laboratory businesses means their owners are actually selling them short?

Murphy

Murphy

That’s what Kathleen Murphy believes. The longtime CEO of Chi Solutions stepped down from that position earlier this year after the Michigan-based consulting firm was acquired by Accumen. Although Murphy remains with Chi as a senior advisor, she suggested at the start of a blunt, data-filled presentation at G2 Intelligence’s Lab Institute in Washington, DC, in late October that her lower profile allowed her to speak more freely.

“I like to be a little contrarian and challenge positive beliefs,” she said. “I may be a tad politically incorrect.”

First, Murphy contended that the hospital laboratory outreach business is doing quite well. According to data Chi accumulated through its industry surveys, in 2013 the average outreach program enjoyed $58.33 of revenue per requisition (compared with slightly more than $44 apiece for both Quest and LabCorp); annual revenue growth per requisition of 5.3 percent (versus a 4.3 percent decline and a one percent dip for Quest and LabCorp, respectively); and a profit margin of 28 percent per requisition (compared with less than 19 percent for Quest and less than 16 percent for LabCorp).

And outreach has grown significantly over the years. Murphy said when she began studying outreach programs in the early 1990s, each one averaged about $5 million in annual revenue. Now it’s about $19 million. Many hospital laboratory outreach programs are significantly larger than that, with some topping $100 million a year in revenue and others reporting more than $50 million in revenue.

Moreover, successful hospital laboratory outreach can furnish more than half of a hospital’s pre-tax earnings while accounting for less than 10 percent of its overall cost.

“It’s one of the best-kept secrets in health care,” Murphy said.

It’s a secret to some hospital executives as well. Murphy noted that just more than a quarter of hospital laboratories actually have the appropriate data to run their businesses, a situation she called “management by braille.”

Murphy is not the only person to hold this opinion.

“I agree to the letter with this,” says Larry Small, chief executive officer of LabPath Consulting in Tierra Verde, Fla. Small says many hospitals simply book their gross revenues without looking at outreach-related net revenues. That’s exacerbated when it comes to billing, as laboratory is often mixed with other services such as x-rays.

“When billing through the hospital’s billing accounts receivable system, hospitals generally can’t track the net revenue per test. As a result, they often don’t really know how much outreach business they have or have a process in place to measure the profitability or value of their outreach business,” Small says.

Patrick Allen, a managing director at Kaufman, Hall & Associates in Skokie, Ill., says the outreach business is sometimes not viewed as a standalone business offering and held to the same efficiency test as other business units. “And by not breaking them up and understanding what their real profitability is as part of the institution as a whole, they can be undervalued,” he says.

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