Is the value of hospital lab outreach underrated?

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Small

According to Small, many hospitals approach the laboratory outreach marketplace with a “grazing,” as opposed to a “farming,” mentality, and thus without a strategic business plan for growing a separate and distinct profitable business that adds value to the hospital or health system.

“If they would farm it, they would grow that business tremendously, and they can very handily defeat the competition of the large independent labs because patients in the community want to use their service,” Small says.

That’s borne out by more of Murphy’s data, which indicated that in 2016, 92 percent of hospital outreach operations were holding their own or gaining against Quest’s market share, while 86 percent were doing the same against LabCorp. According to Chi, it’s the best performance numbers for hospital outreach since 2011. Allen agrees—“in terms of volume and market share,” he says.

Not only does this suggest hospitals may be misjudging the need to sell their outreach, but they lack the data necessary to negotiate a strong sales price. “At the end of the day, then they end up getting taken for a ride,” Small says.

An exception was the Hartford HealthCare deal. The parent health care system had spun off its laboratory operations as a separate entity (Clinical Laboratory Partners), he says, giving Hartford specific numbers for its negotiations with Quest.

There is not full agreement that laboratories are unsung cash cows for hospitals. Dennis Weissman, a laboratory consultant in Washington, DC, believes the fiscal environment is a little more uneven than Murphy suggests it is.
“Some hospital labs do a good job, but others have a tough time, and there’s lots of competition,” he says. The new PAMA rules will wind up flattening payments to hospital labs over the next few years, Weissman adds, making those that are high performers less lucrative.

Allen

“I agree [PAMA’s] going to cause some issues,” says Allen. “Hospitals typically are unable to break out lab costs for their inpatient business, and that’s becoming a problem. They’re going to have to be competitive with other service providers, and if they can’t unbundle part of a [DRG] code or bundled payment [for lab], they will have to take what’s left over, and they are going to struggle.” He adds that commercial payers are also pressuring hospitals to keep their laboratory costs in line with those of standalone entities.

Moreover, the rising employment of physicians by hospitals is also causing headwinds, Allen says. “A lot of hospitals are trying to work with those physicians to lower costs and provide appropriate care,” he says. “And the physicians are saying that the hospital and outreach labs tend to be higher priced than the LabCorp, Quests, and Sonics of the world. To be honest, while [buying physician practices] is driving some of the physician lab work back into the hospital, as everyone is evaluating the total cost of care, it becomes a pressure point that requires reevaluation.”

Murphy and Small do believe there are ways for hospitals to recognize the value of their laboratory outreach and move to protect and grow it.

One of the first things to do, Small says, is to spin the outreach business into a separate corporation, or even just obtain a separate National Provider Identifier number. Once that is accomplished, the laboratory should enter into a purchasing agreement with the hospital. Separate books keep both the hospital and the lab wholly informed as to earnings, revenue, and other financial metrics.

“The lab directors see the value of their operations, and the pathologists see the value, but the problem is they can’t convince the administration of the value,” Small says.

Murphy concluded her presentation by observing there is “no rational way to say outreach isn’t good,” but that many hospital executives act out of fear as opposed to rationality.

As a result, she exhorted those running laboratories to be more direct with hospital management. Murphy suggested trying to convince them as if they were persuading a venture capitalist to invest in the operation.

“Here’s a question to ask your CEO if he gives you crap: ‘What other plan do you have to make more money with less risk?’” Murphy said. “When I ask CEOs this question, they look at me with that deer in the headlights look. Sometimes you need to just challenge them.”

Ron Shinkman is a writer in Sherman Oaks, Calif.