Making the Lab Profitable

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Q&A with Soyring consultant, J. Brian Sanders, MT (ASCP), DLM, MHA

Hospital clinical labs are getting hit on two fronts. On the inpatient side, Medicare payment pressures are forcing labs to cut expenses. The outpatient side is confronting clinical laboratory fee schedule reductions, a new bundled payment system and uncertainty about Medicare pricing revisions. To get at the problem, some hospitals have developed multiple strategies to manage test utilization. As an example, some have defined tier levels of laboratory testing and use their computerized provider order entry system to support their utilization protocol.

What areas of the lab do you see as positive that can enable it to drive revenue?

It has been assumed for the last few years that Molecular Diagnostics (MD) was the new source of revenue for clinical laboratories. A new focus on the cost of these tests by payers, the fractionation of test menus/vendors and the current cost to produce results has made this area problematic. By far, the best benefit that MD testing has demonstrated is the true potential for the reduction in length of stay, the prevention of admissions and the shortening of diagnosis. While this does not directly affect a laboratory’s revenue picture, it certainly could positively impact DRG reimbursement, pharmacy costs and cost avoidance for the parent institutions. I think it would be foolish to think that any particular area (i.e. subspecialty) offers a panacea to laboratory’s revenue stream.

What will drive true revenue performance will be a strong adherence to cost containment, good cost/buy decisions and the development of diagnostic pathways that are strongly supported by Medical Staff and Administrations. Cost avoidance is the name of the game.

In terms of “new” revenue, I have always been a very strong proponent of Laboratory Outreach Programs. If a hospital laboratory does not have one, one should be developed. While many institutions have shied away from these for a variety of reasons, the new paradigm of ACO’s makes the investment in these programs imperative. It is increasingly possible to compete successfully with both regional and national laboratories for basic services. The consolidation of both inpatient and outpatient laboratory data, local pathology consultations, community STAT testing and other locally provided services all play towards the community-based Outreach Program. Given the incremental nature of this business, margins can still be quite good. Laboratory Outreach Programs can also be utilized as “scouts” in garnering new business for the parent organization as well as tightening admission and other ancillary service relationships.

Medicare payment pressures are forcing labs to cut expenses, but what are some areas that cannot afford to be cut?

What cannot be cut are those basic tests and services necessary to providing timely care to our patients. This is sometimes a difficult thing to assess, given the panalopy of patients seen by a laboratory and the capacity of its parent organization. While I suspect there will be a number of institutions that will close due to cost/reimbursement pressures, areas like specialty testing, AP, and Microbiology are always sort of on the chopping block as institution size decreases. Laboratories are volume-driven, and there has been little work to help understand the regulatory and cost pressures of smaller institutions.

While it may be heresy to say so, the continual cost and always increasing obligations and costs from both the Joint Commission and CAP cannot be overlooked. The continual regulatory creep in excess of established CLIA rules does not bode well for laboratories. While their missions are admirable, they have both failed miserably in addressing the continuing cost burdens these regulatory agencies present to clinical laboratories. The cost-benefit of some of the newer regulatory mandates fail to address the time, cost – and in some cases – diminishing return in terms of patient safety or test performance. It would truly be in the interests of these deemed “regulatory” agencies to start to address some of these regulatory cost pressures. This becomes increasingly important the smaller the laboratory is. The regulatory burden on these facilities is just as great as larger labs that have the personnel and testing volume to off-set these costs. The closing of these facilities due to the regulatory pressures will only exacerbate the growing access issues we are seeing in rural areas of the country.

As mentioned in addressing revenue concerns, it is imperative that laboratories start to be aggressive in collaboratively developing diagnostic pathways. Duplicate orders, order frequencies, test request validity, consultative permissions, all need to be addressed at the highest levels of a healthcare organization so that a high level of compliance is achieved.

Cost pressures have greatly increased the need for laboratories to consider actual service reductions. These can take the form of reduced hours for routine testing, reduced availability of as-WANTED phlebotomy, as well as reduced in-house test menus and the resulting degradation of TAT. Labor is the greatest variable and, in many labs, the largest single cost. Wage rates will continue to rise both with inflationary pressures and the coming shortage of both technical and non-technical staff. Can we continue to provide Cadillac service on Chevy reimbursement levels?

The use of bundled services and the upcoming market driven reimbursement levels are tremendous challenges to the health of laboratories and the institutions they serve. It is very common that only three areas of a hospital are actual “revenue” centers, 1. Surgical services, 2. Imaging, 3. Laboratory. Both Imaging and Laboratory services are under tremendous reimbursement pressure. The elimination of these areas as revenue centers would bode ill for their parent institutions.

What are some strategies for saving money in 2015?

Again it may be heresy, but the reduction or the control of growth in POCT testing is the first thing that comes to mind. These devices have been with us for a long enough time now that real vs. promised results can be evaluated. Many of us have not seen the reduction in length of stay or a reduction in the total cost of care that was promised by the use of these devices. While removing these may be impossible in most situations, the introduction into new areas must be done with a rigid cost/benefit evaluation with support at the highest levels of the institution and re-evaluations on a periodic basis. There is no question that these devices are convenient, offer passable accuracy, and have altered, in a positive way, treatment of patients (Diabetes being the most prominent). Still these tests are many times more expensive, less accurate/reproducible, than conventional centralized methods. They do perform as designed but due to the failure of streamlining and cost containment in peripheral activities (imaging, pharmacy, discharge planning, etc.), the resulting cost savings that were promised have failed to materialize.

As mentioned before, any strategy that helps control utilization and appropriate test ordering can return huge cost savings to a laboratory.

Pushing testing to the Outpatient side of the equation is another strategy that has proven successful. Payment through DRG’s and similar payment methods makes it important to control further diagnostic testing that is unrelated to the admission DRG. This is not without its problems however. Strict adherence to the regulatory or contractual obligations of the laboratory must be considered and a very close working relationship with providers to either anticipate or delay test orders can be achieved. This results in a better chance of reimbursement for those tests that could place considerable pressure on DRG rates but meet the patient’s need for further evaluations.

Finally, I would encourage a frequent review of each laboratory’s cost/buy decisions. As test utilization changes with technology or treatment modalities, it is important that those tests performed in-house vs. those sent to referral laboratories be continually evaluated. A close relationship with your referral laboratory can save thousands of dollars a year on a single analyte.

What are some strategies to manage test utilization?

  • Diagnostic pathways. What test(s), when, how often, permissive consultations for tests that go beyond the pathway, gatekeeping on high dollar assays.
  • Religious attention to coding!
  • Reduction in duplicate testing.
  • A hard look at service levels and test menus.

What types of technologies are available – or on the horizon – to help increase outcomes while lowering costs?

As in years past, the use of automation will continue to be the most positive route to technological cost containment. While institutional size has prevented many laboratories from fully accessing automation platforms, the long-term cost saving is making these decision more practical. (I will say that as a former consultant, there needs to be a firm, even written, commitment to the reduction of staff for these projects to show the financial success that drove the decision to implement automation in the first place.)

We are starting to see some automation in the molecular diagnostic area but test menu fractionation will be problematic until there is some consolidation of the market. The number of platforms required to provide any kind of comprehensive service forces this sub-specialty into the realm of only the larger facilities.

Laboratories are hugely dependent on the collection and dispersal of objective data. The aggressive use of a laboratory’s LIS can help the institution better understand from an OBJECTIVE standpoint, what is actually happening. So often in hospitals, decisions are made using allegorical or one-off events. If the lab can quickly and accurately provide objective data over a reasonable period of time, better solutions can be made.

What is the most significant aspect related to reimbursement in the lab?
Probably the most significant thing related to reimbursement in laboratories is the bundling provisions with Medicare for hospital OP visits. While this occurred last year its effects have been significant for those institutions that do not have laboratory income from other sources (i.e. Outreach Programs)

What is a big driver that does not necessarily bring reimbursement?

Perhaps the other big issue for lab reimbursement to control the ordering of high dollar tests (i.e. Genetic analysis and multi-probe PCR) on in-patients subject to DRG or other bundled payments arrangements. These assays can be several thousand dollars each and reimbursement for these tests is usually not forthcoming.

What was typically a business that expected a 60% contractual adjustment from billed fees . . .it is now not unusual for laboratories to see contractual rates of 70% even 80%. As such, the past reliance on laboratories as revenue centers in Hospitals may very well change to being cost centers, with significant implications to the survival of many institutions. More and more healthcare centers are relying on proscribed health pathways to limit cost and the case of laboratory services, limit or proscribe use.

Medicare and insurer payment pressures prompt improvements in medical testing, blood management and health IT

  • Framing the Issue:
  • Demand for medical and clinical laboratory techs is expected to grow in coming years, the Bureau of Labor Statistics predicts.
  • The aging population will drive increased demand as more people need to have medical conditions, such as cancer or type 2 diabetes, diagnosed through laboratory procedures.
  • The number of medical and clinical lab jobs is expected to grow 22 percent, from 325,800 in 2012 to 396,400 in 2022, the BLS states.
  • Hospital lab officials worry that the supply of workers will not keep up with demand.
  • Lab personnel vacancy rates ranged, by department, from 4 percent in cytogenetics, lab safety, histology and immunology to 8 percent in phlebotomy, found a 2012 American Society for Clinical Pathology survey.
  • The retirement rate among lab personnel ranges from 4 percent in cytogenetics and phlebotomy to 10 percent in chemistry/toxicology and immunology, the survey found.
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