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Is Selling Your Hospital Lab Worth It?

Based on Client Experiences, CEO Dr. Perkins Discusses Outcomes

Hospital executives increasingly face substantial offers to outsource or sell their lab services to commercial vendors. Below, ARUP's CEO Sherrie Perkins, MD, PhD, discusses the pros and cons from short- and long-term perspectives.

Why are hospitals selling their labs to commercial vendors such as LabCorp and Quest?

Right now, there is a lot of fear and uncertainty in the laboratory industry. Large commercial vendors are leveraging and capitalizing on this uncertainty and buying hospital outreach programs and hospital labs. This sudden infusion of money is often too hard to resist, given the pressure hospitals are under with declining reimbursement and narrowing margins.

Promises are being made that, in the longer term, end up benefiting the vendor more than the hospital. The first few years may be good, but then these hospital labs are at the mercy of the vendor.

What is the value of keeping the lab in-house, from a financial perspective?

While outsourcing may provide an infusion of cash, it comes with crucial trade-offs. There is a financial advantage to keeping lab services in-house because a health system retains the ability to contain costs. As we move from a decades-old, fee-for-service model that emphasizes volume to a model that places importance on quality outcomes with value-based reimbursement, it is essential to ensure that patients get the right tests for the best medical outcomes at the lowest cost.

As more physician practices align with health systems in ownership models, providing laboratory services from within the system not only means keeping testing close to the patient, but also translates to increased test volumes, lower unit costs, and greater operational efficiency.

From a patient-care perspective, what is the value of keeping lab services in-house?

It’s not just about cost. Selling your lab impacts patient care. To maintain the best patient care is to keep the testing as close as possible to the patient. Oftentimes when a lab is sold, testing goes to other sites, turnaround times increase, and it doesn’t allow for close focus on utilization management or the development of lab practices to improve patient care.

Most people overlook the fact that the laboratory has more touchpoints with patients than any other area. While they may make up only 3 to 4 percent of the hospital’s overall costs, lab services contribute to more than 80 percent of the information in a patient’s EMR [electronic medical record]. This alone is a compelling reason for a hospital to maintain control of its laboratory services.

The role the lab plays is substantial when it comes to patient care, as well as the downstream costs that can accrue if lab services are lacking in quality, accessibility, and quick turnaround times. For example, when specimens are lost or compromised, the impact on patients can range from the difficulty of recollecting the specimens, or cancellation of an outpatient visit, to delays in diagnosis and treatment. All this can impact patient satisfaction scores as well.

Once your lab operations are off-site, it is very difficult to change ordering patterns and communicate with clinicians about appropriate testing. Thus, you lose that close communication that makes a healthcare team, including the lab and pathologists, effective.

What should lab personnel know about the prospect of their labs being sold?

The decision to outsource or sell is often made at the executive level, and laboratory personnel are sometimes the last to find out. This can result in replacing management positions and loss of skilled employees. Often, non-laboratory executives see lab testing as just another commodity without fully understanding what value their lab brings to the overall healthcare organization.

Even when laboratorians do know about the lab being sold, they may not fully understand the value of the lab from a financial perspective and are unable to communicate their value to the executives. 

What can lab management do?

Three things come to mind. First, develop a compelling laboratory value proposition, then share it with key stakeholders, including the hospital’s executives, finance department, clinicians, department chairs, and the managed-care contracting team.

Second, start changing the perception of the lab as a transactional cost center to a competitive business unit that provides cost-effective healthcare through quality diagnostic results that support medical decisions. That’s more powerful than stating, “Our lab provides quality testing and fast turnaround times.”

Third, make sure the lab is represented on patient-care teams where decisions are being made. Our value is evident—without lab results, diagnosing, treating, and managing patients for best outcomes would be virtually impossible.

Help leadership connect the dots between the laboratory, the providers, and their patients in ways that drive outcomes and cut costs.

How are hospital physicians affected?

Physicians depend on quality lab tests that provide results they can trust. In most cases, physicians tend to trust quality of testing and turnaround time from hospital labs more than commercial labs. Studies show that there are fewer errors, like lost or compromised specimens, associated with hospital labs. From a logistical standpoint, physicians don’t want to waste time referring tests to many labs when they have a comprehensive hospital lab.

In healthcare organizations with laboratory stewardship programs, physicians benefit from the expertise of the lab staff that provide guidance with appropriate test ordering on the front end to interpreting test results properly on the back end. Patient care is enhanced when clinicians and laboratory professionals work collaboratively to achieve optimal outcomes.

How difficult is it for a hospital to buy back its lab?

We’re learning from those that have sold and regretted it. Selling services that are essential to patient care is often shortsighted, and reclaiming those services comes with a hefty price tag. Most hospitals will be locked into a three to five year noncompete contract.

The most deleterious impact to the lab is loss of qualified personnel. Commercial labs make promises about cost savings to hospital executives but fail to mention that a good deal of those savings comes from labor reduction. We are all painfully aware of the shortage of medical technologists and experienced testing personnel.   

Lastly, rebuilding the laboratory is expensive. From negotiating new vendor contracts for instruments and supplies to hiring and training new technical and outreach staff, the costs may be prohibitive.

How can ARUP help increase the value of hospital labs?

Delivering value at the laboratory level is more complicated than it used to be. Under fee-for-service, more volume meant more revenue, and more revenue meant enhanced profitability. Today, as fee-for-service gives way to fee-for-value, the value proposition is shifting from simply building volume to learning how to contain overall healthcare costs, maximize reimbursement, and operate labs in the most efficient way possible.

In response, ARUP opens its doors to show other systems some of the ways we’ve succeeded with these challenges.  

We work with our clients to identify key stakeholders, develop value propositions that resonate with each individual laboratory, and incorporate the right mix of services and guidance to help client labs make the transition from a transactional cost center to a competitive business unit.

We are constantly evolving and learning and working to ensure we deliver value that is quantifiable now and actionable as we go forward.

As part of an academic organization, we are committed to creating and sharing knowledge. It defines who we are and what we do. It is natural for ARUP’s business model to be one in which we seek a knowledge-based partnership with—not ownership of—our clients’ laboratories.