The costs and benefits of in-house lab testing

December 4, 2018
Ray Pelosi
Volume 95, Issue 24

In-house testing laboratories can be profitable for physicians and give patients an enhanced care experience.

In-house testing laboratories can be profitable for physicians and give patients an enhanced care experience, too. Not only can they generate their own revenue stream within a practice, they can also provide a competitive edge that could translate into the higher physician ratings that help attract new patients.

In addition, doctors who already have an in-house lab may want to expand their testing because health insurers and employers are creating financial incentives and policies that encourage patients to be quality-conscious shoppers for lab tests that they believe offer them the best value for the money.

Reimbursement, regulation and sound management

But before physicians decide to set up their own testing labs, they should consider factors that will impact their potential to limit costs and increase their return on investment, after they have absorbed the initial cost increases involved in planning and opening up the lab. 

The diagnoses that an in-house lab provides are becoming more popular with patients because they can get test results and begin a treatment regimen right away. Another factor to consider is the availability of more value-based reimbursement options connected to clinical and financial results. 

“With many contracts now tied to quality, you’ll get a higher reimbursement, depending upon the quality of care delivered,” notes John Daly, MD, chief medical officer for COLA, the national accreditation agency that helps clinical laboratories meet federal and other regulatory requirements. 

At the same time, increasing government oversight is requiring in-house labs to understand and master evolving regulatory procedures and requirements. 

For instance, doctors in rural and low-population areas should be aware that the Protecting Access to Medicare Act, or PAMA, that went into effect this year could devastate in-house labs in these locales by cutting reimbursements for many routine tests by 10 percent in 2018 and 30 percent over the three years ending in 2020. 

Once the decision is made to have an in-house lab, the most important action doctors can take  in order to make the lab financially and clinically sound, whether the practice has one or multiple physicians, is to hire a professional lab manager who is obsessive about details, meticulous about record-keeping, and scrupulous about lab conditions. 

“If the lab manager goes in some morning and their machine doesn’t pass controls, they better shut the lab down and not let us run any tests,” says John L. Bender, MD , senior partner and CEO of Miramont Family Medicine, in Fort Collins, Colo. “I don’t want to hear that the machine failed controls and we ran tests all day and might have given people results that were erroneous.”

Test volume, affordability and the break-even point

Bringing tests in house gives the doctor the revenue that otherwise would go to the referrallab. 

As well, an in-house lab removes costs associated with outsourcing the tests; in effect “you now control the costs of the testing (i.e., the markup on the test) that’s performed on behalf of your patient care,” says Lisa Emiliusen, DFSS, an experienced healthcare contract negotiator and lab consultant who is a group manager with Mayo Medical Labs, in Rochester, Minn.

In the absence of an in-house lab’s quick results, a physician who believes it’s important to treat the presenting condition as soon as possible may otherwise order interventions-drugs, diagnostic procedures, or even surgery-that the lab test data could show are unnecessary. 

That’s not just a patient cost burden; those costs also can come back to the practice. 

With all the reimbursement changes happening today, Emiliusen stresses that “having things that are capitated, where doctors will get one reimbursement fee for an entire episode of care, they’ll want to do as much as they can for the least cost possible, because they’re only going to get reimbursed one fee in some cases.” 

Whether doctors get only one payment for an episode of care may depend upon how they’re reimbursed by their payer mix, and if it’s an inpatient procedure or surgery in their office or an outpatient visit, which could leave them vulnerable to absorbing the expense of some procedures. (Typically, the hospital will pay for the inpatient testing associated with the procedure as long as it’s part of the overall care of the patient.) 

So if doctors can avoid taking some procedural steps with the help of an in-house lab test diagnosis, they can lower their risk of incurring unreimbursed costs, 

But in order to determine if an in-house lab is affordable, the practice needs to know how many patients have chronic ailments and what those maladies are. Then it must develop a menu of lab tests that are customized for those conditions and an estimate of how often it will need to run those tests-an approach that not only is patient-centric but also can keep unit test costs down by generating economies of scale from high-frequency test volumes. 

Practices also need to know how many of the tests the practice ordered for patients were actually performed by offsite labs, so that it can measure total patient adherence rate to prescribed treatments. These complementary steps will show doctors which tests have the greatest clinical value when brought in-house and yield quick results that can enable them to make nimble treatment adjustments within minutes. 

In the view of Patrick Bowman, MBA, who helps health systems plan their clinical diagnostic laboratory strategy as director of Health Systems-Lab, at McKesson Laboratory Solutions, in Philadelphia, Pa, a well-planned in-house lab with the right test menu and the right instruments to carry it out can be a revenue producer by producing reimbursements that are greater than expenses.

“To understand the real impact of moving the lab tests in-house, the practice should look at how many of those tests it ordered for its patients and how many of those tests were actually done by offsite labs, with a goal of measuring total patient adherence rate,” Bowman says.

Models that project revenue on the basis of test volume will show if a lab is affordable. At the heart of this calculation is the break-even point, which is the number of tests a lab must run to recover the costs of administering the tests. 

When test volume exceeds test costs, the tests becomes profitable. Bender points out that if the break-even for his practice is three tests a day on a cell counter, and he and two other staffers in his clinic are doing 10 such tests each day, then it makes sense to do that test. 

“If the break-even is three tests a day but it’s a test that we only order every third day, then I should definitely not do that,” he suggests.

Labor saving efficiencies and personnel expenses

For labs, like most businesses, personnel are the biggest expense, and most labs will need to have at least one certified lab technician. “That’s why it’s important to automate as much as possible,” says Tim Dumas, president of TLD Consulting, in Raleigh, N.C., who advises medical practices on the financial feasibility of in-house lab testing. A comprehensive laboratory information system (LIS), whose software captures, manages and stores patient data, is central to the automation process, according to Bowman. A lab can go paperless with software capability that handles the data and monitors all analyzers, runs quality control, and connects to the EHR.

The best way to control personnel expense, though-and reap the primary cost benefit accruing to an in-house lab-is for doctors to “include workforce efficiencies in their workflow,” advises Bender.

For example, before Bender had an on-premises lab, it took his medical assistants 20 minutes over a three-day period to perform all the steps involved in ordering blood work for a patient. Today, the whole test takes just 10 minutes within a single day when performed by the on-staff medical assistant.

“What if I told you every time I took a cell count, a CVC, I lost a dollar, because the CVC costs me $8 but I only get paid $7?” he asks. “You’d tell me ‘You can’t make up that volume.’

While bringing tests in-house is the primary way a practice can earn more money with its own lab, the efficiency at Bender’s clinic that cuts the CVC testing time in half allows his practice to more than compensate for losing money on the test itself. This is done by eliminating several high-wage hours from a employee’s week, “not to mention the competitive advantage it gives me in the marketplace, where I can say ‘Well, even at the urgent care place you don’t get these tests back right away. Here, you do.’” 

But it’s important to figure out exactly much labor time you’re saving in this way. 

Doctors also can create cost efficiencies by partnering with other independent physicians in a common lab, or offering their in-house lab services to doctors who don’t have a lab. And auto-verification modules can deliver workflow and cost savings with enhanced connectivity and intelligence to an existing LIS. 

“When executed correctly, these auto-verification modules can drastically reduce lab technician time and, in some cases, reduce or eliminate any potential overtime,” reports Bowman.

Best practices

It’s important to engage a technical consultant to set up the lab and provide ongoing management oversight. 

“By and large, a physician who is not doing laboratory medicine doesn’t know much about laboratories,” says Daly. “But technical consultants do know, so you can avoid mistakes and wind up with a much better quality laboratory if you have them working with you.”

Once the lab is in place, the technical consultant can help resolve any problems with equipment or tests. Periodically, the consultant can review quality control procedures and the proficiency testing of samples on which the lab’s accreditation depends, as well as educate office staff on quality control measures. 

It’s also smart to work with lab equipment suppliers who can save practices money by covering the cost of interfacing their instruments into the LIS or the EHR. That’s money not spent on coders or programmers who might otherwise be required. 

“Sometimes it’ll take 40 hours to get a test built into a laboratory information system, so the supplier can help you mitigate that cost,” says Emiliusen.

Ultimately, making a POL work is about doing the necessary homework. 

“As long as a practice is performing ample clinical, operational and financial diligence, creating a lean and efficient strategy, there is no reason why their POL won’t bring ample value to the practice in the short and long-term,” says Bowman.

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