The understated value and potential of the clinical laboratory
Given the responsibility healthcare finance leaders bear for assessing the revenue potential of their organizations’ clinical service lines, they should fix their radar on laboratory medicine.
Clinical laboratory services constitute a promising revenue source for hospitals and health systems today. But to meaningfully tap into that revenue potential, these organizations’ finance leaders must understand the potential of the laboratory service line as a conduit for improving population health and take the lead in raising consumer awareness of the opportunities it presents.
Public perception of lab services versus reality
Watch any medical TV show and you will see multiple scenarios involving laboratory testing ranging from the mundane (a family visiting a patient in a hospital bed) to the sensational (a response to a trauma event). In such scenes, the doctor typically tells the patient something like, “We’re sending labs for ABC; that will tell us if you have XYZ.”
In real-life, however, there’s more to it than the physician simply ordering a test. Clinical laboratories must be accredited, and pathologists and laboratory technologists must be licensed and certified to perform the functions of the laboratory. That means, for example, residents in actual hospitals don’t have the freedom to perfrom all the lab tests that Gregory House’s residents are able to effortlessly perform in the TV medical series House. The oversight is in place to ensure each lab test is accurate, reproducible and consistent. (See the sidebar “Understanding the subtleties of lab testing” below.)
Nonetheless, lab testing has evolved in recent years to become one of the most consumer-facing and readily accessible elements of healthcare, and that evolution has accelerated amid the COVID-19 pandemic. Now is an important time for finance leaders take the lead in further advancing this service line’s potential.
Assessing cost and profitability of the lab service line
As with any service line, a key concern for any healthcare entity is the cost and revenue center relationship associated with laboratory medicine. But the simple fact is that laboratory medicine can be quite lucrative.
Consider, one cannot walk through a drug store without noticing direct-to-consumer lab testing approaches.a These include tests for pregnancy, infectious disease and drug use, to name a few.
So how can finance leaders navigate the terrain of the laboratory system to provide optimal patient care while maximizing revenue? Here are some approaches.
1. Synergize lab services with the hospital’s disease demographic. For example, if a hospital is a cardiac center of excellence, it could benefit from integrating cardiac testing with its clinical care to create a “diagnosis and testing” approach aimed at improving efficiencies and maximizing resources. This approach is possible by onboarding specific testing instruments into the clinical service or outsourcing to commercial laboratories, depending on revenue pro forma and ROI analysis.
2. Maximize collective bargaining and payment strategies with your payers. For example, by demonstrating how clinical diagnostic and laboratory testing can promote reduced length of stay and other disease-related costs as well as improved quality-of-life outcomes, a center for inflammatory bowel disease can leverage better payment for lab tests.b
3. Consider direct-to-consumer offerings. Certain tests can be used by patients and consumers to improve their health using a cash payment, fee-for-service approach.c A patient who wants to know if they have antibodies after receiving a COVID-19 vaccine may be willing to pay out of pocket to obtain this information. Such test offerings are not subject to the same state or federal reporting requirements as high-complexity tests such as the COVID-19 RT-PCR test (reverse transcription polymerase chain reaction), which was recently authorized by the FDA for emergency use.d
An unsung hero?
Laboratory testing is an efficient, ubiquitous and low-cost element of healthcare.e It’s not possible to obtain a drive-through appendectomy, but anyone can get tested for COVID-19 almost anywhere these days. Thus, laboratory testing has the potential to be one of the most revenue-generating components of a healthcare system.f In today’s healthcare climate, maturing and maximizing creative laboratory testing approaches may be the way to beckon the unsung hero all healthcare organizations long for.
a Tolan, N.V., “An overview of direct-to-consumer testing,” Clinical Laboratory Medicine, March 2020.
b Behling, K.C., Bierl, C., “Cost per case mix index-adjusted hospital day as a measure of effective laboratory utilization efforts in a growing academic medical center,” American Journal of Clinical Pathology, March 1, 2019; Kautter, J., Pope, G.C., “Competitive bidding for Medicare Part B clinical laboratory services,” International Journal of Health Care Finance and Economics, June 2014; and Gass Kandilov, A.M., Pope, G.C., Kautter, J., and Healy, D., “The national market for Medicare clinical laboratory testing: implications for payment reform,” Medicare & Medicaid Research Review, June 22, 2012.
c Loring, C., Neil, R.B., Gillim-Ross, L., Bashore, M., and Shah, S., “Using fee-for-service testing to generate revenue for the 21st century public health laboratory,” Public Health Reports, September-October 2013.
d FDA, Emergency use authorization (eua) summary covid-19 rt-pcr test (Laboratory Corporation of America), May 11, 2021.
e Fang, C., Otero, H.J., Greenberg, D., and Neumann, P.J., “Cost-utility analyses of diagnostic laboratory tests: a systematic review,” Value Health, December 2011.
f Adane, K., Abiy, Z., and Desta, K., “The revenue generated from clinical chemistry and hematology laboratory services as determined using activity-based costing (ABC) model,” Cost Effectiveness and Resource Allocation, Dec. 8, 2015.
Understanding the subtleties of lab testing
Let’s step back a moment and consider what lab tests are and how they work.
Laboratory testing ranges from annual checks (i.e., cholesterol) to a one-time instance where the physician orders the test to provide ancillary support for a diagnosis based on the patient’s chief complaint and associated signs and symptoms (e.g., autoimmune disease, malignancy).
The value of testing is widely touted, with attestations that 70% of accurate diagnosis are based on lab test results, and that laboratory activity represents 5% of a health system’s costs while guiding decisions that translate into 95% of the remaining costs.a In developed countries, laboratory testing is relatively inextricable from patient management: A patient won’t receive a blood transfusion if the hemoglobin is normal or be kept on an antibiotic if the infectious organism is resistant to it, but a patient will receive a thumbs up from the physician if the prostate-specific antigen or cholesterol result is within normal limits.
But it is important to understand that lab tests are not obtained from the magical “plug and play” instruments so often cavalierly depicted in the media. In reality, to be approved for use, lab tests must undergo the same types of painstaking trials as drug candidates must undergo. For vetting of a lab test intended for a specific disease state, afflicted individuals must be enrolled side-by-side with age- and gender-matched controls in a development trial to determine the test’s sensitivity, specificity and predictive values. The data are then reviewed and subject to FDA approval.
Moreover, even with approved tests, “normal” results may differ in different populations, age, gender and disease states, so it is important to be mindful of such variations. It also is critical to understand when to order a test and what that test result means for patient’s care. A physician’s justification for ordering tests affects operational logic, costs of care, payment, staffing and clinical management.b
Therefore, just as a physician might seek a second opinion for a diagnosis, the physician might request that another laboratory repeat a curious test to confirm results. This process can be confusing if the two labs use different methods, which could amount to comparing apples to pencils. It is therefore imperative that providers assess potential laboratory partners, looking not only at their methodologies, veracity and consistency of results but also at the responsiveness of their customer support in helping physicians or patients navigate their concerns about test results.c
a Hallworth, M.J. “The ‘70% claim’: What is the evidence base?” Annals of Clinical Biochemistry, November 2011.
b Wians, F.H., “Clinical laboratory tests: Which, why, and what do the results mean?” Laboratory Medicine, Feb. 1, 2009.
c Masood, A., Karim, M.Y., “The clinical approach on receipt of an unexpected laboratory test result,” International Journal of Generalized Medicine, 2020.