Duration: 5 min. read
Management & Operations
Laboratory budgets make up about 3% of expenses in most health systems and hospitals. This may not seem like much in the grand scheme of things. Yet given the challenges that healthcare organizations face coming out of the pandemic, with high labor costs being driven even higher by inflation, the lab is an excellent place to look for savings opportunities and to further strategic partnerships. Here are a few ideas for financial innovation I’ve pursued with our customers:
1. Consolidating for value
These days I see a lot of hospitals taking a fresh look at supplier relationships, and the lab is no exception. My advice is to review your highest-cost opportunities with your highest-cost vendors. Perhaps there are creative ways to structure these contracts that are more beneficial to both parties long-term.
In the primary reference lab, there is typically an incumbent provider. But in larger systems, there may be dozens of niche providers offering specialty testing. Here, too, you might find an opportunity to aggregate that volume, and in doing so drive a lower price point on reference work.
At Quest, we've been on this journey ourselves and have consolidated many of our own labs to increase efficiency through streamlined vendor contracts and aggregating test volume to single locations.
2. Optimizing staff
Labor is every health system’s headache these days. Costs are skyrocketing but there’s also a massive labor shortage. That’s why it may make sense to look at overall labor productivity. For example, do you have the right number of laboratory professionals for the amount of volume you’re running in the laboratory? Are there benchmarks you can use to measure yourself against other hospitals? And is there an opportunity to run the lab more efficiently thanks to lab automation or the ability to move the testing off-site to another location?
To meet demand, some health systems are considering med-tech training programs so they can grow and place qualified talent across their networks. Another approach gaining popularity is floating medical technologists or phlebotomists. Rather than working at one hospital site, these professionals work at multiple sites within their system and are compensated on travel for doing so. This is a more creative way to manage costs than having to pay external agencies or staffing fees.
3. Redefining the lab as profit center
Is the lab a cost center or a profit center? It’s a perennial debate. Unfortunately, a cost center mentality can create the false belief that there is no way to improve efficiencies in supplies, reagents, equipment, or labor. Conversely, if you looking at lab as a revenue engine you can examine the costs of what you do in-house versus what you send out. Of course, analyzing what lab services actually cost requires strong cost accounting, revenue cycle management, and centralized billing systems, and some labs have work to do here.
At a healthcare industry level, reimbursement trends are not favorable and continue to go down. This means hospitals need to ask themselves whether lab really is a core business, and therefore whether continuing to pursue outreach business makes sense. In the last 18 months, I’ve seen a lot more hospital executives who want to have conversations around the possible divestiture of lab outreach work with the understanding that having a partner help them run the lab might be more economically viable.
"In the last 18 months I’ve seen a lot more hospital executives who want to have conversations around the possible divestiture of lab outreach work with the understanding that lab may not be a core business and there might be an opportunity to better monetize this business."
4. Making equipment go further—and buying smarter
Capital equipment in the lab continues to represent a significant cost, so it makes sense that hospitals are looking to extend the life of existing equipment. If you must upgrade, ask vendors you are considering to make financing their equipment more affordable, and bring your best negotiating skills to the table. Make sure to communicate that you are considering multiple vendors, even if one is offering a pre-owned version of the equipment you need. Also ensure that your internal stakeholders are aligned on a decision so there are no last-minute surprises, that you communicate transparently with any vendor you’re considering, and that you have a purchase order in hand before beginning final negotiations.
5. Putting more power into purchasing
Many hospitals and health systems buy lab and other supplies from group purchasing organizations (GPOs). This might be a great time to examine your current relationships to uncover opportunities to aggregate volume or extend length of term in exchange for a lower price point or a staggered delivery schedule.
6. Monetizing digital care
Traditional revenue streams in hospitals revolve around patient care, especially surgical volume, but since the pandemic we continue to see more of what I characterize as digital care packages. These include telemedicine as part of a continuum of care offerings in home and outpatient environments. At-home testing through home health therapists is just one potential revenue-generating opportunity here.
7. Benchmarking with third parties
Third-party consultants and lab organizations can share data they've aggregated over the years and provide valuable perspective for hospitals and health systems about how they are performing versus peers of similar size and makeup. At Quest we’ve managed more than 130 hospitals across the country, and our data show that we help generate cost savings of 8% to 15% when we’re working in strategic partnerships with labs. [Data on file. Quest Diagnostics; 2022]
Change demands flexibility
Although labs have traditionally been viewed as cost centers and a relatively minor player in the health system bottom line, consider that as much as 70 percent of medical decisions, from ER visits to hospitalizations, are predicated on the 3 percent of budget spend that lab represents.1 The pandemic has only elevated the importance of running an efficient laboratory with high levels of quality and efficiency.
If I could offer one word of advice to health system executives, it would be to remain as flexible as possible. As healthcare continues to evolve so rapidly, that’s the best way to position your system for operational, financial, and clinical efficiencies. The lab is no exception. The beauty of challenging times like these is that they force people to take a new approach and look at things through a different lens than they have done historically. Just remember, there are limitations in trying to go at these issues and trends alone, and plenty of partners are out there who can help.