Jane Hermansen, MBA, MT(ASCP)
Health system and hospital leaders are facing tremendous challenges in today’s healthcare environment: they must deal with tough competition, strict regulatory requirements, staff shortages, and financial pressures. A recent survey of hospital CEOs cited financial challenges as their top concern. What if the laboratory could be part of a financial solution by providing hospitals with a revenue stream and cost savings?
Successful laboratory outreach programs provide mechanisms to enable health systems to achieve their integration goals, deliver excellent quality of care, and improve patient outcomes. Importantly, laboratory outreach programs can also serve as a key source of income.
The laboratory balance sheet
A laboratory can achieve financial stability by increasing revenue, decreasing costs, or both. Financial performance is demonstrated through a balance sheet or profit-and-loss statement, which is calculated simply by subtracting cost from revenue. In order to accurately project these data, it is important to understand the variables and how they impact the calculations. Simply stated, revenue is the money that the organization receives in payment for performing laboratory testing. Costs can be variable or fixed, and direct or indirect [see glossary]. At the simplest level of accounting, total revenue minus total cost equals profit (or loss) for the department. However, when considering laboratory outreach testing, it becomes more complex to calculate a bottom line or profitability. At the service line level, outreach revenue is usually separate from other hospital outpatient revenues, not capitated or bundled, and the only costs that should be applied are variable and direct. It is important to note that fixed and indirect costs for the hospital laboratory will exist with or without the laboratory outreach program and should not be loaded fully onto the outreach program.
Net revenue: Revenue that is collected for performing laboratory testing.
Gross revenue: Revenue that is charged for performing laboratory testing. Gross revenue is rarely the same as net revenue.
Variable cost: Cost that varies with the number of tests performed (e.g., reagent cost).
Direct cost: Cost that can be fully attributed to the performance of a test (e.g., reagent cost and staff time).
Fixed cost: Cost that does not change with an increase or decrease in the number of tests performed (e.g., instrument cost and rent).
Indirect cost: Cost that is not directly related to test production, such as overhead (e.g., institutional allocations).
Capitated revenue: Fixed, prearranged payment received per patient enrolled in a health plan.
Bundled revenue: Payment based on a patient episode. It does not vary based on services provided.
Bottom line: Calculation of profit or loss for a department.
Service line: A single set of attributes, providing flexibility and consistency across an enterprise and offering a uniform approach to delivering a limited number of highquality products or services.
How outreach programs can help labs achieve financial stability
1. Reduce revenue rejections and delays
Rejected laboratory claims can result in lengthy delays in payment, or in lack of payment entirely, ending in write-offs or bad debt. If laboratory managers are not directly involved in the billing process, they may not be fully aware that they are not getting paid for the testing that is performed. If claims are getting rejected, it is necessary to identify the following: 1) the number of claims rejected, 2) the payer type (e.g., government, health plan), 3) the reason for rejection (e.g., failed medical necessity, missing modifiers), and 4) the source of rejections (specific ordering location or type of testing).
Once the reasons for rejections are known, the laboratory can focus on reducing them. It may require working with provider offices to ensure that they are supplying appropriate diagnosis codes with the test request; working with payers to actually understand why they are rejecting claims; or working internally to apply modifiers to specific tests prior to submitting the claim for payment. Timely and responsive attention to rejections will ensure more timely payment for laboratory services.
If the hospital’s write-off threshold is higher than an average laboratory claim, the entire claim will be dismissed. For example, if the average net revenue for a laboratory outreach requisition is between $50 and $80 and the hospital’s write-off threshold is $250, the rejected laboratory claim will not be reconciled and no attempt to collect the revenue will ever be made. The best solution in such cases to lower the write-off threshold for lab testing. Successful labs have write-off limits of $10 or even $5—this ensures that they are collecting everything they can. Even if write-off thresholds are lower but working laboratory claims are not high-priority, there may still be substantial delays in collecting, and revenue may never be recovered.
Another source of lost or delayed revenue may be clients who receive bills directly from the laboratory. Delayed payments or unpaid bills impact laboratory revenue unless there is a concerted effort to collect payment from clients. Managing Part A (first 100 days) and Part B billing skilled nursing facility patients on Medicare is a frequent concern for laboratories. It is necessary to monitor the census daily to identify when patients transition from Part A to Part B, and to change their billing accordingly.
CAP’s Position on Direct Billing
In 2015, the College of American Pathologists (CAP) released a position statement in support of direct billing for anatomic and clinical pathology services for all payers, public and private. The practice of client billing involves a physician turning a profit by charging a patient full price for a laboratory service on which the physician received a discount, or even by marking up the service. CAP notes that the practice incentivized the physician to do the following two things: 1) choose a laboratory based on price rather than quality and 2) order more tests than necessary, in order to gain more profit. With direct billing, on the other hand, payment for services is made directly to the person or entity that performed or supervised the service. Ordering physicians can benefit from direct billing, CAP writes in its position statement, as the practice helps ensure compliance with federal laws that prohibit unlawful economic arrangements between physicians and clinical laboratories.
2. Improve billing practices
Another way to increase revenue is to ensure that the laboratory customers pay at a favorable reimbursement rate. If the laboratory is serving governmental payers (Medicare and Medicaid), it is possible to increase revenue by including third-party health plan patients into the mix, thereby billing other payers. In some US states, laboratory markup remains an acceptable and common practice. In this practice, the laboratory creates a discounted fee schedule for a client, and the client rebills the testing— at a higher fee—to the patient’s health plan. As state regulations change and physician practices reduce the hassle of issuing additional bills for laboratory testing, the laboratory outreach program may have an opportunity to bill the health plans directly, thereby increasing revenue.
3. Expand laboratory service
Although it may seem obvious, it’s worth noting that an effective way to increase revenue is to expand your laboratory service. Hospital-based laboratories typically send between three and five percent of their tests to a reference laboratory. Such tests may be highly complex, infrequently ordered, or in need of technical expertise and equipment that do not exist within the laboratory. However, when volumes exceed a threshold or technological improvements make select testing more accessible within the hospital laboratory, it may be appropriate to add those tests to the internal testing menu. The laboratory should routinely evaluate the tests that it sends to a reference laboratory and identify the feasibility of insourcing those tests. Part of the evaluation should include a “make versus buy” analysis, which considers immediate revenue opportunities, potential growth in volumes from existing laboratory outreach customers, and the financial impact of not having to purchase a given test from another laboratory. Increasing the esoteric nature of the test menu by including more expensive, specialized tests will also increase test revenue.
4. Manage costs
Lowering costs can improve a laboratory’s financial performance. In most laboratories, salaries comprise a large portion of the budget; thus, one way to lower laboratory cost is to create efficiencies for staff. Many laboratories are investing in automation to replace technologists’ manual work. Laboratory information systems enable bidirectional interfacing with instruments and allow for automatic verification and release of normal test results. Robotic specimen handling, transport, and storage and retrieval allow laboratory scientists to focus their efforts on the technical tasks that are aligned with their education and skill set.
Laboratories also have opportunities to streamline processes by using management engineering principles and implementing lean manufacturing concepts. By eliminating unnecessary steps throughout the testing process, a laboratory may be able to increase throughput, reduce waste, and improve turnaround time. Each of these efficiencies has the opportunity to reduce cost.
Lean manufacturing is a comprehensive set of techniques, derived from the Toyota Production System, that allow manufacturers to reduce waste. The following are a few of the key concepts behind lean manufacturing:
The 5s system aims to eliminate waste by continually sorting items and moving things into places where they’ll have greater value.
Equipment and workstations are arranged to reduce material handling and setup time and to improve productivity.
In this form of automation with human intervention, workers have the authority to stop the process when an abnormality occurs.
This is a system in which manufacturers can control inventory by producing only what the customer asks for.
Lastly, increasing volumes can lower overall cost per test. If a laboratory is functioning at only 60 percent capacity and the outreach program provides additional volumes to bring the laboratory to 90 percent capacity (a 50 percent volume increase), its efficiency will go up. It is unlikely that the laboratory will have to purchase additional equipment or hire substantial staff to test the additional specimens, and the primary cost will be the supplies and reagents to perform the test.
Looking beyond the laboratory
Finally, when considering financial performance, it is important to look beyond the laboratory itself. It is commonly stated that more than 70 percent of data in the patient medical record comes from the laboratory, and that data is used to drive patient care decisions. Diagnosis, treatment, monitoring, and preventive care all rely upon accurate laboratory testing for effective patient care. With the increase in companion diagnostics and pharmacogenomics, the correct laboratory test could save tens of thousands of dollars in pharmaceuticals.
As healthcare payment models shift toward value-based reimbursement, it will be important to retain focus on the importance of performing the right laboratory test for the right reason at the right time. Even an inexpensive test that adds no value to the care of the patient is an unnecessary cost. Diagnostic labs should help guide clinicians in ordering the right test and reducing waste. Nationally, campaigns such as Choosing Wisely provide evidence-based and peer-reviewed guidelines developed by professional associations. As a laboratory industry, we have a responsibility to ensure that our testing is used correctly and managed efficiently.
The laboratory and its successful outreach program can contribute to organizational goals overall by providing financial stability. Effectively managing costs, maximizing revenue opportunities, and demonstrating value beyond the laboratory will ensure long-term success.