Laboratory Outreach Financial Considerations: Reimbursement and Profitability-Series Part 4

Hospitals have a distinct reimbursement advantage over independent laboratories. This is based on the higher cost to provide around-the-clock services: seven days per week for hospital patients. In contrast, independent laboratories operate on one shift five days per week, a 21/5 work ratio for hospital versus independent laboratories. Our 2014 Comprehensive National Laboratory Outreach Survey found the average and median reimbursement to be $16.87 and $19.51, respectively, for hospitals. Using an average of 3.5 tests per requisition or patient encounter, the average and median reimbursement per requisition is $59.05 and $68.29, respectively. Comparing these hospital rates with $44.00 per requisition for independent laboratories shows a 34 to 55 percent higher reimbursement for hospitals. This represents a huge advantage for hospitals.

The reimbursement advantage of hospitals transfers to the bottom line. In our 2014 survey, pre-tax operating margin for independent laboratories was 11 percent compared with a contribution margin for hospital outreach of 28 percent. The largest of the nationals, Quest Diagnostics and LabCorp, had higher margins than independent laboratories as a group (18.9 percent for Quest and 15.8 percent for LabCorp) but still well below hospital laboratory performance.

When we look at subsets of hospital-based businesses, we find that the contribution margin can range as high as 50 percent. What other service business do you know that sports this kind of margin? Typically, system core laboratories outperform stand-alone hospital laboratories. We have not seen any slippage in operating margin over the past few years despite declining reimbursement. We believe this to be due to the simultaneous focus on cost reductions.

Stay tuned to this blog series for information on additional financial issues that laboratory outreach program leaders must consider. You can also learn more in my book, The Profit Machine in the Hospital Basement: Turning Your Lab into an Economic Engine by clicking here.

Kathleen A. Murphy, PhD
Senior Growth Advisor
Chi Solutions Inc., an Accumen Company