There is a fundamental, inherent flaw in the current methodology for benchmarking clinical laboratories—we only measure half of the value equation. Why do we only measure costs and not revenue? It is because most hospitals still view lab as a cost center rather than profit center.
The reality is that hospital laboratory businesses are growing in size. In our 13th Comprehensive National Laboratory Outreach Survey, the average and median outreach programs were $19 million and $11 million, respectively, with an average contribution margin of 28 percent. Businesses of this size and profitability deserve some respect! At minimum, the revenue should appear in the value equation. It is nonsensical to measure only costs. It goes against the rules; it’s like:
- Peanut butter without jelly.
- Biscuits minus gravy.
- Adam without Eve.
- Milk without cookies.
Let’s apply this concept to the business world. Benchmarking on unit costs alone without any measure of revenue or value is like:
- S&P rankings based on expenses rather than market capitalization.
- Morningstar rankings based on expenses rather than return.
- Choosing stocks based on operating expenses irrespective of net income.
- Banks investing in only low cost businesses.
- Management evaluated based on expenditures rather than profits.
Imagine if the business world reflected only half of this view! No business ever shrunk to greatness! There would never be any money for innovation or investments in the future. The future would be bleak. That is what some labs face in trying to justify their laboratory outreach programs. Not only are they evaluated on cost only without regard to revenue, they are penalized by benchmarking platforms that do not account for the infrastructure costs (sales and service representatives, patient service centers, in-office phlebotomists, couriers, specimen processing, client services, billing, and IT connectivity) associated with outreach. To learn more about how outreach impacts benchmarking, please refer to last month’s blog entitled, “Who Are Your Peers…in Laboratory Benchmarking and in Life?”
If you find yourself in this situation where revenue is underplayed, ask yourself why. Is it merely an oversight or a lack of understanding of the true value of outreach? Do you have a profit and loss statement produced by finance that shows the contribution of outreach to your organization? Perhaps you can think about how you can make outreach revenue and profits more visible in your organization. I don’t know any healthcare organization that isn’t looking for new revenue and margins. Once the value is understood, everyone will be watching your revenue like a hawk.
Kathleen A. Murphy, PhD
Chief Executive Officer
Chi Solutions, Inc.