It is common knowledge that hospitals have higher reimbursement rates compared to commercial laboratories. This gives hospitals a distinct advantage on the revenue side, provided that their pricing is not egregious. Recent movement towards pricing transparency is making it more and more difficult for hospitals to justify or sustain this advantage. After all, there is no real rationale for an outpatient test performed by a hospital laboratory to cost more than a similar outpatient or nonpatient test performed by a commercial laboratory. The rationale only applies to inpatient testing which has to be done quickly on a 24/7 basis versus being batched once per 24 hours. There is a much higher cost for inpatient testing.
For years, pricing has been one of the top five obstacles for laboratory outreach programs nationally (as measured annually in Chi’s Comprehensive National Laboratory Outreach Survey). In 2014, it became the hottest issue. There are four primary reasons behind this:
- There is a push for greater pricing transparency for all types of health care pricing.
- The Affordable Care Act is driving prices lower.
- More costs are being shifted to patients in the form of higher deductibles and co-pays.
- National laboratories are using fees as a major differentiator from hospitals.
A recent article in the Wall Street Journal addressed how pricing transparency emphasizes vast differences in pricing within and across markets. This will most likely drive competition based on cost—something that is new to health care. According to the article, “doctors and hospitals have rarely competed on cost. Third-party payers still foot the bulk of the bills, and many players in the health-care industry benefit from keeping their costs and profit margins murky.“
There is another trend afoot in health care that places pricing under the microscope. Employers are asking employees to share the burden of the rising cost of health care insurance. This cost shift comes in the form of increased employee premiums, individual and family deductibles, physician office co-pay amounts, and co-insurance, all of which raise out-of-pocket expenses for individuals. According to the Wall Street Journal, the number of patients with deductibles of $1,000 or more rose from 10 percent in 2006 to 38 percent last year. The Affordable Care Act applies family deductibles of $6,000 and $10,000 for Silver and Bronze plans, respectively.
The table below demonstrates how higher prices charged by hospitals become a deterrent for patients to use their local hospital rather than Quest Diagnostics, LabCorp, or a regional independent laboratory:
The table illustrates that the disincentive involves both a pricing disincentive (i.e., the hospital charge is almost double the average commercial laboratory charge) and a reimbursement premium that is often paid to the hospital-based laboratory providers. This premium comes in the form of increased health care costs for individuals.
The current gap between hospital and independent laboratory reimbursement may be short-lived. At some point in the future, all outpatient and nonpatient laboratory work may be reimbursed under one fee schedule. Some hospitals recognize this and are trying to decide whether to ride the wave for as long as they can under the provider reimbursement model or adopt the lower independent laboratory fee schedule to be more competitive. While they recognize that their patients are unhappy, they choose to maximize revenues in the short run or exit the business and get maximum value for it. Others have chosen to adopt the independent laboratory fee schedule as a defensive move to prevent a loss of business. Real entrepreneurs have adopted independent laboratory fees to continue to grow and capture new market share.
Depending on your goals, you may have to adjust your pricing. If you want to become a regional laboratory and compete head-to-head with the nationals in an open marketplace, then adopting the independent laboratory fee schedule may be required. If you want to develop a modest business from physicians who are employed or affiliated with your organization (what we call “inreach”), then you may be able to maintain a modest pricing advantage over the nationals. For years, I have predicted that this difference will disappear and reimbursement for all outpatient/nonpatient testing will be standardized. Surprisingly, this has not happened as of this writing, but you would do well to plan for it in your financial models.
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.
Kathleen A. Murphy, PhD
Senior Growth Advisor
Chi Solutions Inc.
1 Beck, Melinda, “How to Bring the Price of Health Care Into the Open,” The Wall Street Journal, February 23, 2014.