Chi Chronicles A Laboratory Thought Leadership Blog

Laboratory Outreach Financial Considerations: Pricing-Series Part 3

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.[1]

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.[2]

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:

Chart 6-1-16 blog

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.
2 Ibid.

    What are the Top Metrics for Success in a Clinical Laboratory Outreach Program?

    magnifying glass

    Performance metrics are crucial tools that hospital and health system leadership use to determine the overall effectiveness of the clinical laboratory and identify opportunities for performance improvement.  A successful laboratory outreach program must demonstrate profitability, transparency, good business practices, and overall effectiveness.  By establishing performance standards, the laboratory is able to justify staffing and infrastructure costs by benchmarking against peers.

    With reimbursement cuts and healthcare reform greatly impacting the clinical laboratory segment, more emphasis has been placed on measuring and managing benchmarks and key performance indicators to highlight areas for cost savings as well as improve quality and service for patients and physicians.  Performance metrics can be developed from all departments within the laboratory.  While hospitals have lots of data, they often do not have enough information.

    In an effort to implement best practices in the laboratory where I work, we focused on the main areas of management and business metrics.  The management metrics we chose to track included test volumes, cost per test, turnaround time, and quality.  Business metrics encompassed a more comprehensive set of measures such as patient and provider satisfaction, cost and revenue per test, telephone responsiveness, and patient wait times.

    We also considered the audience to whom the metric is relevant, such as the patient, the customer, laboratory management, and senior leadership.  Once a metric was selected, we decided how and when to measure it and determined the best way to communicate the results.  As this process continues, not only is the metric examined on a recurring basis, but the trend of the metric and the category is closely monitored.

    Today, data is king and provides power.  The most successful clinical laboratory outreach programs will consider a combination of external and internal benchmarks to improve existing processes and demonstrate success over many years.

    Emily Adams, MT(ASCP)
    Client Director of Outpatient Laboratory Services
    Chi Solutions Inc.

      Laboratory Outreach Financial Considerations: Unit Cost-Series Part 2

      One of the big benefits of outreach is the impact of additional volume on unit costs.  We all understand the concept of efficiencies of scale.  Do you think the volume impact is seen early with modest increases in volume or only much later in the growth curve?  Most of us would guess the latter, but, counterintuitively, it’s just the opposite.  The graph below shows that the biggest impact to efficiency is seen in the early stage of growth.

       Economies of Scale for Productivity

       Economies of Scale

      That means that everybody benefits from outreach volume, not just the big laboratories.  In fact, the very large laboratories may not benefit from scale; perhaps the infrastructure costs of securing far-flung business has become so high as to be a diseconomy of scale?

      The same concept of economies of scale can hurt you if you elect to get out of the outreach business. There is a material impact on unit costs.  Last year, we performed a strategic options analysis for a three-hospital system on the West Coast.  They had a $42 million business and wanted advice on whether they should grow, maintain their base, or exit the business.  It turned out that there was a substantial growth opportunity, and they were leaning towards that option.  They did not need the cash from a sale.  What cemented the decision was the realization that they would incur a 52 percent increase in unit cost for inpatients and outpatients without the outreach volume.  Outreach comprised more than half of the laboratory volume and provided tangible economies of scale as well.

      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.

        Customer Service Excellence in the Clinical Laboratory

        Service excellence is a critical success factor in meeting customer expectations, particularly in the clinical laboratory.  As providers of a service, we employ many tactical methods with the intent to improve the overall client experience. Here are a few methods for consideration:

        • Training – Programs to teach or develop the skills and knowledge that relate to specific competencies with the goal of improving one’s capability, capacity, productivity, and performance.
        • Data Collection – Gathering information which will enable us to measure performance against pre-defined standards and record deviations.
        • Business Intelligence – A technology-driven process for analyzing data and presenting actionable information to make informed decisions.
        • Survey – A tool to measure customer satisfaction.

        We train, measure, track and trend, recalibrate, and survey—all in an effort to improve our service levels.  But how do you create and foster a culture of customer service excellence throughout an organization?  This undertaking involves examining organizational processes with a critical eye to introduce and reinforce the concept of service excellence at every opportunity.

        • Develop your plan around the organization’s mission.
        • Encapsulate the ideal of customer service excellence as part of the organization’s motto.
        • Exhibit a commitment to great service throughout the organization, staff to executive level.
        • Demonstrate executive commitment by providing resources, time, and direction, which are essential elements to success.
        • Evaluate your “present state.”
        • Evaluate your service levels using both internal and external customers.
        • Evaluate your competitors’ ability to provide excellent service.
        • Determine how your organization can differentiate itself from the competition with regards to service.
        • Evaluate your employees’ “present state” ability to deliver and exceed customer expectations.
        • Reshape your training and development of current employees around the culture of great customer service characteristics, not what we do but how we do it.
        • Change your recruiting profile to identify where an individual stands on the continuum of understanding great customer service.
        • Use the criteria of the best skills, experiences, and ability to match a job description as an essential part of the selection process. This criterion should be complemented by selecting individuals who possess compatibility with the job and a willingness to work with you.
        • Find and hire the best people to help achieve the goal.
        • Require employees to participate in teaching the meaning of customer service as recognition on delivery of on the service mission.
        • Create awareness in meetings and in discussions, with reminders throughout the workplace.
        • Don’t rely on a reward system to improve customer service.
        • Recognize those that embody the customer service persona.
        • Place recognition above reward, but remember reward should follow the prosperity of the company.

        Each interaction with a customer is an opportunity for an organization to build its track record of excellence.  Providing a solid foundation based on a dedication to exceptional client service is the first step.  Commit to your customers by committing your clinical laboratory to customer service excellence.

        Susan Dougherty
        Vice President, Operations and Outreach Services
        Chi Solutions Inc.


          Laboratory Outreach Financial Considerations

          Consider this analogy.  The average laboratory outreach program is like the old neighborhood “mom-and-pop” hardware store, compared to one of the big box, national chains like Lowe’s or Home Depot:



          Looking at the big picture, a laboratory outreach program does not have the scale or sophistication of the national laboratories.  It cannot compete on price.  It provides quality testing for the community (some would say better than the nationals).  It keeps jobs local.  It provides faster turnaround time and personalized service.  It leverages the sunk investment in facilities, equipment, and staff in the hospital laboratory and lowers the cost of testing overall.  It’s the only laboratory that does testing across the patient continuum (hospital, extended care facilities, doctor’s office, and medical home), not because it’s profitable but because it’s the right thing to do.  This care continuum is absolutely essential for meeting future challenges such as utilization and population health management.  The hospital laboratory outreach program must be preserved.  It is good patient care and good business.

          How do you overcome the preconceived ideas, the obstacles, and the risks?  Financial issues related to outreach are all manageable with the right information and some grit and determination, and include the following components:

          • Unit cost
          • Contracting
          • Pricing
          • Reimbursement
          • Billing
          • Financial transparency
          • Performance
          • Risk

          Subsequent blogs in this series will address each of these components.  You can also learn more about mitigating laboratory outreach program financial concerns in my forthcoming book, The Profit Machine in the Hospital Basement: Turning Your Lab into an Economic Engine.

          Kathleen A. Murphy, PhD

          Chief Executive Officer

          Chi Solutions Inc.

            Is There Room for Improvement in the Laboratory?

            The biggest room in the laboratory is room for improvement.  Improvement you say?  Does that mean we cannot “do what we have always done to get what we always got?”  Does this mean that we must consider lab design and space planning?  Actually, it does not.

            It means that in order to begin a culture of continuous improvement, you must streamline the massive amounts of data found in the laboratory into accessible, accurate, and actionable intelligence that identifies key performance metrics which in turn prioritize the biggest opportunities for impact.

            The foundation of this fundamental form of process improvement is known as benchmarking which is a powerful tool to improve cost and productivity, along with quality, utilization, and growth of outreach, in the most scalable and sustainable entity in a health system—the lab.  It is designed to identify not only how your laboratory is performing but how it compares to the performance of your peers.  This comparison is only accurate when based on an array of operating characteristics specific to the lab including test complexity and volume.

            In the hospital segment, and specifically in the clinical laboratory, more esoteric testing and expensive technology and equipment has driven health system executives to find more “room” to create a culture of continuous improvement.

            Often we are asked, “What is the biggest challenge that prevents implementation of a dynamic benchmarking process?”  The answer:  change.  “People hate change” is often the response when a strategic initiative like benchmarking is discussed.  Today’s health care climate is largely impacted by “churn and change,” and there is no indication that will ever cease to exist.  It has been proven that people actually love change when they are fully engaged in the process.  Benchmarking offers the opportunity to analyze strengths and identify opportunities.  As a team, laboratory professionals realize the outcome of their efforts through regular reporting of key metrics where process improvement is continuous.

            At Chi, we have been offering benchmarking services for more than a decade.  Since January 2015, we have offered this service as a web-based solution with resounding results.  To support our belief in the power of benchmarking, we have offered two webinars:  Part I ‒“Benchmarking: Knowledge is Power” and Part II ‒ Benchmarking: The Customer Perspective.  Part I focused on informing laboratory professionals on how to utilize the power of benchmarking to measure performance and drive change that drops money to the bottom line.  Part II was in dialogue format with a customer who not only does benchmarking but took it to a more granular level through Chi Sectionals™.  If you want to make the best better, consider viewing the webinar recordings.

            So, are you ready to gather three simple data sets to being making room for improvement in your laboratory?  Contact me now and I will help you realize the power of benchmarking and help you get started today!

            Julie A. Stein
            Marketing Director
            Chi IQ® Product Manager


              The Art of Laboratory Sales

              Sales is always among the top five weaknesses reported by hospitals and health systems in our annual Comprehensive National Laboratory Outreach Survey. Why? Because sales is an enigma to hospitals. Sure, hospitals have marketing and communications, but sales? Not really. Sales is a very different skill set than marketing and is only recently gaining importance as health systems consolidate and compete. The converse is true about the laboratory industry. The large national laboratories (Quest Diagnostics and LabCorp) have had experienced, highly skilled, highly trained, and highly compensated “hunters” (sales representatives totally focused on growth) for decades. Most hospital outreach programs have “hybrid” representatives that juggle both sales and service and are not as well trained, compensated, or productive as their for-profit competitors. The difference in results is staggering, especially when viewed on a cumulative basis.

              gooseLet’s start with how the business is built from the ground up. Laboratory is the proverbial goose that laid the golden egg for health systems. Each year the number of eggs gets larger and larger because of the power of a recurring revenue model (from maintaining the base business) combined with the growth of new business. Growth can be exponential because of an industry secret called the rule of 78.

              Here’s how it works. Each month a new account (golden egg) is added. As long as there is no attrition, the business grows by 78 times the value of the account in the first year. The typical physician office client (internal medicine, family practice, or OB/GYN) averages about $5,500 to $6,000 in revenue per month. The total number of cells in the spreadsheet for one year is 78. Therefore, a quick way to calculate annual sales at various revenue targets is to multiply the average revenue per customer by the number of cells in a year ($5,500 x 78 = $429,000 in annual revenue). Refer to the example below:

              The growth compounds over time. The rule for Year 2 is 222 times revenue. For Years 3, 4, and 5 apply the rules of 366, 510, and 654, respectively. Growth builds year over year way beyond what would be expected in a normal business. The same numbers as above extrapolate to $3.6 million in Year 5. The longer the term, the more powerful the impact. This is the secret behind multi-billion dollar companies Quest and LabCorp. They are built on decades of year over year compounding revenues.

              Now that we are beginning to get an appreciation for how revenue grows, let’s go back to our example. The rule of 78 example was for one sales representative.
               What if you had multiple sales representatives?
               What if you also had service representatives that maintained and upgraded the base business at half the new revenue rate of a sales representative?
               What if you could attract the best hunters, representatives who could generate (and make) two to three times the revenue of the average representative?

              Explore how to build a sales infrastructure based on people, process, and technology to drive exceptional performance for your laboratory in my forthcoming book, The Profit Machine in the Hospital Basement: Turning Your Lab into an Economic Engine.

              Kathleen A. Murphy, PhD
              Chief Executive Officer
              Chi Solutions Inc.

                Overcoming Switching Costs for New Outreach Prospects

                If I asked what your retention rate was for your clinical laboratory outreach program, would you know the answer? I bet you do, because it is a critical metric for measuring client satisfaction. Industry averages hover around 90 percent. “Stickiness” is good for our clients and for our programs. Clients hate the process of switching their office routines, and it is always easier to keep a current client than to get a new one.

                While strong retention is good for our current client base, it certainly presents a challenge for a proactive sales team in getting new clients in the door. When your sales representatives are out in the field developing their pipeline, it is important for them to keep focus on how they are going to give the prospect a better service than what they have today. That is the only thing that will make them consider switching.

                Here are the three most important areas for improving physician office operational efficiency:

                • Connectivity: Lab interfaces to EMRs, Meaningful Use office requirements, electronic portal for non-EMR practices. This is the greatest opportunity for a sales representative to show prospects increased office productivity by reducing manual paper orders, eliminating faxing and scanning of results, and ensuring completion of required billing information.
                • Infrastructure: Patients service centers, in-office phlebotomy (where allowed). Where you establish your geographical footprint will determine a good percentage of your market share, so getting this right is critical. Are you investing in locations that are convenient for the patients to complete their testing? Do you have customer service measurements in place to determine patient satisfaction levels? Helping your customers service their customers makes a good argument for making a vendor change.
                • Pricing: Competitive rates are important, but transparency is demanded (as noted in a recent article in HFM Magazine by Jeff Myers). More patients today are being moved into high deductible health plans, and this means greater patient financial responsibility. Patients that used to have 100 percent laboratory coverage are now cost-sensitive and expect hospitals to be competitive with their fee schedules.

                Simple? Yes, I know. But are your sales teams focused on these key areas during their calls? Do they struggle with having a full pipeline, yet no new sales are coming in? If so, now is the time to provide laboratory sales representatives direction toward a consultative selling approach.

                If you’re not sure how to accomplish this, Chi can help you capture the 10 percent of physicians who will be choosing a new laboratory vendor in 2016.

                Jeff Geagan
                Managing Director, Outreach
                Chi Solutions Inc.

                  Solving the Puzzle of Laboratory Outreach Structural Requirements

                  The structure is the foundation upon which a business is built.  It determines scale, operating cost, and profitability.  Ideally, laboratory outreach is set up as a separate company or a distinct accounting entity within a hospital or health system to track business performance.  In addition to structure, outreach requires:

                  • Updated systems (information technology).
                  • Three- to five-year business plan.
                  • Capital budget.
                  • Operating budget.
                  • P&L developed by Finance.
                  • Management reports.

                  The ideal structure for laboratory outreach requires “out of the box” thinking.  No doubt many of you have seen the familiar nine-dot puzzle.  Try to connect the nine dots with four lines and without raising your pen from the paper:

                  inside-outside gif




                  Continue reading

                    Clinical Laboratory Outreach Program Sales Peformance: A “Goldilocks” Story

                    We are all familiar with the concept of a “normal,” bell-shaped curve. By definition, normal curves are frequency curves where most occurrences take place in the middle of the distribution and taper off on either side.  A comparison of a normal curve and sales performance in hospital-based outreach programs is shown below:


                    Un-bell curve (3)





                    The sales curve is anything but “normal.” Continue reading