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.

    2 thoughts on “Laboratory Outreach Financial Considerations: Unit Cost-Series Part 2”

    1. Reading your blog gave me a thought. The 3 hospital sys in CA that was looked at, did they have 3 separate labs in all 3 hospitals? Were they with in normal business geographical relationship?

      Wondering as we are now an 8 hospital org. with 8 separate labs and a very large Outreach. My questions being why not create a stand alone lab supporting all 8 sites except for STAT and BloodBank.

      How would you look at doing this: Cost factors, handling, specimen control etc?

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