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:
The puzzle cannot be solved if we limit the lines to the confines of the box. We are forced to think outside the box to solve the puzzle. Wouldn’t it be great if all our problems were the same? We would be less likely to settle for obvious and easy but poor choices. Looking at the current state of laboratory outreach programs today, the majority are missing key structural and functional requirements as shown below in the comparison of current and future states. Most programs today are constrained by “inside the box” thinking.
The contrast between current and future states is startling, yet none of these desired future state characteristics would be considered odd in any other business. Why do they seem so Draconian for a business embedded within a hospital?
Suffice it to say that most laboratory outreach programs today do not function like businesses because the parent organization (not-for-profit) hospitals still do not function like businesses. How else can we explain the tenfold difference in profitability between not-for-profit and for-profit hospitals?
Let’s look at three approaches to structure:
- Develop a new, separate company: This option provides the most flexibility for a scalable business. It has the added advantage of a separate provider number for clean segregation of revenues and costs. It is a little more work and cost upfront but pays off if you want to develop a large business. It is the most visible and transparent of all the options and is the best option for future exit, sale, or merger. This structure would be appropriate for outreach programs in excess of $50 million.
- Develop a new, separate accounting entity: This option has almost all the benefits of the separate company with less work and cost. The only disadvantage is that reimbursements will be commingled with hospital payments and may not be segregated to the same extent as a separate provider number. This option is adequate for the majority of outreach businesses today.
- Operate the business as a cost center: This is the standard today. It is woefully inadequate if you want to run a serious business. This option is not recommended.
Would it be worth it to you to set up the first or second structural option for a $20 million business? Remember, that is just the average. If you’re serious about developing this business, it could easily be a multiple of $20 million.
Find out more about structures and business models that can drive laboratory outreach program success in my forthcoming book, The Profit Machine in the Hospital Basement.
Kathleen A. Murphy, PhD
Chief Executive Officer
Chi Solutions Inc.