Presentation

Laboratory Outreach Financial Considerations: Risk-Part 8 in a Series

Reasonable folks would agree that most hospitals in today’s environment, especially the not-for-profits, are risk adverse.  So what is the downside of making a mistake?  Of failing to execute?  Of disappointing results?  Not much.  Honestly!

It’s because the vast majority of investment for outreach is in operating expenses.  The capital costs are very modest.  The five-year capital requirements are shown in the table below for a range of program sizes:  $10 million, $25 million, and $50 million.  The first-year capital ranges from $397,000 to $1.0 million and includes the cost of IT connectivity, computers, interfaces, courier vehicles, and upgrading and/or outfitting patient service centers.

Outreach Program – Capital Requirements over 5 Years

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Most of the cost of outreach is labor (additional FTEs for the unique outreach infrastructure).  The following chart shows a five-year estimate of FTEs required for the same size businesses as above.  The range is from 45 to 179 FTEs as shown in the chart below by job title and in total:

Outreach Program FTEs

graph2

Should business conditions or strategic priorities change at some point in the future, the business can be monetized for roughly 1.0 to 1.5 times revenue.  The multiple can be higher for specialty laboratories, but this number is typical of what we have seen in the industry over the last three to five years.  And there are always willing buyers—both Quest Diagnostics and LabCorp have grown mostly by acquisition over the last few years.

The last step in exiting the business would be to right-size staffing for reduced volume and eliminate outreach-specific FTEs (sales, couriers, phlebotomists, specimen processors, billing, and client services).  No doubt, reductions in force are emotionally challenging but fairly straightforward from a management perspective.  In this context, I view the risk associated with an outreach strategy as low.  With a thoughtful analysis of options and good execution, it is easy to exit the business.  The ability to monetize without timing constraints further supports a low-risk strategy.  Does that surprise you?  I think it would surprise many executives who view outreach as difficult, complex, and risky.

See other entries in 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., an Accumen Company