Before health systems consider allowing a third party to service their ambulatory lab testing, they need to fully understand how fee-for-service lab volumes influence the financial health of the organization. ARUP has released a new white paper, “Retain Control, Retain Revenue: Why Investing in Ambulatory Lab Services Is a Better Long-Term Strategy Than Selling.” Here, we speak to a contributor to the white paper, David Shiembob, MBA, C(ASCP)CM, manager, ARUP Healthcare Advisory Services, about the mismatch between how commercial labs assess the value of ambulatory testing services and how health systems assess that value.
Question: Why are commercial labs eager to purchase ambulatory testing operations from health systems?
D.S.: Health systems typically don’t have a firm grasp of the margin contribution from their ambulatory, fee-for-service testing because the revenue from this testing is often not tracked separately, and lab expenses may be inaccurately attributed to this testing. On the other hand, this type of testing is what commercial labs focus on exclusively. Commercial labs know exactly how much it costs for them to bring on new testing, and they have a very good handle on their revenue cycle to predict what revenue they’ll be collecting. So commercial labs have a clear understanding of the margin they can expect from acquiring fee-for-service testing, while health systems are operating with incomplete information.
Q: How can a health system determine the true value of the lab’s ambulatory services?
D.S.: There are two pieces to that calculation. First, what is the net revenue associated with that ambulatory testing? Ideally this information is readily available, but it can be estimated by applying a collection rate to the lab’s gross charges. Then, what are the expenses associated with the testing? It’s important to associate only the costs that are truly incurred by performing that additional ambulatory fee-for-service testing with the revenue to understand the actual margin contribution.
The laboratory’s average cost per test doesn’t cut it in that scenario. If labs rely on that number, they run the risk of dramatically overestimating the costs associated with the fee-for-service testing. Instead, a lab can either perform a cost analysis to understand what their incremental costs are for additional performed tests, or they can use a more generic adjustment to account for the fact that a large portion of the overall hospital lab’s budget is tied up in fixed expenses.
Q: What are the downsides of selling ambulatory operations?
D.S.: The health system is agreeing to take a one-time payment in exchange for some amount of lost margin. They’ll discover only after the fact that their lab expenses didn’t decrease as expected after selling ambulatory testing, meaning they underestimated the margin being generated by that testing. This lost margin will continue impacting their balance sheet for years to come, leaving them in a worse financial situation in the long run. For systems operating on very slim margins, the consequences can be enormous.
Second, the clinical laboratory is tightly integrated with patient care, and there’s a strong preference on the part of providers—whether those are providers within the health system or local unaffiliated providers—for testing to be performed locally by someone who understands their patient population, provides rapid turnaround times, and is available to answer interpretive questions. It’s often underestimated just how much collaboration and assistance the laboratory provides to ordering physicians. This is a strong competitive advantage for hospital laboratories that are willing to serve their own clinics and outside physician groups.
Q: Can laboratories grow their fee-for-service testing to increase revenue?
D.S.: Absolutely. A trend within the entire industry is a move toward more ambulatory care within an integrated health system network. This means that ambulatory settings represent a larger percentage of the overall business. Health systems have the opportunity to grow by providing integrated continuity of care for their patients, no matter where they’re being seen, and to capture fee-for-service reimbursements.
Q: How can health system leadership evaluate the opportunity to grow their ambulatory testing program?
D.S.: By working closely with their revenue cycle team and their laboratory to understand both potential revenue and incremental costs. Because that is easier said than done, this is a focus of our consulting work. Our consulting team can quantify the market size along with associated revenue and expenses, providing a roadmap for profitably expanding operations.
Access the white paper, “Retain Control, Retain Revenue: Why Investing in Ambulatory Lab Services Is a Better Long-Term Strategy Than Selling,” to explore the clinical lab’s financial contribution to the system and learn from the experiences of labs that have successfully grown their fee-for-service operations.
At the Becker's 11th Annual IT + Revenue Cycle Conference: The Future of AI & Digital Health, taking place September 14–17 in Chicago, healthcare executives and digital leaders from across the country will come together to explore how AI, interoperability, cybersecurity, and revenue cycle innovation are transforming care delivery, strengthening financial performance, and driving the next era of digital health. Apply for complimentary registration now.