by Walt Valliere
Consulting Director
10/21/20

The COVID pandemic has produced many new challenges for hospital-based laboratories. Laboratory personnel have been eliminated or furloughed due to a number of reasons: lower numbers of elective surgeries reducing workloads; labs that have not been set up to handle COVID-19 testing; and supply lines that have been compromised for essential supplies and reagents forcing laboratories to acquire product from sources where no negotiated purchasing agreements exist.

One area that laboratory leaders may find immediate cost reduction opportunities is through a review of utilization and pricing for reference laboratory services. 

Typically, reference laboratory costs represent a hospital laboratory’s second largest purchased service expense. So, attention to reference laboratory test pricing has the potential to yield significant cost-savings if managed to that goal. However, a successful outcome requires a framework that allows a hospital laboratory to understand the cost-savings opportunities in advance of negotiating directly with current vendors or issuing an RFP.

Our nation’s independent reference laboratories, as we know them today, were founded by Dr. Paul Brown in the late 1960s in New York as Metropolitan Pathology Laboratory, Inc. His idea was that laboratory tests could be performed with results delivered to physicians better, faster and cheaper independent of hospital-based laboratories. He also recognized that by focusing on medical laboratory-related business exclusively, it was possible to expand testing capabilities into the area of esoteric testing, which was significantly more profitable than routine testing. Metropolitan Pathology Laboratory, Inc.was a successful venture and has gone through several name changes and acquisitions and today is known as Quest Diagnostics, Inc.

Independent laboratories such as Quest serve thousands of clients domestically and internationally. Their success, as with all reference laboratories, is based on knowing how to cover direct costs while negotiating pricing with existing and potential clients. To make the playing field more level, hospital-based laboratory leaders need to remember there is a large variation in test type and pricing for work outsourced to reference labs. Additionally, insight regarding existing test pricing and benchmarking with peers is essential before negotiating pricing or issuing an RFP.

Let’s examine five reference laboratory pricing arrangements that I’ve managed for hospital, IDN, and academic medical center clients over the last 18 months:

Reference laboratory pricing covers a broad range of test types. Because of the broad range, we advise against using average price per test as a metric for evaluating prices in a data set.

While the average and median can be the same or nearly the same for some hospitals, they are different if more of the data values are clustered toward one end of their range and/or if there are some extreme values. In statistical terminology, this is called skewness. Because significant, extremely high pricing existed in each reference laboratory price set we evaluated, the average was significantly influenced by the few extreme values, making it a less than reliable measure of true central tendency for the values in the data set. Under these circumstances, median provided ves a better representation of central tendency than average.

The benchmark data also revealed that cost savings opportunities existed for all five clients although three of them thought that their existing pricing could not be improved. The opportunities were identified by benchmarking current detailed reference laboratory prices in advance of issuing a competitive bid or initiating a price negotiation. The formal benchmarking exercise allowed the client to understand the cost saving opportunity, set a target price and establish a work plan and negotiating framework to achieve the goal target. In other words, the client negotiated from a position of strength due to price insights gained by benchmarking its existing reference laboratory book of business.

It is important to also mention that many reference laboratories contract using value-added sales models. While these value-adds are useful, hospital laboratory leaders are advised to focus on price. Once acceptable pricing is established for reference laboratory testing, a value-add conversation is appropriate.

In conclusion, the age of COVID requires hospital laboratory leaders to aggressively seek ways to improve laboratory performance and to reduce costs. One area where opportunities exist is in reference laboratory pricing and contracting. Before entering a price negotiation with a reference laboratory provider or issuing a competitive bid, benchmark your pricing so you know what potential cost-saving opportunity exists, thus allowing you to negotiate pricing from a position of strength.

To learn more about identifying savings opportunities for your hospital lab, visit Vizient Pharmacy Solutions.

About the author. Walter Valliere brings more than forty-five years of experience leading initiatives to grow market share and reduce operating costs through process improvements, strategic outsourcing, business restructuring, business consolidations, supply chain optimization, and new venture development. Nine years with Vizient, Valliere has also held principal leadership/ownership positions with both a multi-site independent laboratory and a specialty consulting firm that served healthcare, biotech, and biopharma industries.