Navigating the laboratory’s macro- and microeconomic environment

By Walter Valliere, Vizient Consulting Director

The U.S. healthcare's macroeconomic environment in which hospital-based laboratories are currently operating — amid inflation, rising healthcare costs and regulatory burdens — is facing scarcity. This gap between the demand of a growing, aging population, and availability of resources continues to increase. According to the National Library of Medicine, about 70% of clinical decisions are based on an initial laboratory result that highly influences downstream medical care. Medicare spent $7.68 billion on clinical laboratory tests in 2019, an increase of $93 million from 2018, while payment rates in 2019 were lower for 73% of laboratory tests than in 2018.

Rounding out the perfect storm of scarcity in the laboratory macroeconomic environment are higher labor costs fueled by a growing shortage of qualified laboratory bioanalysts, increased test volumes (particularly new and expensive tests), incomplete deployments of laboratory automation and higher costs for materials. Simply stated: Hospital-based laboratories across the nation are stressed to deliver high-quality and cost-effective services.

Unlikely that the environment will improve anytime soon, it's more important than ever for hospital-based laboratories to implement proactive strategies to improve efficiencies. Leaders should carefully assess these microeconomic trends — ways to cut costs and improve capacity and quality — as part of their laboratory decision-making throughout 2024 and beyond.

1. Standardize laboratory methods and operating systems. The importance of standardizing laboratory operations and improving the alignment of laboratory capabilities with institutional demand and evidence-based medical practices has increased significantly over recent years. Doing so enables leaders to strengthen operations, realign capabilities and workflow, develop partnerships or exit certain laboratory segments.
2. Restructure laboratory capacity through capability tiers and partnerships. To address increasing and emergent demand events and labor shortages while supporting optimized testing production and reducing costs, many hospital-based laboratories are seeking partnerships with physicians to reduce unnecessary testing. They're also redefining on-site testing capabilities using laboratory capability tiers and developing new levels of "strategic" capacity through formal mergers and acquisitions, as well as complete or partial outsourcing.

3. Monetize non-profitable laboratory outreach programs. Many hospitals have set up laboratory outreach programs to capture test demand from non-hospital sources such as physician offices and non-hospital clinics. Unfortunately, many of these programs don't produce net operating incomes (NOL). Currently, select independent laboratories are buying hospital-based laboratory outreach business books as part of their strategies to increase sales, market penetration and reduce competitive pressures. Hospitals benefit by receiving a one-time cash payment and reducing costs.
4. Acquire laboratory automation that delivers production efficiencies and measurable cost reductions. Driven by worsening long-term labor shortages of qualified laboratory bioanalysts and the imperative to reduce operating costs, hospital-based laboratories are investing in total industrial pre-analytical and post-analytical automated systems to produce documentable cost reductions and improve workflows. Automating inefficient, repetitive and unrewarding tasks such as specimen aliquoting, pipetting and specimen storage supports laboratory bioanalyst retention by maximizing the top level of bioanalysts' education and training. Automation also helps to reduce manual errors, strengthen quality and reduce the cost of test production.
5. Consider exclusive third-party payer agreements. Third-party payers continue to shut out hospital laboratory outreach programs and other competitors by developing exclusive laboratory provider arrangements with select independent laboratories for non-hospital testing at discounted pricing. This contracting model is expected to increase throughout 2024. To compete, hospital laboratory leaders should focus on maximizing outpatient business capture where it has active third-party payer agreements instead of focusing on outreach business capture (non-hospital business) thus leveraging existing positions with third-party payers.
6. Integrate digital pathology and artificial intelligence (AI) into laboratory service paradigms. Emerging technologies promise to provide transformational change within labs. As AI gains acceptance, the technology will improve efficiencies and could significantly reduce labor constraints. AI tools have the potential to deliver improved professional services for physicians and their patients and can facilitate access to specialized expert pathologists and scientists that may not have been otherwise available. However, healthcare laboratories face major deployment obstacles, including obtaining funding for AI technology, as well as analytical testing platforms and information systems that support AI. Overcoming these obstacles could take years for some providers.

In-hospital laboratories are indispensable to patient care. By paying close attention to these trends, healthcare organizations will more successfully improve their quality and laboratory margins.

To learn more about identifying savings opportunities for your hospital laboratory, contact Akiva Faerber, Vizient senior principal at akiva.faerber@vizientinc.com.