Hospital laboratories that compete for non-patient outreach business often find themselves hamstrung by collection problems, a lack of pricing flexibility and difficulties in determining the true financial health of the laboratory.

As a result, some health systems are electing to sell their hospital laboratories to national lab companies. Although this decision can generate a one-time financial gain and steady revenue going forward, it also cedes control of a vital hospital and community asset to an outside party and can compromise a good referral base for non-patients in search of hospital services.

Finally, selling ignores the opportunities that exist to improve a laboratory’s overall financial performance and boost its bottom line through utilization of existing staff and technology.

McKesson Business Performance Services (McKesson) understands the economic difficulties that are affecting the hospital laboratory revenue cycle today. That’s why we work to help our clients enhance their financial transparency and competitiveness by strategically focusing on four key operational areas. These areas include:

  1. Data Collection
  2. Pricing Differentiation
  3. Hospital Contracts
  4. Sales and Marketing Strategies
Data is destiny

In-house laboratory billing traditionally has flowed through the hospital’s central billing office and revenue cycle management platform. This methodology may be adequate for labs that focus solely on hospital-generated business, but the approach falls short when it comes to outreach services.

That’s because most hospital billing systems are not equipped to provide the business intelligence needed to manage the lab as a stand-alone business. Without the ability to separate inpatient, outpatient, and non-patient procedures, hospital platforms are unable to produce the data required to track, compare and understand a lab’s overall business mix.

Making matters worse, many hospitals’ central billing offices focus their collection efforts exclusively on low-volume, high-dollar claims and consequently write off delinquent or denied low-dollar claims like those produced by lab procedures. This trade-off results in a continual and significant erosion of revenue.

The good news is that McKesson’s laboratory billing solution can extract a wealth of financial and operational data to help labs understand exactly where they stand financially and where they can improve. For example, McKesson’s transaction-level posting allows for detailed cost analysis by patient type, location, payer, CPT code, referring physician and/or any combination thereof.

McKesson’s billing solution also can produce reports that allow labs to monitor reimbursements, from fluctuations in charges and collections to physician-specific referral collections and payer reimbursement trends. By tracking key cost and revenue indicators, labs are able to accurately evaluate their outreach business to determine profit and loss. They can also benchmark performance against industry norms or internal targets and make more informed business decisions.

Dedicated laboratory billing solutions like McKesson’s likewise generate monthly contract variance reports that compare fee schedules against the amounts actually submitted by the payer. This helps confirm that claims are being paid according to agreed-upon terms.

Finally, McKesson’s focus on addressing the full spectrum of laboratory revenue cycle requirements means that no claim, however small, is ignored. Rigorous collection and denial management processes help labs capture every dollar they’re entitled to.

Pricing power

One of the most common problems hospital labs face in competing for outreach business is the inability to offer better pricing through discounts and multiple fee schedules. Pricing inflexibility typically reflects the hospital view that the laboratory is simply a cost center and service provider created solely to meet hospital inpatient and outpatient needs. Because the idea of competing for external lab business has not traditionally been part of hospital administrators’ DNA, little or no thought is given to creating multiple fee schedules and strategies to improve the lab's competitive footing beyond the hospital walls.

Once this mindset is altered, competitive pricing requires a laboratory billing platform equipped with powerful rules engines and pricing logic that can accommodate differentiated pricing strategies. The system should likewise have the capacity to discount existing schedules based on pre-defined revenue or volume thresholds. By establishing true pricing flexibility, practices are far better positioned to defend market share and generate incremental revenue over and above their fixed costs.

The best of both worlds

Outreach labs gain significant contracting leverage by operating beneath the umbrella of their hospital’s taxpayer identification number. As a component in a larger provider organization, labs typically receive more generous payer terms than those offered to stand-alone, independent labs.

Labs can create additional leverage by setting up their own national provider identification number (NPI) within the framework of the hospital’s taxpayer ID number. A unique lab NPI allows payers to process lab claims separately from hospital claims. This provides the lab with greater visibility into their reimbursements and case mix, as well as cleaner segregation of cash application.

There is also the big picture to consider: Thanks to the Protecting Access to Medicare Act of 2014 (PAMA), labs that operate under their own NPI will help set Medicare lab reimbursement rates going forward. Beginning this year, the Centers for Medicare & Medicaid Services (CMS) will use the weighted median of private payer rates paid to NPI-designated labs to establish the Clinical Laboratory Fee Schedule (CLFS). Insofar as hospital rates typically are higher than those paid to independent labs, it is in the collective best interest of hospital labs to report under separate NPIs and thus push up, or at the very least, sustain overall CLFS reimbursement rates going forward.

Chasing business

Another under-utilized strategic opening for laboratories involves adopting a more pro-active approach to client maintenance and business development. Too often, a hospital provider relations specialist serves as the de facto sales representative for laboratories. While these individuals may have the best of intentions, many lack the knowledge or incentive to actively sell outreach business to referring physicians.

Assuming hospital outreach laboratories can compete on price, they should consider recruiting dedicated sales and marketing personnel to aggressively pursue outreach opportunities. Not only can lab-specific marketing increase the organization’s visibility in the provider community, it also creates a means for allaying common misconceptions about hospital-based labs. Chief among these is the frequently held notion that hospital labs cannot or will not take non-patient business. Demonstrating the ability to perform non-patient testing in a cost-competitive and timely fashion can go a long way toward winning business that may previously have ended up with a national laboratory company.

McKesson Market Analysis for Pathology and Laboratory is designed to help clients maintain and expand their referral base while gaining a competitive advantage. Using defined referral patterns and dynamics, this program helps assess market potential and project opportunities for future growth. In addition, McKesson’s Client Marketing Resources offer a variety of market resources to assist in the identification, hiring and training marketing and sales personnel.

Creating a profit center

At first blush, selling a hospital lab to a third-party provider may seem like a reasonable, low-risk move that will generate a predictable revenue stream and alleviate operational and management headaches. But it is important to remember that while a lab typically represents just 5% of hospital spend, fully 80% of clinical decisions turn on work produced in the lab. Moreover, the importance of the lab in assessing population health is likely only to grow as value-based care gains momentum.

It is therefore worthwhile to consider the opportunities created by data collection, improved pricing, hospital contract leveraging and dedicated sales and marketing. By working with McKesson to convert your lab from a cost to profit center, a key component of the care continuum remains under organizational control. What’s more, effective financial management in the lab can contribute to the hospital’s hard-pressed bottom line.

With revenue cycle management expertise in billing, coding, collections and financial reporting for pathology practices and clinical laboratories, McKesson Business Performance Services for Pathology and Laboratories can help you compete in the changing healthcare environment.

McKesson Helps Meridian Laboratory Physicians Navigate Difficult Waters
Brian Kemp

About the author

Brian Kemp
Vice President, Laboratory Operations
McKesson Business Performance Services