Hospitals have been selling their lab outreach operations for a number of years, mainly to the two large national reference labs, Quest and LabCorp (see: LabCorp to Acquire Assets of Mount Sinai Health System Clinical Outreach Laboratories). A recent article in CAP Today raised the issue of whether hospital executives understand the true value of their lab outreach programs and may even be undervaluing these properties when selling them (see: Is the value of hospital lab outreach underrated). Below is an excerpt from the article:
Hospitals across the nation have been selling their laboratory outreach operations to national laboratories, which have been snapping them up from community hospitals and larger enterprises ....Management executives at many hospitals and health systems have said their impetus to sell is to focus on what they consider more profitable parts of their operations. And observers say such transactions are likely to continue. But what if it turns out that selling those laboratory businesses means their owners are actually selling them short?....According to data Chi accumulated through its industry surveys, in 2013 the average outreach program enjoyed $58.33 of revenue per requisition (compared with slightly more than $44 apiece for both Quest and LabCorp); annual revenue growth per requisition of 5.3 percent (versus a 4.3 percent decline and a one percent dip for Quest and LabCorp, respectively); and a profit margin of 28 percent per requisition (compared with less than 19 percent for Quest and less than 16 percent for LabCorp). And outreach has grown significantly over the years.....[M]any hospitals simply book their gross revenues without looking at outreach-related net revenues. That’s exacerbated when it comes to billing, as laboratory is often mixed with other services such as x-rays.....[B]y not breaking them up and understanding what their real profitability is as part of the institution as a whole,...[lab outreach operations] can be undervalued....Not only does this suggest hospitals may be misjudging the need to sell their outreach, but they lack the data necessary to negotiate a strong sales price.
None of the points made in this article were surprising to me. Hospital executives may not understand how significant their outreach programs actually are for their bottom lines. However, I also think that a larger issue is that some executives are not that interested in their diagnostic units, particularly the labs. They have a better appreciation and understanding of direct patient care operations and can therefore justify spin-offs of lab outreach on the basis of the programs being not profitable. Selling hospital labs to a reference lab may also be a strategy for addressing persistent lab management and quality problems. In a previous post about outsourced diagnostic services (see: Value-Based Healthcare Will Drive Outsourcing of Hospital Diagnostic Services), I made the following point:
Hospital executives will have a near-total focus [under value based care] on the delivery of clinical services as opposed to ancillary [i.e. diagnostic] services. Although critical in diagnosing and monitoring disease, diagnostic services remain tangential to this view of the role of the hospital. In the movement from fee-for-service to value-based care, there will no longer financial incentives to encourage the use of radiology and lab services which in the past have made major contributions to the hospital bottom line.
I personally believe that hospital executives who outsource or sell their outreach operations may be losing sight of the quality implications of such an initiative. I don't believe that outsourcing lab operations to a national lab reference lab will necessarily result in higher quality lab testing for hospital physicians. Of course, while all of this is occurring, we also are experiencing a trend toward hospitals going out of business or being acquired by larger ones. There is also a trend toward "bedless" hospitals which I discussed in a recent blog note (see: Some Additional Ideas About the Bedless Hospitals of the Future). As described, there is another strategy that comes into play for providing lab support for these acquired hospitals or all hospitals in a single system:
Under pressure from MACRA, some large health systems will consolidate/insource their lab operations and testing to their own central labs. With economies of scale, these centralized labs will be able to perform most esoteric testing with few remaining send-outs such as some genomic and molecular tests. Some of these large health system centralized labs will be located in bedless hospitals.