Transforming Your Lab from a Cost Center to a Strategic Asset

The hospital laboratory can be a source of value enhancement with several areas for optimization.

First Published in Healthcare Financial Management Association

Hospital labs are challenged on multiple fronts, including growing reimbursement pressures, increasing breadth and complexity of laboratory technology, rising laboratory costs, and ongoing staffing pressures. These challenges are leading health systems to reevaluate the financial benefit of running their own labs and to assess alternatives that can optimize hospital lab financial returns while retaining control of the continuum of care.

The Challenge

Hospital labs deal with many of the same challenges faced by health care in general, including an aging workforce, a shortage of new talent entering the field, reimbursement and bundled payment pressures, and quality and service challenges. These challenges are further complicated by a proliferation of new technology driving increased utilization of expensive laboratory tests, which increases the diagnostic cost of clinical care.

Hospital labs provide 60-90 percent of the clinical information in all electronic health records and are a rich source of data for patient care and broader population health opportunities. In spite of this rich resource, hospital labs are often seen as cost centers and are not effectively integrated with the clinical operations. This separation leads to waste and poor quality and service that can result in a delayed discharge, delayed admission from the emergency department (ED), and potential misdiagnosis.

The Opportunity

Hospital labs offer an immediate opportunity to transform and be utilized within the health system as a strategic partner by implementing innovative approaches for process improvement and cost control. The top priority should be to ensure all service lines are operating at their best.

The improvements can come from several key areas, such as cross-training, management and reporting of critical performance measures, and implementation of Lean strategies. Cross-training can help address natural workforce fluctuations caused by attrition and paid leave without adding resources or missing on quality and service. Work should be based on experience, freeing up critical team members to perform more complex testing while using entry-level staff to fulfill routine tasks.

Another efficiency drain is the placement of critical equipment, which is often located where it fits physically rather than where it fits in the workflow. Hospitals optimize productivity by eliminating wasted steps and creating work cells to allow team members to operate more than one piece of testing equipment at a time.

Opportunities to reduce costs in the hospital lab are not only driven by the process improvement strategies noted above but also achieved through reducing the costs of supplies and “send out” tests and ensuring an effective patient blood management program. Laboratory supply spend should be analyzed to ensure the test menu is optimized (tests are performed with the fastest turnaround and highest quality and at the lowest cost). This requires a comprehensive assessment of the hospital’s technical capabilities to determine if the work should be brought in-house as well as a competitive pricing analysis. Patient blood management programs are focused on reducing unnecessary transfusions to patients through education and monitoring, and they are highly correlated with better patient outcomes and directly tied to savings in blood spend.

Through these opportunities, hospital labs can achieve cost savings ranging from 15 to 25 percent or more in a period of three years or less. Such financial improvements can give hospitals flexibility to expand their service offerings.

Hospital leaders can continue to drive value to the health system by developing an effective physician outreach program. Community physicians are interested in delivering top-quality service to their patients at a competitive price. Effective outreach programs deliver this value to physicians, patients, and hospitals. Same-day testing is a key benefit to using a local lab, as well as robust and timely reporting of results. In addition, an outreach lab creates an additional revenue stream for the health system, leveraging the existing equipment and resources needed to provide all of the inpatient testing.

A transformed hospital lab can add value to the broader continuum of care by providing insights on patient populations and monitoring key disease trends. Consider the following questions.

  • Are test results showing a disproportionate number of chronically ill patients compared with the community at large?
  • Are there opportunities for other service lines within the hospital to leverage this insight and improve patient care?
  • Is there a way for the lab to identify critical population risks through testing already performed by the lab?

By developing a cooperative relationship between hospital lab leadership and the clinical leaders of the hospitals, health systems can drive true advances in patient care.

The Approach

There is a clear path to ensuring transformation in the lab, which can only occur with a well-executed process improvement program, leveraging a variety of subject matter experts, including medical technicians, operations excellence experts, clinical patient blood management experts, supply chain experts, and financial analysts, along with a strong executive sponsor. A successful program requires the following elements.

  • Physician buy-in. Physicians are the key stakeholders of lab results and information, and clear communication and engagement is critical to ensure their support.
  • Evidence for change. Whether it is cost improvement or clinical quality, stakeholders require evidence that the changes made will succeed and that patient care is not a affected.
  • A variety of subject matter experts all rowing in the same direction. Healthcare services require multiple inputs, and the lab is no exception. Key stakeholders for a successful lab transformation program include pathologists, those responsible for lab operations, the chief medical officer, ED physicians, supply chain leaders, the finance team, and IT staff. Ensuring stakeholders understand their roles in delivering the transformation and the expected results requires a well-coordinated, focused approach.

Once the transformation has been started, key initiatives should be put in place to lead the change, and ongoing performance should be monitored.

Dedicated Resources to Sustain Change

Hospital leaders should take a close look at the effectiveness of using internal staff. There are several competing pressures on systems operations experts, and this pressure may delay or reduce the opportunity for true transformation. Some key factors to consider are the following.

  • Timing. Now is the time for health system leaders to maximize the value of their hospital lab. Labs will continue to grow as a source of clinical information, and poor quality and service as well as increasing costs can no longer be absorbed by the hospital.
  • Teamwork. To drive transformation in a hospital lab, you will need to establish a dedicated, multidisciplinary team that is focused on the successful outcome. For true transformation, hospital leadership should determine if existing resources have the ability and capacity to ensure success. If internal resources are unable to drive the change, hospitals can select a partner that will work side by side with the hospital teams to ensure success, often using a risk- based payment model. The savings from the transformation should more than cover any incremental costs incurred to reach these savings.

You can achieve “quick hits” with short term projects, but true savings as well as greater lab efficiency will come after a multiyear, focused effort.