The Value in Lab

Hospital systems acquire physician practices, but what happens to the physician office lab?

In this corner, patient care.

In this corner, cost.

And in the middle? The lab.

These days, as hospital systems’ stomachs appear to be growling for physician practices (and vice versa), lab professionals, and the patients themselves are caught in the middle. Should the hospital system take on some or all of the lab testing done in those offices, thus fully using its experienced staff and state-of-the-art equipment? Or should the physicians’ offices hold on to their analyzers in the name of better patient care?

The question will come up with increasing frequency: “Hospitals are grabbing physicians as fast as physicians are running to them,” says Patrick Creager, medical technologist ASCP, HS, and president of Guidance Healthcare Consulting, Grand Rapids, Mich.

That these decisions will have to be made is inevitable. They already are, and the results aren’t predictable.

“As a broad observation, ‘If you’ve seen one, you’ve seen one,’ or put another way, the model varies widely from deal to deal,” says Sumner Spradling, CEO, Infolab Inc., when asked about which way hospitals and doctors are going on the centralized-vs.-decentralized lab debate. “Whether or not the hospital assumes the lab testing depends on how the deal is negotiated.

“Generally speaking, lab testing is addressed during the negotiating process between the hospital and the physician. So if a physician sees value in the laboratory and wants to retain it as part of the practice, then the hospital is likely to accommodate the doctor during negotiations. But if it gets overlooked or if there is no strong voice, then the hospital is highly likely to assume some or all of the lab testing.

“We see widely divergent outcomes in this regard, but most acquisitions result in some if not all lab testing migrating to the hospital. Unfortunately, many times the physician lab is simply an unintended casualty of the transaction.”

The tests that tend to migrate to the hospital include what Spradling calls the “Big Four” – hematology, chemistry, immunoassay, and coagulation. Rapid diagnostic tests are typically left on site at the physician office, he adds. “But it is important to restate that there is no standard pattern as to how lab testing is handled in an acquisition.”

Good ol’ fashioned customer service
“In my opinion, it’s easy to integrate the back office, billing, coding, procurement,” says Mark Zacur, vice president of marketing and business development, Thermo Fisher Scientific. “But as it relates to the lab, I have a hard time envisioning a huge amount of integration. Most of the testing in the physician office is done that way for speed, efficiency and customer loyalty – the ability to get back [with results] to the customer quickly. I don’t know that I see that really changing, at least not for flu, strep, that sort of thing. If more sophisticated testing is required, or there’s some huge financial benefit to leveraging the central lab, I can see that.”

“Hospitals are taking moderately complex, but not waived, tests,” says Tim Dumas, TLD Consulting LLC. “The reason waived tests came into existence in the first place was rapid turnaround time. It’s all around patient care.” Waived tests yield rapid results, allowing the doctor to make a diagnosis and prescribe treatment, he says. “They don’t have to call the patient back. That’s one of the big advantages to having your own in-house testing – you get patients treated, and they’re out the door.” Neither physicians nor hospitals are likely to change that.

Adds Creager, “Most hospitals that are big enough to buy practices, at least in metro areas, have done some outreach to doctors’ offices.” Their message to the docs: “We’re roughly the same or just a little bit more expensive than [a commercial lab], but we will put a printer in your office and we can get your lab reports directly to you; and we’ll pick up three times a day.” It’s a proposition that may be hard for the physician to turn down.

What’s most important is that the physician makes the decision, says Rodney Forsman, assistant professor emeritus of laboratory medicine and pathology, College of Medicine, Mayo Clinic. “One might assume, on paper, that it would be great to have a core lab in the middle [of an IDN], to create efficiencies,” says Forsman, who is president-elect of the Clinical Laboratory Management Association. But with years of experience under its belt integrating multispecialty practices, Mayo has discovered that what works best is letting the physician decide what’s best for patients. “That may mean, in many instances, that some tests are done near the patient, in the doctor’s office. A classic example is hemoglobin A1c. You’re getting numbers while the patient is in front of you. The hope is, you can drive better compliance and good old-fashioned customer service.”

Regardless of where the tests are performed, newly created accountable care organizations will have to carefully decide which tests are performed at all, continues Forsman. “It’s analogous to the DRG model on the inpatient side. You’re not going to overutilize [the lab], because you don’t get paid any more to do so.” Calling himself a strident advocate for the lab proving its value, Forsman says that “providing the right test at the right time on the right patient can avoid a lot of other aggregate costs of care. If you can avoid starting the wrong treatment for depression or ordering other procedures or pharmaceuticals [that are unnecessary or worse, incorrect], that’s where the expense is, and lab is a way to get at some of it.”

Overutilization a problem
While the physician office lab has its defenders, others question its value, at least for moderately complex tests. “Personally, I don’t think that [point-of-care testing] was ever an efficient model, as it encouraged overutilization and increased capital costs compared to the use of centralized laboratories,” says Ted Almon, president and CEO, Claflin Co. “In addition, the loss of revenue from ancillaries, such as complex testing, forced hospitals to raise prices of other procedures/services in order to cover their high fixed costs. This resulted in higher total system costs in spite of sometimes lower unit costs for [point-of-care testing].

“Having said that, I think the only testing that will remain decentralized in the doc’s office will be extremely simple tests. Generally, these IDNs/ACOs set up a courier service that runs among the sites picking up specimens and delivering supplies, results, etc. I think this will be true of most ancillary services, which have become fragmented in recent years due to physician ownership and other economic issues.”

Progressive IDNs are purchasing physician practices and consolidating them to capture economies of scale, says Almon. “Others have taken a much more hands-off approach, but what we have called the healthcare ‘system’ has, in reality, not been a system at all, but a highly fragmented, somewhat duplicative, and competitive array of independent providers organized around their own need to survive financially, rather than around patient needs or convenience. The idea of some ‘organization’ that is capable of being ‘accountable’ for the actual needs of a patient population is the essence of reform, and should be able to produce superior results at dramatically lower costs.”

Relief for some
In some cases, physicians may actually welcome centralization of the lab, particularly for more complex testing, points out Spradling. “The upside for the physician can probably be summed up in one word – security,” he says. “The physicians I have interviewed have all said pretty much the same thing: ‘We’re having to see more patients for less money, and we’re being squeezed to the point where we can’t make ends meet.’ A physician in that position is no doubt relieved to have the hospital take over responsibility for the practice. This includes in-office lab testing. No lab equals no employees, no operational costs, no equipment payments, no proficiency testing, no lab inspections. For a physician who does not want the responsibility, this is definitely an upside.”

Creager says that despite conventional wisdom, in-office testing may not be as profitable for physicians as they think, and hence, doctors might be wise to “outsource” more complex tests to the hospital system. “Doctors may think they’re making money, but they’re not taking into account their true expenses,” he says, that is, equipment, quality control procedures, repeat tests, etc. Some doctors fail to hire qualified people to run their labs. And there’s always the doctor who decides that since she was exposed to lab in medical school, she can run a successful lab on her own.

“You don’t have a person who knows the business of lab, and those practices will lose money,” says Creager. “There are some practices for whom it’s working out well, particularly if they limit themselves to CBC, urinalysis and basic chemistry. But once they go further than that, they have trouble with reagents expiring, inability to calculate their volume, mismanagement.”

For hospital, driving down unit costs
Centralizing many lab functions is a “win” – even a necessity – for hospital systems, says Almon. “They must force this ancillary business back into the hospital in order to drive down their unit costs,” he says. “And they want to capture all the referrals from the practice, which may have previously been divided between several hospitals where the doc was on staff. It also eliminates the doc’s tendency to play one hospital off against each other in a competitive game over preferred OR times and a variety of other costly accommodations.”

Says Spradling, “With specific regard to lab testing, the upside for hospitals is increased test volume and therefore more reimbursement/revenue. Whether the hospitals can cost-effectively and efficiently assimilate the added test volumes and report results in a timely and secure manner is unclear at this point.
“In a more general sense, the upside for hospitals is their ability to assemble the necessary components to qualify and function as an accountable care organization, and therefore capture and maximize reimbursements, including those for lab testing,” he continues.

Adds Forsman, “When you talk about what should be done where, hospital labs have capacity that’s unused, especially on the second and third shifts. They have to be available 24 hours a day. So they have excess capacity, and they could easily bring on work. That’s a notion I have espoused – outreach to community. But they have to make it available at a reasonable price to the physicians. Make those things available that they can do uniquely and efficiently, and provide superior turnaround time to the physician office.” But, he adds, there are tests that are best performed in the office, with the patient on hand.

Lost revenue and autonomy
For the physician, though, losing the lab to the hospital system can be a hardship. “The downside [for the physician] is lost revenue and lack of autonomy,” says Spradling. “Clearly there is reduced control over how the practice is operated” when a hospital system acquires a practice. “There are also logistical problems, i.e., waiting for test results from the hospital. Ironically, not having on-site lab testing actually increases the cost of patient care by virtue of repeat office visits, additional patient-notifications costs, courier costs, compliance costs, etc. And the most important downside of all is the inability to have test results available while the patient is on site.”

There’s an upside and a downside to centralizing lab functions, some of which go beyond merely performing tests, points out Zacur. “There’s a benefit to standardization of protocols and certain types of test,” he says. “I would assume the hospital would bring some discipline to that. But from patient perspective, there may be the risk of losing some personalization.” In other words, if the hospital dictates which tests should be performed in response to specific indications, the physician may lose the ability or inclination to perform other tests based on his or her intuitive interpretation of the situation. “There may be a loss of flexibility,” he says.

Hospitals’ costs can be substantial
In some ways, the hospital can actually lose out by pulling in testing to its central lab. “The downside for hospitals is the cost of acquiring and operating the practice, along with substantial integration and standardization costs,” says Spradling. “With specific regard to lab testing, there are increased costs for additional test materials and ancillary products, specimen transport, labor costs and reporting costs. Also, as hospitals standardize, they incur costs associated with acquisition of standardized equipment, reagent systems, control and calibration materials, proficiency testing, etc.”

It’s true that the central lab may have plenty of capacity and existing overhead, says Creager. And from that standpoint, bringing in as much testing as possible makes sense. “But in some instances, after the hospital acquires the practice and gets the lab work, those doctors may become unhappy or disenchanted, and start sending out lab work to Quest or someone like that. In that case, the hospital may end up losing money, because they may have worked lab into their comp package.”

What about the patient?
While economics and logistics are important in discussions about the lab, the welfare of the patient should drive any and all decisions regarding lab testing, according to those with whom JHC spoke.

“Theoretically, the upside for the patient [of the integration of inpatient and outpatient care settings] is continuity of care as a function of the accountable care organization,” says Spradling. “However, it remains to be seen whether this will actually materialize.

“When lab testing is shifted away from the practice to the hospital, there may no longer be the ability to provide test results during the patient’s initial visit. That is clearly a disadvantage from a patient-care perspective, and a tangible cost to both the patient and the practice in terms of callbacks, follow-up visits and possibly even delayed treatment. Even when lab tests are performed prior to the office visit, the patient is still inconvenienced by having to make multiple trips. This is a tangible cost to the patient in terms of time off work and transportation costs, not to mention the anxiety and stress the patient experiences while waiting for test results. In a society of instant everything, this is unacceptable.”

Almon has a different take. “The coordination of various provider entities and the commonality in their access to patient records should make the system far easier to navigate for patients and minimize needless redundancy in record keeping, testing, etc.”

“There is the element of consumerism,” says Forsman. Patients going to the doctor expect test results on the spot. “You could argue whether that’s always clinically useful or not,” he says. “But if you don’t offer those tests, people will vote their feet and go to someplace that does.”

Can IDNs pull it off?
Even if hospitals and doctors were inclined to bring tests in to a centralized lab, can hospitals pull it off? And if the hospital system or IDN does allow onsite testing to continue, but wants to exert some control over it, does it have the savvy and expertise to coordinate testing among all the different sites it now owns?
“Test turn-around time and reporting mechanics present new challenges,” says Spradling. “Probably most difficult of all is simply integrating the practice and its patients into the system. How does the hospital efficiently implement contracts, personnel policies, record-keeping, security policies, etc.?

“As an example, a hospital with multiple clinics may allow on-site chemistry testing. But in order to standardize, they need all clinics to operate the same brand of analyzer. This in turn necessitates standardization of reagents, proficiency testing, lab information systems, and service contracts. This also requires systemwide standardization of control and calibration lots to minimize variation from site to site.” What’s more, the hospital will have to make sure that all sites follow standardized written procedures. “It is a costly and time-consuming process, and both the hospital and the clinic appear to be struggling with implementation.”

Hospitals that pull in CBCs, for example, risk burning bridges and making plenty of enemies if they fail to provide good service to their outlying sites, says Dumas. “The problem is, it’s a hell of an infrastructure to build if you don’t know what you’re doing,”

The information technology factor
A wild card in these developments is information technology. The Obama administration – as the Bush administration before it – has championed electronic connectivity. Should that happen, and should physician offices have easy, instantaneous access to lab results for tests performed at a central lab, they may welcome centralization, says Forsman. “Decisions will be made on the basis of quality and turnaround time, and that will be driven a lot by the IT solutions.”

The patient – and health system at large – will benefit by electronic connectivity as well, he says. “Fifteen to 20 percent of lab testing in this country is redundant, because we can’t find the previous test. Or if you’re in the hospital, you run the same tests over again. If everyone is on the same system, and physicians can view previous or subsequent results, you save money.”

“I think there are a lot of assumptions we have been making in our industry that will now be questioned,” says Almon. “Among them will be whether moving a lot of tests and procedures out of the hospital as a way of saving money made any sense. I think it would only if you get rid of some hospitals as a result. Otherwise, hospitals have to be fully staffed and equipped 24/7, and therefore have high fixed costs. Doing fewer tests and procedures doesn’t change that, so while they may have cost less on a line item basis in the off sites, the hospital costs never went away, hence much higher total societal costs.”

“The mad rush to acquire physician offices is, I believe, driven in very large part by the new reimbursement model centered on the accountable care organization,” says Spradling. In the 1980s, lab testing moved from the hospital to the physician office as an unintended consequence of government regulation and reimbursement in the form of DRGs, he says. “To put it another way, the market followed the money.

“The point is, as reimbursement goes, so follows the market. So if this ACO model is changed in the near future, what will the hospitals do with all those practices they now own? And if they divest themselves of these practices, will lab testing migrate back to the physician office, or will it stay in the hospital?

“There is clearly a need for both hospital and physician office labs,” says Spradling. “I can only hope that hospitals, in their single-mindedness to capture market share, do not throw the office lab baby out with the bath water. The good news is that not all doctors will abandon their practices or their labs. They know that in-office lab testing is not only a sound financial investment for their practice, it is good medicine.”

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