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When to consolidate clinical testing (core) laboratories.

By Wan C. Leung / Special to Healthcare Facilities Today
May 24, 2019

Clinical laboratory testing is an integral part of healthcare delivery. According to the American Clinical Laboratory Association, national lab tests guide more than 70 percent of medical decisions and personalized wellness options, including early detection, personalized treatment, and wellness programs, and responses to an individual’s genetic makeup. From my own discussions with clinical testing lab operators, the common feeling is that proper investment must be aligned with this critical patient care value.

Whether in an independent lab, hospital, or large healthcare system, the three primary business drivers are the same: competition, increasing regulation, and insurance reimbursement. Service providers can respond in three ways: expand their service lines or foot print, selectively or completely outsource, or divest. About a decade ago, healthcare providers wanted to offer all services, at a high quality, and expect to be compensated. However, with rising competition and increased operating costs, the need to create a more sustainable or valuable model is the concern of the moment.

There are few models gaining traction; continued outreach, partnerships, outsourcing, and consolidation, all which address specific market conditions. Consolidation, or a combination of consolidation with the other approaches, seems to be most attractive – Quest Diagnostics, LabCorp, Northwell Health, and Geisinger Health System have all recently undergone some form of consolidation. We will examine four key reasons why this might be the most appropriate direction for a health system to take.

Existing facilities and capabilities

Evaluation criteria for existing core labs falls into two categories: are there any deficiencies in the ability of the lab to provide the necessary services associated with the current and future service lines, and can it accommodate their current and potential future customer base as demands change?

Identifying deficiencies often requires careful analysis, including input from subject matter experts outside of the lab operations group. Consider the following:

    • The physical condition of the facility typically degrades over time. The items to examine in detail are those that cannot be easily retrofitted or exchanged. For example, the life of mechanical systems can hypothetically exist for as long as one can maintain them. But how well will they function? Do they have the ability to adapt? Finally, will their continued use cause detriment to the lab? In a recent project I was involved in, the existing ducts contained interior lined insulation, which was fraying and distributing particulates into the lab environment. These ducts provided essential ventilation and air to the labs and are integral to the facility. They could not be replaced without closing large portions of the laboratory to perform retrofits, which was not an option for the business.

      • Can the facility maintain cross-contamination control, requiring separations of testing environments? That is, can separations be created that cannot be achieved through an operational protocol? Depending on the biosafety level and cleanliness of the labs, the existing facility may not have the capability to move to more critical testing.

        • As regulations become more stringent than what existing facilities were designed under, older facilities have to upgrade and adapt.

          • How flexible is the existing facility? Equipment is shrinking in size, but not in scale. Additionally, as testing volume continues to increase, more automation is integrated for efficiency and accuracy, and services lines are added, the ability to adapt remains key. Older facilities, especially those planned prior to the last decade, were based primarily on the manual testing model, which means change requires substantial retrofit and construction.

Increasingly, customers of clinical testing labs want a one-stop shop, particularly as large healthcare systems acquire smaller, more specialized independent practices. The population of customers looking for quality above all is shrinking in favor of lower cost and convenience. With this trend, pressure is applied to core labs to expand their services, deliver services as fast as possible and for the lowest price possible, especially as reimbursement rates become lower. Older facilities find this particularly challenging, due to the possible deficiencies and the attractiveness of new facilities built on flexibility and through-put.

Business reasons and assets

The business of healthcare is anything but easy. Clinical testing labs need to balance a multitude of factors – as well as the pressure to grow, outsource, or sell – to maintain a cost-effective business model.

External pressures are among the strongest drivers for consolidation. Declining reimbursement is an ever-continuous trend. Most insurance policies have moved in the direction of higher deductibles or co-payment, informing the patient of the cost for testing services. Typically, labs offset lowering reimbursement with offers of new tests, enhancing the average cost per-test reimbursement. Medicare adds another level of complexity, as reimbursement uses a weighted median from private payer rates. This requires analysis of ambulatory data and hospital data to effectively establish a strategy. In any case, expanding and growing allows the lab the ability to offer new tests and combat lower reimbursement.

The other element of external pressure is technology. Not only from changing equipment (automation), but from how tests are performed. Patient-centric data bases, specialty systems, and security systems impact test validation, systems redundancy, data back-up, speed of results, and, ultimately, operational costs.

Since growth is considered essential to business success, the volume of tests must grow and as a result, so too must the volume of employees and accompanying need for support. From a recent confidential client that combined joint venture, outreach, and consolidation as a future business model, the table below describes the significant changes required to the existing lab facilities:

Serviceability is also taking the form of one-stop shopping. It is attractive for customers to be able to obtain all of their testing at one provider – it provides convenience and efficiency. It also directly reflects the quality of the results: if re-tests are ordered too often, or contamination occurs, customers have different options to compensate.

Consolidation of services lines go hand-in-hand with core lab consolidation. As the need to reduce redundancy and shift focus to what each lab does best, to encourage best quality results, service lines are co-located, rolled into others, or eliminated or outsourced. This may employ the standardization of instruments and test menus, installation of a common laboratory information system and specimen tracking system, and then optimizing this use of equipment around the clock. When looking at the same lab, the operator can project significant efficiencies in terms of cost-per-test when scaling through standardization is considered.

Additionally, staffing pressures added through retirements, location, and licensing have a significant impact on productivity. Following the status quo would mean adding additional FTE’s when volume increases, but this runs contrary to the need for efficiency. Labs are using metrics to increase productivity and reduce labor through normal attrition. If we look at example labs and the required productivity increase based on units (volume of tests) produced per hour, then a metric can be established for consolidation. In planning a sample lab, the operator can identify a target productivity for each lab area for the growth and consolidation process to be successful. This is based on using the day one metric (base value), then increasing the volume units to the final growth projection (target value). Efficiency is a more complicated metric, as clinical testing labs involve human interaction – it would be incorrect to calculate against a perfect efficiency ratio.

Consolidation presents the idea of a single local regulatory authority, compared to multiple, when satellite locations exists, reducing the need for varying compliance routines, and facility up-keep. The ever-present fact of competition, through physician practices and national reference laboratories, requires hospital labs and regional labs to look for more cost-effective operating measures.

Operational gains when consolidating

The goals of any consolidation include improvements to quality and efficiency while incurring no additional costs, and in fact sometimes creating a reduction in costs. In terms of operational improvements, the focus is specifically on quality, efficiency, safety, regulatory compliance, and data reporting and recording.

Consolidation offers opportunity for improvement in safety and containment. The ability to apply the latest strategies in facilities design and safety protocols will reduce errors and chance contamination. Part of the consolidating planning process includes the development of a sample management plan incorporating chain-of-custody control, which will include material receiving, test sample registration, distribution, test application, results reporting, storage, bio-waste, and material removal. Since consolidation will eliminate or reduce satellite locations, this centralized resource and control mechanism provides simple and improved control and monitoring.

Maintaining labs under a single roof usually means the operator only needs to accommodate a single local regulatory environment. In terms of operating license, reporting, and data management, the more simple structure allows the operator to focus more on the quality of testing and customer satisfaction than compliance documentation.

Reporting and information custody can be greatly improved by implementing and validating the latest centralized Laboratory Information System and Specimen Transportation System, which can trace the location of all patients’ specimens. Collecting and analyzing patient outcome data has become more essential in the laboratory services business sector, not only for ease of documentation but for the ability to retrieve and review over time with a health provider.

Core Labs can also offer a single location for multiple tests, providing for improvements in early diagnostics and therapeutics. A sample(s) can be distributed internally to different testing lines, and provide quick turn around results, without the need to outsource or separate specimens.

Taking advantage of new technologies

Advancements in testing technologies and testing equipment permits labs to consolidate its testing process and offer services at lower costs. They also serve to improve the quality of test results. It makes more sense to consolidate the technology, as once the basic infrastructure is in place, the system can be expanded more simply in one location.

Consolidation of tests such as blood banking, ICP Analysis, and others, greatly improves efficiency. This consolidation is made possible due to interchangeable activities for each type of test. In order to do this, equipment analyzers are modified to perform various tasks and tests, although, structurally, the equipment is the same. If we consider the operations of a sample presentation, results review, and quality control, these are very similar even though they might be performed on various analyzers.

Transformation of less lucrative testing: simply put, these are performed as quickly as possible in specific processes, and on equipment dedicated to “churn.”

Automation has long been and continues to be a factor behind the changing clinical testing lab, especially the consolidated core facility. In recent years, advancements in all phases of the automated laboratory process – including the preanalytical stage, analytic, and post analytic stage. Specimens may still have to be transported manually to a centralized lab if outside a hospital environment (one can assume, not too long into the future, automated robots/delivery can fill this gap), but once at the lab, automation can transfer, sort, and distribute the specimen to specific analytic stage service lines.

Analyzers can perform test with little to no manual intervention. Additionally, modular laboratory automation has allowed incremental inclusion of automation for the entire laboratory, one element at a time. This technology starts with a basic service spine and permits the lab to “add” or “remove” modules/equipment as needed. Eliminating manual processes can eliminate risks of mistakes and reduce testing error rates. As previously mentioned, automated Laboratory Information Systems can also automate much of the post-analytic stage of the testing process. Results can be sent directly to the physician, and billing and collection can also be automated to various levels.

Summary

Clinical testing labs of all types are facing very similar challenges: dealing with less revenue and increased competition and customer choice. The decision to consolidate should be made in a strategic manner. It needs to be inclusive of all stakeholders within the organization, as well as the patients they serve. Laboratory leadership should examine the customers it wishes to service, where it wants to position its lab services, and its goals as a business enterprise. The obvious trend is mergers, acquisitions, or partnerships that embrace the advantages of size. Although perhaps the decision should be to divest the service all together and rely on a reference lab.

Technology is playing an instrumental role in a possible paradigm shift in the clinical testing market place. However, whether they can be utilized in a sustainable business structure is still yet to be determined. It will largely depend on the ability to apply the technology at a cost that payers/reimbursors are willing to commit to.

We have yet to see real impacts from Point of Care Testing or Home-Based Testing, but it’s likely the focus for centralized core lab facilities will be on esoteric testing. In all cases or scenarios, the trend of lower labor costs, and therefore the reduction in cost-per-test, will continue.

Wan C. Leung, AIA is principal at FCA Architects and Planners, and can be reached at wleung@FCArchitects.com

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