Outsourcing vs. insourcing

Oct. 24, 2016

Which strategy is the better way for labs to support their larger institution?

In every hospital or health system, there is a common thread that exists throughout the care continuum. It is the thread that enables a physician to diagnose, prescribe treatment, and monitor progress for a patient. It is the thread that delivers results that comprise more than 80 percent of a patient’s electronic medical record and that influences more than 70 percent of the medical decisions made about that person. That critical thread is the clinical laboratory, and it is also the one asset that is most often undervalued by the hospital or health system. It is often at the greatest risk of being targeted for acquisition by very large regional or national laboratories, which increases the potential for creating gaps in connectivity with the medical decision makers relying on lab outputs and performance. Yet the clinical lab is an asset that can be the most scalable to drive revenue to the bottom line by doing one thing: increased laboratory testing. The lab, so often seen as a cost center, can in fact be a profit center for the larger institution—if it is properly understood, utilized, and managed.

In order to truly utilize the clinical laboratory as an integral provider to a health system’s population health and continuum of care initiatives, it must be optimized to its full potential. Contributing factors that play a role in achieving less than optimal performance include insufficient productivity tools, inadequate infrastructure to enable growth through outreach, and a lack of leveraging significant excess capacity.

There is no magic that can replace implementation of performance improvement initiatives that ultimately lead to better patient care and outcomes. Historically, health systems have focused on aligning the lab with the vision and brand of the health system, building comprehensive and sustainable lab capabilities, strengthening physician-to-hospital relationships, creating efficiency and speed to outcomes, and enabling lab analytics and insights. In today’s climate, health system executives seek input from laboratory directors and managers for innovative solutions to consider as mandates to optimize peak performance increase, as pressure for additional cost reductions impacts workflow and reimbursements continue to decline. At peak performance, the clinical lab not only generates new business revenue but extends the hospital or health system brand as a critical and valued community resource. More than seven billion lab tests are performed each year in the U.S., and health systems process and provide service for more than 50 percent of that volume. In the laboratory, key areas of value include speed and accuracy, efficiency, and growth. As such, it is a transformational moment when clinical laboratory management recognizes that an inflection point exists: insource or outsource.

One alternative: outsourcing

It is not uncommon for leadership to be approached by third parties to propose joint ventures, acquisition, or outsourcing, all of which come with inherent risk. There are alternatives. As an alternative to acquisition, executives should seek input from laboratory directors as well as industry peers who have valuable experience to share and leverage their expertise to drive initiatives that impact change and growth. If there is a need to assume some level of risk to drive outcomes, develop an internal task force to explore “early adopter” strategies or services to keep the lab organization dynamic and on the leading edge of fierce competition.

Outsourcing through acquisition is an option—but it is one that carries with it distinct disadvantages. Acquisition does enable a short-term return to the health system by monetizing the lab as an asset for a one-time payout while allowing for continued service delivery. But it is a shift of capacity and capability to a commercial entity. The system loses management control and revenue sharing opportunity, the cost of testing ultimately increases, service delivery ultimately decreases, physician dissatisfaction grows, and patient care is negatively impacted by increased turnaround times. What are the alternatives?

A second way: do-it-yourself

Do-it-yourself models are often applied because “we don’t know what we don’t know.” Executives focused on the bottom line often challenge lab managers and directors to implement cost reductions rather than growth strategies while balancing clinical and business demands. Labs are complex entities serving a highly competitive market. Business must be conducted with adequate sales, patient service centers, logistics, client service, billing, financial reporting, and technology for reporting.

Cost reduction as an end in itself is a shallow strategy because it tends to disregard return on investment. In nearly 70 percent of labs across the U.S., management reports that it has tons of data but not enough information, ineffective IT, flawed billing systems, and pricing challenges. In this model, costs are likely to be higher, speed to outcomes slower, and value dispersed. Limited internal capacity and resources critical to complete transformation elongate the outcomes and are often underfunded. Clear, long-term analysis of ROI is difficult as staff function within the day-to-day activity at a brisk pace, and value rarely outpaces inflation.

The better option: insourcing

It is in this context that the power and value of insourcing as a better option becomes apparent. At its most basic level, insourcing is a strategy in which work that could have been contracted out is instead done in-house. Forging partnerships with resources outside the organization that have a value-based, patient-centric focus can provide a necessary stimulus to achieve greater success. This model focuses on aligning people, process, and technology while the health system retains ownership and control. A partner mitigates risk, delivers speed to outcomes, and is accountable for positive impact to the bottom line. Value is delivered in this structure through sophistication of consultative revenue growth initiatives, infrastructure development, assessment of advances in lab technologies, access to group purchasing agreements that leverage economies of scale, and other proven cost-reduction strategies. Lab managers and directors are active participants in the partnership and provide value by being the champion of the outcomes resulting from change and growth.

Using proven and comprehensive models that incorporate capabilities, lab directors can accelerate growth for all patient types including inpatient, outpatient, and outreach. Best-in-class labs aspire to The Triple Aim of healthcare to simultaneously pursue three dimensions of the lab: improving the patient experience of care (including quality and satisfaction); improving the health of populations; and reducing the per capita cost of healthcare. Change management is designed to build internal staff capability and develop a “business operations” culture that boasts its own balance sheet. Access and analysis of industry data draw emphasis to clinical “pathways” leading to diagnosis, treatment, and prevention. Benchmarking tools measure and manage costs, productivity, quality, and utilization as intelligence to make high-value decisions with importance to integrated care. Key brand awareness and connectedness to the health system allow the lab to offer consistent patient quality for all patient types while differentiating service to physician offices and providing access to a local pathology resource. Above all, continuity of care is superior.

Jeff Osborne serves as CEO of Accumen, a San Diego-based healthcare transformation company.