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21 August 2023

The case for not outsourcing the lab

Clinisys and R. Keith Laughman

CareTinuum Advisors founder and managing partner


Keith has held numerous executive healthcare positions in both not-for-profit and for-profit settings. He has a record of advising clients and leading companies in optimizing efficiency, enhancing effectiveness, and maximizing profit contribution by focusing on growth and aggregate patient care costs.

According to American Hospital Association figures, more than half of US hospitals were projected to have negative margins through 2022. In fact, hospital inpatient growth may never again achieve historic levels in the wake of the global SARS CoV-2 pandemic, during which consumers embraced telemedicine and sought alternative points of care. With hospitals under sustained financial pressures from these and other trends, we expect cash-strapped and distressed hospitals will consider outsourcing laboratory services as a means of cutting costs—a potentially “penny-wise, but pound-foolish” decision.

At both CareTinuum and Clinisys, we believe that there are viable opportunities for the clinical laboratory to generate profitable income from a hospital laboratory diagnostic (Dx) integration program, also called a hospital outreach program, as well as viable strategies to reduce episode-of-care costs.

The allure of outsourcing laboratory services

Following basic laws of economics, the standard advice to build a profitable laboratory business would be to grow test volume and thereby decrease per test cost. A well-planned laboratory Dx integration program can provide that direct and indirect value to the health system. But, because the incremental revenue and cost savings from laboratory Dx integration programs are not yet well understood by health system leaders, there has been instead a trend for hospitals to sell off outreach programs and/or outsource the management of laboratory services to big-box laboratory providers like Quest and LabCorp. In such an arrangement, the hospital receives a one-time boost to income and divests to the big-box operator its laboratory overhead costs and liabilities, in the form of capital equipment, plant, personnel, and supply chain.

Penny-wise, these outsourcing arrangements undoubtedly have the potential to reduce per-test prices. Pound-foolish, however, is the missed opportunity to use the Dx integration program as a source of investment capital for the laboratory and of increased operating margin to the hospital. There are also a variety of risks associated with outsourcing the clinical lab, along with unintended, short- and long-term consequences to the hospital, that hospital leaders need to consider prior to entering into an outsourcing agreement.

Key laboratory functions to consider

To better understand these risks from outsourcing, it is important to keep in mind the core capabilities of a hospital laboratory with a Dx integration program. The hospital clinical laboratory:

  • Generates 70% of the objective information in a patient’s medical record
  • Delivers test results that trigger or confirm most healthcare costs in today’s environment, which will increase significantly with precision medicine
  • Touches every patient’s care in nearly every community care setting
  • Is a core competency in every healthcare system
  • Is a critical element in population health and in new care delivery models
  • Is a light manufacturing environment with excess capacity concerning its plant and equipment, once its acute-care service needs have been met
  • Represents 3% of total healthcare spend in the United States

The importance of the clinical laboratory to the delivery of healthcare is clear. What is then at stake is how a hospital or health system approaches the effort to improve margins, elevate patient care, and ensure satisfaction ratings where the laboratory is concerned. Until the full value of the laboratory as a Dx integration service has been recognized, it will remain under scrutiny as a cost center and be an easy target for sell-off or third-party management, which could make it difficult for the health system to thrive in value-based care.

Realities at the end of the initial outsourcing contract period

Where outsourcing laboratory services can deliver reductions in the laboratory budget, a recent study among pathology chairs shows hospitals that have outsourced laboratory services experienced detrimental effects after the initial contract period, largely because hospitals lose at least partial control over the clinical laboratory, a core competency in its overall healthcare delivery system. Risks from this reduced control are higher costs, less reliable quality of results, extended turnaround times, and reduced incentives to optimize test utilization by the third party. These scenarios will increase episode-of-care costs to a degree far exceeding possible laboratory budget reductions.

Less obvious downsides to laboratory outsourcing agreements cited in the study included lack of pathology resident teaching opportunities and lack of on-site laboratory training opportunities. Declines in physician or patient satisfaction from lower quality and longer turnaround times often cause hospitals to reverse the outsourcing decision and elect to restore full ownership and management of an in-house hospital clinical laboratory once the initial contract has expired. To re-establish their clinical laboratories takes effort and investment, but facilities have deemed reversing their outsourcing decisions unavoidable to prepare for value-based care and engage in new care delivery models.

Benefits to communities should be added to the equation

More concerning than penny-wise reductions in services for quick gains on the balance sheet, however, is the pound-foolish loss of opportunities to improve community care. We believe that US clinical laboratories also have an opportunity to play a critical role in value-based care and community care coordination in support of new delivery models.

As laboratory results comprise 70% of the data in the patient health record, hospital laboratories possess a wealth of critical information about people’s health and wellness. There is clear potential for laboratory informatics and analytics to uncover insights for better population health and preventive care, as well as to lower episode-of-care costs and significantly improve a hospital’s operating margin. However, if laboratory staff is managed by a third-party and priorities are not aligned, the hospital is necessarily constrained in its ability to innovate and implement new care delivery models. The decision to outsource is likely a failure to look at the bigger, more altruistic and practical picture.

Laboratory analytics as a source for new revenue

Enterprising hospitals and healthcare systems will use clinical laboratory data science and analytics to make conclusions about the health of cohorts and populations that can inform and progress preventive interventions, precision medicine, healthcare delivery models, community health programs, and even public policy. They will innovate and create new revenue opportunities by using laboratory data to earn a piece of the pie from the sale of more value-based care services, like interpretive care for early detection and intervention as well as ongoing disease management, and subsequently less from reactive care services in acute treatment.

With self-insured employers, for instance, innovative hospitals and health systems can monetize lab analytics for workplace wellness initiatives and preventive services that benefit their clients through tangible reductions in sick time and job productivity. For these data-driven activities to be effective, though, the current fragmented community diagnostic system must be replaced by an integrated hospital-based and patient-centric system underpinned by standardized test nomenclature, consistent results, and normalized ranges.

More innovation will build bigger diagnostic integration markets

For both pragmatic and altruistic reasons, another way of achieving both profitability and better patient care is not only to operate the laboratory by and for the community, but also to build the Dx integration business to serve more points of care within the community.

Due in large part to the COVID-19 pandemic, some demand for laboratory services has increased from sources beyond the hospital and from further afield in communities. Today, common laboratory outreach program customers include point-of-care locations, like doctors’ offices, urgent care centers, concierge clinics, skilled nursing facilities, and walk-in retail wellness clinics. Since COVID-19, new lab customers also include non-healthcare groups like private employers, schools and educational institutions, fitness centers, and sports teams.

Even more potential for testing exists in the growing consumer-to-lab space as consumers gain experience and confidence shopping for retail test kits and collecting their own specimens. Laboratories will innovate in this space by overcoming chain of custody, sample quality control, and sample handling barriers and by adding them to their quality management systems along with the associated results into the patient’s integrated diagnostic record.

As you look to innovate to capture these new markets or evaluate the potential for higher margins and greater value for the hospital or health system, you must align your lab’s IT infrastructure to your business goals. Clinisys and CareTinuum Advisors can help.

Choose the right path for your laboratory

Even under financial pressure, there can be ways for your hospital to confidently make decisions about the future of your laboratory service program that will prepare the health system for the next inevitable financial challenge.

CareTinuum Advisors provides hospital and healthcare system leaders with the strategy and hands-on assistance to help shift the laboratory from being viewed as a cost center into being viewed as a revenue and value center. The team focuses on materially improving the hospital operating margin through better utilization of tests to reduce patient care variation and by leveraging the laboratory’s existing plant and equipment to support growth. To discuss an initial assessment with actionable recommendations, go to

With Clinisys Atlas™, Clinisys provides clinical laboratories with a middleware solution designed to connect the LIS with community providers’ EHRs and EMRs to facilitate and automate efficient laboratory test ordering and result delivery. Previously called Sunquest Atlas™, Clinisys Atlas helps clinical laboratories grow their outreach business by intaking lab orders from providers and then cleansing the data to ensure the required data elements are submitted, insurance information is provided, and medical necessity is met.

This workflow-driven solution is key in today’s world of reduced reimbursement rates and growing complexity to help ensure that write-offs and customer service calls are reduced, while payments and outreach program revenue are increased. To talk about Clinisys Atlas for your clinical laboratory, set up time with us here.

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