By Kathleen A. Murphy
10/09/07

Assessing the Latest Outreach Market Intelligence:
Results of the Chi Solutions Fifth Annual National Outreach Survey

The Fifth Annual National Outreach Survey from Chi Solutions, Inc., provides the latest market intelligence on how hospitals are faring against commercial labs and each other with respect to growth, market share, competitors, and profitability. It also underscores the importance of lab “culture” in the success of outreach programs. This article will highlight the results and provide insights on competing successfully with major labs.

The Survey Says

“There are some interesting findings in this year’s survey,” says Kathleen A. Murphy, PhD, president, Chi Solutions, Inc. (Middleton, MA). The survey was sent to 1,859 hospitals, excluding non-government hospitals and those with less than 150 beds, and there was a 10 percent response rate (173 hospitals).

Geographically, respondents by region were as follows:

New England: 11
Middle Atlantic: 18
East North Central: 41
South Atlantic: 31
East South Central: 10
West North Central: 13
West South Central: 18
Mountain: 6
Pacific: 25

“Overall, we found that 80 percent of respondents said that they had an outreach program. This is up from last year, where we had a rate of 75 percent,” she says. “Over the years, this has grown to the point where the vast majority of organizations are now involved in outreach in some form or another.”

Survey participants who were not involved in outreach indicated that the most common reasons were inadequacies of the library information system (LIS), competition, disinterest or lack of support by senior administration, billing issues, and concern over profitability. However, of those hospitals that did not currently have an outreach program, a little more than a third indicated that they were thinking of developing one within the next year or two.
Most of the institutions that responded to the survey were predominately community hospitals (81 percent) located in urban areas (45 percent). Specifically, 59 percent were part of an integrated health system, 41 percent were standalone hospitals, and 90 percent were not-for-profit facilities. In addition, almost 85 percent (118) were hospital-based labs.

Respondents were also asked about the non-economic benefits of outreach and cited the following top reasons:
• Revenue and/or or profitability.
• Volume. “According to the economies of scale, as you bring in more volume you lower your unit costs,” Murphy says.
• Improved services to all patient types. “When you bring in outreach business it really makes you look very carefully at the services that you offer, and you end up offering better services for all your patient types,” she adds.
• Supports relationship building with active medical staff.
• Creates and supports relationships with patients in the community or region.
• All inclusive laboratory database (patient encounters via hospital, physician practices, nursing homes, etc.).
• Extra volume allows faster access to new technology.

Regarding the primary strength of their outreach programs, hospitals viewed their turnaround time as key. “That is a big competitive advantage over the nationals, as are quality, customer service, and pathologist reputation and involvement. It’s always easier to talk to a doctor if necessary at a local rather than a national hospital,” she points out.

The following graphs illustrate the primary strengths and weaknesses, respectively, of outreach programs according to survey respondents.
When it comes to competitors, hospitals named Quest at number one (47 percent) followed closely by Lab Corp (32 percent). Respondents also cited regional independent labs (21 percent), followed by regional hospital outreach programs (8 percent).

There was quite a range in terms of size as measured by net revenue or volume. In terms of net revenue, the average was $7 million and the median was $4.5 million, with a range of anywhere from less than $100,000 all the way up to $30 million.

What is most interesting, however, is the net revenue per test. “The average net revenue per test for hospitals that responded averaged $18, and that is really phenomenal. By contrast, the net revenue per requisition for national labs was $13 for the most recent year that was reported,” Murphy says.

In addition, when you look at the results by payer, there are some very high numbers in hospitals. “We have actually had clients this past year that have had net revenues for some payers up in the $70, $80, $90, $100 range,” Murphy says. “If you could get your systems together for billing and collections and provide good services, you could be a phenomenally profitable business with those kinds of net revenues per requisition.”

“It’s all based on the fact that hospitals oftentimes have an advantage over commercial labs in terms of their payer contracts, especially when the hospital is getting paid a percent of charges,” she continues. “It used to be that if you wanted to be big and successful, you would spin off into an independent lab. Then you would have to develop all your own contracts and you would end up being paid like the national labs, or perhaps a bit better. This has caused me to rethink recommendations for this business. If you want to be just a good, solid local outreach program, perhaps doing it under the hospital, if you can get all the other stuff to work right, might be the most profitable way.”

Over a period of two years, overall hospital programs grew at a rate of 8 percent, or 4 percent per annum. The growth is highest in the top quartile and in the lowest—and that is typical of what has been observed, Murphy comments.

Looking at revenue, over a two-year period there has been 17 percent growth or 8.7 percent annually. Compared to national labs, the most recent data in the past couple of years for Quest and Lab Corp, excluding acquisitions and focusing on organic growth, indicate that they are growing at about 3 to 5 percent per year.

Regarding market share, outreach programs were holding their own or gaining against their competitors (i.e., large national or regional labs). The following charts detail the findings.

Lack of IT connectivity was cited as the biggest competitive issue. “This has been a trend, and managed care has always been another key issue. Some of the reasons include the inability to offer competitive pricing, limited IT connectivity, and lack of dedicated sales staff. Overall, sales, IT, and managed care are always up there in competitive issues year after year.”

In terms of competitive success strategies, rapid turnaround time, customer service, IT connectivity, local presence or serving your community, and the ability to use electronic medical records were ranked among the top five.

“Connectivity is an important component of our industry and national labs have pushed for it over the last few years,” she notes. “A majority of respondents noted that they need some type of connectivity and that half of their physician clients use it. Only half actually use connectivity to perform order entry functions, while almost all of them do result reporting. When you look at the type of connectivity being used, a little more than half use Internet connectivity, whereas a lot more still use printers and auto-fax capabilities. The latter two are not a good strategy for going after big-dollar clients. Finally, there was no one vendor with a strong market share regarding connectivity.”

The response to whether hospital labs have access to information to manage their business, only a little more than half indicated that they have the tools to monitor quality based on regulatory requirements and only a third had the information, management reports, and key performance indicators. Finally, only a third reported that they had the tools to analyze the profitability of the outreach program.

The following graph indicates the percentage of respondents that have access to different information.

“I guarantee that your competitors, the national labs and regional labs in your area, know the information that is necessary to manage their business—they know key performance metrics on a daily basis. They monitor them, and they take action on a proactive basis if any of these things are off,” Murphy says. “We would hope that everybody would know the volume of tests, but hospital labs often have difficulty distinguishing outreach volume from hospital outpatient business.”

Only 69 percent of respondents knew the volume of requisitions. “I used to count them by hand because most hospital LISs don’t count requisitions—rather they count orders. However, corrected reports, lost specimens, data entry errors, mixed pickups—these are all critical pieces of information to manage your business and compete successfully as very few labs have all this information,” she says.

“It’s no surprise that most respondents (87 percent) believed that their outreach program was profitable, while CFOs in the same organization thought it to be a little less so (67 percent). Only two-thirds of respondents reported that the CFO actually believed that they were profitable,” she notes.

Most respondents also said that the profitability of their outreach program had been analyzed. “However, only half know their true actual revenue and most estimated the amount. When looking at the cost structure and how costs are allocated, 50 percent of respondent allocated hospital overhead to a lab outreach program. In practice, you should only allocate costs that are truly dedicated to your program. If you were to close your business tomorrow, what costs would go away? Those are the costs that should be allocated to your program. Most people look at incremental costs for the technical cost.”

In terms of actual numbers for profitability, the survey accounts for core labs and full-service labs. “The contribution margins are a little higher in the core laboratories than in the full-service labs. That’s no surprise given the fact that a core lab has larger volume, greater economies of scale, and is probably a little more competitive,” Murphy points out. “Outreach programs are running a respectable 20 to 30 percent contribution margin.”

According to the survey, 76 percent of respondents were unaware of the amount of their bad debt and 86 percent did not know the days sales outstanding. “When you look at the actual numbers, an average of 9.4 percent bad debt is probably double what you’d see in the commercial labs,” Murphy says.
Only 50 percent were aware of their net revenue and, for most (75 percent), the billing function was performed by the hospital. However, three-quarters were unable to have billing information to look at profitability by client. “Most respondents (less than 25 percent) couldn’t review the data by sales rep, so they had no idea whether they were bringing in good business or just any business—and that can be problematic,” she notes. “Also, very few look at the data by courier route or market segment. If you want to improve your profitability, you should focus on building business on your existing courier routes.”

In the area of profitability according to market segment, physician officers were number one (31 percent), followed by anatomic pathology (16 percent), hospital reference work (14 percent), and nursing homes (13.5 percent). “If you want to know your costs, you should participate in a benchmarking program and know how you compare to peers,” Murphy suggests. In fact, the survey shows that approximately half the respondents engage in benchmarking.” The following charts detail survey responses on benchmarking.

Most respondents reported that they use the hospital’s billing system (73 percent), while 16 percent using an in-house system or an ASP dedicated for the lab, and 11 percent report that they outsource the function.

“One of the most intriguing questions is whether the labs are confident that they are collecting everything that they can. Only 27 percent responded in the affirmative. Hospital billing departments are notoriously poor—they write off what the average claim is.” To build a strong program, Murphy suggests taking a different approach or outsourcing the function to improve collections.

“Organizations that are really successful in this market are what we call hybrid laboratories,” she notes.“They are labs that service the hospital side of the business but also service the non-patient, commercial market. In order to do both well, it requires unique skills to be the best in both worlds, which certainly makes it more challenging.”

Just about half of the respondents said that they have the autonomy to run their own business. When it comes to tracking revenues and profitability, only about half said that they do. In addition, of those that responded yes, 59 percent have a separate provider number and the remainder outsource their billing. “This is probably one of the most important take-home messages,” she notes. “If you don’t have a way of segregating your revenues, you can’t even begin to track how you’re doing in terms of your numbers. This is the first place that you should be looking.”

Of the respondents that indicated that they conducted outreach, 72 percent said that the hospital viewed them as a revenue center. Conversely, 30 percent viewed the lab as a cost center. “The 30 percent response indicates that labs are not making a compelling business case within the organization about the value that outreach brings. In terms of how the outreach program is viewed by the lab staff, most (77 percent) view it as a critical component and animportant strategic initiative for the organization. Finally, they also do not mind the extra work that it entails.”

In examining support for outreach programs, in most cases it is driven by the lab’s administrative director or executive (90 percent). Support is significantly less at the executive or vice president level. In addition, only about half (55 percent) reported that their medical director supported the program. “This is one of the issues that you have to grapple with. You need to figure out how to better sell your program within your own organization.”

Most respondents (76 percent) said that they have the capital to run their business and be able to invest in technology and applicable resources. “While they also said that they had the skills to make a business case (82 percent) and that their organization was service-oriented (88 percent), when we drove down to the details to determine if the support infrastructure was within their direct control, half said they had it for IT, a third for billing, three-quarters for couriers, and half for sales. These are all things that are critical to success,” Murphy points out.

Survey Conclusions

“These results demonstrate that outreach has really become a mainstream strategy for hospitals,” Murphy concludes. “Hospitals are really gaining against the national labs, which can especially be seen in growth rates and net revenue per requisition.This takes a serious commitment to an infrastructure in terms of resources, systems, technology, information to manage the business, and a unique hybrid lab culture. Hospital labs that take into account all these factors will be able to compete—and win—against the national and regional laboratories.”