This article was originally published and written in Laboratory Economics Volume 18, No. 12 December 2023 issue
Introduction
Many health systems are under financial pressure primarily due to rising employee costs and inflation. For example, hospital employees’ average hourly earnings grew by 3.8% in the 12 months ended July 2023, according to Fitch Ratings and the U.S. Bureau of Labor Statistics. That’s down from the high of 7.5% growth seen in calendar year 2021, but still well above the 2.3% average annual growth for hospital employees from 2010 to 2019. For insight into how this financial pressure is affecting hospital outreach labs, Laboratory Economics recently spoke with Jeff Myers, CPA, Vice President, Consulting and Strategic Advisory Services at Accumen Inc. (Scottsdale, AZ).
How is financial pressure at health systems affecting their outreach labs?
More health systems are evaluating the economic and operational value of a potential sale of their outreach labs. At the same time, Quest Diagnostics and Labcorp are aggressively seeking out strategic acquisitions of hospital outreach labs and have been willing to pay higher acquisition prices than in the past. There were a near-record seven outreach lab sales in 2023 and the trend is not slowing down.
How are health systems evaluating the potential sale of their outreach labs?
At the end of the day, it’s a basic cash flow analysis assessing the value of cash flows from continuing to operate a service line versus an immediate cash flow. In those cases where hospital outreach businesses have low operating profits (<10%), health system CEOs and CFOs often believe the cash received from a sale can be redirected into a higher-margin business such as an outpatient surgery center.
Conversely, there are many hospital outreach labs receiving favorable reimbursement rates (e.g., 3x Medicare CLFS) from private insurers. In these situations, hospital outreach labs can have operating margins in the range of 30% to 35% and are valuable assets to keep. The key here is developing a credible financial analysis of the hospital lab outreach business. Outreach testing revenue and costs are often intermingled with inpatient/outpatient testing. The sale of an outreach lab is a long-term commitment and should not be undertaken without significant due diligence that supports the decision to sell or hold an outreach lab asset.
What are some other factors that can lead to a successful hospital outreach sale?
Having realistic expectations of the timeline required is crucial, as unattainable timelines can impede a health system’s ability to plan and organize a favorable outcome for all stakeholders (patients, providers, employees, etc.). Conversely, too much time can kill a deal, so the right timeline must be addressed from the start of discussions/negotiations.
Why do most hospital outreach labs continue to get paid such high rates?
Most health systems still have leverage with private insurers and have been able to keep their lab outpatient contracts, including nonpatient outreach testing, tied to their overarching outpatient contract negotiations. This means some health systems continue to be paid for lab testing on a percentage of charges or at fixed contract. Hospital lab outpatient/outreach rates from private payers can average 2x and more above Medicare CLFS rates. In comparison, independent labs at best are getting private-payer rates equal to the Medicare CLFS.
How long will the rate discrepancy between hospitals and independent labs continue?
The convergence is happening slowly. Private insurers, including UnitedHealthcare, are slowly pushing hospital outreach labs into separate fee schedule contracts with lower rates.
About Accumen:
Accumen’s team of experts will determine the true profitability and financial value of your Lab Outreach program asset and associated cash flow and help support the development of a systemwide strategy for your organization.
