Hospitals are supposed to heal people, but some hospitals are fighting for their own lives. In fact, the economic outlook for some hospitals appears down right gloomy right now — especially small rural ones that are sliding in the red. And it’s changing the way hospital leadership thinks about finding new sources of revenue. Why is the picture so bleak? The answer lies in the existing hospital business model.
It might seem obvious, but one of the things every viable business must do is focus on core competencies — what you do that delivers value to your customers. What might not seem immediately obvious — and this is a crucial point — is that you should outsource the rest.
Trying to do everything yourself — whatever your size, whatever your business — is never a viable strategy. Yet that’s the model hospitals seem chained to.
Take for instance lab work. A hospital’s lab business is not a core activity. Not any more than food, I would argue. Neither is run with the intention of earning revenue. Instead, they are part of a hospital’s operation that generates costs without making money.
Given that backdrop, it comes as no surprise that some forward-thinking hospitals across the country looking to boost cash flow are already outsourcing meals to private companies. They should be just as eager to divest themselves of their lab service. Working with an outside lab, just like working with an outside food service management company, allows hospitals to redirect valuable time and scarce capital to their core business — the healing of patients.
Given the high cost of labor, providing laboratory services internally, like providing food service internally, is a cost center not a profit center for hospitals. Outsourcing provides a great opportunity to reduce — even eliminate — laboratory labor costs. It’s an opportunity that exists today that didn’t exist yesterday in part because private lab companies faced with shrinking profits due to lower reimbursements from insurance companies are coming up with some pretty attractive deals to purchase or form joint ventures with hospital labs.
But outsourcing lab services can be far more than a means to a cut costs. It can be what it has been for years to other industries: a value creator. For instance, the money saved by outsourcing can be used broadly and strategically by hospitals for everything from growing outpatient services to expanding area access via the acquisition of urgent care practices. Both improve care coordination and quality, and thus value.
While focusing on operational efficiencies should be of interest to all hospitals, outsourcing lab services works best for small to midsize ones. That’s because outside lab companies are more efficient than they are in identifying and implementing best practices. By opting to outsource lab services, a hospital with, say, 300 to 500 beds can expect to save several million dollars a year.
Now you’re wondering: Will outsourcing negatively affect turnaround times? Simply put, no. In fact, outsourcing will allow both doctors and outpatients to receive results in a timelier manner. Unlike a small hospital that performs lab tests once or twice a week, outside lab companies handle these same tests many times each day — which results in better quality and better turnarounds.
For hospitals that want to reap the benefits of outsourcing but prefer not to separate themselves entirely for whatever reason from their internal lab, joint venturing with a lab located outside the campus of the hospital offers an attractive option — particularly when the outside lab is an out-of-network lab.
Under this model, the outside lab builds out the hospital’s lab to handle increased sample volume it brings to the hospital from outside the hospital’s area. The outside lab may even employ hospital staffers on its payroll. It’s a win-win relationship — for both parties. The increase in collection volume produces millions of dollars annually in new revenue to the hospital, and the relationship with the hospital entitles the outside out-of-network lab to bill at hospital rates.
Let’s face it, most of us aren’t fans of change. But clearly we have entered a new age of healthcare. Gone are the days when hospitals can offer everything to everyone. With rising expenses, and with an eye toward profitability, more and more hospitals when it comes to food are already following the advice of celebrated business consultant Peter Drucker: “Do what you do best and outsource the rest.” The same principle should apply to lab work.
Outsourcing improves efficiency, cuts costs, speeds up lab turnaround times — and saves money that hospitals can channel into growing their core business. Hospital management would do well, therefore, to investigate lab outsourcing fully and put their time and capital back to where it belongs — healing people — and let someone else handle the rest.
Originally published at medium.com