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Lab Saving Tips:

How To Cut Costs To Boost The Bottom Line -- Play The Efficiency Game...And Win!

by Dr. Sheila Dunn

Reprinted with Permission from Washington G-2 Reports, Physician Office Testing, October 1998

In the mid-1980s, hospital laboratories became cost centers when Medicare switched to reimbursing inpatient services based on diagnosis related groups (DRGs, or as they're often termed, Da' Revenue's Gone). Since then, hospital labs have focused on increasing revenue (going after outpatient business, for instance) and reducing costs by downsizing or network formation and curbing personnel expenses.

Many physician office laboratories (POLs) now find themselves in a situation similar to the one their hospital lab counterparts have experienced for the last decade. They are making the painful transition from being "cash cows" to "barely breaking even." A few POLs with high penetration of capitated managed care plans may actually be cost centers. Administrators are taking note and holding POL managers more accountable, even though lab expenses typically account for less than 3.5% of medical practice expenses (Medical Group Management Association Cost Survey 1997 Report, based on 1996 data).

If your POL looks bad on paper, you're not alone. A POL manager recently lamented at a symposium: "Last year, our practice administrator demanded cost cuts. We cut to what we thought was the bone. We reduced personnel, discontinued some low volume tests, and negotiated better reagent and supply costs from our vendors. Now, I'm told that further cuts are needed. There's nowhere else to cut."

Meanwhile, overhead costs increase every year for many reasons: staff raises, instrument replacement, supply cost creep, computer upgrades, just to name a few. So the successful POL manager has to work smarter...not just harder and longer...to maintain last year's cost savings, not to mention achieving more savings!

There is light at the end of the tunnel, but cutting costs without sacrificing quality requires tough decisions that aren't always apparent. POL managers need to look objectively at how they provide services and take steps to make their department lean and mean. The most common ways to cut costs are provided in Figure 1.

There's More Fat To Cut
Have you tried some or all of the steps listed in Figure 1? If you have, and you still need to cut more, consider the ideas below. These are some rather esoteric ideas you may not have yet considered. These are guaranteed to help your POL get leaner and meaner.

Find & Keep A Good Supplier
1. Consolidate vendors. Make a list of every supply your POL purchases. Contact at least three vendors to bid prices and services. Commit to purchase all supplies from the winning bidder. Include regular office supply purchases (exam table paper, gowns, etc.) to gain leverage. When awarding the business to a particular vendor, consider obtaining extra services (such as those below).

2. Manage inventory. Make this the responsibility of your supplier. Set minimum and maximum quantities to have on hand for all items. Let the vendor know either electronically or during the sales call.

3. Standardize lot numbers. Save costs of maintenance and calibration by making reagent lot number control the responsibility of your supplier.

Trim Supply Costs
1. Recycle cuvettes. They're expensive, and recycling (you must rinse and ship) may save money.

2. Cut service contract costs. Compare manufacturer prices to a third party, preferably local, provider.

3. Source a reagent grade water system locally. High volume POLs should avoid expensive water "reagent cubes."

4. Consider generic reagents.

Cut Personnel Costs
1. Are you paying a physician to direct your moderately complex lab? You may qualify to take this responsibility. A physician's time is a medical practice's biggest expense. If possible, insulate your physician from day-to-day management and take this responsibility yourself. While you're at it, ask for a raise.

2. Cut time spent on non-reimbursable duties, such as calling patients with test results. Consider an electronic voicemail system for these results if lab employees are tied up excessively on the telephone.

3. Split the cost of shared employees with other departments. If a POL employee performs services for other physicians/departments, be sure that that employee's expenses are not posted entirely to the lab and that revenues generated are not posted elsewhere for these duties.

4. Avoid the temptation to understaff. Proper staffing is a delicate balancing act. Understaffing is evidenced by poor service, excess overtime, and increased employee turnover. Having more employees may allow your POL to be more productive, depending on how well they are utilized.

Reduce Unnecessary Workload
1. Identify and decrease unnecessary testing. Track testing by physician and type of patient. At staff meetings, propose test ordering patterns to reduce any identified "shotgun" approaches to testing. Compile data to prove that a particular small test panel can be more cost-effective and, more importantly, can yield information similar to that obtained from a larger panel.

2. Perform less repeat testing. Meet with your physicians to revise criteria for repeating lab tests.

3. Explore with physicians the possibility of changing the criteria for test review to streamline workflow.

4. Don't overdo controls. If your POL tests controls more frequently than required by regulatory agencies, consider using your quality assurance program to identify areas of potential overkill. Areas to explore are hematology (three vs. two levels of controls), urine dip strip (two controls per day vs. periodic control testing), and chemistry QC on each shift vs. every 24 hours. The savings vary by instrument, but can amount to thousands of dollars per year.

5. If you belong to a network of practices or have more than one location, standardize equipment and reagents to achieve economy of scale. Consider a core lab to centralize tests that can be batched and don't require prompt results.

Delegate Work That's Not Lab-Related
1. Teach billing office personnel to submit claims for POL tests. Stay on top of accounts receivable for your department by ensuring that bills are mailed out within one day of the service.

2. Transfer phlebotomy duties to the nursing staff.

3. Consider having the nursing staff perform certain CLIA-waived testing in the exam room; for example, rapid strep, urine pregnancy, and whole blood tests for glucose and prothrombin time.

Get Your Fair Share
1. Account for expenses incurred on your POL's bottom line for gratis testing such as work-related post-exposure injuries and other non-billable tests.

2. Get referral testing revenue posted in the POL revenue area.

3. Get revenue from testing performed in exam rooms by the nursing staff posted to the lab.

Market Your Lab
1. Recapture market share lost to managed care/capitation. Solicit referral work from nearby medical practices.

2. Offer preventive testing. Consider adding to your menu vitamin assays and bone mineral density tests. (see footnote 1)

3. Offer disease management services. One example is to become certified to offer glucose self-testing training courses to diabetic patients. (see footnote 2) Combine the patient self-testing protocol with periodic POL testing for hemoglobin A1c and/or fructosamine for a complete disease management testing program. Quantify your results in terms of less expensive care and fewer diabetic complications, and share this with health plans. Coordinate with the practice administrator to be sure physicians get their yearly bonuses (which could amount to thousands of dollars) from these health plans for lowering costs and improving quality.

Balancing Cost & Quality
POL managers can achieve a balance between lowered cost and equal or better quality. Sometimes, in order to lower costs, more must be spent initially. An important management function is to recognize these situations and, armed with hard data, convince the practice administrator to provide the resources. Examples of these investments are:

  • Instruments with increased automation: primary tube sampling, cap piercing, autodilution, automated repeats, automated maintenance, etc.
  • Instruments with improved performance: longer calibration/reagent stability, decreased maintenance, built-in sample integrity monitoring, etc.
  • Electronic information transfer: bar coding, electronic archives, workload reporting, on-board training, quality control, diagnostics.
  • Cost accounting software: determining your cost per reportable result is essential in defining the higher cost components of your operation, then working to reduce them.

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Figure 1: 10 Steps To a Lean, Mean POL
(Return To Text)

1. Cut instrument/consumable costs. You won't get what you deserve, you'll get what you negotiate.

2. Manage inventory; buy only as needed.

3. Invest in a laboratory information system for quality control, quality assurance, billing, etc. (this saves on personnel costs and improves turnaround time).

4. Fully utilize personnel (cross-train, flex-time).

5. Decrease personnel costs (use less expensive staff for simple tasks, eliminate frequent overtime).

6. Manage utilization (change ordering patterns with new requisition forms, institute reflex testing policies).

7. Discontinue low volume tests or unprofitable ones.

8. Analyze workflow to eliminate wasted action and schedule efficient use of personnel (track workstation specs/hr/day).

9. Track workflow to consolidate, move, or eliminate workstations (chart work flow on your existing floor plan).

10. Live longer with existing equipment, then consolidate, or consider refurbished or leased equipment.

1. Effective July 1, 1998, Medicare covers certain bone mass measurements at specified frequencies under the physicians' fee schedule (POT, July '98, p. 3). Return to text.

2. Effective July 1, 1998, Medicare covers diabetes self-management training (POT, July '98, pp. 2-3) as well as blood glucose meters approved for home use and test strips/lancets (POT, June '98, p. 2). Return to text.

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