CEO SUMMARY: Interest by office-based physicians in creating an in-clinic medical testing laboratory is on the increase. This has direct consequences for independent commercial labs, hospital lab outreach programs, and anatomic pathology groups, since office- based physicians are a primary source of lab test referrals. One consultant says that 60% to 70% of the volume of tests going out of many physicians’ offices are routine tests that can be done in a physician office laboratory (POL).
THESE DAYS, GROWING NUMBERS of office-based physicians are taking steps to build and operate a clinical laboratory capable of moderately complex testing in their medical practice. That’s the experience of a consultant who advises physicians on the set up and operation of in-clinic laboratories.
This trend has serious implications for the laboratory testing industry. It is the test referrals of office-based physicians that represent the largest competitive market segment for independent commercial lab companies, hospital laboratory outreach programs and anatomic pathology groups.
Thus, were large numbers of medical groups to establish an in-clinic medical laboratory capable of doing complex lab testing, this would reduce the volume of lab specimens these physicians refer to independent commercial laboratories.
In the next few years, a greater number of POLs (physician office laboratories) running complex testing could noticeably erode the current number of test referrals flowing from office-based physicians to their lab testing providers.
“In my consulting practice, I see two primary reasons why physicians decide to create an in-office laboratory,” stated Tim Dumas, CLS, of Raleigh, North Carolina, who calls his POL consulting practice Tim The Lab Guy (www.timthelabguy.com). “First are the clinical benefits of having an in-office laboratory. Second are the financial benefits of offering this ancillary service.
Boosting Office Productivity
“Physicians who are savvy about management and workflow are quick to see that having an in-office laboratory can help them improve patient care while running a more productive office,” noted Dumas. “When they can get chemistry and hematology tests within minutes—and not have to wait for their outside laboratory provider to deliver test reports the next morning—they have the information they need to treat the patient on the spot.
“I like to say that ‘faster results gives faster treatment and faster recovery,’ ” commented Dumas. “That is a boost in the overall productivity of the medical practice. In turn, faster access to laboratory test results has significant revenue benefits for physicians beyond the POL itself.
“The second major reason why physicians establish a POL is to create a source of ancillary revenue,” stated Dumas. “Whether it’s an outside commercial laboratory or the physician’s in-house lab, someone is going to get paid for these tests. So these doctors ask themselves ‘why shouldn’t our medical practice get this revenue?’”
A Growing Opportunity
During the past 10 years, Dumas has grown his business from advising one physician office laboratory to working with about 45 POLs as a consultant and a clinical laboratory scientist (CLS).
“Because of declining reimbursement and pressure to improve measured improvements in patient health outcomes, physicians are waking up to the value that a POL can bring to their medical practice,” stated Dumas. “These are the reasons why my POL consulting business has grown exponentially over the last five years. I’m adding about one to two POLs per month.
“Primary concerns my clients have are: 1) accuracy of test results; 2) compliance with CLIA, federal, and state regulations; and, 3) maintaining the profitability of their POL,” observed Dumas.
“Because most of the laboratories perform only moderately complex testing, they are CLIA compliant and many are COLA registered,” he explained. Dumas says that the increasing number of reliable, automated benchtop-sized analyzers is contributing to increased physician interest in establishing an in-office laboratory.
Capital Requirements
Start-up costs for a POL are reasonable. “A full package deal that includes hematology and chemistry analyzers and an LIS (laboratory information system) costs around $75,000,” explained Dumas. “It takes about six months for a POL of average size to make back that investment.”
Dumas has his clients working with an LIS called LabTrack. “This LIS communicates with all the lab test analyzers,” he noted. “The LIS assigns a bar code, accepts orders from the EMR, and sends back notes and results to the EMR. A physician can install this robust IT solution for approximately $15,000.
“The economics of operating a POL are straightforward,” continued Dumas. “Most physicians send out 100% of their lab tests. A full-year utilization report from their laboratory provider helps me determine the financial viability of their proposed POL.
“The largest volume of tests referred to outside lab providers are CBCs, chemistry profiles, and lipids,” he stated. “These make up 60% to 70% of the volume of tests going out. If total testing volume for those physicians generates reimbursement of about $500,000 per year, the physicians might be able to keep $300,000 of that volume in-house and it will cost them about $75,000 up front to do that.
POL Generates Revenue
“When I ask, ‘Are you interested?’ they almost always say, ‘Yes.’ And why not?” Dumas asked. “Assume that POL start-up expenses are amortized over five years. The expenses for a lab tech, regulation fees, and reagents will be around $8,000 a month. Against those costs, a typical POL will generate about $20,000 a month in revenue.
“Physicians immediately recognize that this revenue can help them pay for staff, rent, and other operational expenses,” observed Dumas. “However, there are physicians who see only the costs and don’t look at the return on investment (ROI). They are the ones who pass on this opportunity. Those physicians who look at the ROI will often accept the financial risk of setting up a POL.
“Usually a single-provider practice can’t afford to operate a POL,” he stated. “The physician doesn’t order enough laboratory tests to support the cost of an in-clinic laboratory. “The economics of a POL become favorable for groups that have three, four, or more physicians in the practice,” said Dumas. “Specialities where the value of an in-clinic laboratory is highest include primary care, family medicine, pediatrics, internal medicine, oncology, and HIV clinics.
“These physicians want to run their own chemistry, blood, and lipid or cholesterol tests because having rapid access to these test results allows them to make faster diagnoses and start therapies quicker—often while the patient is still in the office.
Same List of Top 10 Tests
“The tests they want are the same top 10 tests that any doctor orders,” added Dumas. “The list includes CBC, CMP, lipid panel, liver function, diabetes, glucose, and kidney function tests. The physicians need a basic chemistry profile and a basic blood count.
“Some offices do a high volume of thyroid tests,” he recalled. “If the group has five doctors or more, we put in an analyzer that does PSA (prostate-specific antigen), TSH (thyroid-stimulating hormone), and free T4 (thyroid level) tests. There are tests doctors use when doing a full physical.
“For these physicians, we set up moderately complex analyzers that require an operator with a high school diploma to run,” Dumas continued. “POLs could still use the services of pathologists. Every POL must have an approved lab and a medical director who oversees and reviews these lab testing activities.”
Just as clinical laboratories and anatomic pathology groups have seen a steady decline in reimbursement for their most important CPT codes over the past 20 years, the same thing has happened to reimbursement for the most important CPT codes in every medical specialty. Like laboratories, physicians feel this financial pain.
“Many physicians recognize they make less today, in inflation-adjusted terms, than they did 20 years ago,” concluded Dumas. “Faced with rising costs and the need to finance an EHR (electronic health record) system, it is no surprise that the financial and clinical benefits of a POL are more attractive today than in the past.”
Simple, But Powerful Economics Support Operation of a Physician Office Laboratory
CERTAINLY THE ECONOMICS of a physician office laboratory (POL) can be compelling. But new pressures on physicians to handle more patients each day and improve patient health outcomes that are measured by Medicare and private payers are also reasons why a POL represents an attractive ancillary service for office-based physicians.
“Typically a physician and I will start with lab test volume and the financial analysis of a proposed POL,” explained Tim Dumas, CLS, Founder of the POL consulting practice known as Tim The Lab Guy. “Then we will determine if rapid access to lab test results can help the operational and clinical performance of his or her medical practice.
“The questions are basic,” he noted. “What tests do your patients need? How many of these tests do you order every month or every year? From those numbers, we calculate the potential revenue. If we ran the tests that most patients need every year, we could generate about $100,000 in revenue. Then we ask: What will it cost?
“The hematology analyzer costs about $15,000 and the chemistry machine about $30,000 to $40,000,” continued Dumas. “We plug these numbers into a spreadsheet and estimate the start up costs and income for the proposed POL each month.
Five-Year Amortization
“The physician can amortize the cost of each analyzer over five years,” he noted. “This allows him or her to see a very quick return on investment (ROI). Another big decision involves running complex testing in the POL. If the decision is yes, then the POL must meet stricter regulatory requirements.
Dumas says that each medical specialty will want to emphasize a different mix of on-site medical tests for their POL. “Let’s say I set up a lab for an oncologist,” he said. “The main tests oncologists run are CBCs, and, increasingly due to newer drugs, they need to monitor kidney function before administering chemotherapy.
“A CBC machine costs about $15,000, but almost every patient seen by an oncologist needs that test and it’s best to get the test done in the doctor’s office before administering chemotherapy,” he explained. “With a POL, in as little as five minutes after the patient has given blood, the CBC test results are back in the chart ready for the physician to review. It costs the oncologist’s POL about $1.00 to perform a single CBC test. Medicare reimbursement for that test is $10.54.
“Most oncology practices have three, four, or more physicians, meaning they need to do numerous CBCs every day,” Dumas said. “And as the medication changes for a particular patient, the oncologists might want a calcium or a protein level. A patient’s kidneys may need to be checked before prescribing certain new medications and that often involves a creatinine test and a magnesium level. These examples show how operation of an in-clinic laboratory contributes to significant improvements in patient care.
“Other physician specialties can also benefit from POLs,” he continued. “This is true of any doctor checking cholesterol, diabetes, or thyroid problems, or any conditions for which the physician does not need to consult another specialist.
“Urgent care centers get great benefit from the POL,” noted Dumas. “When a patient presents with a possible virus or bacterial infection, having the results within minutes of the CBC with white cell count and the differential becomes essential. It allows the physician to make an immediate decision on whether to prescribe an antibiotic. In cases where appendicitis is suspected, fast access to the CBC results run in the POL contributes to a rapid, accurate diagnosis. In turn, that allows the physician to act quickly to treat the patient.”
Paperless POLs Interface with EMRs
MANY PATHOLOGISTS AND CLINICAL LABORATORY MANAGERS are unaware of how automation and integrated informatics have changed the daily operation of a POL (physician office lab) doing moderately complex testing,” said Tim Dumas, Founder of the POL consulting firm known as Tim The Lab Guy.
“In vitro diagnostics (IVD) manufacturers have automated almost everything,” he observed. “These instrument systems are easily interfaced to a laboratory information system (LIS) and the LIS is interfaced to the new EMR systems.”
“Most of my clients’ POLs are paperless,” continued Dumas. “This eliminates the transcription errors that often still occur in labs and pathology practices. Because the physicians are doing computer order entry, all information comes directly from the doctors and no staff member in the medical practice is writing paper orders.
“In these paperless environments, the doctor orders a lab test in the EMR,” he said. “The EMR transmits the lab test order directly into the POL’s LIS, where a bar coded label with the patient’s name and the information is printed.
“The sample—with a label and bar code—goes onto the analyzer,” stated Dumas. “The analyzer performs the tests ordered by the doctor, then electronically reports the results back to the LIS. A review of all the results is conducted, then the results are released into the patient’s EMR record. In minutes, the lab test results are available to the physician who ordered the tests.”
