Tough Financial Times Ahead for Hospital Labs

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THIS YEAR’S MASSIVE HEALTH REFORM LEGISLATION has a ticking financial time bomb for hospital laboratories. Starting October 1, Medicare Part A hospital fees will be reduced by 0.4% for the federal fiscal year 2011. This is expected to reduce Medicare Part A spending by $440 million in 2011 compared to 2010.

As go the finances of the hospital, so go the finances of the laboratory. I predict that, during the upcoming budget planning cycle, many hospital laboratories will be asked by hospital and health system administrators to spend less in 2011 than they did in 2010.

This will intensify the budget squeeze already experienced by hospital labs. As a consequence of the painful economic recession which commenced in 2008, during the past two years, most hospital laboratories were forced to cut costs, defer important capital expenditures, and contain spending below the level of prior years.

Thus, my prediction of further financial belt-tightening for most hospital laboratories means 2011 will be the third consecutive year where budgets are barely adequate to support the year-over-year increase in the volume of lab tests flowing into the laboratory. You might say that hospital laboratories are caught between the hammer of increased lab test utilization by physicians and the anvil of reduced institutional budgets.

I suspect most of you readers already know at least one obvious response to a shrinking hospital laboratory budget. That response is to identify and develop new and independent sources of revenue from laboratory testing services. For most hospitals, a laboratory outreach testing program can be a significant source of additional specimens and new revenue.

Thus, it is a bit ironic that the funding cuts for Medicare Part A hospital services in 2011 and beyond may actually trigger a surge in laboratory outreach testing activity throughout the country. After all, a growing volume of outreach specimens not only brings in additional revenue to the lab and its parent hospital, but—because of economies of scale—that additional lab test volume con- tributes to lowering the average cost per test in the lab. In turn, that reduces hospital inpatient testing costs, which is a budget-positive outcome.

Pathologists and lab managers should expect budget planning discussions to intensify during the coming weeks as hospital administrators respond to the reduced Medicare Part A payments they will receive in 2011.

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