Increasing Costs for Genetic Tests Are Busting Lab Budgets

Hospitals can’t recover full cost of send-out tests

CEO SUMMARY: Across the nation, hospital administrators are recognizing that effective lab test utilization is a critical factor in a lab’s success. At Seattle Children’s Hospital, clinical pathologists, clinical chemists, and laboratory genetic counselors are using an innovative utilization management program to ensure the appropriate use of genetic and molecular tests. They also formed Pediatric Laboratory Utilization Guidance Services. In two years, PLUGS has gained 32 members, including seven hospital labs serving adults. Interest in utilization management is driven by a desire to decrease test ordering errors and to control the cost of send-out tests.

FOR MORE THAN A DECADE, the explosion of expensive esoteric and genetic tests has sent the cost of send-out testing spi raling ever higher at hospitals and health systems throughout the United States.

Another dynamic in the lab testing marketplace compounds the problem. Many lab companies providing these esoteric and genetic tests charge high prices. But when a hospital bills a health insurer, the insurer’s payment is much less than the price the hospital pays to the send-out lab.

This means hospitals and health systems get hit twice. The rising number of esoteric and genetic tests that have clinical value increases the cost of send-out tests each year. At the same time, health insurers are reducing what they reimburse hospitals for these same tests, which increases the hospitals’ testing costs.

To address these problems, hospital administrators support the efforts of pathology groups to introduce laboratory test utilization programs. The goal is to improve patient outcomes while controlling the cost of a hospital’s send-out tests.

“Improving the utilization of lab testing is a big opportunity for pathologists, clinical chemists, and laboratory genetic counselors who want to contribute more value,” noted Michael Lee Astion, M.D., Ph.D., Medical Director of Laboratories at Seattle Children’s Hospital. “Our program is based more on the work of Ph.D. clinical chemists and masters-degree level genetic counselors than it is on the work of pathologists.

“At our institution, we focus on certain kinds of tests, such as for celiac disease, unusual infectious diseases, and especially genetic profiles,” he said. “More specifically, the poor reimbursement on genetic tests is the biggest pain point. To manage these costs, we implemented an active utilization management protocol for germ line testing for heritable diseases and for cancer gene expression profiling.

“Some of these tests now cost more than an MRI,” noted Astion. “Many of them cost more than $2,000 each. Just this example helps to illustrate why genetic tests are breaking laboratory budgets.”

The high price for these genetic tests is only part of the story. The other factor breaking lab budgets is the meager reimbursement health insurers pay for these tests. “Assume that a lab sends a test out for $2,000 and that it marks up the bill a bit, then sends that bill to the patient for $2,500,” Astion explained. “But the insurance company doesn’t reimburse much, usually about only 35¢ or less on the dollar.

“Thus, for a test that costs the lab $2,000, it brings in about $700 in reimbursement from insurers,” he said. “At that rate, testing costs are about three times higher than testing revenue. That’s unsustainable.

“This scenario is worse if the test is for a Medicaid patient,” he emphasized. “In that case, the lab gets paid little or nothing. Often, the patient can’t pay and so the lab doesn’t get reimbursed. Sometimes Medicaid pays something, depending on the test, the state, and the Medicaid administrator.

Losing Money on Lab Tests

“Thus, because it has a contract with the send-out lab, the hospital lab pays $2,000 to the lab that performed the send-out test,” stated Astion. “But from the payer, the hospital lab is reimbursed for only about one-third of that $2,000. This is one reason why hospital labs lose money on send-out genetic testing.

“A typical, freestanding pediatric hospital might spend about $1 million per year on germline genetic testing,” he explained. “At about 35¢ on the dollar, this lab is losing $650,000 every year.

“That financial gap between cost and price paid for genetic tests directly affects the entire lab budget and therefore the ability of the lab to serve its hospital,” said Astion. “The fact that many genetic tests are misordered or unnecessary compounds the problem.

“We hear plenty of discussion about value-based purchasing and capitation but that’s not driving the interest hospitals have in laboratory test utilization management,” observed Astion. “The reasons are much more pragmatic, particularly when looking at the cost and ordering errors associated with genetic testing.

Addressing Diagnostic Delay

“At a time when hospitals are experiencing fewer inpatient admissions and budgets are declining, tighter management of every source of unnecessary or excessive cost becomes a financial priority,” he added. “In addition, the diagnostic delay associated with ordering the wrong genetic test is an important, pragmatic driver.”

The need for immediate and effective solutions to improve the utilization of lab tests motivated Astion’s team, led by Jane Dickerson, M.D., a clinical chemist, and Jessie Conta, a laboratory genetic counselor, to develop a utilization management service that other children’s hospitals and health systems could use. The team at Seattle Children’s founded an entity called Pediatric Laboratory Utilization Guidance Services.

“PLUGS is a membership and networking organization that helps hospital laboratories decrease costs and errors associated with unnecessary laboratory testing,” explained Astion, a clinical pathologist. PLUGS covers many areas of lab utilization management but the best return on investment for PLUGS members comes from focusing on high-cost tests, such as genetic tests that each cost over $700.

“Basically, our program ends up canceling 10% of these genetic tests at the ordering stage because they are wrong or duplicates or have some other issue,” he continued. “Some 15% of genetic test orders are modified, usually in a way that increases the quality of the test order and decreases the cost. The remainder of genetic test orders, which is about 75% of them, go right through.

“On average our utilization management program saves us about $400 for each genetic test requisition that we subject to active utilization management.” he noted. “Many of our PLUGS hospital members report similar cost savings.”

The utilization management program uses the existing hospital information systems. “In our hospital we have criteria for which genetic tests to review,” said Astion. “Those tests are flagged in the computer. Each time a doctor orders one of those tests, she knows the request has been submitted for a laboratory genetic counselor’s review.

Assessing Medical Necessity

“If it’s a genetic test, then it goes to our laboratory genetic counselors (GCs),” explained Astion. “We have three GCs on staff and they rotate. Most of the tests we flag are genetic tests, but not all.

“If it’s a nongenetic test, then it goes to the doctoral-level person on call in the utilization management group,” he said. “Typically, we have three doctoral level people, either pathologists, led by Bonnie Cole, M.D., or clinical chemists, who are on call and each one takes a week on call at a time.”

Jessie Conta, MS, LCGC, a Laboratory Genetic Counselor and Supervisor, explained that the counselors have key questions to ask about flagged genetic tests. “We want to know if this is the right test, meaning will it make sense for this patient?” she said. “Is it medically necessary and will it affect the patient’s care or is the ordering physician just curious about the result?

Most Appropriate Test

“Like many of the PLUGS members, we are a teaching institution and so the line between whether a flagged test is for clinical or research purposes is often blurred,” she added. “So we delve into the medical record or discuss the case with the provider to determine why this test is necessary.

“If a genetic test is indicated, then we want the physicians and patients to have the most appropriate test,” continued Conta. “Many doctors think they have identified the best genetic test.

Hospital Laboratories Need Processes To Limit Liability and the Cost of Send-Out Testing

WHEN SEEKING TO CONTROL LAB TEST COSTS, one area stands out for pathologists and clinical laboratory directors: send-out testing.

“We focus on improving the processes we use for send-out tests because that’s where labs typically get the poorest reimbursement and where doctors make the most ordering errors,” said Michael L. Astion, M.D., Ph.D., Medical Director of Laboratories at Seattle Children’s Hospital.

“Here’s what happens with reimbursement,” he stated. “When we send a test to a specialty genetics reference lab, our hospital must pay the full amount negotiated on our contract with them. But after filing a claim with the patient’s health plan, the insurance reimbursement on average is only about 35¢ on the dollar. So, if our lab pays the specialty genetics lab $1,000 for a test, we get about $350 back in insurance payment. So, the lab loses $650 on that test.

“Over time, that rate of loss is unsustainable for our lab and our hospital,” he added. “This is the reason why we focus financially on send-out tests. Our goal is to not send out any test unless it is medically necessary. When we do send out a test, we refer only to certain labs that we know provide high value to patients. We know we’re going to lose money but we can at least take smart steps to minimize the loss and maximize the quality of the test that the patient receives.

“Thus, one component of our test ordering protocols is to carefully manage send-out processes, and do so in a cautious manner because, in addition to financial issues, there are a number of patient safety problems related to send outs,” he explained. “Not many lab directors know this, but studies of legal claims against labs reveal that three of the most significant lab service problems associated with patient harm and substantial payouts are ordering the wrong test, not retrieving the test result, and misinterpreting a test result. All three of these problems originate more from send-out testing than from other areas of the lab.

“There are many reasons why send-out tests can be problematic in this regard,” observed Astion. “They are usually rare tests, for example, and the doctors who order these tests don’t have great knowledge about them. That means they don’t know how to order them or how to interpret the results. Also, they tend to forget they ordered these tests because it takes longer to get send-out test results.

“If they forget about the tests that were sent out, the physicians don’t retrieve the results,” he explained. “Moreover, when the unretrieved lab test results are abnormal, then it’s easy to see why the doctor would be subject to litigation.

“For these important reasons, it is essential that the lab establish strict protocols to minimize these types of failures that lead to diagnostic errors,” concluded Astion.

“However, because we work in this area daily, we may know of a different genetic test that will get them a better answer, and, in some cases, it may be more expensive,” she noted. “More commonly, we can identify an equivalent genetic test offered by an alternate lab that might cost less.

“We also make sure that the insurance preauthorization is in place in advance of the testing,” stated Conta. “We want to protect our patients from unexpected bills.”

Astion explained that, of the 1,700 tests that have required utilization management at Seattle Children’s in the past three years, most are genetic tests. “About one third are not genetic tests,” he explained. “These might be esoteric chemistry tests such as vitamin 1,25 D or reverse T3, or autoantibody tests like those used to diagnosis celiac disease.

“We review any lab test order that is not on the formulary or any test where a physician asks us to send to a lab that is not one of our chosen reference labs,” noted Astion. “We also have a list of banned tests and we don’t run any test from a direct-to-consumer kit that a patient brings in.”

PLUGS members take a similar approach to utilization management and they get many of the resources they need from participating in PLUGS. “Should your hospital have nothing in terms of utilization management and it joins PLUGs, we have educational materials to help start your utilization management committee,” Astion noted. “If needed, we also will attend your first committee meeting.

“Jessie, Drs. Dickerson and Cole, and the PLUGS team have developed materials on how to be effective at managing lab test utilization,” added Astion. “These materials offer insights into how to talk to physicians to persuade them to change their orders in a way that is not hostile.

Access to Materials

“To join PLUGS and participate, hospital laboratories pay $4,200 per year,” he continued. “This gives them access to our utilization management materials, including online webinars, written education materials, policies, procedures, and quarterly WebEx meetings that spotlight member successes, as well as access to a member discussion forum.

“Members also can call our staff if they have questions,” stated Astion. “For instance, they might ask how to deal with a particular doctor, for instance. We give them ideas about how to change orders in an inoffensive way.

“The members earn their $4,200 payment back quickly because savings from careful management of high-cost lab tests is substantial,” he added.

In an article published last year in the Archives of Pathology & Laboratory Medicine, the Seattle Children’s team described the results from the first eight months of the utilization management effort. Tests that met defined criteria were subject to additional review. These were requests with multiple genetic tests included on the same requisition, requests to send to a nonpreferred or international laboratory, and requests to send out tests that are normally done in house.

Reporting on Successes

In each of these cases, the redundant test was vetted with the ordering clinician who opted to cancel the test or order a more appropriate test based on conversations with the UM consultant.

Over eight months, the researchers analyzed the costs of 251 test orders (including orders for 199 genetic tests) and found that without utilization management, the total cost would have been $610,456. They also found that UM cut spending to $491,504. The savings of $118,952, was 19% of the total without UM, or an average of $463 per test request under management.

With leadership of many hospital labs complaining about the same problems that PLUGS was addressing, the lab team at Seattle Children’s developed the membership-based collaboration that PLUGS is today.

Even though PLUGS was started to serve labs in pediatric hospitals, about half of all pediatricians practice in health systems serving adults. “The Mayo Clinic is a good example,” observed Astion. “Additionally, seven PLUGS member hospitals serve adult patients, such as HealthPartners in Minneapolis,” commented Astion. “We also have some freestanding labs such as TriCore Reference Laboratories in Albuquerque, New Mexico.

“The other reason so many hospitals and health systems serving adults have joined PLUGS is that there is tremendous overlap in testing for children and testing for adults,” continued Astion. “For example, the problems hospital laboratories have with celiac disease tests, other autoantibody tests, nutritional tests, and allergy tests, are the same for children and adults. There’s a lot of overuse and over-bundling when physicians order these send-out tests.”

Mayo Medical Labs Seeks to Bring Utilization Management to More Hospital Laboratories

WHEN IT COMES TO MOLECULAR AND GENETIC TESTS, few hospital-based clinical laboratories have the expertise needed to effectively manage the utilization of these tests, stated Don Flott, Director of Utilization Management for Mayo Medical Laboratories (MML).

“The explosion in genetic-testing technology means more genetic and molecular tests are being introduced all the time,” noted Flott. “The problem with such a rapid increase in the number of lab tests being offered is that doctors don’t always fully understand the value of these tests. Busy physicians today may be overwhelmed by technology, and as a result, there is often a knowledge gap, which leads to testing being inappropriate or over-ordered.

“But physicians still order these tests because that’s what patients want,” he said. “And, often, doctors order genetic tests in a shotgun manner, meaning, they order many different tests and may not fully understand each one. That knowledge gap leads to unnecessary testing. This is a critical issue today when the spending on genetic and molecular tests is growing by 12% to 25% per year, and between 20% and 40% of these tests are unnecessary.

“When doctors don’t know what to do, they need experts in molecular and genetic testing,” he continued. “For example, when a physician wants to consult with a pathologist or Ph.D. knowledgeable about molecular and genetic tests, one of the first questions the expert will ask the physician is, ‘What clinical question are you trying to answer?’

“Another problem is the acute shortage of genetic counselors to meet with patients, gather a patient and family history, and counsel them on appropriate genetic and molecular testing,” noted Flott. “The demand for genetic counselors is so great that community hospitals just don’t have access to labbased genetic counselors.

“Across the nation, some large pediatric hospitals have genetic counselors, but small hospitals don’t have them, and there are good reasons why a small hospital doesn’t need full-time genetic counselors,” he stated. “Instead, hospitals could benefit from having access to a genetic counselor only as needed, and these arrangements are workable because genetic counseling can be conducted by phone or email.

“That’s why we joined PLUGS (Pediatric Laboratory Utilization Guidance Services) as a gold member last year,” said Flott. “A gold membership allows us to supplement our Mayo Clinic genetic counselor expertise with the genetic counselors at PLUGS to better serve hospitals with large pediatric practices around the country. These hospitals may not be children’s hospitals, but they still have pediatric patients and thus need utilization management.

“Meanwhile, we continue to make our inhouse genetic counselors at Mayo Clinic available to our hospital clients that serve adult patients,” he continued. “Because of PLUGS’ expertise in pediatric laboratory medicine, it made sense for us to partner with PLUGS to serve our hospitals that have pediatric patients.

“Thus, both Mayo Medical Laboratories and the PLUGS team at Seattle Children’s Hospital share a common goal: We are both helping physicians to close the knowledge gap and achieve improved patient safety and outcomes through better utilization management of molecular and genetic tests,” concluded Flott.

Contact Michael Astion, M.D., at 206-987-2103 or; Don Flott at 206-987-2103 or


Leave a Reply


You are reading premium content from The Dark Report, your primary resource for running an efficient and profitable laboratory.

Get Unlimited Access to The Dark Report absolutely FREE!

You have read 0 of 1 of your complimentary articles this month

Privacy Policy: We will never share your personal information.