CEO SUMMARY: To meet the financial challenges of healthcare today, clinical labs and pathology groups can follow the five classic lab rules of success. However, as noted by Stan Schofield, CEO of NorDx Laboratories in Scarborough, Maine, the “old school” methods need to be replaced by “new school” strategies. In this conclusion to a two-part series, Schofield discusses how labs can go new school when following the last two rules, which are “Get Paid” and “Reduce Expenses.”
Second of two parts
IT’S A CHALLENGING FINANCIAL ENVIRONMENT for clinical labs today. One factor is health-care’s rapid transformation toward integrated clinical care. Another factor is reduced payment for lab tests when government and private payers cut reimbursement.
Yet one lab CEO says the five classic rules for clinical and financial success still work. To use these rules successfully today, however, labs must apply them differently.
For Stan Schofield, President of NorDx Laboratories in Scarborough, Maine, one way to apply the five classic rules for lab success is compare “old school” versus “new school” methods.
Schofield shared his perspectives on these rules at the Executive War College in New Orleans in April. (See part one of this two-part series, TDR, July 21, 2014.)
“Old school versus new school is a great way to understand why these five classic rules are effective today, but only if followed in new and different ways than we did in the past,” observed Schofield. Along with his duties as NorDx President, he is also Senior Vice President of MaineHealth and Co- Founder and Managing Principal of The Compass Group.
Schofield’s lab represents a good example of a regional consolidated laboratory organization within a large health system. NorDx provides clinical diagnostics services to hospitals, physicians, other laboratories, and managed care providers throughout New England. NorDx’s parent is MaineHealth, the largest health system in the state.
Schofield’s participation with The Compass Group has given him useful perspectives on how other regional lab organizations respond to current trends in healthcare. The Compass Group is an organization of leaders from 24 large integrated delivery systems. As part of his presentation, Schofield identified these five rules for lab success:
1. Add clients
2. Keep clients
3. Create revenue opportunities
4. Get paid
5. Reduce expenses.
In part one of this series, Schofield addressed the first three rules. In this second and final installment, he outlined the steps labs should take to follow the last two rules.
RULE 4 | Get Paid
Certainly all pathologists and lab managers understand the importance of following this rule. In the old school world, it was much simpler for laboratories to submit claims and get full payment. Today, however, the old school methods are no longer as effective as they once were, Schofield said.
“In the old school approach, if your lab had its own billing operation then you didn’t have to work with your parent hospital,” Schofield said. “The lab’s in-house billing operation allowed managers to temper collection efforts as needed.
“For example, to avoid irritating an influential physician-client, the billing and collections department could soften collection efforts at times when this physician ran up large balances,” he noted. “Such flexibility could avoid making this client unhappy, or sad, or mad.”
Yet, the focus on medical necessity began to change lab collection practices. “This was the time when payers began to assess medical necessity,” explained Schofield. “Payers would refuse to pay for some lab tests if they determined the tests were not needed.
“Suddenly, the lab was on the hook for the cost of those tests,” he stated. “This was true even if the patient or the physician or both were not following prior authorization rules.
“Once financial risk was shifted to labs, a lab could no longer let large balances accumulate for any clients,” he said. “At NorDx, we had to increase our collection efforts. As we did, we brought our collections under control.
“But that was then,” continued Schofield. “Today, the money is going away as payers cut reimbursement for lab tests and implement restrictive coverage rules for certain lab tests.
“This is why the new school approach to rule 4: get paid requires labs to beef up billing operations,” he said. “Every lab
needs a billing staff that has top-ranked coding expertise and collection abilities.
“Labs have to fight for what’s owed to them today,” advised Schofield. “We no longer have the luxury to let anyone- —patients, physicians, or payers—fail to pay for the lab testing services you rendered.”
Slow Payment for Claims
Schofield next addressed slow payment for claims. “It is common for all providers to pay slowly, particularly long-term care (LTC) facilities because they have no money,” he said.
“Many LTC facilities are struggling financially,” added Schofield. “Industry experts say this sector is in crisis and that between 20% and 30% of the LTC facilities could collapse due to financial problems.
“If they do shut down, good luck to labs that are owed money,” he said. “On the financial hierarchy at every long-term care facility I know, the lab is just below the vendor who cleans the parking lot.
“These facilities pay their doctors, nurses, and pharmacists,” noted Schofield. “They pay their utility bills and—after they pay everything else—then they will pay the lab, but only if some money remains.
“That’s why this rule is so important,” he added. “Revenue cycle management is a phrase everyone uses to describe the new school method of following an old- school rule: get paid.
“So, how do labs effectively implement revenue cycle management?” asked Schofield. “The new school answer to get paid is that labs must have two elements in place.
“First, your lab needs the right expertise in the billing department,” he said. “It is no longer acceptable to have someone who knows how to use QuickBooks running the financial operation in your organization. You need an experienced financial manager who understands how revenue cycle management works.
“Second, your lab needs to know its data and carefully manage that data,” continued Schofield. “This requires information systems to collect, store, extract, and report data on billing. These systems are absolutely critical to your lab’s success.
“Having access to extensive data on every aspect of your billing and collections efforts in real time equips you with what is called business intelligence,” he stated. “This helps your billing team know which insurers are paying you and the denial rate for every payer. Also, this data tells the billing team what it can and should collect for each group of patients.
“To do this well, your billing department needs data extraction tools,” explained Schofield. “This aspect of revenue cycle management is difficult and it’s confusing.
“But it is a great opportunity for labs to collect and view all the data they need to manage every aspect of their operations,” he noted. “When you have the right data, the right systems, and the right people running these systems, it gives you the capability to manage every aspect of your business more effectively.
Answers to Right Questions
“Having the right information systems allows you to answer questions every lab needs to answer,” continued Schofield. “These questions are:
- How many tests did you run today, this week, this month, quarter, or year?
- What did it cost to run those tests?
- How do those numbers compare to previous months or quarters or years?
- How do those numbers for your lab compare with those of other labs?”
Schofield next addressed revenue cycle management as it pertains to payers. “The new school approach to getting paid requires your billing team to identify how many of your lab test claims going to insurance companies are being denied,” he said. “Denials are how insurers make money.
“If you got 50 lab bills from any lab,” he stated, “you would find that ten of them—meaning 20%—would be denied simply because someone at an insurance company pushed the denial button to see if anyone was paying attention! The denial rate is high for every laboratory.
“Once denial rates get to a certain level, your lab must take decisive action,” emphasized Schofield. “Every unpaid claim must be managed because—with all the new coding for molecular and genetic tests—no lab can afford to go for six months or more with unpaid bills or with billing disputes. Should that happen, your lab will probably not win many of these decisions.
“This is why, in the new school mode, every lab needs detailed information on billing and collections in real time,” he observed. “The real time aspect is the key, because the billing team needs to manage these issues immediately, not weeks later.
“A related problem is bad debt,” Schofield said. “As one consequence of the Affordable Care Act, hospitals, health systems, and laboratories are now serving more patients than before. However, many of these new patients have high- deductible health plans.
“In the new school approach with rule 4: get paid, this is why laboratories must closely monitor their bad debt,” he commented. “In the past 14 months, our bad debt has doubled and that has probably happened at many other labs across the country.”
RULE 5 | Reduce Expenses
Cutting costs is the fifth rule. “Old school methods for reducing expenses were to cut full time staff, freeze travel, and freeze capital,” recalled Schofield. “Each of us has done these things in our labs.
“Today, the new school approach is to use detailed metrics to manage costs,” he said. “NorDx has metrics to identify trends such as test volume and patient volume. We know how well the hospital is doing with bed days and emergency room visits. We also know the effect on test volume if the hospital closed a clinic, a surgeon moved out of town, or a physician group was acquired by a rival hospital.
“Managers at NorDx have daily numbers, along with weekly, monthly, and quarterly reports on the number of ED draws, critical calls, high-risk incidents, lost specimens, and outpatient draws,” noted Schofield. “Each is an operational metric that we monitor.
“We need this data at NorDx because we operate 10 lab facilities and some of them are 140 miles apart,” he said. “It is essential for our managers to watch these numbers to know what’s happening at every lab site. Access to real-time metrics is the only way to watch trends and intervene in a timely fashion.
“Our daily metrics are detailed and allow us to develop flexible staffing schedules,” said Schofield. “It gives our managers the flexibility to use lab staff where they can contribute the greatest value.
“Because of standardization and cross training, we have a ‘plug and play’ capability,” he noted. “With four or five facilities within 20 or 30 miles, we are able to staff these lab facilities almost as if they were a single central lab. That is an excellent way to reduce overtime and cut staff costs in a staff-friendly manner.
“Another new school strategy to reduce expenses is to be smarter in using buying groups,” said Schofield. “For example, The Compass Group is a 503(c)(6) trade federation. Our members are the laboratory corporations of 24 healthcare systems.
Through The Compass Group, NorDx can contract directly with diagnostic companies for new, differentiating technologies,” he explained. “By doing so we bypass the group purchasing organizations.
“The reason we do that is that GPOs will take 3% to 5% for administrative fees right off the top, and the lab will never get any benefit from that expense,” said Schofield. “Conversely, The Compass Group doesn’t have administrative fees because the members contract directly with diagnostic companies.
“Lab test utilization is another opportunity to manage costs—and to avoid fees that IVD manufacturers charge,” he said. “In most clinical labs, utilization is dropping and many of us believe it will continue to drop.
“This is a significant trend because many labs have volume contracts with suppliers,” continued Schofield. “Should a lab not run the volume it is committed to deliver, it could trigger payments to the vendors. For the first time, the diagnostic companies are enforcing their contracts by checking on the volume commitments and assessing penalties if needed.
Caution about Commitments
“These vendors say, ‘You’ve got until the end of the quarter to pay $15,000,’ which is the amount in the contract,” he explained. “Of course, labs should not make any commitments into the future. Diagnostic companies hate when I say that. But these are issues to negotiate with them.”
Standardization is Schofield’s next new school strategy for reducing expenses. This can be done with instruments and information systems. “Having disparate IT systems is a killer,” noted Schofield. “This gets in the way of optimizing workflow, let alone intelligent cost-cutting and deeper integration. “Standardization also is important for lab test utilization,” he said. “NorDx uses a lab diagnostic committee that has laid the groundwork for installing utilization controls—meaning the parameters physicians will need to follow for population medicine.
“Another important way to reduce expenses is in lab administration,” stated Schofield. “Labs should flatten their organizations. We’ve done that at NorDx and will continue to do so.
“Having more lab administrators than you need is a luxury labs can no longer afford,” he said. “To be successful in the lab business today, no lab can be top-heavy. If it is, that fact will be evident in its metrics and in its benchmarking. For example, one lab’s average costs-per-test will be higher than that of other labs, thus impeding its ability to compete effectively.”
To Manage Test Utilization, Maine Lab Adopts Different Methods, Including a Test Formulary
“PATHOLOGISTS AND CLINICAL lab managers need to be involved in test utilization management in hospitals, health systems, and accountable care organizations today,” advised Stan Schofield, President of NorDx Laboratories in Scarborough, Maine.
“In today’s new school environment, lab management is all about cost control,” he said. “That means test utilization has taken on new importance. Labs must help clinicians use the right test for every patient.
“Consider the role of accountable care organizations,” noted Schofield. “ACOs have value oversight committees and pathologists and lab managers need to be members of these committees.
“At NorDx, we present our test utilization projects to these committees,” he said. “We don’t wait for them to call us. This is the opportunity pathologists have been waiting for: to explain to physicians which tests to order for which patients.
“Our approach is to emphasize test utilization management,” observed Schofield. “Computerized test ordering is one of the most powerful tools available to a lab. But to optimize this, the ordering sets must be changed. For example, tests that are not clinically viable must be eliminated.
“Another new school strategy is to use a lab formulary, particularly for the most expensive tests,” he continued. “Some reference tests cost $3,000 or $4,000 each. Devote resources to where the big bucks are.
“Ask yourself this question: How many CBCs or cholesterol tests do you have to eliminate to make up for one $3,000 genetic referral test?” he said “With a lab test formulary and ordering screens, labs can manage utilization effectively.
“The single biggest way to save money in a hospital or a health system is with a comprehensive blood management program,” advised Schofield. “When we installed such a program, we saved between 40% and 45% in blood utilization at just one of our hospitals. That amounted to several million dollars per year.”
Schofield’s Rule 4 and Rule 5 for Laboratory Success
IN HIS PRESENTATION at the Executive War College in April, Stan Schofield, CEO of NorDx Laboratories, presented his five classic rules of the laboratory business. He described the “old school” approaches, then discussed how labs should pursue “new school” strategies to meet today’s healthcare challenges. Here are the last two rules:
Rule 4 | Get Paid
- Independent lab billing operation—if possible
- Tempered collection efforts to keep doctors happy
- Address medical necessity
- Billing staff is skilled in coding and collections
- Labs must fight for what is owed
- Revenue cycle management
- Use of data extraction tools
- Fast response to greater number of denials
- Attack sources of increasing bad debt
Rule 5 | Reduce Expenses
- Cut staff
- Freeze travel
- Freeze hiring
- Freeze capital
- Reduce expenses
- Monitor sophisticated metrics daily
- Have flexible staffing at every opportunity
- Use buying groups such as Compass Group
- Do direct contracting with diagnostic companies
Billing is Designed to Collect What’s Owed
AT NORDX IN SCARBOROUGH, MAINE, the clinical lab has a billing staff of 12.55 full-time equivalent employees. Each member of the staff has a specialty and can provide cross-coverage as needed.
As part of the lab’s new school strategy for getting paid, it has five specialists in billing who review claims from payers, each with a specific area of expertise. One is a specialist in bills that go to Anthem, for instance. One works with bills going to MaineCare, the state’s Medicaid program. One is a federal programs specialist, handling Medicare claims. One specializes in serving client physicians and one is a specialist in collecting payments from patients.
The billing department also has exceptional productivity, said Stan Schofield, CEO of NorDx Laboratories. “Productivity significantly exceeds the most aggressive end of our consultant’s benchmark range,” he stated. “Each full-time equivalent staff member processes 172 requisitions per day and the benchmark range is 59 to 69 requisitions per FTE per day.”