Industry Insights
A State of the Lab Industry Discussion with Stan Schofield
July 26, 2024
As we move into the second half of 2024 now’s a good time to check on the state of the lab industry with an expert who has a strong sense of where it is presently, and where it’s headed soon.
Stan Schofield is a trusted voice within the industry. He is the Founder and Managing Principal of The Compass Group, an association of 32 regional laboratory corporations, all housed within some of the largest and most prestigious healthcare systems in the U.S. He also served as President of NorDx (a regional laboratory corporation) and Senior Vice President of Laboratory Services within the MaineHealth system before retiring from both positions in January 2023.
Schofield is a wise sage with a boatload of experience. He understands how highly complex lab organizations work, their pain points, and what can be done to help them meet current challenges.
We recently sat down with Mr. Schofield for a wide-ranging discussion on the overall state of healthcare, while also paying special attention to laboratory financial, regulatory, and staffing challenges.
Here’s our conversation.
Q: What are the hot topics in the lab world today, and what’s the state of healthcare in general?
If you look at the lab industry in general from the 2020 to 2022 time frame, the lab was a hero. Instead of being taken for granted, labs were the heroes when COVID-19 hit.
Some were very successful and met the testing challenge. Others who were less prepared, less flexible, and with less entrepreneurial spirit didn’t do so well. This created an image within the health system C-suite of those who get it done and those who don’t. That was the framework heading into 2023 and 2024.
Q: Where would you rate staffing concerns at this point?
Today the number one issue remains staffing, a problem first identified about five years ago and as challenging as ever. Labs are struggling to hire at the entry level and many med techs have already retired or will do so soon.
There's a widespread loss of intellectual capital, and a loss of seasoned, experienced people who can make critical care and patient care decisions. This is problematic and compounded because it's not just the labs facing this issue. It’s all of healthcare.
Q: What role has PAMA played in terms of lab finances?
The Protecting Access to Medicare Act has resulted in 45 to 50 percent drops in outpatient reimbursement over the last six years, despite it being suspended for three years due to COVID and other related factors. Labs that previously had lucrative external and outreach business have taken a big hit due to PAMA.
Q: Where do things stand with the FDA and lab-developed tests (LDTs)?
The U.S. Food & Drug Administration's final rule on LDTs came out in late April and it’s now tied up in lawsuits with different laboratory associations that believe the FDA is overstepping its bounds.
Add the recent Supreme Court ruling of the Chevron case (Chevron v. Natural Resources Defense Council), where rule interpretation by federal agencies has now been called into question. One can see how that could also directly impact the FDA’s rulemaking ability around LDTs. How all this turns out will be a big deal for many labs and health systems.
For example, many regional and big hospital labs use LDTs for infectious disease and cancer markers because they are significantly less expensive than the FDA-approved IVD assays, allowing them to compete with the big commercial labs.
Positive flu, positive COVID, and positive RSV (respiratory syncytial virus) are pretty simple to do these days, so that’s a big issue because the government's trying to regulate all of these tests, and it's up in the air as to how it will all be resolved.
Q: What do health system C-suites think about the current state of healthcare and the challenges ahead?
Fifty-seven (57%) percent worry about revenue growth and new sources of revenue.
Forty-six (46%) percent think reducing costs is the number one issue.
Twenty-five (25%) percent worry about the patient experience. That’s a priority for them.
Q: What’s happening with revenue growth in healthcare?
The money continues to be made in complex procedures, orthopedic procedures, open hearts, hips, knees, spines, shoulder replacements, big joint replacements, and cancer medicine. Everything else barely covers the expense.
If you look at what's hurting hospitals and healthcare systems the most it’s primary care for chronic illnesses. People are not going to the doctor, they're not following up, and the hospitals and health systems aren’t getting the patient visits.
So what’s the problem?
Most practices and physician provider groups don’t have adequate staffing. There are big openings for entry-level staff, nursing assistants, and medical assistants all over right now, and the ones who can fill these spots often have long learning curves.
So the challenge is getting patients to come back so it’s not one-and-done. Providers need to keep contact for early detection. They need to continue the relationship with the patient because only 30 percent of providers feel that their patient population is getting adequate cancer screening and participating in a meaningful fashion for early cancer detection and screening.
Q: What about hospitalization costs?
A problem 20 years in the making is managed care, the diagnosis-related groups (DRG) system, and length of hospitalization, specifically how Medicare and health insurance companies categorize DRG for hospitalization costs.
For example, if the hospital gets a flat amount of money and the patient is allocated three days' worth of payment, when care goes into day four or five, each day after the managed care/DRG allowance becomes very expensive (about $2,500 a day). So having a patient with a chronic illness remain in a hospital bed because there are no nursing home beds or step-down facilities to discharge to, is a big problem.
On top of that, mental health is a growing problem. Every emergency department in this country has mental health patients, and they have nowhere to place them and no one to care for them. Most behavioral health hospitals and delivery systems don’t make money here and behavioral health. In most cases, it's a drain on the system because you lose 10, 12, 15, $20 million running a behavioral health facility thanks to poor reimbursement.
Q: What’s the overall financial health of hospitals and health systems now that Covid is no longer the primary focus?
When you put it all together, 50 percent of U.S. hospitals today are losing money. It's a big number. That's better than the 75 percent from two years ago when hospitals were full of COVID patients and the government was paying for it, but it’s still a major problem. If the government hadn't paid for it all back then, the entire healthcare system in the United States would have collapsed.
Real big money wasn’t made with COVID-19. The best you could do at the time was break even because all the beds were full and the complex cases and the surgical rehab and facilities that generate the most money were sidelined. Also, when you shift from private pay to government pay, that’s usually a huge reduction in revenue.
So we’ve seen some recovery, but large cost increases have continued.
The large cost increases for most systems are directly related to labor, contract nursing, and contract traveler expenses.
During COVID everybody was scrambling for nurses, and many went on the road and became travelers to get paid $75 to $100 an hour. The old $35 to $40 an hour model collapsed.
Then there’s the inflation effect.
We went for 10-plus years without much inflation, a little here and a little there. We used to have five-year fixed laboratory contracts with no price escalators. That’s almost impossible to get these days.
If you’re trying to do business with any of the diagnostic companies or the lab vendors and suggest fixed contracts, that's a walk-away-from-the-deal situation for them now.
We used to be the buying power and we could negotiate that. Not so much anymore.
Supplies and materials are up five to seven percent at a minimum and have been for the last two to three years, caused mainly by supply chain issues and difficulty obtaining raw materials from places like China and Asia.
Q: What about the patient experience? How has that been affected by these ongoing issues?
Expenses are up, revenue is down, and hospitals, with all the unclaimed entry-level positions, aren’t getting the patients in the door. If you have a primary care doctor that you need to see for a physical, it takes four to six months just to get an appointment.
If you're sick and in need of help, often you’re told, ‘I'm sorry, we can't see you now, just go to an urgent care down the street.’ This is a terrible way to lose revenue because not all systems and hospitals have urgent care centers.
When you have all these open positions, access is hard to obtain and patients get upset from poor experiences. They're not very happy. Most patients are good about understanding, but every day, there are serious patient service failures and problems with confrontational patients in sometimes violent situations.
Five and 10 years ago, you wouldn't hear much about physical violence by patients, but that’s not the case today where you have people who are this unhappy, very short-tempered, and tired of being told ‘no’ because health systems don't have the resources to accommodate them.
Q: So if you’re in the C-suite, what can be done to reverse these disturbing trends?
If you can't grow the business, you can merge, reduce, or sell, but hospitals don’t have much to sell. They've outsourced dietary services, they've outsourced housekeeping services. Some of them are starting to outsource physician management services, but at the end of the day, that's not putting a lot of money into the coffers of a hospital.
From 2020 to 2023, large commercial labs made lots of money with COVID testing. They charged and were reimbursed very well. When I ran the regional lab, it was extremely profitable. We were productive and automated testing thousands of patients per day. But that dried up very quickly.
The government cut reimbursement in half over a year ago, and the COVID numbers for a system that was doing 3K, 5K, and 10k a day went down to 300 to 500 a day. COVID is making a slight comeback but the profitability is no longer there.
The lab, which was a hero and made a huge difference in delivering service and keeping hospitals open and patients and staff safe and alive, has suddenly realized that it's not such a shiny penny anymore, no longer the favorite son or daughter within the healthcare system.
What you have now is these large commercial labs knocking on the doors and saying, ‘Hi, we're from blah, blah, blah, and we'd like to buy your laboratory, and we will pay cash.’
Health systems that previously would never consider selling off the crown jewel or the golden goose of their network don't have any options anymore. Cash is king.
Commercial labs like Quest and LabCorp are working out deals with medium and large-sized healthcare systems almost every month. It's happening everywhere, and it's hard to stop the process once it starts because everybody's still losing money.
Q: What advice do you have for those searching for guidance during these turbulent times?
All labs, their administrators, and pathology staff need to prepare to meet these threats because nobody's exempt and nobody will be bypassed.
What do you have to have as a lab?
You have to have performance metrics.
How are you doing? What's your turnaround time? What's your redraw rate? What's your quality for stats?
You need to demonstrate strong financial and operational performance through data. You need a good laboratory information system (LIS system) that will allow you to extract, use, and report the data.
Financial performance has to be a priority because commercial labs are coming in and saying, ‘I can do the work much cheaper than you can, and we're willing to pay you so you don't lose money on all this work.’ The commercial labs know if you can't do the work for 30 percent less than you could five years ago you’re losing money on it.
If you do a real deep dive into outpatient profitability, it's declined dramatically, and in many cases, 30 to 40 percent of the revenue that used to be there is gone. It's just a fact. Not only the government reimbursement rates and the clinical laboratory fee schedule, but the insurance rates have declined, and many times the insurance rates and managed care rates are even lower than Medicare.
Financially, the lab has to prove that it's efficient. It has to have a Lean mentality, strong expense management, and Lean performance.
Learn More: Four Game-Changing Business Strategies to Improve Laboratory Processes
We've been talking about Lean Six Sigma for 15 years now. Well, data and strong performance work in messaging the C-suite.
You need to demonstrate lab value to the decision-makers. It was great when you were doing COVID testing, and if you could do COVID testing and get the results out not in two, three, or four days, but in hours, you did well. Today you need patient service and patient satisfaction metrics, and you probably need to have laboratory staff on patient care teams around the hospital for visibility, otherwise, the lab won’t be properly represented.
Strong performance needs to be communicated. If you have a good lab, you have to let people know. It's not being immodest, it's reminding them that we were heroes during COVID and can still be heroes today.
The lab contributes to keeping patient care costs down. Timely response, timely information, and data. All these things are important, and it all comes back to operations, performance, and data, and that's where advanced LIS systems come into play. If you're performing and communicating there will be a seat at the table and you will be visible.
What about laboratory revenue cycle management (lab RCM)?
If you're an independent lab, the number one thing around informatics and data is having an advanced laboratory billing system. You've got to get the money. Don't screw with the money.
You need good lab revenue cycle management (lab RCM). Get the bills out, get the bills paid. Do claims tracking, claims adjustment, adjudication, eligibility, and scrubbing. Do everything you can to ensure clean claims so you get paid promptly because it takes very little to disrupt your cash flow.
If the insurance companies start denying you, which they do, just to see if you're paying attention, a good laboratory revenue cycle management system will alert you to this long before it’s too late.
Learn More: Reduce Denials and Stop Revenue Leakage With Integrated Laboratory Billing Management
Q: Any final thoughts or words of advice?
Labs have to do a lot of work because it's easy to forget about them unless they're out there every day at practice making the catch or making the play, so to speak, for the health system.
If you're delivering the tests, have happy patients, expenses are under control, and you’re able to show value, you’ll have a seat at the table.
If you don't have good data and can't demonstrate excellent operational management and patient care, then the commercial labs and the C-suite will have further discussions. You may find yourself being shipped off and shipped out.
