New ARUP White Paper Tackles the Hidden Costs of Outsourcing Clinical Laboratories

Hospitals and health systems face growing pressure to outsource their clinical laboratories amid an increasing number of healthcare mergers and acquisitions. As healthcare leaders weigh the perceived short-term financial benefit of outsourcing, they must also consider the hidden costs that can drag down an organization for years to come.

In a new white paper, “The Hidden Costs of Outsourcing Clinical Laboratory Functions,” Brian R. Jackson, MD, MS, medical director of Business Development for ARUP Laboratories, reviews important factors to consider when making an outsourcing decision. He also lays out a framework of actions that clinical laboratories can take to strengthen their health system integration and circumvent outsourcing threats.

“In the face of financial pressures and market uncertainty, hospital leaders can fall victim to short-term temptations such as selling off their laboratory operations. Such actions almost never play out well for the organization over the long term,” Jackson said.

The white paper describes how outside vendors almost always focus on easy-to-quantify direct costs while glossing over indirect costs in ways that favor their own services. Direct-cost analysis typically favors outsourcing laboratories, partly because of volume purchasing of reagents and other supplies and partly because external vendors often cut staffing levels as part of an outsourcing arrangement.

However, focusing only on direct costs obscures indirect costs that may be harder to measure but are still impactful.

The white paper describes critical factors that impact clinical laboratories’ overall costs and value to the health system. Some of these factors include timely communication, process customization, internal expertise, maintenance and preparedness, quality, and more.

For example, communication delays between medical providers and outsourced labs can result in a variety of indirect costs to a healthcare system, including incorrect test orders, unnecessary therapy, and delayed discharge. In-house departments are typically more responsive than outsourced entities, and they often provide better customer service overall.

Additionally, outsourcing vendors generally offer a standard package of services while limiting the opportunities for customization. But an emergency department’s processes and workflow are quite different from those of an ICU or primary care clinic or surgical center. Although certain aspects of laboratory services can be standardized, others need to be locally customized in the interest of clinical performance.

Other factors that can result in indirect costs include a lack of oversight of the vendor’s hiring and workforce development practices and a lack of transparency into the vendor’s compliance activities.

“A hospital selling off its laboratory operations is like an airline outsourcing its flight attendants. Yes, it can bring a one-time financial windfall. But over the long run, losing control of service quality puts the entire enterprise at risk,” Jackson explained.

Costs that result from quality failures can be distributed throughout the healthcare organization and are therefore difficult to measure. For example, poor quality can have a deleterious impact on patient satisfaction, a key metric for health systems. On the other hand, laboratories with high analytic quality have fewer diagnostic errors and more consistent turnaround times due to fewer repeated runs.

In addition to describing these hidden costs, the white paper includes practical actions clinical laboratories can take to optimize their value to their health systems.

“Every laboratory leader should be aware of the potential threat of outsourcing and take steps to proactively show that the services they provide directly support their clinicians and patients and are integral to a high-functioning healthcare system,” said David Shiembob, MBA, C(ASCP)^CM, manager, ARUP Healthcare Advisory Services.

In essence, clinical laboratories need to highlight their value as a key component of the health system, not just as a service provider. The white paper discusses steps laboratories can take to demonstrate that value, such as proactively communicating performance, supporting strategic decision-making, and aligning the laboratory with system and local needs.

ARUP Healthcare Advisory Services consultants are experienced in helping laboratories better align with their health systems. “Health system laboratory alignment efforts can actually accomplish the goals that are promised with outsourcing, such as decreased costs and greater efficiencies, while still maintaining alignment with the healthcare system’s priorities,” Shiembob said.

Access the white paper, “The Hidden Costs of Outsourcing Clinical Laboratory Functions,” here.

Heather Stewart, heather.stewart@aruplab.com