Inside the Lab Industry: Reimbursement Cuts Have Led to New Lab Mantra: Cost Control and Efficiency

For a venture doing as well as West Pacific Medical Laboratory, its leadership is taking no chances. A startup little more than three years ago, the Southern California-based West Pacific performed 12 million tests last year. It is projected to more than double that total in 2013, reaching a volume of 27 million, according to Richard Nicholson, its chief executive officer. Nonetheless, West Pacific is also striving relentlessly to cut down costs even as volumes have grown dramatically. Nicholson wants the company to reduce the cost of a requisition by 10 percent—about $2 to $3 apiece. West Pacific is about halfway there. “Every lab has been doing cost cutting,” Nicholson said, adding that he is trying to balance dramatic growth with cost control. The obsession with costs has been confirmed by interviews with several laboratory executives. Their operations have been nipped by repeated cuts from Medicare and exclusions from private payer networks. They are also concerned by the future the Affordable Care Act holds for them. As a result, many labs have been wringing out costs and introducing efficiencies to every corner of their business. Labs Must Change Tom Tiffany, the former chief executive officer of PAML Laboratories in Spokane, Wash., and now an industry consultant, said that labs and pathology practices are confronting an array of cuts. They include deep reductions in reimbursement for the technical component (TC) of the 88305 CPT code, the end of the Medicare grandfather protection that allowed independent labs to bill Medicare directly for the TC of pathology services provided to hospital patients, and the elimination of code stacking for molecular testing (and resulting delayed payments). As a result, labs have no choice but to make changes. “They essentially have to start increasing their technical work and take it in-house,” Tiffany said. “They have to cut down on their sendouts and go to higher-paying CPT codes. It’s not an easy task.” It’s also not cheap. According to Tiffany, a small lab or pathology group that decides to take flow cytometry and fluorescence in situ hybridization testing in-house may have to invest $500,000 or more in order to do so. Meanwhile, he is seeing pathologists cutting their pay by 20 percent or more to try to keep operations going. Options for Labs Even among medium-sized labs with revenue in the tens of millions of dollars, investment in a doctorate-level employee and some pieces of equipment are not likely to reap the savings and efficiencies they are seeking. Instead, larger operations are taking a more holistic approach. West Pacific itself has taken back in-house several tests it had been outsourcing, celiac and reverse T3 among them. That’s added between $300,000 and $400,000 annually to its bottom line, according to Nicholson. Meanwhile, Pacific West’s forecast for torrid growth is being used as leverage with suppliers. “If we tell them we anticipate a growth rate of 20 percent, we can get a response,” Nicholson said, adding that supply prices can be negotiated downward as a result. West Pacific has also explored going overseas for some supplies—it is regularly contacted by Chinese firms—but it has yet to cross that threshold. “If we switched from a recognized vendor, and we had a disruption . . . it is a big concern,” Nicholson said. “We can’t have an interruption like that, and we can’t be the guinea pig” for testing a foreign supply market. Even Bigger Labs Are Tightening Up PAML, which has been moving boldly from a large regional to a national player, is also taking a close look at efficiencies, with a goal of cutting costs by a double-digit percentage as part of a three-year plan. It has made some recent dramatic changes as a result. According to PAML CEO Francisco Velázquez, M.D., although the company’s volumes have grown, reimbursements per test have eroded. “Our approach has been a little more strategic than reactive,” he said. The lab is wrapping up the consolidation of all nine of its supply depots into a single locale—the underground parking garage at its company headquarters in Spokane. That will be completed in October and is expected to translate into six-figure annual savings. Moreover, PAML is seeking partnerships with hospitals to perform basic testing such as lipids locally. “A lot of routine testing is better done in the community,” Velázquez said. Among the advantages is a lower transportation cost while turnaround times are shortened. But it also helps to expand PAML’s reach without having to construct additional laboratories, according to Velázquez. PAML has also streamlined its agreements with the delivery companies that make its shipments—entering into a single tentative pact with FedEx. “This is not typically a core competency for a lab—shipping things all over creation,” Velázquez said. The deal also allows PAML couriers to focus on picking up and delivering specimens as opposed to juggling that task with transporting supplies. The company is not finished, however. PAML recently established a product innovation and improvement group that will scrutinize the entire enterprise for efficiencies. Although it has only two employees to start, Velázquez said it will expand in the future. Employees Not on Table Despite the focus on keeping costs in control, few of these changes have involved what has become a common refrain across corporate America: cutting jobs. Nicholson has eliminated a couple of employees in the billing department but has otherwise been hiring, particularly sales staff. There have been seven sales hires so far this year at West Pacific, with two let go because they couldn’t cut it. “You have to take risks with salespeople,” Nicholson said, with their performance the indicator of whether to keep them on. And while PAML is in the middle of revamping its primary laboratory in order to make it more efficient, there are no layoffs planned for the moment. “It is not about downsizing people—it’s about giving them better tools and a better [work] space,” Velázquez said, adding that it’s tough to recruit and hold on to qualified employees. Doesn’t Work for All Although both PAML and West Pacific have been success stories in a tough environment, cost cutting and efficiencies are not the magic bullet for every laboratory. Hunter Laboratories, located in California’s Bay Area, recently sold out to the much larger Bio-Reference Lab after three years of struggles, according to former CEO Chris Riedel. After Riedel’s lab was shut out of the Blue Shield of California’s provider network, “the company was the walking dead,” he said. A lab that previously had 45 percent annual growth no longer had any. During that time, Riedel tried every option to stay afloat, investing about $10 million in the process. They included expanding to include cardiovascular testing and esoteric testing, the shutting down of unprofitable patient-service centers, and hard-line negotiations with vendors.  The staff was reduced 10 percent. Riedel expects many other smaller and regional labs to eventually succumb to such pressures, and either find a buyer or file for bankruptcy. “You have these nationwide specialty labs, and tons of molecular labs, and most are losing money,” Riedel said. “They have no choice but to run as lean as they possibly can.” But even the labs that have growth and bright futures ahead are in a similar mind-set. “There is not going to be any end,” to keeping focus on costs and efficiencies, Velázquez said. Takeaway: Medium-sized and large regional labs are undertaking cost cutting and streamlining operations in order to counteract revenue cuts from the elimination of code-stacking, the changes in the technical component of 88305, loss of commercial payer network participation, and other reimbursement cuts.