Clinical laboratory outreach programs gain favor because of many clinical benefits—along with healthy profit margins

In the wake of the severe recession and weak recovery, hospitals across the country recognized they could no longer carry unprofitable programs. That is why, in recent years, a growing number of hospitals reduced or discontinued unprofitable services even as the number of hospital clinical laboratory outreach programs increased.

During this same time, the hospital industry actively expanded into lucrative lines of business, such as clinical laboratory testing. This is an auspicious trend for pathologists and medical laboratories, particularly those who work for hospitals and health systems.

It is welcome development that hospital administrators finally recognize that their institutions can no longer provide the A-to-Z of clinical services and continue to be financially viable. The economic pressures of recent years have encouraged a larger proportion of hospitals to decide to specialize in core competencies. In that sense, the era of the “all care, acute care hospital” may be at an end.

In a recent story, Modern Healthcare (MH) provided examples of hospitals that were dropping unprofitable clinical service lines. Excela Health is a health system that cut unprofitable mental health services in response to downward economic pressures.

Excela is a Greensburg, Pennsylvania-based not-for-profit health organization that includes three licensed acute care hospitals and various other facilities and services. “When you’re in good economic times you can oftentimes carry programs you know should be revised,” stated Sam Raneri, Senior Vice President and Chief Strategy Officer for Excela.

 Tougher economic times in the United States are one reason why increased numbers of hospitals took steps to cut back or eliminate unprofitable services in recent years. In the search for more profitable clinical services, an increased number of hospital administrators are recognizing the value of a professionally-managed clinical laboratory outreach program. (Photo by

Tougher economic times in the United States are one reason why increased numbers of hospitals took steps to cut back or eliminate unprofitable services in recent years. In the search for more profitable clinical services, an increased number of hospital administrators are recognizing the value of a professionally-managed clinical laboratory outreach program. (Photo by

A 2009 survey conducted by the American Hospital Association (AHA) determined that, of the more than 1,000 hospital executives surveyed, one-fifth of them reported that their hospital had reduced services that lost money. These services included behavioral health, post-acute care, and patient education services. Meanwhile, services that generate profits for hospitals, such as neurosurgery and interventional cardiology, got a thumbs up and were initiated or expanded.

Troublesome Questions for Policymakers about Patient Access

The good news is that analysts and executives credit the hospital industry’s recent strong performance to these and other harsh strategies, such as mass layoffs, MH reported. Unsurprisingly, the bad news for health policymakers is that the cuts raise difficult issues about access to healthcare services for the poor, as well as growth of costly high-margin services that may be unneeded.

“I think that programs that deal with poor, difficult, complicated people, and illness are at risk,” said Richard G. Frank, Ph.D., Margaret T. Morris Professor of Health Economics in the Department of Health Care Policy at Harvard Medical School. Frank pointed out that behavioral health inpatient is especially focused on poor people. “[I]llnesses that disproportionately rely on public programs are generally going to have more economic pressure.”

Hospital executives have defended the cuts. “At a time when the healthcare delivery system in our country is undergoing a massive transformation, every medical center has a responsibility to examine what it should focus on to ensure that it is strong over the long term to serve the community,” said Thomas M. Priselac, President and CEO, Cedars-Sinai Health System.

Priselac was talking about how Cedars-Sinai had decided in November to drop its inpatient and outpatient psychiatry service, except for certain consultations and mental healthcare for transplant and cancer patients. It announced that it would also no longer train new psychiatrists. “In looking at where our core strengths are in a variety of clinical and research areas… and where Cedars-Sinai is most likely to continue making the most effective contributions for the nation with advances in research and in training tomorrow’s physicians, this difficult decision needed to be made,” Priselac declared.

In a report issued last year by the National Bureau of Economic Research, researchers stated that cross-subsidies  are often considered the principal mechanism through which hospitals provide unprofitable care. The report found that hospitals faced with falling demand in more profitable services, responded by investing less in unprofitable ones. Unprofitable services included psychiatric, substance abuse, and trauma care. Areas targeted for expansion included neurosurgery, a highly profitable service, the report stated.

Weak Demand for Profitable Clinical Services Affects Unprofitable Services

Experts have pointed to three forces propelling the change in service mix at hospitals:

1. more uninsured patients;

2. slack demand for profitable elective procedures; and,

3. public and private insurers that have squeezed payment rates.

As the economy worsened, hospitals saw decline in demand for profitable services such as orthopedic surgery and imaging, explained Jane Jerzak, She is a partner at consulting and accounting firm Wipfli. She told Modern Healthcare that few hospitals closed programs entirely or launched entirely new services, Jerzak called the remixing of services by hospitals “an intermediate strategy at best.”

According to MH, figures released in January 2012 showed a related decrease in household medical spending. Additionally, the economic malaise since 2008 has resulted in fewer households with health insurance. Similarly, many consumers who still have health insurance are avoiding healthcare expenditures due to financial pressures.

Hospitals responded to these shifts in the marketplace by cutting expenses or finding new sources of revenue. As a result, many hospitals survived the recession with profit margins intact, or even improved. However reporters at MH believe the weak economic recovery probably won’t ease the pressure on hospital revenue. Experts expect private insurers’ squeeze on hospital payments to continue. At the same time, federal and state lawmakers will be under intensifying pressure to slash healthcare budgets and slow spending.

These developments should prove favorable to clinical laboratory and anatomic pathology testing activities over the long term. As hospital administrators gain financial savvy and get better at analyzing the financial performance of individual clinical services within their institutions, they are likely to recognize why laboratory outreach programs represent a way to advance clinical care in a financially sustainable manner.

—Pamela Scherer McLeod

Related Information:

Juggling the lineup

Do Hospitals Cross Subsidize?

Cedars-Sinai to Phase Out Some Psychiatry Programs