Establishing a Financial Discipline in the Laboratory

August 7, 2020

Many laboratory directors come from a technical background, however as healthcare becomes increasingly more complex, it is important to also have a strong financial foundation. An effective outreach leader will be able to consistently quantify revenue, cost and profitability of the outreach program, and communicate relevant data to senior leaders.

It begins with creating a common language, a mutual understanding of which patient segments are served by an outreach program. Within a hospital there are four types of patients: inpatient, outpatient, in-reach and outreach. A laboratory outreach program typically provides service to all segments except inpatients.

Next, understand how and how much the laboratory is paid for performing outreach testing. This can be a challenge because laboratory tests may be bundled with other clinical services, or routine financial reports provide only gross charges. Although it may be difficult, knowing actual net revenue is paramount to demonstrating the financial impact of the outreach program. When laboratory revenue is not recognized or demonstrated, the laboratory may be viewed as a cost center and laboratory leadership will be challenged in justifying new resources.

It is also important to be able to quantify laboratory costs. Types of costs include variable, fixed, direct and indirect. Laboratory outreach testing tends to increase variable and direct costs, while fixed and indirect costs often remain the same. This is the financial value of a laboratory outreach program—utilizing existing laboratory capacity and subsequently lowering costs, while generating revenue.

Using a return-on-investment (ROI) model can be helpful when justifying additional resources such as new equipment, staff or a patient service center. An effective ROI calculation accounts for all costs associated with the investment, estimates revenues and shows the profit or loss for the investment. Most investments will not show an immediate return, thus it is important to demonstrate performance over time.

Transparent and effective financial control in the laboratory can be an extremely powerful tool, not only for the health of the laboratory operation, but for elevating the overall role and value of the laboratory within its organization. A laboratory that is financially efficient and effective is well-poised to contribute to the organization’s future success.

A recent article in MedicalLab Management magazine discusses laboratory finance in more detail. Click here to read the full article.

Mayo Clinic Laboratories Outreach Team