COVER STORY

Adding a lab: Is it right for you?

It can improve patient satisfaction and boost your bottom line. Here's how to decide if one is best for you, whatever size your practice.

By Wayne J. Guglielmo
Senior Editor

During the '90s, new federal rules made many physicians think twice about starting in-office labs. But doctors have grown less intimidated by the rules, and today, in-office labs are quickly becoming an indispensable feature of many physician practices.

The biggest increase is among "waived" labs, which perform easy-to-administer, fairly low-risk tests: ovulation, blood glucose, dipstick or tablet reagent urinalyses, rapid strep tests, and the like. Waived labs are attractive because they're subject to only minimal requirements under CLIA, the Clinical Laboratory Improvement Amendments of 1988. But doctors are also establishing labs that do more complex testing like CBCs, PSAs, routine chemistry panels, and antibiotics susceptibility tests. These moderate- to high-complexity labs must adhere to a stricter set of federal requirements, including routine inspections.

Doctors who've established office labs seem to like what they've done for the practice. Many report a fatter bottom line, a more efficient practice, and happier patients. But office labs aren't for everyone—and not every practice that starts one does so in the right way.

"There are two key mistakes," says Charles Root, PhD, president and CEO of MCF Compliance, a Barrington, IL-based consulting firm. "Doctors either do tests that they aren't doing enough of, so expenses outstrip revenues, or they simply mismanage the lab."

Beyond test volume and proper management, doctors contemplating an on-site lab need to take other issues seriously—CLIA compliance, reimbursement, and proper design, to name a few. We'll lay out these general issues—and offer tips for practices of different sizes.

First, ask the right questions

The time to ask the tough questions is before you've committed to opening an on-site lab. Here are eight you need answers to:

Which tests must you have quickly? FP Gregory T. Lyon-Loftus runs a four-physician rural health clinic in Mont Alto, PA. On any given day, he and his partners (along with two physician assistants) call for an array of relatively simple but necessary tests—strep screens, pregnancy, hemoglobin A1c, blood glucose, and urinalyses. The clinic's relatively remote location made it difficult to get results quickly. So, about 10 years ago, Lyon-Loftus created an on-site waived lab. "It makes much patient care a single encounter transaction, which saves us a huge amount of money," he says.

If the tests you need quickly are among those waived by CLIA, you're in luck. Regulatory hassles are minimal, and deciding whether it makes financial sense to do the tests yourself is relatively straightforward—will they pay you more than it costs you to run them? To qualify to open a waived lab, simply enroll in the CLIA program and pay your fee every two years.

Do you have the volume? Financial calculations are somewhat harder if your specialty demands that you do more complex testing, since the more complex the testing, the more you'll pay for equipment, staff, regulatory compliance, and just about everything else.

For this reason, experts advise taking a close look at your ordering pattern. "If you're ordering eight to 10 CBCs a day, bring them in-house," says Ann Bachman, a consultant with DoctorsManagement of Knoxville, TN. "If you're doing 10 to 12 metabolic profiles a day, bring those in-house, too. But if you're doing two to three thyroids a week, send them off to a reference lab, which can probably do those tests more cheaply." (For help calculating the break-even point on different tests, check out "Find out more about office labs.")

But for some doctors, turning a profit is secondary. They're more interested in pleasing patients and enhancing overall practice efficiency, which can itself add to the bottom line.

Will you be paid adequately? "If you're doing 30,000 general chemistry tests a year, and your managed care contracts pay for only 10 percent of them, you have a problem," says Cathy Kenny, an independent lab consultant in Wintersville, OH.

Fortunately, health plans have become much more flexible over the years. "If you negotiate with them ahead of time, you can often carve out your labs as part of your contract," says Kenny. "Just be sure to hit the right points during negotiations—like telling the plans that your practice wants to provide one-stop shopping that will decrease follow-up visits."

Also be sure to get a copy of the fee schedule in advance, she advises. That's easy for Medicare, but you'll have to ask your private insurers. "It may not be financially feasible for you to run a test—or a series of tests—for what the insurer is paying the reference lab, which can do things more cheaply because they have the volume. You could end up winning the contract, but losing money."

What CLIA certification do you need? The accreditation process starts by applying for a CMS certificate of registration (CMS is responsible for implementing the CLIA regs) and a CLIA number. Use Form CMS-116 (available at cms.hhs.gov/clia/cliaapp.asp). Send the application to the appropriate agency in your state—typically the state health department or a CMS regional office. (For state information, go to www.cms.gov/clia/ro-map.asp .)

Other certification requirements are minimal for physicians who want to limit their testing to waived tests or provider-performed microscopy (PPM) procedures such as nasal smears for eosinophils, pinworm exams, and fecal leukocyte exams. Physicians who wish to conduct either moderate- or high-complexity lab testing must meet stricter requirements, including accreditation from either CMS or one of several private accrediting agencies. (For more on CLIA accreditation, see "Two roads to CLIA accreditation.")

Will you need additional staff? The answer is No for waived testing and PPM procedures, but Yes for more complex testing. For moderate-complexity testing, CLIA requires at least four positions: lab director, testing personnel, technical consultant, and clinical consultant. (The same individual may hold more than one position, assuming she meets the minimum education and experience requirements.) Testing staff must have at least a high school diploma or equivalent and documented training in the tests being performed.

For a moderate complexity lab, the director, typically one of the practice's physicians, needs a year's experience directing or supervising a nonwaived laboratory or 20 hours of lab-related CME. Only the testing personnel must be on site at all times during testing.

Should you buy or lease equipment? "It very rarely pays to buy," says consultant and economic analyst Charles Root. "Most of the vendors have a very good lease program."

Root is also high on a form of leasing called a "reagent rental." In contrast to traditional leases, in which you pay a set amount per month regardless of the number of tests you run, vendors offering reagent rentals charge a flat price for each test. Included is the cost of the reagent required to perform it. "Usually, there's a minimum number of tests you have to meet for a given period," says Root. "If you don't meet it, the vendor could take back the equipment. But since the vendor or distributor is usually selling other things to the practice, it's motivated to keep things friendly."

Lab consultant Cathy Kenny thinks the reagent agreement is "fine if you can't afford the technology you really want." But she cautions that, for a growing practice, it could cut into profits down the road. "Let's say a year from now you're doing 50,000 chemistry tests instead of the 25,000 you were doing when you signed the agreement," she says. "You could be making a nice profit on that kind of volume if you weren't stuck with an agreement that requires you to pay 50 cents per test, regardless of volume."

Have you calculated your costs? Some purchases—syringes and bandages, for example—are probably already part of your fixed expenses. But strips for diabetes testing may not be.

"Have a nurse or physician go through everything you're likely to need for an on-site lab," says Kathryn Kocevar, a consultant with The Health Care Group, in Plymouth Meeting, PA. "Then calculate how much it would really cost for a patient to have a particular set of tests done." Keep in mind, however, that simply having a lab on-site may reduce your overall per-patient costs because of increased practice efficiency, as studies have suggested. These overall reductions can potentially offset at least some of your total per-patient test costs.

Would you need to renovate? Most practices underestimate the space they'd need—for the lab itself; for drawing blood; for storing supplies; and for ancillary equipment like the incubator, centrifuge, autoclave, and CBC rocker. Doctors also tend to lowball the cost of upgrading or changing ventilation and temperature systems, lighting fixtures, and electrical systems, in order to comply with Occupational Safety and Health Administration requirements. (To find out about individual state OSHA requirements, go to www.osha.gov , and click on state programs.)

"I consulted for one lab where, unknown to me, the immunochemistry analyzer was hooked up to the same circuit as the microwave in the break room," says Kenny. "Every time someone would microwave her lunch, we'd get these really wacky results."

Kenny believes that most practices are savvy enough to sift through these office design issues. "After all, these are the same questions they had to ask themselves when they were deciding how many exam rooms they needed or where to put the X-ray machine," she says. "Also, a reputable manufacturer's rep can walk them through this. But it's still buyer beware."

There are also a number of specific issues doctors need to consider, depending on their practice size.

Small practices (one to three doctors)

It may be difficult for a small practice to successfully run a moderate-complexity lab: A primary care practice usually needs at least five doctors to ensure sufficient testing volume, says Root. But a well-run waived lab may work.

Sharon Martin-Holm, an FP in Longview, TX, shares office space with another family physician, and together they began a waived lab. They started out offering a limited menu of tests—pregnancy, urinalyses, strep screens, and mono screens. But volume calculations and the ability "to have results before a patient leaves the office" prompted her and her lab partner to gradually add to the menu. The on-the-spot results, she says, "significantly cuts down on the time you waste phoning people and managing care over the phone." Currently, she's considering adding CLIA-waived influenza testing, cholesterol testing, prothrombin time, and hemoglobin A1c testing.

"Get a microscope and use it," she recommends. "I do wet preps on nearly every woman I do a Pap or vaginal exam on, and I've been amazed at the number of trichomoniasis cases I would have missed otherwise. I also use my microscope to evaluate fungal skin disorders, and I even spin a urine down from time to time and examine it microscopically."

Medium-sized practices (five to 10 doctors)

FP William J. Epperson's moderate-complexity lab turns a modest profit (in part because other practices in the building also have access). But the real payoff for the five-practitioner Murrells Inlet, SC, practice has been in better efficiency and better patient service. "When we had an outside lab, patient wait time for results could be one to two hours," says Epperson. "Now it's somewhere between 10 and 30 minutes."

Epperson has several tips for doctors who want to start their own moderate-complexity lab:

• Avoid buying new equipment. "I'd encourage physicians to buy refurbished equipment," he says. "New chemistry analyzers are going for about $60,000; a refurbished unit runs around $30,000. It may be a little slower, but it will still work out quite well."

• Hire the right people. "When I first started out, I hired a med tech who had a bunch of degrees and 30 years' experience, but he couldn't keep things running day to day," says Epperson. "Now I've hired someone with incredible intelligence who used to be a phlebotomist, and my clinical consultant has been able to teach her everything she needs to know to keep things going. You need an individual who is confident, a quick learner, and is also obsessive-compulsive about delivering the correct data."

• Invest in a lab information system, preferably one that can interface with your electronic medical record. "Without such a system," Epperson says, "the effort of trying to maintain information is horrendous."

Epperson's final tip for small to medium practices: "Don't expect to break even for six months to a year."

Large practices (10+ doctors)

While they share many of the same problems as doctors in smaller practices, doctors in larger groups typically face hurdles uniquely their own because of the complexity and volume of the testing they perform.

The Elkhart Clinic in Elkhart, IN, is a 36-physician multispecialty practice that comprises 15 specialties, ranging from primary care to neurosurgery (obstetrics, orthopedics, and urology aren't included). To serve these specialists and their patients, the clinic's on-site lab conducts waived, moderate-complexity, and complex testing (manual differential/hematology and synovial fluid differential). Total testing volume each year exceeds 300,000.

Given this volume, a lab information system is "absolutely necessary," says Joan Dolan, the clinic's lab manager. But no ordinary system will do. Elkhart's produces "bar codes so that samples can be labeled." The system can also electronically validate medical necessity—a key to ensuring Medicare payment for otherwise uncovered tests—and interface seamlessly with billing software.

Profits from the lab are distributed equitably, but with a twist. Stark lab rules make it illegal for doctors to be compensated based on the volume or value of test referrals. To avoid running afoul of the law, many practices typically "pool" profits from ancillary services such as on-site labs, and then distribute those profits equally. Elkhart's formula is a variation on this theme.

"What we do is to assign four levels of participation based on specialty," says Darryl Busby, the executive administrator. "Oncol-ogists may be at level four, the highest, because of all the lab tests they order, while surgeons may be at level one because most of the tests they order are done at the hospital, where they do their procedures. All specialists in the same category get compensated equally, but the categories recognize distinctions between specialties."

Does this pass legal muster? "Our attorneys have reviewed this carefully and believe it would pass the Stark sniff test," Busby says.

What does the future look like for physician office labs? "Technology is moving toward easier, near-foolproof, Star-Wars-like testing," says FP Paul B. Fischer from Evans, GA, who's among the best-known experts in the field. Already a company like Hayward, CA-based Cholestech offers point-of-care testing for cholesterol and related lipids, blood glucose and glycemic control, and liver function. Other companies are racing to compete.

"Ten years down the road, doctors will be doing tests that are so simple to perform they won't even be considered tests," says Charles Root. "Spit on the instrument and it gives you a result. When that happens, the traditional clinical lab, in a sense, will disappear, except for very unusual testing. Most tests will be done at the point of care—and almost every major test will be in a waived category."

Find out more about office labs

These resources and organizations can help you out—whether you're thinking of starting your own office lab or have an established lab and need more information:

Office Laboratory Check Up: Is Your Lab Financially Fit? Developed by the American College of Physicians in conjunction with MCF Compliance, this spreadsheet program can help you determine the practicality and profitability of a small- or medium-sized lab. Free to ACP members. Nonmembers can order the program for $175 by calling customer service 800-523-1546 (ext 2600) and requesting product #410900400.

COLAwww.cola.org . The organization maintains a toll-free Call Center staffed by laboratory personnel (800-981-9883).

LabUniversity www.labuniversity.org . A joint service of COLA and the University of Wisconsin Medical School's Office of Continuing Medical Education, this is an online learning program designed to meet the needs of physicians and practice staff interested in quality lab practices. Doctors can complete 20 CME hours online to meet the requirements for the position of director of a moderate-complexity lab.

Physician Office Laboratory Symposium. COLA sponsors seminars that bring together many of the experts in the office lab field. Call COLA at 800-981-9883 for upcoming dates.

American Association of Physician Offices and Laboratories www.aapol.com . Contact Executive Director Ann Bachman at 865-470-9605.

Two roads to CLIA accreditation

Doctors who wish to conduct moderate- or high-complexity testing have a choice to make. After applying to the appropriate state agency to obtain their CMS certificate of registration and CLIA number—which permits them to operate an on-site lab and receive Medicare reimbursement—they must decide which path to take for the remainder of the accreditation process.

They can stay with the state or choose one of several private accrediting organizations approved by CMS. The process is similar (with each offering consultations to aid compliance), but many doctors prefer the private agencies because of the special emphasis they place on education and remediation.

The largest of the private agencies is COLA—founded by doctors themselves in 1988 as the Commission on Office Laboratory Accreditation. COLA offers doctors a variety of educational materials prior to conducting on-site inspections. The purpose—to permit them to assess their own degree of compliance with CLIA rules and implement any necessary changes before the inspection.

The inspection focuses on several areas, according to Kathryn Connolly, division manager for accreditation services:

• lab organization and personnel

• procedure and policy manuals

• proficiency testing

• test tracking

• equipment maintenance and calibration

• quality control

• quality assurance

During the actual inspection, labs with deficiencies in any of these areas typically receive a Plan of Required Improvement. COLA technical advisers work with lab staff to solve especially difficult problems. Repeat offenders may be placed on probation pending corrective action. And in the most serious cases, COLA may simply prohibit further testing until it verifies that a lab has taken corrective actions.

Each year approximately 5 percent of all accredited labs are randomly rechecked by CMS.

New CLIA rules spark debate

On April 24, several changes to the Clinical Laboratory Improvement Amendments of 1988 took effect. Most are fairly benign, but one change can be an added hassle for doctors considering their own moderate-complexity lab.

From now on, before conducting patient testing for each new test, doctors and their staff must verify that the test is working as the manufacturer says it should. (Previously, only high-complexity tests carried this requirement.)

The new rule, say CMS officials, grows out of regulators' experience over the last 11 years. "Most of the simpler tests formerly in the moderate-complexity category have already been waived," says Judy Yost, director, Division of Laboratory Services Survey and Certification. "What we're left with are tests that are more complicated to perform—that are more technique dependent and that need added quality control." CMS has detected problems in these very areas and hopes the stricter rule will help.

But officials have left many of the specifics of the new rule vague—at least for now. That's got some interested parties up in arms. "Let's say a doctor wants to buy a new chemistry analyzer," says Sheila Dunn, PhD, president and CEO of Quality America, a technical consulting firm. "How many tests will he have to run to verify the method? It's potentially a big burden and expensive."

FP Paul Fischer of Evans, GA, a founding member of the Commission on Office Laboratory Accreditation, is more blunt: "The whole thing is stupid."

CMS promises over the next few months to provide doctors with reader-friendly guidelines. It also says that there's a two-year window for doctors to get up to speed.

Wayne Guglielmo. Adding a lab: Is it right for you?

Medical Economics

Jun. 6, 2003;80:90.