College of American Pathologists
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Money order: Hunting down the true costs of POC testing

September 2002
Karen Southwick

Akron General Medical Center, a 530-bed community teaching hospital in Ohio, purchased 180,000 strips for its point-of-care glucose meters in 1998, but it got back only 81,000 filled-in result forms.

Even allowing for quality control, that left 46,000 of the strips, or 26 percent of total usage, unaccounted for. It was far too many, acknowledges Kenneth Button, MD, chairman of pathology and laboratory medicine. Last year, the medical center bought 175,000 strips and received 113,000 patient results. Only 9,000 of the strips, or five percent, were unaccounted for.

What made the difference? Two steps: Akron switched to glucose meters that automatically transmit results to the lab information system, and it beefed up the cost--accounting procedures on its point-of-care work.

Cost accounting, never a strong suit of labs, gets even iffier when it comes to point-of-care testing. Labs -often don’t control the departments that do near-patient testing or even the supplies it requires, so manag-ers throw up their hands on trying to account for the costs.

"The lab has never been an area that’s really defined itself as a business," says Jackie McDowell, director of sales and marketing for Tismo, which makes management and accounting software for health care institutions. "It looks upon itself as a service provider." Consequently, labs "rarely know their entire cost structure," especially indirect costs such as IT maintenance, marketing, or results distribution. For point-of-care testing, the picture is even worse.

McDowell says that most health systems fail to consider what she calls horizontal costs, which occur across the system. Hospitals generally calculate vertical costs: what it costs in the actual department where the care is performed. Since POC testing crosses departmental boundaries, it’s especially important to consider both horizontal and vertical cost drivers.

"People tend to look at materials cost and perhaps the average cost of labor," McDowell says. But with POC testing, you also have to look at the impact of the horizontal issues, such as shortening length of stay by helping a physician make a decision more quickly. If those factors aren’t considered, you run the risk of overpricing POC tests. In working with Tismo clients, "we find that materials and direct labor represent only 25 to 30 percent of the total cost of providing a lab service," she notes. "That leaves 70 to 75 percent of costs unaccounted for."

C. Anne Pontius, president of Laboratory Compliance Consultants in Raleigh, NC, agrees with McDowell that few labs are doing a good job of POC cost accounting, especially in the outpatient/physician office area. "The more sophisticated the lab, the more likely they are to know their costs," she says. Smaller labs "feel like that’s something they don’t really have to worry about."

However, she says, even smaller labs may be involved with managed care contracts where the payment is fixed. "Payments don’t reflect a difference in where a test is provided. Payers don’t feel like they should have to pay more based on the environment."

Laboratory services, she says, can become a source of revenue for physician offices, but only if they know their costs. "Many physicians see lab tests as part of the service structure they have to provide," Pontius says. But in breaking out costs for different tests, "you can start looking upon the lab as a profit center and determine which tests might be more lucrative, like thyroids." Others can be outsourced. "No one should provide a service for free. Either break even or accept the fact that you’re losing money on a certain test but you’re bringing people in the door," Pontius says.

Hospital-based laboratories differ greatly in their approaches to POC accounting. Some track only supplies and maintenance in assigning costs; others attempt to factor in labor. In most instances, any billed revenue goes back to the lab, but it can also be split with the department doing the testing. Here are four case studies of how various institutions are making a stab at establishing cost-accounting procedures for POC testing.

Akron General Medical Center

At Akron, glucose tests are the primary POC test. Nurses perform them now, but previously they were done by phlebotomists. The laboratory orders the reagents and troubleshoots instrument problems. Dr. Button says the cost-accounting structure improved when the hospital moved from paper to electronic filing of results.

Formerly, the laboratory had to depend on the nurses to fill out forms and return them. Now, the electronic glucose meters transmit the results automatically and lock out operators if quality control has not been performed.

Costs are accounted for by calculating not only the cost of the strips but also the glucose meters themselves. But the system is not perfect. "We cannot factor in the nurses’ time," Dr. Button admits, "because we don’t have access to it." The time devoted by the lab’s full-time POC coordinator is figured into the costs. Revenue and cost accrue to the laboratory.

The cost per strip is 47 cents, which includes the reagents and equipment. Akron hasn’t figured out a cost per test recently. "We computed it at one time, but we haven’t revisited that," Dr. Button says. "It’s not very useful."

That’s because, he adds, the revenue per test is fixed by payers. With clinicians demanding POC testing, the laboratory is obliged to provide it. Dr. Button says he concentrates on lowering the wastage rate and training the nurses to perform the tests as efficiently as possible.

Via Christi Regional Medical Center

Based in Wichita, Kan., Via Christi consists of two merged hospitals with about 1,000 beds. POC testing is concentrated within the hospitals, directed by a core laboratory. POC tests consist of glucose, urine dipsticks, occult blood, blood gases, electrolytes, ACTs, H. pylori, and pregnancy. The operators are nurses, respiratory therapists, and perfusionists.

The core lab bears the cost of the supplies, says Carolyn Strunk, POC supervisor. "It’s a trade-off. They [the other departments] give us their labor, and we order the supplies, do the validation, and handle the linearities," she says. Test operators are responsible for routine QC and daily and weekly maintenance. "The lab will support them on troubleshooting," Strunk says.

Unlike some other hospitals, Via Christi does factor in labor costs. Annually or biannually, Strunk reviews how many tests different staff are doing. If nurses do 75 percent of glucose tests, for example, she calculates how long it takes to complete a test on average and what portion of the nurse’s salary should be assigned to that test. That way, the laboratory can fairly allocate the revenue.

Most of the revenue comes to the labs, but in some cases it has negotiated splits with other departments. For example, the emergency department receives the revenue from the i-Stats and chemistry profiles it runs. In surgery, perfusionists do the activated clotting times, and the revenue is allocated to surgery.

Says Strunk, "It’s obvious that POC testing is more expensive to run than core lab testing." However, if a patient can be moved out of the hospital or into a stepdown unit more quickly because tests are performed at the point of care, that saves the system money overall, even though the cost per test may be higher.

She tracks wastage of supplies by doing chart reviews and obtaining information from purchasing about how many POC supplies have been ordered versus how many results have been reported. "We don’t let it get too far out of hand before we’re on the phone offering to do additional training," Strunk says.

Via Christi does about 2,000 POC tests per day, of which half are glucose tests. "Across the board for my department, I try to keep the cost per test at $1.25 or less," she says. "Usually I’m pretty close to that."

Geisinger Health System

Danville, Pa.-based Geisinger, which owns two hospitals and 55 clinics, has a much more complex operation than Akron or Via Christi. The core lab and each of 55 owned clinics have CLIA licenses in a system called a "distributed laboratory." The central lab "standardizes and takes CLIA ownership of all the testing," says Jay Jones, PhD, director of chemistry and regional laboratories. "We take the responsibility for costing out the tests and having a standard charge throughout the system."

POC testing consists of glucose, ACTs, and i-Stats connected to the LIS in the hospitals and some instrumented and mostly manual POC testing in the outpatient facilities. The test operators include nurses and technical and office assistants. The lab must approve new POC tests by assessing the clinical value added as well as costs, such as additional support.

When a new test is implemented within the two hospitals, Geisinger has sent a PC on a cart to each laboratory area to cost out tests. The PC-based program factors in, along with supplies, the hands-on operator time, the frequency of doing quality control, and the need for proficiency tests.

"If the test is run in an office practice, we’re less formal with the hands-on time," Dr. Jones says. Generally, the hospital costing is also applied to the outpatient setting. The central laboratory orders and pays for all the supplies, so it basically pays for the test. If the test generates a charge, the revenue goes back to the lab. For POC testing provided by nonlaboratory personnel, such as nurses, "oftentimes we will pay them a salary offset" to help cover the cost of their time, Dr. Jones says.

As a closed HMO that owns its physician practices, Geisinger has an easier time imposing procedures on clinicians than most health systems, Dr. Jones acknowledges. "The doctors don’t complain and say they want a cut [of the revenue]. It’s all going into the same pot anyway." If the entire system is profitable, everybody shares in the profit.

Physicians are given incentives not to order too many lab tests because "if they order a lab test, the cost comes back to them as a charge for utilization. It determines how much they’re going to get in profit-sharing." A physician who over-orders will likely be squeezed by his or her peers because "that affects the profitability of the whole practice," he explains.

Dr. Jones reports that the cost per service unit for the entire distributed laboratory varies from $12 to $13, which includes direct and indirect costs. "The distributed lab is bearing the expense, and whatever we collect in claims processing comes back as revenue." Overall, the laboratory is profitable, especially on the outpatient side. "We’re very conservative about what we put out into the various clinics for POC," Dr. Jones says.

Health Midwest Laboratories

Health Midwest serves a 10-hospital system in Missouri and Kansas, with a core lab at the largest facility. The other hospitals have rapid-response labs. The POC program includes 36 i-Stats in surgery and critical care areas, 17 ACTs in cath labs and surgical units, 14 HbA1C instruments used in the diabetes education program, about 222 glucose meters systemwide, coagulation instruments in a pilot Coumadin clinic, and a dipstick reader in its largest ED. Nurses, perfusionists, dieticians, and respiratory therapists are the test operators.

"We have just begun to track POCT costs," says Cynthia Kelley, director of POC testing. The first targets are the high-volume tests: glucoses and i-Stats. "If you don’t bill for it, it’s hard to track it," she says. The glucoses and i-Stats account for a high percentage of POC test cost and volume. Next on the list are dipsticks and occult blood testing.

Last year, Kelley was asked to cost out the glucose and i-Stat tests. Her first step was to extract reports from materials management with all the supplies associated with POC, such as glucose strips or i-Stat cartridges. The second step was to mine specific revenue reports for POC tests. Combining those gave her the direct cost per billed procedure, along with revenue.

"We’re not including specimen collection supplies, QC materials, or proficiency testing," Kelley says. "I consider that a fixed cost. What I’m trying to do is track the costs that can be controlled and to improve wastage." Labor costs are not included because they’re difficult to track and because moving testing from the lab to POC doesn’t remove labor from the lab; it merely shifts it from the bench to management, she notes.

As results are automated, Kelley believes she’ll be able to do a better job of tracking costs. Health Midwest is now installing new glucose meters in all hospitals; they will interface to the LIS. "Once we have better data management, we’ll be able to target wastage by unit," she says. The i-Stats are already automated and have therefore been easier to track.

Now that she’s begun the cost-accounting process, Kelley is committed to it. It helps the lab track its own operations better, and it can help the system generate new revenue by billing for tests that previously haven’t been tracked, such as occult blood.

"We want to see what our cost is versus what is being billed," she says. "To do that, I had to round up the information cost center by cost center. By finding this out, we can get ordering under control and find possible sources of new revenue."

Karen Southwick is a writer in San Francisco.