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Labacoeconomics™: Applying the concept of pharmacoeconomics to the clinical laboratory

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For decades, stakeholders throughout the healthcare industry have used the discipline of pharmacoeconomics to measure and compare the costs and consequences of pharmaceutical products. By applying a similar concept called labacoeconomicsTM to their clinical laboratory’s services, hospitals and health systems can significantly improve their financial performance while providing a more satisfactory experience and better outcomes for patients. Instead of focusing on price per test, labacoeconomics looks at the impact the laboratory has on the patient’s entire episode of care. This shift in perspective aligns with the ongoing transition from traditional fee-for-service to value-based reimbursement models. 

The pharmaceutical industry has faced significant criticism for the cost of therapeutic agents. Initially, these costs were justified on the basis of the expense involved in developing new treatments, which can easily run into hundreds of millions of dollars.

The discipline of pharmacoeconomics developed, in part, in response to that criticism. Pharmacoeconomic studies focus on cost in a broader context than just the dollars spent for the therapeutic agent. For example, the downstream costs associated with the need for hospitalization and length of stay can be dramatically influenced by the choice of a therapeutic agent that can be safely administered in an outpatient setting rather than one that needs to be given in the hospital setting.

The concept and discipline of pharmacoeconomics also can apply to the evaluation of services delivered by the clinical laboratory — labacoeconomics, if you will. The key to this approach is to view the laboratory in the context of its impact on the patient’s episode of care rather than the price per test. For example, some molecular diagnostic tests can cost thousands of dollars. Viewed from the limited perspective of a laboratory budget, it might seem illogical to provide such a test by using the hospital lab. But if that test can decrease the patient’s length of stay — or possibly even eliminate the need for hospitalization — then the savings overall could be substantial, as the direct variable cost of a typical patient’s day in the hospital exceeds $2,000. So why hasn’t the discipline of labacoeconomics flourished?

To understand the current state, it’s helpful to look back at the evolution of pathology as a discipline. At one time, the pathologist was referred to as “the doctor’s doctor.” That’s because pathologists had knowledge of clinical laboratory tests and services that providers didn’t have. But as clinical laboratory testing became increasingly important to specialists in the provision of care, those specialists became experts at interpretating the results of tests they used most frequently. As this transition was taking place, reimbursement changes disproportionally incentivized pathologists to devote more of their time to anatomic pathology, where the CPT codes afforded them better compensation. Today, many pathologists are almost entirely focused on anatomic pathology.

This combination of specialists becoming proficient at interpreting clinical test results and pathologists turning away from clinical pathology has resulted in less time being spent on laboratory medicine and, hence, less focus on the value of the clinical laboratory in the context of the overall cost of care.

The transition to value-based reimbursement models can help to drive the development and increased adoption of labacoeconomics. Here’s why: Under such reimbursement schemes, hospitals and health systems must take a bigger-picture view of the relationship between costs and patient outcomes, as well as their own accountability for those outcomes. Instead of making decisions on a cost-per-test basis, for instance, it’s to their advantage to think about the impact that clinical lab data has on ongoing care, outcomes, and episode-of-care costs overall.

Consider this: Clinical laboratories provide approximately 70% of the objective data that supports many critical decisions in the provision of care. Moreover, the clinical lab is used to support care across the entire care continuum, in the inpatient, physician office, skilled nursing facility, and home care spaces. By tracking test results, the clinical lab can help to identify patients who are at risk for a prolonged hospital stay — or, post-discharge, those at risk for readmission — thereby providing the health system myriad opportunities to improve both financial and clinical outcomes.

Viewed in this light, it’s easy to see how hospitals and health systems can use their clinical laboratories and the concept of labacoeconomics to facilitate and hasten their transition to value-based care, if that’s a goal. Even if the transition from fee-for-service to value-based reimbursement is not a priority, every hospital wants to enhance its bottom line and provide a better experience for patients. Labacoeconomics can a play crucial role in achieving both of these results, while giving pathologists the opportunity to again become “the doctor’s doctor.”


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