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How an office lab can help patients—and your income

Regulations are not as tough as you might think, and new technology is making it easy to get started

From the February 2000 ACP–ASIM Observer, copyright © 2000 by the American College of Physicians–American Society of Internal Medicine.

By Bryan Walpert

Some physicians figure that regulations and reimbursement hassles make it hardly worth the effort to run an office lab. But don't tell that to James S. Osterberger Jr., FACP.

The Baton Rouge, La., internist started an office lab in early 1999, only a few months after leaving a group to go solo. Not only does he get test results back faster than he would from reference labs or the local hospital lab, but he figures that he earned about $50,000 in lab fees in 1999, an amount that he expects to double this year.

"It's convenient for the patient," said Dr. Osterberger. "And it's good medicine."

Setting up your own office laboratory offers some clear advantages. When you need quick clinical information, you can get test results back in minutes instead of hours or days. Advances in lab technology allow you to perform and process more tests in-house and deliver results to patients immediately, reducing follow-up phone calls, additional visits and paperwork. Patients get treated faster and more effectively, and when done well, physician office labs add to your practice coffers and income.

While office labs do pose some disadvantages in the form of regulations, the rules are probably not as formidable as you think. Federal regulations are neither particularly expensive nor difficult to follow. And with the price of equipment declining, it's less expensive than ever to start up. Here are some tips on how even small practices can make office labs work.

CLIA regulations

One of the largest perceived roadblocks is the hassle and cost associated with the Clinical Laboratory Improvement Amendments (CLIA) of 1988, which was finalized in 1992. CLIA sets standards for quality control, personnel requirements, test management procedures, proficiency testing and inspections.

"There are a number of physicians out there who just threw up their hands and said, 'I don't want to mess with it,' " said Andy Gill, president of HealthCare Technologies, a Baton Rouge, La.-based laboratory consulting firm that works with physicians.

But physicians who have labs say the regulations are not all that burdensome. If you're a small practice, one option is to hire a qualified medical technologist as a consultant to set up a CLIA compliance manual and related procedures, get the lab running and help train your own laboratory person.

After a few months, your inside lab person should be able to run the lab. At that point, you can use the medical technologist as needed to address specific questions or to come in periodically to ensure all requirements are being met. You can find certified medical technologists at your local hospital who moonlight as consultants. (For a list of consultants who specialize in lab issues, call American Medical Technologists at 847-823-5169, ext. 226. The list costs $5.)

Experts also say that compliance costs are relatively low. CLIA fees (including the CLIA certificate and inspection) for moderate to high complexity labs range from $450 every two years to several thousands of dollars, depending on test volume. CLIA certificates for waived labs (those that perform simple tests and are therefore required to comply with few regulations) cost $150 every two years.

Fees for proficiency testing (proving that your lab can accurately test samples) typically range from $200 to $2,000 per year. The College's Medical Laboratory Evaluation (MLE) program provides proficiency tests and free advice over the phone, as well as guidance on lab management issues to practices that subscribe to its program.

Charles B. Root, PhD, president of Venture Resources, a Chicago-based market research and consulting firm that specializes in laboratory economics, said that practices can expect CLIA compliance to account for 3% to 4% of overall lab costs. He said the figure includes CLIA fees, proficiency testing fees, inspection fees and staff time.

For more information on compliance, see "CLIA and Your Laboratory," which is available on ACP–ASIM Online at www.acponline.org. The guide, which costs $30 for members and $50 for nonmembers, provides answers to internists' top 10 questions on CLIA compliance.

Equipment

Equipment needs vary from practice to practice, but internists typically want three types of machines: a chemistry analyzer, a hematology analyzer and an immunoassay machine.

Depending on test volumes, smaller practices (one to three physicians) with limited capital often elect to purchase only one or two of these machines. Competition among vendors and improved technology have driven equipment prices down by as much as 30% over the past five years, Dr. Root said, making it more affordable for small practices to expand the range of tests that they perform internally.

For most equipment now on the market, you can expect to pay in the neighborhood of $40,000 to $60,000 for a new chemistry analyzer and $12,000 to $20,000 for a hematology machine. (You can either buy outright or lease.) Manufacturers usually provide immunoassay machines for free; you pay for the reagents only (at a cost ranging from $2 to $8 per test).

Cheaper alternatives, however, are on the market. For instance, last December, Careside Inc. in Culver City, Calif., began offering a new bench top chemistry analyzer for $9,995 that uses a cartridge to produce automated test results in 12 minutes.

Another option is to purchase used equipment. According to Mr. Gill from Baton Rouge, you'll save at least 50% if you buy a refurbished machine. Be careful to avoid what Mr. Gill calls "spray and pray" dealers—those who do little more than clean up the machine and pray it won't break down before the 30-day warranty expires. Mr. Gill said that he only installs refurbished analyzers that come with the same one-year warranty he could get on a new one.

In analyzing which machine will best meet the needs of your practice, look beyond the machine's price tag. What you pay for reagents each time you run a test can greatly influence your overall costs. The Careside Analyzer, for example, is a closed system. That means that it uses individual cartridges that contain reagent, which results in a higher operating cost per test than machines that use batch reagents. While some machines may cost more up-front, per-test operating costs may actually make the machine cheaper to operate in the long run, which is why you need to analyze your expected test volume before purchasing equipment.

Personnel

Once you purchase the right equipment, you'll need someone to work either part time or full time in the lab. Some physicians train an existing staff member like a nurse or medical assistant. CLIA says that a "moderately complex" lab (the level typically found in many internal medicine practices) can be run by anyone with a high school diploma and "adequate" training, which is often provided by the equipment manufacturers.

But Dr. Root suggested hiring a trained laboratory technologist. "It's well worth paying somebody $15 an hour vs. $10 to do it right," he said. "The incremental cost is very minimal, and that person will have no problem meeting CLIA standards and understanding them." Ultimately, the qualifications of the lab person should depend on the range of testing performed. Smaller practices with more limited testing have successfully used medical assistants to run their labs, sometimes supported by an outside contract medical technologist.

Reimbursement

Physicians worry that HMOs looking for volume discounts won't reimburse for their lab services, but Dr. Root said that's typically not the case. "The rule of thumb is that nine times out of 10 if you ask you will receive," he explained. "It's true they sign national contracts with big labs, but if you simply write and say I have the capability to do these tests in-house, I propose you pay me at the Medicare rate, they typically fire back a letter saying they will pay you."

(A sample letter is available on ACP–ASIM Online www.acponline.org/cca under the "Physician Office Laboratories" section.)

Once a health plan is reimbursing you for lab services, stay on top of your contracts, as they tend to change. "I recommend that physicians examine their contracts periodically to make sure their list of covered services are the services they are doing," said Sheila G. Dunn, president of Quality America Inc., a health care consulting firm in Asheville, N.C., that specializes in CLIA compliance.

Lab economics

According to Dr. Root, a well-run lab should produce a profit margin of 40% or more. A practice with four or five physicians, he said, can earn a couple of hundred thousand dollars a year in profit, depending on the payer mix and practice philosophy, or the extent to which a practice relies on lab tests. Smaller practices can profit from their labs by limiting the up-front investment and then performing in-house only those tests that they currently order regularly. If you perform a test so infrequently that you can't break even on it, Dr. Root said, you should continue sending it to an outside lab.

Consultants can help you analyze your test volume and costs. ACP–ASIM offers Office Laboratory Check Up, a software product that uses Excel spreadsheets to help determine the feasibility of starting or maintaining a lab or a particular machine. The product examines a practice's demographics, costs, personnel and other practice information. It can also help determine the optimal mix of tests to perform internally vs. those sent out to reference labs. (See "Give your office lab a free physical with software from the College," for more information.)

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