Health systems have struggled to dig out from the financial landslide of the COVID-19 pandemic, but the financial pressures are only mounting due to declining reimbursements, rising supply costs, and an ultratight labor market. Added to those challenges is the increased uncertainty related to House Resolution (HR) 1 (also known as the One Big Beautiful Bill Act), the effects of which are yet to be fully understood.

Amid the uncertainty and ongoing financial pressure, some hospitals and health systems are entertaining offers to sell their laboratory operations, with sale prices that look like a potential financial windfall for the system.

Before health systems consider selling their laboratory operations, they need to understand the big picture of how labs influence the financial health of the system. When laboratory operations are sold, health systems lose a robust contributor to the bottom line. What’s more, they lose the opportunity to grow revenue contributions from high-value ambulatory services. In other words, a system may sell a big, plump goose but forever lose its golden eggs.

An Industry Under Pressure

Healthcare margins are shrinking due to the increasing cost of drugs, supplies, and labor. Health system margins dropped into the red in the first two months of 2026, according to Strata, a financial analytics and decision support services company that produces a monthly report on healthcare financial benchmarks. The median year-to-date operating margin for U.S. health systems hit a 12-month low of -0.6% in January 2026 and inched up only slightly to -0.3% in February, according to Strata data.

Kaufman Hall, a healthcare consulting firm that provides healthcare data and analysis, reported that healthcare mergers and acquisitions (M&A) have been increasingly driven by financial necessity, with 43.5% of M&A transactions in 2025 involving a financially distressed party—a new record high that represents a large jump from 30.6% in 2024.

It’s no wonder that health systems are looking for ways to pare expenses and gain some financial breathing room. But when margins are tight, selling clinical laboratory operations is the exact wrong move.

The Clinical Lab’s Contribution to Margin

Too often, health system leaders consider the clinical laboratory a cost center because the lab requires a lot of high-cost equipment, supplies, and highly skilled laboratorians. However, hospital labs perform a great deal of valuable fee-for-service ambulatory testing that contributes significantly to health system margins. Unfortunately, health systems don’t often track and measure fee-for-service revenue separately from overall lab revenue, making it difficult for health leaders to clearly see the bottom-line impact.

Similarly, lab expenses are often inaccurately attributed to fee-for-service testing, which obscures the true value of this testing. Laboratories have fixed costs, such as staffing, reagents, and equipment, that are necessary for performing inpatient testing. These costs are not reduced proportionally when fee-for-service ambulatory testing is eliminated or sold because the lab must remain staffed and equipped at a baseline level. For this reason, the value of fee-for-service testing cannot be determined by simply calculating the average cost per test in the lab.

The eagerness of commercial laboratories to acquire ambulatory operations is a clear indicator of the financial value of this testing. In fact, many of the recent acquisitions by commercial labs have been solely for a system’s ambulatory or outreach services. When commercial labs have made agreements to purchase or manage the hospital laboratory, those agreements have generally given them access to the lucrative fee-for-service testing performed by the lab.

From Zero to Profitability in One Year

Tucson Medical Center (TMC) discovered the value of its ambulatory lab services only after these services were sold to a commercial lab in 2003. For years, TMC watched as its affiliated physicians sent testing out of its 11 clinic locations to the commercial lab. “Lab leaders had been asking TMC executives, ‘Why are we sending this out when we can do it here, gain the revenue, and provide better service?’” said Sanjay Timbadia, MBA, BSc, MT(ASCP), director of Laboratory Services at TMC.

With the support of the hospital’s finance group, the TMC lab was able to make the case to leadership that rebuilding its ambulatory operations would be profitable within a year. TMC then engaged ARUP Healthcare Advisory Services to help create a project plan to rebuild ambulatory infrastructure, including billing operations, courier services, information technology (IT) interfacing, and new patient service centers.

TMC began to transition its affiliated clinics away from the commercial lab in May 2020. “We were at breakeven within the same year and were profitable in 2021,” Timbadia said. Ambulatory testing contributed $2.5 million in net revenue in 2021, and test volume grew by more than 800,000 tests. “Now it’s just profit all the way, and we keep adding providers and clinics.”

Since the initial launch, TMC has grown its physician network by building and acquiring several new specialty clinics, including five cancer centers in 2025. Net annual revenue from its ambulatory services has more than tripled.

Inreach ambulatory testing services bring more than financial value to the health system, Timbadia said. He pointed to improved turnaround times and greater coordination with the lab as examples of the impact inreach testing has on quality and patient care. When TMC was relying on the commercial lab, physicians had to wait at least a day for results. “Now, they send the test in the morning, and usually within three hours, they have the result,” he said. “When there’s a critical result, we call. They weren’t getting that before.”

Inreach testing growth has allowed TMC’s lab to grow in other ways as well. The lab has expanded its testing menu to better serve the ambulatory clinics, and it’s been able to add a new automation line to operate more efficiently. The lab added more courier stops each day, which not only benefited the lab’s workflow by spreading out testing batches over the day, but also helped the lab get results to physicians faster.

The success of the ambulatory testing program has changed how system leadership views the lab—not as a cost center but as a revenue generator. “Executives tell me all the time that they have no worries about the lab,” Timbadia said. “I’m supported in everything I request because I can make a good case for it.”

Meeting Financial Headwinds With a Growth Mindset

The central laboratory at Bryan Health, a six-hospital system in Nebraska, was challenged by system leadership to find ways to trim costs and operate more efficiently in an effort to address industrywide financial headwinds. As part of that endeavor, the Bryan Medical Center (BMC) lab suggested launching a serious initiative to capture all the inreach testing from its affiliated physician groups throughout the state. Bringing in the ambulatory testing would both drive increased revenue and allow the lab to optimize the use of its resources.

“There’s a lot of value in the hospital laboratory because we have to be staffed 24/7. We have to have the equipment and the redundancy,” explained Christina Nickel, MHA, MLS(ASCP)^CM, CPHQ, laboratory director at BMC. Capturing inreach testing helped the lab better utilize those necessary resources. “Once we got all of our inreach testing, we decided we needed to do outreach, too,” she said.

A local reference lab had closed its doors during this time frame, which left Nebraska physician groups to rely on a national reference laboratory for testing. Nickel said several of those groups approached BMC seeking laboratory services because they were experiencing lengthy turnaround times with the national reference lab.

BMC lab leaders believed they could bridge that gap for Nebraska physician groups, but they needed to create an outreach business plan before taking on outreach clients. The system worked with ARUP Laboratories to evaluate its outreach market potential, identify needed infrastructure updates, and build test menus. The outreach effort launched in 2019 and began to pick up considerable steam by 2021, and growth further escalated in 2024.

In addition to outreach testing, the BMC lab began offering direct-access testing to patients. The lab created its first patient service center where patients could request and pay for select testing, such as hemoglobin A1c, pregnancy, COVID-19, assorted screening tests, and more. The BMC lab coordinated with its inreach physicians to ensure the direct-access test menu was appropriate for the patient population.

“We said, ‘We’re going to do these cheap.’ That’s the intent, because it’s the same high-quality testing we use for our hospital and clinic patients, but it’s not going to go through insurance. We’re not going to need registration. We’re not going to need to have any manual billing because it’s going to be paid at the time of service. That one location brought more than 3,500 new patients into our system in the first year,” Nickel said.

Since BMC began to focus on inreach, outreach, and direct-access testing efforts, its overall testing volumes have increased by 53%. “It’s huge for the organization. You just get to grow. It brings you the volume that can bring in new tests, such as flow cytometry,” Nickel said. “It has also brought more visibility to the laboratory. We’re much more well respected as a revenue generator.”

Knowledge Is Power

Fee-for-service laboratory testing contributes significant margins to most health systems, and it’s important for system leaders to know the value of that business before making any decisions about whether to maintain it, grow it, or sell it. Commercial labs understand very clearly the value inherent in laboratory operations, but there’s an information disparity that affects how commercial labs and health systems assess the value of the lab. Commercial labs take a bigger-picture approach.

A large offer for laboratory operations may look like a good deal for the health system. But a closer look at ambulatory revenue, a correct accounting of costs, and an understanding of the laboratory growth potential will, at the very least, remove some of the glow from the offer.

ARUP Healthcare Advisory Services offers a customized analysis to help our clients gain an understanding of the true value of their laboratory operations. This preliminary financial assessment includes a revenue estimate for current ambulatory and outreach operations, an estimate of variable and fixed lab costs, the impact to overall cost per test if ambulatory and outreach testing were sold, and the five-year net present value (NPV) of ambulatory and outreach operations.

Beyond this preliminary assessment, Healthcare Advisory Services consultants can help clients evaluate the market potential for ambulatory growth and develop a business plan to achieve sustainable growth. Our consultants can also help labs find cost savings by streamlining laboratory operations, creating greater alignment among the health system’s laboratories, and optimizing test utilization.

The bottom line is that most laboratory operations acquisitions are not a good long-term deal and actually undercut the health system, leaving it with reduced revenue and less operational control. ARUP can help clients grow their laboratory revenue while reducing operational costs in ways that make a positive, sustainable difference for healthcare margins.