What Lab Products and Services Should Be Outsourced? Insourced?

July 11, 2019

"Health system labs are not a commodity and are not likely to become one any time soon. An in-house lab can fine-tune its services to match different clinical needs within a hospital." Brian R. Jackson, MD, MS, Medical Director, Business Development, IT, and Support Services, ARUP Laboratories.


Dr. Brian Jackson is an associate professor of clinical pathology at the University of Utah School of Medicine and directs informatics efforts at ARUP. He also founded the podcast, LabMind. As more health systems merge, Jackson feels hospital leadership needs a deeper understanding of clinical and operational relationships. “You can end up with senior executives making decisions about functions they know little about, such as the lab.”

Q: How do businesses typically decide what to outsource versus keep in-house?

A: Some leaders label their organization’s most visible products or services as “core competencies” and try to outsource everything else. Others underappreciate their organization’s internal potential, or believe that financial deal making is the best way to create value. Sometimes it just comes down to what’s trending. For example, in the 1990s, many IT and HR departments were outsourced largely because CEOs saw their peers doing the same thing. A smarter approach is to base decisions on a strategic analysis of your organization and the outside marketplace. Outsourcing makes sense when the service or product is not a key differentiator and when it is okay for it to be just average. Outsourcing works best for plug-and play products and services that do not require customization for your setting. The opposite of outsourcing is vertical integration, where functions remain in-house under the control of the organization. This approach makes sense when your organization’s success relies on tight integration of that product or service.

Q: What are some examples of vertical integration?

A: In the early 1990s, Apple’s vertically integrated manufacturing of Macintoshes made for a superior user experience. They successfully replicated the strategy years later with the iPod and later the iPhone. Microsoft, in contrast, treated printers and other devices as interchangeable commodities from early on, and users suffered the consequences.

Q: Isn’t lab testing “plug-and-play?” Doesn’t it make sense to outsource it?

A: Actually, laboratories are some of the least plug-and-play departments within modern healthcare. Clinical departments such as EDs, surgical centers, primary care offices, and ICUs all have markedly different laboratory testing needs. An in-house laboratory can adapt and fine tune specimen collection, individual assays, and TAT to match these needs. Health system laboratories are not a commodity, and are not likely to become one any time soon. On the other hand, within any given health system laboratory, there are likely to be specific components that could make sense to outsource. Take esoteric tests, for example: the volume doesn’t justify the resources to maintain them in-house, and turnaround time greater than a day is acceptable for clinical needs. It also makes sense to outsource services such as online test directories and courier services.

Q: When a laboratory loses profitability (e.g., due to reimbursement pressure) isn’t that a good time to outsource it?

A: Actually, that might be the worst time. For one thing, knowing that you’re under financial pressure will give a commercial lab tremendous negotiating leverage. More fundamentally, a lab’s direct costs and reimbursements give an extremely incomplete and biased perspective on the overall financial impact of testing services. For example, suppose a lab sets up near-patient testing for an outpatient infusion center. Based on internal lab accounting, this arrangement will be much more expensive than sending those same tests to a core lab or a reference lab. However, rapid TAT in that setting means that patients do not have to come in the day before their chemotherapy just to get their labs drawn. This can positively impact patient satisfaction, leading to growth in a health system’s lucrative oncology business. The bottom line is, unless you’re a completely independent reference lab, profitability can only be properly assessed within a clinical service line or clinical enterprise, and not within the lab in isolation.

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"Clinical Services Utilization: How Are Laboratories Leading the Way?"

"Listen Up: A New Podcast Explores Laboratory Medicine 'Outside the Box'"

Catherine Arnold