Over the last quarter of a century, despite tremendous advances in medical science and technology, there has been a growing realization that the healthcare delivery system has not been able to provide consistently high-quality care to all Americans. In response to this, value-based healthcare has now become the focus of our national health policy, with value defined as the health outcomes achieved per dollar spent.

The Department of Health and Human Services (HHS) recently announced that 30 percent of Medicare payments will involve alternative payment models (APMs) by the end of 2016. By the end of 2018, half of Medicare payments will go to APMs such as ACOs, patient-centered medical homes (PCMHs), and healthcare organizations that accept bundled payments.

Meanwhile, a group of 20 leading insurers and provider organizations has an­nounced their commitment to putting “75 percent of their business into value-based arrangements that focus on the Triple Aim of better health, better care and lower costs by 2020.” Other major insurers previously announced their intention to move to value-based payment models.

The Fee-for-Value (FFV) model is in contrast to the traditional and prevailing model of Fee-for-Service (FFS). In an FFS model, primary health care professionals get paid per person per visit. Providers get paid for seeing patients regardless of clinical outcome, providing little differentiation between effective and ineffective encounters.

Value-based systems incorporate clinical outcomes in provider reimbursement, and generally provide differential payments based on measures of clinical quality and cost. Reimbursement can be associated with meeting specific performance criteria, or negotiated through ‘shared risk’ contracts in which the cost of a patient illness is shared by the provider as well as the payer. Some systems grade reimbursement along the continuum of the patient’s journey with their disease, reimbursing more highly for care of complex disease.

To meet the demands of these payment reforms, practices will have to adopt a team-based approach to the delivery of services providing proactive patient care. This approach must evolve to enable increasing coordination between practitioners within the healthcare system and connect patients to community-based resources and supports. Providers will need to adopt new technologies for communication and monitoring.

The Value of the Laboratory in the New Healthcare Model

Labs have always faced changes and challenges due to technological advances and economic pressures, but healthcare reform requires laboratories to adopt new ways of operating, actively aligning with the larger institutional goals. From a revenue standpoint, this means laboratories contributing to the reduction in the cost of the overall patient interaction. Laboratories can impact this by increasing the speed and accuracy of correct diagnoses, monitoring patient health to prevent disease, providing rapid turnaround times that allow reduction in length of hospital stays, and promoting the most appropriate test selection options with applicable interpretations in order to help avoid adverse events and point to the most appropriate treatment protocol.

The value of a laboratory test must be ascertained not only on the basis of its clinical performance and cost, but also by its impact on patient management. The best, true assessment of the quality of testing lies in its impact on patient outcomes. With a stronger focus on preventive medicine versus curative, the introduction of companion diagnostics, a multitude of new testing options, and the ability to communicate results in real-time scenarios, this is an opportune time for laboratory professionals and pathologists to expand their contribution.

Following are steps laboratories can take to adapt to value-based reimbursement:

  • Align With Organizational Goals: Laboratories have to review their operational assumptions, and align their goals with the organizational goals and actively pursue ways to increase the success of the group that they serve.
  • Increase Efficiency: While all labs have had to deal with cuts in reimbursements and miniscule budgets for years, the focus now will change from savings based on individual reimbursements per CPT code, to reducing overall costs. The goal is to contribute to the larger organization-wide savings and to provide value in ways that best support the clinician in daily encounters with the patients.Careful analyses of staffing needs, workload distribution, and hours of operation, instrumentation and test menu must be implemented to ensure that redundancies have been addressed. However, laboratory operations are not static; these systemic studies should be carried out annually to ensure adjustments are made to reflect changes in test demand, regulatory requirements and changes in technology.
  • Test Utilization Management: Identify when lab tests are poorly utilized. Laboratories need to guide providers to the minimum level of testing that creates maximum patient care value. Pathologists and laboratory professionals can get involved and use their clinical knowledge and experience to advise clinicians about appropriate test orders and provide enhanced test interpretations. In order to meet the changing needs of our healthcare system, the laboratory will need to be pro-actively involved in patient care management.Begin monitoring test utilization with variation analyses to determine the disparity between provider orders within a facility or across multiple organizations for a specific diagnosis. This data can be analyzed and, combined with recommendations from professional societies for specific diagnoses or specialties, to develop internal guidelines that support optimal usage of the laboratory. Once this data has been communicated to the providers in a positive, informative format, a committee can be appointed to use the variation analysis to begin to establish best-practice ordering guidelines.
  • Provide Detailed Test Interpretations: In conjunction with the need for guidance in test selection, there is also a need for automatic, patient-specific narrative interpretations from the laboratory that include information and recommendations about other lab testing options and relevant clinical details. There is a clear need to not only provide physicians with test selection assistance, but also with useful patient-specific interpretations of complex test results that lead to appropriate clinical decisions. The expertise of highly knowledgeable individuals can be utilized to create complex laboratory evaluations that can lead to improvement in the overall quality of care, reduction in medical errors, and reductions in the cost of care. Implementing patient-specific narrative interpretations can consistently reduce medical error.


Labs are no longer profit centers; they have become critical cost centers that help us to manage and treat disease. As we go through the process of moving from a fee-for-service healthcare model to a value-based system, the methods for calculating laboratory return on investment (ROI) changes. Currently, lab testing ROI is calculated using the reimbursement for a particular test versus the cost of producing a patient reportable result. The new system will not only change this mindset, but it will change the testing menus that are available, the volumes of these tests, and potentially the testing locations. Increased usage of Point of Care Testing (POCT) is forecast.

The calculated ROI in the future will not be based on how much profit is made on a test, but on how much savings there is for an episode of care. Moving forward, lab testing will be focused on prevention and diagnosis. The goal of preventive testing will be to diagnose an issue before it becomes a high-cost healthcare episode. In this scenario, the cost of the test versus reimbursement will not be the deciding factor on whether to perform the test. Instead, the focus will be on what it can save the patient and the entire organization by enabling early detection.

Laboratories will have to adjust to this new paradigm or they will not survive. If laboratories cannot contribute to the overall mission of their larger institution, they will be replaced by those that do.

Originally published in ADVANCE for Laboratory Quest for Quality Series

Sylvia M. Burwell, “Setting Value-Based Payment Goals—HHS Efforts to Improve U.S. Health Care,” NEJM, Jan. 26, 2015, DOI: 10.1056/NEJMp1500445
Emily Rappleye, “20 major health systems, payers pledge to convert 75% of business to value-based arrangements by 2020,” Becker’s Hospital Review, Jan. 28, 2015. http://www.beckershospitalreview.com/finance/20-major-health-systems-payers-pledge-to-convert-75-of-business-to-value-based-ar­rangements-by-2020.html
Changing Landscape: From Fee-for-Service to Value-Based Reimbursement. NIH: National Institute of Diabetes and Digestive and Kidney Disorders. https://www.niddk.nih.gov/health-information/health-communication-programs/ndep/health-care-professionals/practice-transformation/why-transform/changing-landscape/Pages/default.aspx.
K. Futrell. Orchard Software Whitepaper: The Value of the Laboratory in the New Healthcare Model. Diagnostic Information: The New Currency in the Future of Healthcare. July 2013. http://www.orchardsoft.com/files/white_paper_value_lab.pdf
Panteghini, Mauro. “The Future of Laboratory Medicine: Understanding the New Pressures.” The Clinical Biochemist Reviews. November 2004. Accessed at http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1934959/
Catrou, Paul G. “Is that Lab Test Necessary?” Am J Clin Pathol. 2006. Accessed at http://ajcp.ascpjournals.org/content/126/3/335.full.pdf

About The Author

Irwin is Quality Advisor for COLA Resources, Inc (CRI®). where he provides a wide range of technical assistance to laboratories across the country. He previously held the position of Executive Director at Community Response, a community-based organization that provides HIV/AIDS support services in metropolitan Chicago. Prior to that position he was the Laboratory Manager of Crittenden Memorial Hospital, West Memphis, AR. He holds a Bachelor of Science degree from Brooklyn College, a Medical Technology degree from Good Samaritan School of Medical Technology, a Master of Science degree from Colorado State University, and a Master of Business Administration degree from the University of Memphis.

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