How Competing for External Business May Strengthen Laboratory Service Delivery and Health System Performance
Executive Summary
A hospital laboratory that serves external physician practices and unaffiliated community care settings operates in a more competitive environment than one serving only its own health system. External customers have access to a variety of laboratory service providers, creating market accountability for service levels, responsiveness, and overall performance.
Outreach generates testing volume and contribution margin, but its potential value extends further. Competing successfully for external business requires a deliberate operating discipline. The capabilities developed in response to market demands can strengthen laboratory service levels for hospital providers and inpatients, potentially contributing to improved health system performance.
This raises an important strategic question:
Can sustained market exposure strengthen hospital laboratory capabilities in ways that benefit the health system beyond the incremental contribution margin it generates?
Market Exposure Changes the Operating Environment
Within a hospital, laboratories and clinical teams are part of the same organization. Service problems can often be addressed individually through workarounds or the extra effort of highly committed laboratory staff. While these responses may address the immediate need, they do not necessarily correct the underlying process or prevent recurring problems.
The external market is less forgiving. For example, physician practices experiencing repeated courier failures, delayed results, difficult issue resolution, inadequate test availability, or other service problems can move their testing to another laboratory. Poor service can therefore become a customer-retention and revenue issue, making service failures more visible and consequential.
Competing successfully in this environment requires more than excess analytical capacity. It requires dependable couriers, responsive client services, reliable IT connectivity, competitive turnaround times, effective problem resolution, and an in-house test menu that meets market expectations.
This market exposure creates ongoing pressure to identify the underlying causes of service failures, correct them, and prevent recurrence. Over time, it can reinforce a culture in which reliability and responsiveness become more consistent operating requirements.
Meeting these higher service expectations does not necessarily require a proportional increase in resources. Competitive rowing provides a useful analogy. Competition creates an environment in which eight rowers cannot succeed simply by pulling harder as individuals. To make the boat move faster, they must improve their timing, coordination, and execution as a team. As they become more synchronized, the boat balances and glides more efficiently through the water, translating more of their collective effort into forward movement.
Outreach market exposure can have a similar effect on laboratory operations. Generating effective service levels requires coordination across specimen logistics, testing, information flow, client service, and problem resolution. Improving that coordination can reduce operational friction and allow the laboratory to operate more efficiently.
Over time, these capabilities can become part of the laboratory’s broader infrastructure and operating culture, with benefits extending to inpatient providers as well as outreach customers.
Why Might This Matter More to the Hospital Today?
Clinical demands on hospitals have increased. An analysis of 30 randomly selected independent acute care hospitals found that average case mix index increased from 1.7643 in 2018 to 1.9178 in 2022, an increase of approximately 8.7% (p ≤ .004). The years 2018 and 2022 were selected to provide pre- and post-COVID comparison points while avoiding the years most directly affected by the pandemic. Case mix index is not a direct measure of diagnostic complexity, but the increase is consistent with hospitals caring for a more clinically complex patient population, particularly as less complex care continues to migrate into community settings.
Greater inpatient complexity can increase the number of clinical decisions that depend on laboratory results, as well as the interdependence of those decisions. Delays in specimen movement, limited test availability, or slow issue resolution can complicate those decisions and potentially delay patient care.
As these clinical demands increase, the capabilities developed and reinforced through external competition may become more valuable to inpatient care, particularly when speed, reliability, and access to diagnostic information are important to clinical decision-making.
Case in Point: Outreach Intensity and Hospital Performance
An analysis of 250 randomly selected independent acute care hospitals with outreach programs provides a basis for examining this question further. Two groups of 25 hospitals were identified, representing the highest and lowest 10% of the sample based on outreach volume per licensed bed. The selected hospitals were shown to have comparable patient discharges and case mix indices, reducing the potential influence of differences in hospital size and patient complexity.
Hospitals in the higher-outreach group had a shorter average length of stay than hospitals in the lower-outreach group. The difference was statistically significant (p ≤ .001). This relationship raises the question of whether capabilities associated with a substantial outreach presence are also relevant to inpatient performance.
Several factors could contribute to the observed relationship. Higher outreach testing volume and contribution margin may support a broader in-house test menu and more frequent testing schedules than would be financially feasible based on inpatient volume alone. That could improve turnaround times and accelerate clinical decisions through faster access to laboratory diagnostic information. Greater integration with community providers and care settings may also support continuity of laboratory monitoring following discharge, which could allow earlier discharge when clinically appropriate. It is also possible that hospitals with substantial outreach activity operate in environments where leadership more actively supports innovation, growth, and service improvement, factors that could independently contribute to hospital performance.
These findings do not establish why hospitals with greater outreach intensity had shorter lengths of stay. They do, however, provide a rationale for examining whether the operating capabilities associated with successful outreach programs contribute to improved inpatient performance.
Implications for Health System Leadership
For hospital and laboratory leaders, the relevance of market exposure may extend beyond the financial performance of the outreach program itself. If capabilities developed to compete externally also improve laboratory service to hospital providers and patients, some of the value created by outreach-related investments would not appear in the outreach program's financial results.
This distinction matters for resource allocation decisions. Investments in laboratory capacity, technology, logistics, connectivity, client service, and other capabilities may appear as costs within the laboratory even when some of their potential value is realized through improved inpatient service, patient flow, care coordination, or other measures of health system performance. Evaluating these investments solely against outreach revenue and contribution margin could therefore provide an incomplete view of their potential return and lead to underinvestment.
The leadership opportunity is to identify and measure these broader effects rather than assume them. Focused, data-driven pilot studies can help determine where measurable benefits occur and whether to incorporate them into laboratory investment and resource allocation decisions.
Conclusion
The potential value of outreach market exposure extends beyond its direct financial contribution. Understanding whether the operating capabilities developed through external competition also improve inpatient care delivery could have important implications for hospital laboratory strategy and investment decisions.
Outreach programs are generally evaluated through testing volume, revenue, contribution margin, and the resources required to support external customers. These measures remain important. However, determining whether outreach-related investments also strengthen inpatient laboratory services, support more efficient clinical decision-making, and improve patient progression would provide hospital and laboratory leaders with a more complete view of the combined economics of hospital laboratory operations and outreach.
