Wednesday, November 06, 2024

Part 6:
Ambulatory Surgery Centers Investment

by Dr. Shakeel Ahmed

Part 6 of a 6 Part Series

For parts 1, 2, 3, 4 and 5 of this series please visit PhysiciansOfficeResource.com/articles 

Entering the laboratory industry offers an exciting opportunity for healthcare professionals and investors alike, providing essential services to the medical field while also holding substantial financial promise. With advancements in molecular diagnostics, the lab industry has seen consistent growth, driven by demand for specialized testing and precision medicine. However, success in this space requires not just clinical expertise but also a firm grasp of business fundamentals, regulatory requirements, and market trends. This article outlines the key considerations and challenges involved in building a successful diagnostic laboratory, from initial planning to long-term profitability, in a rapidly evolving healthcare landscape.

“ The future belongs to those who believe in the beauty of their dreams.”

— Eleanor Roosevelt

In my previous articles, I discussed investments in Multispecialty Groups, ASCs, Imaging Centers. The logical next addition to your portfolio is a medical lab. While an integrated practice-owned lab concept is an excellent investment for physicians, I want to focus in this article on a de novo freestanding lab concept for investors. The greatest benefit to the latter is a broader patient base. The disadvantage? Navigating the treacherous tracks of federal and state laws. Having said that, the laws and principles of the business apply to both setups. 

Introduction

The American Clinical Laboratory Association (ACLA) is the national trade association of leading clinical laboratories. It renders essential information about diagnostic laboratories and their evolution to meet the nation’s continuously evolving healthcare needs to patients and healthcare providers. The ACLA sees clinical laboratories as the first line of defense against disease, since all diseases inherently have identifiable factors that can be gleaned from the chemistry of blood and other fluids and the histology of tissue; such information spawns the ability to diagnose, and we’d be lost without it. 

The ACLA, illuminating the critical role labs play in the healthcare system, states that diagnostic laboratories provide more than 70 percent of the medical information (knowledge) to diagnose and treat (action) patients. This is staggering when you consider how much additional (and crucial) information was provided by labs during the recent COVID-19 pandemic.

Infectious agents, among many other culprits conspiring to do us in, are constantly changing. The pandemic adjustments to the sudden, unanticipated, and additional volume are just one example of how laboratories offer another advantage in the practice of medicine—they are designed to adapt.

Laboratories played a vital role in developing and distributing tests for COVID-19—in fact, providing the majority of the tests in the US. But COVID isn’t entirely over; not yet. No one can guarantee a new variant or a wholly different infectious agent altogether won’t rear its ugly head, making diagnostic labs our anchor in safe harbors.

Therefore, if you’re looking to enter the laboratory business, this can be very lucrative financially; additionally, you can be reassured that the clinical laboratory world is expanding quickly. Since 2016, diagnostic and medical laboratories have grown by 1.5 percent yearly. It should continue at this rate (or faster) based on observable trends. 

What Is Involved

CBCs, metabolic profiles, fasting glucose determination, Pap smears, and the other quotidian tests of yesteryear are now only afterthoughts in a brave new world of biochemistry and histology. Consider that it wasn’t until 1984 that Helicobacter pylori (and not psychological stress) was associated with gastritis, with subsequent years of opportunities wasted due to a lack of credibility. One Nobel Prize later, H. pylori histological testing is mainstream in evaluating recalcitrant GERD and high GI cancer risk.

So, with total medical knowledge doubling every few months now, newly discovered epiphanies and complexities will continue to usher in ways to identify, quantify, and qualify illness. And treat them.

For example, molecular diagnostics, the process of identifying disease by studying the molecules in its cascade of determinants, such as proteins, DNA, and RNA in fluid or tissue, has skyrocketed due to the COVID-19 pandemic creating unprecedented demand for such testing. Also, advancements in precision medicine and genetics continue increasing demand. With the human genome project continually being raided for novel ways to address disease, the future of the diagnostic laboratory seems unbridled. While you may not be winning a Nobel Prize anytime soon, the academic and intellectual fascination will be nonstop. And—financially—stepping into the laboratory business is likely a sure bet if done right. 

Do It Right

Besides walking hand-in-hand with a crucial piece of the modern diagnostic and treatment paradigm, owning a laboratory can be financially rewarding. The financial performance of diagnostic laboratories contributes significantly to our economy, generating $75 billion in revenue annually and employing over four hundred thousand people.

Physicians who consider such a venture should feel comfortable making such a rewarding and lucrative lateral move, considering they did well in their previous “box”; this portends well for doing well out of the box. Indeed, they already have a head start over other entrepreneurs because of their diagnostic sensibilities, education, and training. But that does not mean it isn’t challenging—it is.

Even with the proper knowledge and resources, running a laboratory business can be complex and challenging, albeit rewarding and profitable. Laboratories play a fundamental role in the practice of medicine and provide critical diagnostic and analytical services to hospitals, clinics, and all other healthcare providers. 

Create a Detailed Business Plan

This can steer you through the difficult questions before you start spending money or sweat equity over qualms about feasibility and profitability. A detailed business plan is useful for you and your potential investors. While it won’t guarantee the future, it will portend it reasonably well enough upon which to rely for making decisions.

According to the US Small Business Association (SBA.gov), a business plan will include:

• The Executive Summary: A brief overview of your lab, what it will do, and why it will do well. It should also include the business type. (Sole proprietorship, partnership, LLC, C-Corp, S-Corp? These considerations depend on your economic environment and what serves your financial plan best. This is probably advice you will have to pay for.)
• Company Description: An outline of what your lab will specialize in, what makes your lab unique (especially compared to your competitors), the advantages of your location, what needs you will fill, and all the positive aspects you can list.
• Market Analysis: The take on all the research into your competition.
• Organization and Management: Who will run the lab, how many employees will you hire, how many specialty tests and techs to support them, and how will it be managed?
• Marketing and Sales: Your plan to capture funding and sales and the marketing strategies you’ll use to do this. How will you get into this market? How will you expand? What about communication and distribution?
• Funding Requests: How much will you need on the front end and during the transition from start-up to profitability? What will this funding cover? Why is the funding necessary?
• Financial Projections: This is the crux of your business plan—why and how you plan for the lab to be profitable, and the road to that time.
• Appendix: Your research sources.

Within your business plan will be the following additional considerations: How financially successful are the average labs in your area? How crowded is the marketplace you’re seeking to enter? Have other labs required continued funding to be viable? Are there any special relationships with payers with whom you might have trouble contracting? These considerations take into account the networking milieu you’ll be entering. Will you have more partnering associations than competitors (or, read another way, more allies than enemies)?

What is the market demand? Can you do the market research to make a legitimate case for getting into the lab business? There should be a competitive analysis. Are there competitors, and if so, can you do it better with newer technology? (Any lab already in business is already behind the times regarding technology.) Can you offer state-of-the-art technology for bragging rights that will give you a competitive advantage? Are there new cutting-edge technologies you want to feature? Are there new research and testing opportunities brewing, such as what emerged from the recent pandemic?

Who will be your customers? Learning this will be part of this research. This means knowing what products and services you will offer and how these will jive in the competitive marketplace. For example, do you want to invest in durable medical equipment to diagnose conditions specific to one demographic that is irrelevant to the demographics that predominate in your area? Do you want to cater to specialists from outpatient services, e.g., histology services for endoscopic biopsies, HPV testing, and reading colposcopy tissue biopsies for a large gynecology presence in the area?

Will there be customers you need from whom you’ll be excluded contractually? Insurance panels are designed for several purposes, but none of those purposes are to benefit anyone but the insurers. Always keep that in mind. Nevertheless, networking potential is essential to learning who your customers will be.

Will you be competing with a large, nearby hospital? This requires extensive assessment of what you can offer to be done better, cheaper, or quicker.

Will your customers include those who favor online and delivery methods, e.g., stool samples, COVID-19 screening, genetic swabs, etc.? If so, will you have synchrony between your brick-and-mortar building and your online capabilities? This also includes the digital transfer of results to patients and providers alike.

Will your demographics be ethnically focused, age-specific, or predominate according to other considerations, such as gender? Will you be serving a particular niche?

Will a research grant strategy be a part of your plan? If so, in what way and under which funding possibilities?

What do data and statistics say about market demands, trends, and penetration?

These inquiries will answer issues over geographic realty trends, average labor costs, funding potential, and your competitors’ state-of-the-art assets (or lack thereof). Pay for consultants to get you this information, because you’ll have to commit to or decline this venture sooner or later and need the best information.

You need to know the costs of the reagents and media involved in your testing, the costs of the required equipment, and the employee salary costs.

If there are many competitors, will they adversely threaten the success of your lab? Remember that everything in this venture depends on supply and demand; even with competition, if demand is not completely supplied, there will be room for you. Thus, a competitor merely existing does not necessarily mean a struggle.

What about your other customers? By this, I mean your investors. Start-up labs require liquidity, so you must consider your investors as your other customers. Part of your business plan requires you to delineate project milestones that depend on product and service delivery. You also have to discuss cost-effective solutions such as rental of space, equipment, furniture, etc., vs. ownership, shared space, employee pools, and other ideas that can be explained as part of your anticipated return of investment.

Multiphase government research grants and direct sales of home testing over the internet will help control costs.

Signing long-term customer contracts (including those other customers) is as important as the ones utilizing your services. 

Buy (Sow)/Collect (Reap)

What type of lab you choose will determine the equipment and instrumentation you need to buy. For example, molecular diagnostics will be involved with the following:

1. DNA extraction
2. PCR machine/thermocycler
3. RT-PCR machine
4. Gel electrophoresis
5. DNA sequencing
6. Refrigerators/freezers
7. Buffers, gloves, tips, and other consumables
8. Any safety apparatus and other durable medical equipment and their supplies

Besides the cost of space (rental vs. amortization of purchase), incubators, refrigerators/freezers, computer systems (hardware and software), and furniture, most labs, generally, will need:

• microscopes
• hematology and differential counters, chemistry, blood gas, urine, DNA, and immunoassay analyzers
• autoclaves
• hotplates
• histology and cytology equipment
• gamma counters
• microplate readers/washers
• point-of-care analyzers
• immunoassay analyzers
• hormonal testing
• cancer diagnosis and treatment biomarker testing
• hazard safety items, e.g., hoods, eyewash stations

Such equipment can range from $20,000 to $50,000.

The investment range of a small to medium lab can be from $38,000 to $200,000. However, this can anticipate a revenue potential of $350,000 to up to $1 million annually. Of course, the larger the lab, the bigger the numbers, not the least of which are the investment costs. On a positive note, the industry trend is excellent and growing. It has grown 3.1 percent annually in the last five years. As of 2023, more than  thirty thousand diagnostic and medical labs were running in the United States.

Lab tests can cost anywhere from one hundred dollars to $1,000 or more, but for your purposes, they can be averaged as $300 per test. With all things applied, a 20 percent profit margin after overhead, space, and labor can be reasonably expected. 

What Could Go Wrong?

The biggest challenge today for laboratories is a need for more qualified or certified employees, especially after the recent pandemic. The average lab technician has a bachelor’s degree.

As a higher public and legislative sensitivity to medical waste continues, you can be sure there will be added costs to regulatory requirements in the future.

But keep in mind that our population is aging, expanding the industry by 24 percent in the last ten years. They will be getting older and more sizeable within the demographic cut of the pie. 

Get Funding

Funding is no small part of the what-you-need formula. Different aspects of this are covered in other areas, but one beneficial tool is affiliating your lab with a grant. The federal government offers hundreds, funded by agencies such as the National Institutes of Health (NIH), the National Science Foundation (NSF), the Department of Energy (DOE), and more.

Winning grants offer prestige, credibility, goodwill, and bragging rights and are often the subject of news fillers on the evening news. Even better, they don’t have to be paid back. Free money, free advertising. (Well, not really; the work has to be done, and there are often laborious protocols used and strings attached.) Some grants are renewed annually on a rotating basis, making them permanent within your budget. (They can just as capriciously disappear, too, so don’t rely on them.)

Another source is venture capital. This can come from deeper pockets than other sources and provide a quick input of the cash you need, but they are the proverbial good news/bad news.

The good news is the large amount of capital you can get—and quickly. The investors may already be in the industry and can provide valuable advice too. They are usually big shots and can add credibility to your business, especially if they sit on your Board of Directors. They can jumpstart your business, allow you to grow faster, and cease any wasting of time that only enables other competitors to pass you up. It’s reassuring that they share in any plan’s fragility in case you grow too fast or even collapse.

The bad news is that this is dilutive financing. These partners now own a percentage of your company, earning a share of your profit; depending on their stake, they can even make decisions outside of your control, including taking you out of the management loop.

There are many venture capital firms centered on biotech and life sciences. Still, you need to be a salesman to attract their interest. Even if you strike out, at least you’ve made connections with business leaders who may be helpful to you in the future. 

Accreditation

You will need both business accreditation and lab accreditation.

Business Accreditation

All businesses, including those in the “noble” profession of medicine, must file as a business with the state in which they operate. This includes obtaining an EIN. This means you need to name your business, which has ramifications in marketing, branding, and even searchability on search engines. If you think yourself clever, this is the time to shine.

You should choose a short, unique, catchy name that is easy to say and spell. It should be relevant to what your lab offers. In today’s SEO world, using a keyword can be a great idea, e.g., “medical testing,” “medical lab,” “diagnostic tests,” etc.—not those words, necessarily, but you get the idea.

Don’t put your location in the brand’s name because it will compromise expanding elsewhere. Also, anticipate your online presence. Your name should be able to be placed in a domain URL (Web name/address) that isn’t taken already.

Once you settle on that perfect name, you can verify whether it can be yours by consulting your state’s Secretary of State website. You can file the forms you need to get an EIN and a business license if available.

Be aware that just because a name is available in your state doesn’t mean others elsewhere aren’t watching. (As a ridiculous example, if you name your lab “Lab Retrieval,” you might get a nasty cease-and-desist letter from an attorney for a company involved with Labrador retrievers. Silly, but crazier things have happened.)

Besides your state, your city will probably require licensing. After all, how else to tax? 

Lab Accreditation

The laboratory industry is governmentally regulated at both the federal and state levels. The regulations include compliance with laws and regulations related to the handling and testing of biological specimens as well as the management of patient information and the handling of controlled substances.

In handling specimens and biological substances, most regulations are for safety; however, there are other concerns, such as whether you meet fire regulations. Did construction or renovation follow code? Are there enough well-demarcated exits or parking spaces?

Laboratory facilities are highly regulated because of what they are. For example, handling potentially dangerous biological pathogens will fall under the CDC’s biosafety regulations based on a determined biosafety level. Such designations have implications from supply and inventory to customers to the very types of employees you need to hire.

Certifications—the official ones—are issued, some mandatory but optional, others which can be chosen among many. What your lab does will determine the regulations and certification requirements.

Such accreditation is usually lab-specific, depending on what you test, how you test it, whether or not there are hazards in testing it, how you dispose of your hazmat materials and biohazards, etc. CLIA has an actual complexity scale by which it certifies labs.

There are laboratory consulting specialists who can guide you through this, not the least of which are those knowledgeable of your state’s CLIA peculiarities, as well as with the Joint Commission, COLA, SAMSHA, or CAP, all of which are flavored according to the lab-specific accreditation you need. All clinical diagnostic labs are required to have a CLIA license, even if they are accredited by the additional organizations above. But these additional accreditations can add value to your lab. 

Financial Considerations

Budgeting

It is important to clearly understand the costs associated with running a laboratory. In this respect, you will need to create a budget as part of your business plan to be used in your proposals. What type of lab you will run will heavily influence your budgeting. The type will dictate your inventory, employee salaries, and any special costs involved in handling specific substances, biological or otherwise.

How you plan to treat your investors is part of the budget too. Will you need to begin returning (ROI) in the first year, and how much? This all figures into the cost of running your business.

Instead of buying, leasing equipment favorably impacts two issues: 

Expense

It’s much cheaper to lease than buy, altering your budget by increasing your ability to go in other directions with your liquidity. Opting to lease equipment rather than purchase will change the part of your budget that applies to the space you use as well. Especially in a start-up venture, the leasing savings can be put toward other aspects of your business, such as salaries that will be competitive. A start-up can be a start-up faster.

Nondilutive financing is the term that applies to leasing. This refers to any capital received which doesn’t require a compensatory surrender of your ownership share. It proves a creative way to get a start-up or otherwise small business off the ground more quickly by enabling full operation of your lab sooner.

Other forms of nondilutive funding are tax credits, vouchers, grants, winning competitions, and even “friendly territory” loans, e.g., from family. Especially initially, nondilutive strategies allow the building of equity without otherwise penalizing you. Companies want to ensure that they can continue to create equity during the initial growth phase, which makes nondilutive capital a critical instrument.

Some loans, even nondilutive ones (e.g., family), can still charge you interest, which must be budgeted. Also, some grants may have some strings attached that affect income in other ways. The Small Business Administration offers loan options if you meet their criteria. If you’re a veteran, you should also sit down with your banker about that. Your proposed research also garners financing opportunities in terms of the available grants.

Interestingly, the government response to employee attrition due to the coronavirus pandemic was the nondilutive funding made possible by the Paycheck Protection Program, which offered loan forgiveness for using at least 60 percent of the money salaries. It even offered a low 1 percent interest rate for those who couldn’t meet the criteria but received funding anyway.

Leasing allows you, as a shareholder, more ownership of your lab business while allowing you to crank up sooner with expensive, sophisticated equipment. A smaller cost at the get-go allows your money to follow more emergent paths of day-to-day necessities.

Leasing is also fast. It doesn’t have the vetting and lag involved in acquiring a loan or soliciting more dilutive investor funds.

You must budget for business insurance in your overhead projections, including general liability, property, equipment breakdown, worker’s comp, commercial auto, professional liability, and even business interruption protection.

Every area in the country has unique risks: earthquakes, tornadoes, flooding, hurricanes, fire, sinkholes, etc. These are zebras among the many horses you must consider paying for, but consider whether you could survive a business interruption of a week, a month, or even longer. There is also an all-in-one type called a Business Owner’s Policy.

Besides budgeting for lab equipment and its space, staff, overhead, insurance, accounting fees, and payroll costs, you should set aside an emergency stash for surprises (they will be there, trust me). There will also be legal fees.

The wild card in the budget is how fast you want to set funds aside for growth. Do you want to scrape by, or do you have eyes on the future?

You need to budget into your needs any “upfit” accessorizing your physical business needs: special personnel (specialty techs and science experts); materials; specimens; software (accounting, reporting, and bridging software to allow your software to talk with other software beyond your walls); personnel (lab technicians, scientific specialists); testing materials and other consumables; and digital equipment (mobile devices, computers, networking servers, backup services, etc.), which can also be leased.

Industry-specific software such as Qualer, HealthAxis, or CGM can manage workflows, regulatory compliance, specimen and other inventory, billing, and digital storage and retrieval of records.

Remember, each state also has electronic record, waste disposal, safety, HR, and other requirements to which you must adhere. Your certifications will likely pigeonhole you into specific protocols. 

Accounting

Even though payroll is part of budgeting, it also has a special place in accounting. Your payroll scheme should ensure you stay efficient and cost-effective if it is designed to optimize what staff you hire and when.

The staff you need to consider is a lab director, consultant(s) (clinical, laboratory, etc.), technical manager, general supervisor, and finance director. As an aside, CLIA requires several of these, depending on what type of lab you have; the good news is that one person can wear several of these hats. As your staff and/or their roles grow, it underscores the benefit of an excellent HR department.

Currently, males outnumber female employees, but not by much—53.3 to 46.7 percent, respectively. Thus, gender is probably not an issue in the search for employees. Just remember that sexual harassment is a big part of HR sensibilities. That doesn’t mean “don’t hire women.” No, it means protecting everyone from workplace ugliness and having the appropriate HR resources in your plan.

It may be cost-efficient to outsource your payroll because such services have become very competitive. Otherwise, you can assign it to one of your other hat-wearers.

All other accounting will follow the general guidelines for business accounting. Your finance director will know what these are. 

Financial Planning

With the numerous revenue streams in progress, financial planning will help you make informed decisions about everything from business management to your life goals. Your financial plan will be a living, breathing beast, which will change as the world does and change how your future, planned or unexpected, unfolds. 

Know the Science

You may not be a rocket scientist, and you may very well be a brain surgeon, but it’s neither rocket science nor brain surgery. Nevertheless, you must understand the tests and services you will offer. This includes the latest technology and methodologies of different tests, managing your inventory, and ensuring the accuracy and reliability of your results.

Architecture is a player in science. Your lab, depending on your intent, will include either wet labs, dry labs, or both, as well as other areas:

• Wet labs handle liquids. This involves knowledge of resistant surfaces, adequate sinks and waste drainage, and fume hoods for noxious gases and dangerous particles that can waft through the air.
• Dry labs/tech labs are not only laboratory zones handling dry chemicals but also computer systems (tech lab for collecting, storing, and communicating results and workstations for IT services.) Higher-power HVAC systems are needed for the extra heat generated. Also, backup generators will be necessary.
• Depending on your safety or protocol standards, lab clean rooms may be necessary.
• Electronics protection will spare sensitive (and expensive) equipment from the ravages of rogue sparks and the like. Antielectrostatic discharge systems will prevent serious waste that can occur by shuffling your feet across the carpet.

Everything changes. Building in a modular concept allows you to rearrange your architecture as the future becomes the present (where you don’t want to be stuck in the past!). You want your lab to morph with the times, and that is best designed on the front end.

The answer is to design with flexibility so that you can make changes over time without enduring the interruptions caused by extensive renovation projects. Modular also simplifies moving. 

Can’t Build? Buy It.

All of the above information pertains to starting a lab business from scratch. But what if you just don’t want the hassle? What if you wanted something turnkey you could just step into by writing a check?

Writing that check, however, invokes the above information on funding only if you have the wherewithal to debit yourself without angst. If not, return to the Funding and Financial Considerations sections. But for argument’s sake, let’s assume you’re ready just to buy your lab business.

“Always look for the fool in the deal. If you don’t find one, it’s you.”

—Mark Cuban 

But this value is much more than the equipment, inventory, and revenue. You must also figure in the futures of this particular lab and the industry itself.

For example, there’s goodwill. Goodwill is the intangibles that assign worth, such as brand, reputation, and even employee loyalty. If the revenue and the books that define it are the body of the business, the goodwill is its soul. Yes, goodwill is a thing, and yes, you can pay extra for it. However, it may open a can of negotiable worms since it’s something intangible, if not philosophical. Ultimately, goodwill impacts revenue, so you must respect it somewhat.

What about the ongoing contracts? Are they guaranteed to continue? Are they likely to leave you? Are new ones likely to come to you? What you really want to feel comfortable with is the continuity of the status quo. After all, you’re not stepping in to rescue a failing business; you’re buying one to set yourself up sweet. Revenue depends, not solely but primarily, upon the contracts with payers in effect and an expectation of them continuing.

If you’re a physician, you already know about the special club you’re a member of, called the in-network club. This is a huge deal because many large networks are closed and locked up from the inside. If you have every reason to believe the in-network relationships will continue, you should expect to pay more for the lab you’re considering. This is because it can take years to “mature” a family of in-network relationships with payers. In fact, buying or buying into an up-and-running lab with a mature camaraderie and solidarity with payers is one of the distinct advantages of buying a currently operating lab instead of starting your own!

Licensing and certifications are certainly already in place in a running lab. All clinical diagnostic labs must have a CLIA license, but additional organizations can also accredit labs. While a major certification or two may suffice, additional accreditations can benefit the right buyer. And if the CLIA licensing is specific to the higher complexity of lab services, this is even more valuable. Some states also require an Out-of-State Processing License if what you’re testing comes to you across state lines. If the lab you’re considering holds such certification to test samples from all fifty states, that is very valuable indeed. Chalk up another plus for buying a lab instead of starting one.

Labs come with stuff. They have upfitted additions, lab equipment, furniture, computers, supporting equipment, delivery vehicles, etc. Typically, the added portion for the stuff should be 50 percent of its actual worth since things devalue over time.

The type of lab matters. Laboratories specializing in blood/chemistry, pathology, molecular, and next-generation sequencing have value scales based on the number and types of assays done.

Location. As in location, location, location.

Staff stability refers to the happiness of the employees (how quick is the employee turnover?), but also the qualifications of the staff. Certified Medical Lab Scientists, Medical Lab Technicians, and a Board-Certified High Complexity Lab Director are very valuable and figure into the total value of the lab. The sales reps should be EKRA compliant (based on the Eliminating Kickbacks in Recovery Act [EKRA]).

Intellectual property can be valuable. Is something innovative being offered, vetted by grants, and supported by the data and medical literature? This is a very wild wild card and can add considerably to the value of the lab.

Follow the money. All of the above is important, but money is the biggest determinant of a lab’s value. In seeking to purchase an established and profitable lab, you do this via evaluations based on multiple EBITDA (according to the previous twelve months) and adding or subtracting from it, depending on the many items I’ve already explored.

You want at least three years of financials.

Small labs usually come in at four to six times EBITDA. ($1.5 million EBITDA will value at $6–9 million, and medium-sized labs typically see a valuation of four to six times the EBITDA. As the EBITDA increases, so can the range of multiples of EBITDA.

Caveat emptor: The increased business created by the recent unprecedented COVID-19 testing could have inflated the reality of a lab’s post-COVID-19 worth, so beware.

Running something as complex and challenging as a laboratory can be thrilling and satisfying. When done right, it is an excellent investment, whether you own it all or share ownership with the investors who made it possible.

It requires a strong business understanding of the industry, a scientific understanding of the testing, a clinical appreciation for the pathology, diplomacy to romance in-network payers, and a willingness to jockey around for a position with the changing times. Such a business is at the top of technology.

The nuts and bolts are challenging but reasonable: financial, operational, and marketing aspects, having a team of employees who are all-in for excellence, public service, and public relations, and an aggressive networking continuum that grows over the years. 

Profitability

The profitability of a lab may be the toughest question to answer in the business of medicine. As I mentioned above, lab revenues can range from a constant state of deficit to a profit in the millions. It all depends on your location, payor mix, and test mix. While a practice depending on bread-and-butter CBCs and chemistries may only be able to generate a few thousand in profits every month, others during times of mass COVID-19 testing made fortunes. There were labs running thirty to forty thousand COVID-19 tests daily at the height of the pandemic, and by garnering a technical and professional component fee of $110 to $120 per test, were generating millions in profits every month. I hope everyone remembers at what human cost and suffering those profits came at, and hopefully we will never see either those sufferings or those test numbers in our lifetime again.

                Here are some basic labs and CPT codes that a nascent lab can expect to do:

1. Complete Blood Count (CBC): HCPCS code 85025
2. Basic Metabolic Panel (BMP): HCPCS code 80048
3. Lipid Panel: HCPCS code 80061
4. Comprehensive Metabolic Panel (CMP): HCPCS code 80053
5. Thyroid-Stimulating Hormone (TSH): HCPCS code 84443
6. Hemoglobin A1c (HbA1c): HCPCS code 83036
7. Prothrombin Time (PT/INR): HCPCS code 85610
8. Urinalysis: HCPCS code 81002
9. Hepatitis C Virus (HCV) Antibody: HCPCS code 86803
10. Vitamin D, 25-Hydroxy: HCPCS code 82306 

The reimbursement for these tests can range from four to five dollars up to forty-five or fifty dollars, depending on plans.

A real-life example of a lab we recently set up included these data and results. The lab was established in two phases. Phase 1 included simpler test, with their attendant lower equipment cost. These tests are called moderate CLIA intensity.

The CLIA Moderate Testing Program included these costs:

1. Chemistry Analyzer: $40,000–$60,000 (brand new)
2. CMP’s (CPT 80053) reimbursement: $10.56 per test
3. Immunoassay Analyzer: $40,000–$60,000 (brand new)
4. Some IBD markers like CRP and Sed rates are moderately complex; however, others like pANCA are highly complex. TGG for celiac is moderate complexity. You can do the blood/serum tests on different immunoassay analyzers. Knowing more about the markers you want to test will determine what equipment you look at.
5. Hematology: $10,000–15,000 (brand new)
6. CBC’s (CPT 85025) reimbursement: $7.771 per test

Typically, a group will implement chemistries and CBCs for reasons that are intangible (for example. running pre-op testing on-site reduces issues with sending patients to a third-party collection site for pre-ops). At ideal volumes, these platforms can be financially viable in-house, but don’t expect it to move the needle on your bottom line. Instead, it should make your life easier and more productive.

However, some lines of testing run on the immunoassay analyzer (vitamins, hormones, protein markers) can be somewhat profitable. This is where a utilization report comes in handy to see if there are any diamonds in the rough.

A practice can gauge the strength of their referrals to see what kind of numbers they can generate.

As an example:

• Five tests per day as minimum viable volumes for bringing in-house CLIA mod analyzer
• Ten to twenty tests per day as ideal viable volumes

Stepping up a notch, we start entering the realm of high complexity tests (CLIA High Complexity).

It’s important to identify the profit generating tests of the lab. These will be high complexity tests. High complexity tests are usually ordered by specialty providers (taking a gastroenterologist here as an example). Ideally, the high complexity testing program not only makes your life easier, but at ideal volumes you operate at 50 percent margins or higher and get paid per sample in the triple digits ballpark.

A few examples would be:

1. Molecular PCR Diagnostics Program:
   Gastrointestinal Pathogen Panels (GIP) (i.e., Clostridium difficile, E. Coli, Salmonella, Shigella, Norovirus, Giardia)
   1. Billing/Reimbursements for these tests would be (based on Illinois, National Government Services, Inc. [NGS MAC-A58963)):
      128. 87505 (three to five pathogen targets)—$128.90
      129. 87506 (six to eleven Gl pathogen targets)—$262.99

• 87507 (twelve to twenty-five Gl targets)—$416

1. Reimbursement is dependent upon ICD-10 codes supporting medical necessity

1. Capital Equipment Costs for these tests would be:
   1. For one (1) testing platform: PC System + extraction platform + ancillary equipment = ~$164,000–$222,000

Again, as I mentioned above, the viability and profitability of a lab is completely user- and site-dependent, and every investor would have to run their own numbers to see if these waters are worth treading.

In summary, opening a successful lab entails meticulous planning, encompassing clear objectives and financial projections. It is not the most complicated of healthcare ventures to set up, but therein lies its greatest peril. There are so many variables that go into the success and failure of the lab business that are beyond your control that it ranks at the top of my list of high-risk medical investments. It is easy to accomplish, but much easier to fail at. Tread wisely.