Can Clinical Laboratories Adjust To ‘New’ Healthcare System?

Anticipating end of fee-for-service reimbursement

CEO SUMMARY: Month by month, there is increased clarity in the path the American healthcare system will follow as hospitals, health systems, and physicians integrate clinical care, manage populations, and practice personalized and precision medicine. While these changes play out, clinical labs and pathology groups will need to align their diagnostic services to meet the changing needs of hospitals and providers—because laboratories will soon be paid differently for the added-value diagnostic services they provide.

BY NOW, MOST LAB ADMINISTRATORS AND PATHOLOGISTS recognize that the nation’s health system has already changed in fundamental ways. That makes it essential for every lab organization to have business and clinical strategies that allow it to make the transition to be effective providers in the healthcare system of tomorrow.

To help lab executives with their strategic planning, THE DARK REPORT offers this overview of several important trends now transforming the American healthcare system. It is expected that, as these key trends play out, they will irrevocably change the way clinical laboratories are organized and how they deliver lab testing services to the hospitals, health systems, and physicians they serve.

As healthcare’s transformation moves forward, three fundamental changes will occur to the long-standing business model of the clinical laboratory industry. They are:

  1. Labs will be organized in new ways to collect specimens, perform tests, and report results;
  2. New reimbursement models of bundled payments and budgeted payments will dictate a radically-different financial model for clinical labs (indeed, for all providers); and,
  3. Top-performing labs will become sophisticated in how they use information technology to collect, store, analyze, and create value from the huge volumes of data that ongoing advances in molecular and genetic testing technologies will produce.

As part of our analysis, it is important to recognize that the effect of these fundamen-tal changes to the American healthcare system will be uneven across different regions of the country. Some regions will experience change at a faster pace than other regions. Remember the era of the closed-panel, gatekeeper HMOs of the mid-1990s? States such as California, Florida, and Minnesota experienced rapid and widespread adoption of this model of health insurance. Meanwhile, many states went through the decade of the 1990s with only a small proportion of patients insured under this type of HMO. The current cycle of healthcare transformation will produce the same variation in how rapidly providers in different states adopt new models of care.

Watch Change Leaders

Also, within different regions, it is helpful to watch the leading health systems. They are generally first to respond to healthcare trends by introducing new care delivery models and offering clinical services in innovative ways.

The successes and setbacks of these trailblazing health systems are already providing valuable insights into what works and what doesn’t as the United States pursues a new vision of integrated healthcare that uses precision medicine to diagnose disease earlier and keep consumers healthier and out of hospitals.

For example, the integration of care and the creation of regional—even statewide— integrated health systems and provider networks is advancing swiftly. This is particularly true in such states as Arizona, Minnesota, and Wisconsin.

In Arizona, Banner Health is the main player to watch. In Minnesota, besides Mayo Clinic in the south part of the state, the Minneapolis-St. Paul metropolitan area has at least five health systems that have already achieved tight integration. From this foundation, they are pushing forward to improve patient care still further.

In the Minneapolis-St. Paul area, Fairview Health Services, Allina, Health Partners, Health East, and CentraCare Health often get national recognition for their accomplishments.

In Wisconsin, two health systems seem to anchor the statewide market. One is Aurora Health in Milwaukee, with 15 hospitals and 1,400 physicians. Its primary competitor, also based in Milwaukee, is Froedtert Hospital & Medical College of Wisconsin, with three hospitals and 2,000 physicians.

Each of these health systems is participating in a statewide provider network. Aurora is part of “abouthealth,” which includes five other health systems. Froedtert participates in the Integrated Health Network of Wisconsin which includes at least three other health systems.

Lab administrators and pathologists are likely to gain the most useful insights about healthcare’s changes by studying progressive health systems such as the ones described above in Arizona, Minnesota, and Wisconsin. These systems are comprised of multiple hospitals that formed a system, then began to acquire or ally with office-based physicians and other clinical service providers.

This model distinguishes these health systems from such well-known innovators as Kaiser Permanente and Geisinger Health, for example. Kaiser and Geisinger each have decades of experience as integrated care providers that own most or all of the hospitals and physicians within their respective systems.

By contrast, such organizations as Banner, Fairview, and Aurora are still in the process of inventing themselves. They are dealing with the challenges of integrating clinical care in ways that allow physicians, hospitals, rehab providers, home care, and nursing homes to deliver seamless care to patients—regardless of the setting.

provider-Owned health plans

Another element that distinguishes Kaiser and Geisinger from other health systems is that these two organizations have had their own health insurance product for decades. By contrast, Banner, Fairview, Aurora and other health systems are just beginning to explore how their integrated clinical care organizations will relate to both the health insurance products they may own, and to other health insurers.

The consolidation of hospitals, physicians, and other providers in communities across the nation is a positive trend for local labs and pathology groups. As the delivery of care becomes more tightly integrated, a faster time-to-answer for diagnostic tests will become more important to providers than the cheapest cost per test.

Faster Time-To-answer

However, faster time-to-answer comes with a trade-off: a higher price for those lab tests. Here is why. To achieve the cheapest cost per test, it is necessary to funnel huge volumes of specimens into a large lab facility to achieve economies of scale. In today’s marketplace, the national lab companies accomplish this by having super-sized labs in different regions of the country.

Essential to this business model of clinical laboratory testing is the need to collect lab test specimens from doctors’ offices on a weekday afternoon, fly them to a big regional lab facility that evening, perform the tests during the night, then report the results the next morning or a few days later.

Essentially, the trade-off for clinicians in ACOs, medical homes, and for health insurers is that, in order to obtain the lowest price for lab tests, they must accept a delay in reporting time. In a tightly-integrated ACO or medical home, providers know they are being paid to improve patient outcomes.

Thus, having faster access to lab test results allows speedier interventions within these integrated care organizations. It also improves the throughput and productivity of providers, in part because they can avoid having to hold patient files—and a final diagnosis to start treatment—overnight or for several days while waiting the laboratory test results to be reported.

Eight Types of Reimbursement Models Now In Use within the U.S. Healthcare System

WITH MOST HEALTHCARE EXPERTS PREDICTING the demise of fee-for-service reimbursement to hospitals, physicians, and clinical labs, the question that is regularly asked is, “What takes its place?” According to McKesson Corporation, there are eight basic types of healthcare reimbursement models under development or already in use.

Labs will be paid differently under these models. That is why lab administrators and pathologists will want to understand how each reimbursement model works and what type of strategy is best to ensure that their lab gets adequate payment.

  • Fee-for-service: Patients or payers reimburse the healthcare provider for each service performed. A drawback is that no incentive exists to implement preventive care strategies, prevent hospitalization, or to take any other cost-saving measures.
  • Pay-for-coordination: Goes beyond fee-for-service by coordinating care between the primary care provider and specialists. Coordinating care among multiple providers can help patients and their families manage to a unified care plan and can help reduce redundancy in expensive tests and procedures.
  • Pay-for-performance: In a pay-for-per- formance (P4P) or value-based reimbursement environment, healthcare providers are compensated only if they meet certain metrics for quality and efficiency. Creating quality benchmark metrics ties physician reimbursement directly to the quality of care they provide.
  • Bundled payment or episode-of-care payment: Providers are reimbursed for specific episodes of care such as inpatient hospital stays. This healthcare payment model encourages efficiency and quality of care because there is only a set amount of money to pay for the entire episode of care.
  • Upside shared savings programs (Medicare or commercial): Incentives for providers paid with respect to specific patient populations. A percentage of any net savings realized is given to the provider. Upside-only shared savings is most common with Medicare Shared Savings Program (MSSP) Accountable Care Organizations, but all MSSP participants must move to a downside model after three years.
  • Downside shared savings programs (Medicare or commercial): These models include both the gain-share potential of an upside model, but also the downside risk of sharing the excess costs of healthcare delivery among providers and payers. Because providers have greater risk with this model, the upside opportunity potential is larger in most cases than in an all-upside program.
  • Partial or full capitation: Patients are assigned a per-member-per-month (PMPM) payment based on age, race, sex, lifestyle, medical history, and benefit design. Payment rates are tied to expected usage regardless of whether the patient visits more or less. Just as bundled payment models, healthcare providers, such as ACOs and medical homes, have incentives to help patients avoid high-cost procedures and tests in order to maximize their compensation. Under partial-capitation or blended-capitation models, only certain types or categories of services are paid on capitation.
  • Global budget: This model involves a fixed total dollar amount paid annually for all care delivered. However, participating providers can determine how dollars are spent. Global budgets limit the level and the rate of increase of healthcare costs and budgets typically include a quality component as well.

These are reasons why the further consolidation of providers and efforts to integrate clinical care more tightly will create new opportunities for local clinical labs and pathology groups. Local labs—often based in hospitals—are the labs that can provide the fastest time-to-answer. Of course, local labs must provide those speedier lab test results at a reasonable price-per-test, but cheapest price per test won’t be the sole determining factor.

New payment Models

Another trend now unfolding in healthcare is the abandonment of fee-for-service reimbursement in favor of new payment models. This trend will have profound influence on the long-standing operational and financial model of clinical labs and anatomic pathology groups.

These new payment models all share a common goal: they are designed to disincentivize providers from earning money based on the volume of transactions. Instead, they are constructed so as to incentivize clinicians to deliver value in patient care. That value can be measured in several ways. One way is improved patient outcomes. Two other ways to measure value are fewer medical errors and reduction in the overall cost per healthcare encounter.

Serious Threat To Labs

Another feature of the new reimbursement models is seldom discussed. This feature represents both a serious threat to the clinical lab industry as it is currently structured and a once-in-a-lifetime opportunity for nimble, innovative labs that respond in appropriate ways.

The new reimbursement models now arriving in the healthcare marketplace have a common trait. In one fashion or another, the reimbursement is global. Instead of a discrete FFS payment going to each provider who treated the patient, these reimbursement models pay a lump sum and the providers involved in that patient care episode must divide the funds. (See sidebar.)

Bundled reimbursement is a good example. In recent years, clinical labs and pathology groups have seen the Medicare program change payment for selected episodes of care from FFS to bundled reimbursement.

On January 1, 2014, the federal Centers for Medicare & Medicaid Services implemented a scheme in which it bundled reimbursement to hospitals and their laboratories for outpatient clinical lab tests under the Hospital Outpatient Prospective Payment System (HOPPS). Previously, clinical lab tests performed on outpatients were paid separately under the Clinical Laboratory Fee Schedule (CLFS).

In such cases, the clinical laboratories involved in running tests for those patients must negotiate with the other providers to assign a portion of the bundled payment to them that is adequate to cover the cost of lab testing.

More Budgeted payment

Another global reimbursement model gaining traction is budgeted payment. In simplest terms, the payer gives the integrated healthcare system (ACO or patient-centered medical home, for example) a flat payment per patient per month. The health system then provides all the care needed to the population of patients it serves for that budgeted amount.

All of the trends described above will not transform healthcare overnight. It will take several years for health systems, payers, and employers to make the transition away from current payment methods and care delivery models.

Thus, clinical laboratories and anatomic pathology group practices have time to prepare for these changes. It is important to recognize that clinical and financial strategies that worked in 2010 will not work in 2020. Innovative lab executives and pathologists will show the way forward to the rest of the lab industry.


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