Executive War College Looks at Threats to Lab Industry

Speakers identify specific market forces that portend a very different future for clinical labs

CEO SUMMARY: Taken collectively, the speakers at the opening session of the 17th Annual Executive War College on Lab and Pathology Management had a powerful message to the nearly 700 attendees. After years of slow movement, a rapid transformation of the American healthcare system is about to unfold. There will be opportunities for clinical labs and pathology groups to prosper, but it will require new business strategies and good management execution.

WITH ALMOST 90 SPEAKERS over the course of three days, this year’s Executive War College on Lab and Pathology Management provided a detailed window on the trends and technologies unfolding in the lab marketplace.

One of the most important sessions took place on the first morning of this year’s conference. A series of speakers looked at the dominant forces actively reshaping both healthcare and the lab testing industry.

There is only enough space in this issue of THE DARK REPORT to bring out the essential points of three speakers. Additional insights from the other presentators will be provided in upcoming issues.

The opening speaker was Robert L. Michel, familiar to readers as the Editor-in-Chief of this publication. His primary message was that the long-standing business model of the independent clinical laboratory is poised to change in significant ways.

Michel called attention to the fact that, over the past four decades, office-based physicians have been the source of 80% or more of the lab test specimens referred to independent laboratories. He noted that, during this time, the dominant business model for office-based physicians has been one of physician ownership, either in the form of a partnership practice or a professional corporation.

However, the era of physicians as owners of their medical practices is ending. Doctors are moving from partners and equity-owners in their medical groups to employees. The pace of this transformation is moving quickly.

“In 2010, Department of Labor Statistics noted that 691,000 physicians were practicing in this country,” stated Michel. “Data from the Center for Studying Health System Change (HSC) show that approximately 73%—or 504,400 physicians—practice in office-based settings. It is this 500,000 physicians who represent the source of the vast majority of specimens and revenue handled by independent laboratories.

“In recent years, a sizeable proportion of physicians have moved from partner/owners to employees,” he continued. “Data published by the Medical Group Management Association (MGMA) show that hospital ownership of medical practices moved from about 20% in 2002 to more than 50% by 2008!

New Criteria for Lab Tests

“Of course, the pace of hospital and payer acquisition of medical groups has accelerated since 2008,” noted Michel. “This shift in the business model of the office-based physician means that the new owners of these medical groups will use different criteria when choosing their laboratory provider.

“Independent laboratories will need to develop a strategy to retain the lab test referrals from these office-based physicians,” advised Michel. “Obviously, if hospitals and health systems are buying medical groups, then the labs of those hospitals and health systems have the inside shot at getting and keeping that business.

“The point here is that the fundamental change in who owns office-based physician groups is a trend which can create new winners and new losers among the nation’s independent laboratories,” concluded Michel. “The shorthand strategy hook is to answer the question: How can our lab best serve doctors who are employees versus doctors who are owners?”

Paul Mango had the challenging task of explaining the transformation of the American healthcare system and how laboratories should respond with strategies to emphasize their value proposition to physicians, patients, payers, and employers. Mango is a Director at McKinsey & Company.

Pricing Health Insurance Risk

Mango’s first point was that reforms and similar changes within the healthcare system are altering the way health insurance risk is priced. “In particular, employers and private payers are now reallocating the financial accountability for medical risk,” he said. “Further, the price bands imposed by the Accountable Care Act (ACA) will further narrow and socialize medical risk.

“An example of this is how employers are raising the deductibles and the out-of- pocket requirements for employees,” continued Mango. “This can be seen in the increased enrollment in high-deductible health plans (HDHP). In 2012, it is estimated that 21 million people have HDHPs, compared to just 4 million people in 2006.”

Mango next discussed the types of reimbursement initiatives underway. He identified four different care models that incorporate payment bundling. They are:

  • Full capitation
  • Accountable care organization
  • Episodes of care
  • Patient-centered medical home
  • Basic pay-for-performance (P4P)

 Two Drivers to Use of IDNs

The integrated delivery network (IDN) is another form of reimbursement reform. “On one side, payers are driving this,” observed Mango. “Payers are affiliating or acquiring health systems and supporting full clinical and operational integration to reduce costs, improve member experience, and manage referral volume. In Pennsylvania, the Highmark/West Penn Alleghany Health System relationship is one example.

Mango Looks at How Hospital Laboratories Should Transform in their Role as Providers

AMONG THE ISSUES TO BE ASSOCIATED accountable care organizations (ACO), Paul Mango of McKinsey & Company, highlighted the fact that the existing economic basis for ACOs will be misalignment between medical risk in the health economy and the way it is financed. In his view, this will be exacerbated by the Accountable Care Act of 2010 (ACA). However, this will open the door for hospital laboratories to support the transformation in the three dimensions he describes below.

Implications of ACOs for Lab Service Providers:

Role transformation along 3 dimensions

1) OUTREACH

  • Within a hospital-led ACO, an effective outreach program becomes much more important. This includes not only the logistics of specimen transport and test result delivery, but of specimen draw as well.
  • A more likely development is the formation of physician-led ACOs, in which case the hospital will need to have a competitive offering along many dimensions with the national laboratory service companies.
  • Where insurers induce ACO-like formation, their benefit and reimbursement designs will likely guide patients and doctors away from using the hospital lab.

2) LABORATORY BENEFITS MANAGEMENT

  • Establishing laboratory formularies and testing algorithms, and then enforcing them will be a new, value-enhancing role
  • Adherence to evidenced-based standards of testing
  • Substituting advanced diagnostics for other factor inputs (e.g., companion diagnostics and costly biologics).

3) FROM INFORMATION TO INSIGHTS

  • At the individual patient level, using laboratory data to derive insights into early onset of disease, or broader practice patterns.
  • At the population level, discerning incidence of disease, trajectory of health status.

“On the other side, provider systems can build a health plan specifically to leverage the brand name and to drive volume to the provider system,” he explained. “Intermountain Healthcare in Utah is pursuing this strategy.”

At a minimum, clinical laboratories and pathology groups need to pay increased attention to developing bundled payment models of care that will eventually change how laboratories are reimbursed for lab testing services. The different care delivery models described by Mango show the breadth of employer and payer interest in moving away from fee-for-service payment and toward other models, particularly bundled payments.

The next area of healthcare transformation that Mango discussed involved the Medicare program. He first identified the strategic drivers that the Centers for Medicare and Medicaid Services (CMS) will use to improve patient care and lower the growth in Medicare spending. There are three goals:

    • Better care for individuals.
    •  Better health for populations with respect to educating beneficiaries about the upstream causes of ill health.
    • Lower growth in expenditures by eliminating waste and inefficiencies while not withholding any needed care that helps beneficiaries.

He then explained the two Medicare ACO gain-sharing models; a one-sided version and a two-sided version. “The important thing to understand is that for primary care providers (PCP), there is worthwhile upside potential from achieving total cost of care savings,” noted Mango.

Primary Care Bonus

“Assume a 10-physician PCP ACO with 5,000 Medicare beneficiaries (500 patients per doctor),” he began. “Currently, the median PCP annual salary in this country is $183,000.

“Should this PCP achieve just a 2% total cost of care savings with a shared savings of 25%, that would equate to a bonus per physician of $15,000 (or about 14%),” said Mango. “Raise that to a 5% savings on total cost of care and a 90+ percentile on quality. In this instance, each physician could receive more than $100,000 of bonus.”

Mango also noted that Medicare Advantage plans are likely to gain favor with Medicare beneficiaries. CMS data shows that enrollment in Medicare Advantage is 12.8 million in 2012. That is a jump of 10% from enrollment of 11.7 million in 2011. This number represents 32.3% of the 39.3 million seniors enrolled in Medicare in 2012.

For clinical laboratories and pathology groups, a shift in enrollment by seniors away from Medicare Part B and over to Medicare Advantage plans will not be an auspicious development. That’s because private health insurance companies administer the Medicare Advantage plans and these private payers tend to purchase laboratory services based on the commodity mindset; that is, all lab tests are equal, so why not pay the lowest price per test?

In fact, the danger of commoditization was one major point made by the speaker who preceded Paul Mango during this session. Marc Grodman, M.D., Chairman and CEO of Bio-Reference Laboratories, Inc., spoke to the need for laboratories to work cooperatively to address the two “Cs” of the lab market. One C is competition and the other C is commoditization.

“Everyone in today’s audience has a stake in seeing that vigorous and healthy competition continues in the lab testing marketplace,” noted Grodman. “However, the growing size and clout of the national lab companies is approaching the tipping point where it will become very difficult for smaller lab companies to compete in a financially-sustainable way.”

Grodman links competition with commoditization. He explained the connection between these two dynamics. “Reduced competition for laboratory testing will be a bad outcome for all stakeholders in the American healthcare system, ” he observed. “It makes it easier to cut reimbursement if just a handful of very large lab companies remain. At the same time, smaller labs are consistently at the forefront of innovation and delivering a higher level of service to physicians and their patients. Yet it is this group of laboratories that will disappear if competition skews in favor of larger national laboratory companies.

Lab Test as a Commodity

“Similarly, all labs should be concerned about the steady drive by payers to commoditize laboratory testing,” explained Grodman. “Laboratory tests are not a commodity. Every laboratory offers a unique combination of quality, accuracy, and clinical expertise that lie behind the results printed on the lab test report.

“Market forces currently are working to reduce today’s level of competition and drive down the price of lab tests,” he concluded. “That is why the lab testing industry should find ways to work more effectively together to preserve competition and prevent commoditization.”

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