Lab CEO Sees Three Trends Cutting Volume, Revenue

Clinical lab testing industry being reshaped by major changes in healthcare and lab market

CEO SUMMARY: Following the sale of his hospital lab outreach business to a national lab company, former CEO James Fantus told THE DARK REPORT about the significant trends he saw unfolding in the Northeast. They include: a shrinking number of physician customers for labs; a rising number of patients with high-deductible health plans, resulting in lower lab test utilization; and increased competition from national labs that force regional labs to match the large labs’ prices just to remain in contention for hospital and health plan contracts.

AT THE END OF FEBRUARY, the acquisition of Clinical Laboratory Partners of Newington, Conn., was completed by Quest Diagnostics Incorporated. Formerly owned by Hartford Healthcare and founded in 1998, CLP has been one of the most successful hospital lab outreach businesses in the United States.

For more than a decade, James Fantus served as President and CEO of Clinical Laboratory Partners. Prior to his arrival at CLP, Fantus had several decades of experience leading a number of outreach lab organizations owned by hospitals and health systems.

Consequently, Fantus is among a handful of lab industry executives serving today whose experience reaches from the era of “any willing provider” and “usual and customary fees” of the 1980s right up to the current era of ACOs, integrated clinical care, and precision medicine. This experience gives Fantus a unique perspective on what is truly different in today’s lab testing market, particularly when assessed against the evolving healthcare trends he dealt with at CLP.

To learn Fantus’ view on the current viability of hospital laboratory outreach programs, THE DARK REPORT asked him to discuss his insights and recommendations about strategies and actions labs should employ to add value. This is part one of a two-part series.

“Since 2010—about the time that the Affordable Care Act became law—wave after wave of changes have rolled over the clinical lab industry,” stated Fantus. “These changes include sharply declining payments, narrow networks, and fewer opportunities for growth.

a Big Share of Trouble

“Certainly other healthcare providers have experienced many of these same problems, but clinical labs seem to have borne a disproportionate share of trouble,” noted Fantus. “I consider three developments to be most significant for clinical labs.

“First is a shrinking number of physician customers for labs,” he said. “Second is the rising number of patients with high- deductible health plans, resulting in lower test utilization.

“Third, increased competition from large national labs forces regional labs to match the large labs’ prices just to remain in contention for hospital and health plan contracts,” stated Fantus.

For Fantus, regional labs still have several ways to compete effectively and prosper in the current marketplace. “One effective business strategy is to partner or collaborate with large regional health sys- tem networks that are aggressive at acquiring and retaining market share,” suggested Fantus. “However, labs must first address several specific challenges.

“The biggest challenge is probably the most profound one and that is, we are running out of customers,” declared Fantus. “That was one factor that prompted the sale of CLP to Quest.

“Our physician customers are already aligned with a hospital or health system,” he said. “And, many physicians are selling their practices to health systems or joining bigger practices. Combined, just those two factors mean there are fewer independent doctors for our sales staff to call on.

“The way health systems operate here in Connecticut is probably similar to the way they operate in other states, meaning they’re all aggressively competing against each other. They rarely cooperate to any degree and don’t want to,” he added.

“That means our lab serves the client base we have, but once you get away from those physicians, it’s very hard to pull any of them away from the other health systems,” Fantus commented. “So, for me, the biggest change I’ve seen in the past five to six years has been the disappearing, private practicing physician.

“The other challenge labs face is one we’ve seen coming for years: the effect of high-deductible health plans,” he added. “To bring down the cost of healthcare, many employers and health plans are making patients pay for part of it. The effect is lower utilization of healthcare services— not just for lab tests but for all the other clinical services offered by a health system.

“Now you have a one-two combination of disappearing physician customers and the remaining lab clients ordering fewer tests,” stated Fantus. “As a clinical lab, you can reduce your costs only so much. If a patient asks that two or three tests be dropped out of an order, the lab must still perform those one or two tests that remain.

“Costs to operate your patient service centers remain; you still have phlebotomy costs; and all the normal costs of doing business are still present,” he noted. “That is why the reduced number of specimens means it’s tougher and tougher to make the operating margins we once did.

payers are Cutting Costs

“When specimen volume declines, a lab’s cost-per-test rises. It’s simple economics,” said Fantus. “Unfortunately, these two trends are widespread now. They are the key negative drivers affecting the lab outreach business, at least here in Connecticut. Most labs cannot do anything about these trends.

“At the same time, payers are trying to reduce their costs and are asking labs to get their costs in line with those of the large national laboratories,” he explained. “Payers know they can switch to Quest or LabCorp if needed.

“But some payers may not want to make that switch because they have solid relationships with local and regional labs,” continued Fantus. “So if the costs for a lab like CLP are much higher than those of Quest or LabCorp, then that could be a problem. At the very least, it means payers can threaten our lab to get our costs in line by telling us that we will see no further increases in our rates until our fee is equal that of the national labs.

“As a result, CLP was not seeing annual rate increases as we did in years past,” he added. “In the last two years, CLP held the line on its reimbursement rate because health plans have a strong emphasis on reducing what they want to pay.

“With those three big trends, how does a lab like CLP overcome negative factors like these?” he asked. “This challenge is more difficult if the parent company faces many of the same problems. Cash is short and the health system wants to cut costs and make changes for the future.

“CLP’s parent company, Hartford Health Care, is like many others in that it has seen patients moving away from inpatient care to outpatient settings for at least the past 20 years,” Fantus explained. “That means their revenue is declining too.”

In part two of this two-part series, James Fantus discusses the lab’s opportunity to contribute value through integration of healthcare data.

Contact James Fantus at 860-696-8091 or jfantus@clpct.com.

Health Insurers in Connecticut Are Not Yet Embracing New Payer Reimbursement Models

DESPITE THE MOVE AMONG health plans to adopt risk-sharing contracts, health insurers in Connecticut have been reluctant to move away from fee-for-service payment, at least for now, stated James Fantus, former President and CEO of Clinical Laboratory Partners.

“Payers here seem to be resisting alternative forms of payment,” he explained. “CLP asked for at-risk contracts, but so far payers have refused to do it.

“It may seem counter-intuitive, but I think the reasons are obvious: Health plans don’t want us to become like an insurance company. That’s their job and they don’t want to give it up,” he opined.

“If a provider like Hartford Health is managing the entire continuum of care, then what role is left for the insurance company?” Fantus asked. “Why do we even need health insurers?

“Despite all the talk about accountable care organizations and risk-sharing contracts, there’s conflict across the country. Health insurers do not want another Kaiser Permanente to develop,” he said.

“If other health systems in Connecticut developed ACOs, these ACOS would cut out the middleman—the health insurance company—which means ACOs would deliver lower cost care,” he said. “That may be why we have not seen the development of ACOs here in Connecticut. That, plus the big insurers here—Aetna and Cigna—want to manage the care for their own employees.

“This could be the next big battle in the development of ACOs and how care gets paid for,” he continued. “In fact, in our market, we’ve seen capitation go away over the past couple of years. About 20 years ago, 35 hospitals banded together in an organization called the Connecticut Hospital Lab Network. All the hospital labs in our state participated, except four.

“This was when Quest was getting all the capitated contracts here,” he recounted. “The consortium’s sole purpose was to go to the payers as a single contracting entity and it worked!” recalled Fantus. “Through this consortium, the hospital labs eventually won all the capitated contracts.

“But since then, capitated contracts have been disappearing,” he noted. “Here in Hartford, we’re down to only two capitated contracts. Last year there were three. One was with Anthem, one was with Connecticut Care, and one was with Oxford.Then Anthem got out of its capitated program.

“In five years or so, we’ve seen enrollment in capitated contracts go from hundreds of thousands of members down to the tens of thousands. It could be that capitated contracts don’t work well with high-deductible health plans and HDHPs could make capitation unnecessary,” he concluded. “Just look at all the HDHP plans the insurance exchanges offer. That’s what insurance will look like in the coming years,” he predicted.

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Enter Your Login Credentials
This setting should only be used on your home or work computer.

×

Send this to a friend