Lab Site Visits in NZ Show Impact of Lab Contracting

Use of exclusive contracts to drive down cost of lab tests means most cities have one private lab

CEO SUMMARY: In some ways, the story of the New Zealand’s health system’s 15-year strategy to reduce the cost of clinical laboratory testing is a cautionary tale for public laboratory companies in the United States. During THE DARK REPORT’S site visit to several private labs in New Zealand last week, the consequences were easily seen and understood. Well-equipped, modern labs can only deliver a menu of about 150 lab tests and are not encouraged to innovate in ways that advance patient care.

OVER THE PAST DECADE AND A HALF, the healthcare system in New Zealand has been uncommonly aggressive at squeezing private sector clinical laboratory companies in an effort to achieve significant cost savings.

It is these persistent and ongoing efforts to reduce the reimbursement paid for clinical laboratory testing that makes New Zealand an interesting case study. The district health boards (DHB) in many regions of the country have indeed controlled the year-over-year increase in the cost of lab tests. But this has come at a price.

Sole Private Lab Providers

After more than 15 years of efforts to pay less for lab tests and to restructure lab testing services in city after city, this island nation has left itself with one private laboratory company in almost every region. For that reason, going forward, health program officials now have limited options to leverage the value of medical lab tests in ways that improve patient outcomes and substantially reduce the overall cost of care.

More specific to the interest of executives at public lab companies here in the United States, New Zealand provides a fascinating business case study. It shows how use of sole-source contracting policies—in this case by the regional DHBs—can destroy what was once a vibrant and highly-competitive market with multiple private lab companies jostling to win the lab testing referrals of office-based physicians.

New Zealand’s experience in lab test contracting is a cautionary tale for all pathologists, laboratory scientists, and lab administrators. A health system which evolves to allow just one private lab company to provide services in a city or metropolitan area loses a great deal. It no longer benefits from the innovation and clinical service excellence that results when two or more private lab companies compete for the lab test referrals of office-based physicians.

During my visit to New Zealand last week, the consequences of communities reliant on just one private lab provider was quite visible. Among the labs I visited were two private labs—one on the north island and one on the south island.

Because of contract awards by the respective DHBs, each of the private labs that I visited can be considered a “monopoly” provider of lab tests to office-based physicians located in each lab’s designated service region. Over the 15 years that DHBs have followed this contracting policy, it is now common to provide a five- year contract term with a renewal clause of another three or five-year term.

Newest Lab Automation

What I found striking on my site visits is that both of these private laboratories had well-designed lab facilities with state-of- the-art lab equipment. Each lab had the newest pre-analytical and analytical automated line for chemistry and immunoassay. In one case, the vendor was Beckman Coulter. In the other case, the vendor was Roche Diagnostics.

However, these labs are not utilized to their fullest potential. The reason is that their sole-source contracts with their respective district health boards only cover between 125 and 150 routine assays.

What happens to the rest of the lab tests that originate in physicians’ offices? The DHBs typically have those reference and esoteric tests sent to local hospital labs in the area. More complex reference testing is handled by a tertiary hospital lab in the north island and another tertiary hospital lab in the south island.

Because the sole-source contract typically encompasses about 125 routine tests (mostly chemistry, hematology, some microbiology, and some histopathology), there is a practical consequence. The contract lab is constrained from introducing new test methologies that might offer improved diagnostic accuracy or a faster time to answer.

At each lab I toured, the pathologists and lab scientists can identify numerous opportunities where their laboratory—as equipped and staffed—could deliver additional value to the referring physicians were they able to introduce improved assays or faster methodologies.

Another consequence of the DHB’s contracting policy as it pertains to lab testing is that, in the two cities where I visited private laboratories, all office-based physicians utilize paper test request forms. This requires the labs to hand-enter the data from these paper test requisitions.

By contrast, it was around 1990 that private labs in the United States, at their own expense, began introducing systems that allowed office-based physicians to electronically order lab tests and electronically receive the lab test results. Today, accessed via a web browser, these solutions only need access to the physician’s practice management system to pull the demographic data on the patient needed for the test request.

Beyond the immediate cost savings that come from eliminating paper lab request forms and paper lab test reports, these arrangements also improve patient care because of greater accuracy and the fact that the physician can have electronic access to lab test results (via the web brower-based system) as soon as the patient results are posted to the LIS.

Other Ways to Cut Costs

I mention this because, in New Zealand, the contracts crafted by the DHBs are written in such a way that, over the past 15 years, there has been no incentive for the private lab providers to implement similar cost-effective solutions that eliminate paper request forms and paper lab test reports. The benefits are reduced costs associated with lab tests, as well as better physician access to patient lab test data.

It should be added that the district health boards and local physicians are beginning to recognize the deficiencies of the sole-source lab test contract strategy. This may lead to better recognition of the value of having competing private lab providers in the same city or region. At the same time, that would affect specimens flowing to local hospitals. These are complex politics and the end game has yet to be determined.

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