Laboratory Offers Early Lessons in Positioning for Success with ACOs

Contracting with ACOs has potential for risks, rewards

CEO SUMMARY: Accountable care organizations (ACOs) are already leading the shift from fee-for-service reimbursement to population payment. ACOs are leading healthcare’s evolution to preventive care, wellness, and better management of patients with chronic disease. This evolution will require that all providers, including clinical laboratories, must shift from delivering volume to producing value. In Phoenix, Arizona, Sonora Quest Laboratories has already entered into contracts with multiple ACOs. Its CEO shares insights about the process and early lessons learned.

UNDER THE AFFORDABLE CARE ACT, the U.S. healthcare system is shifting focus from one that addresses the acute care needs of patients to one that delivers wellness, illness prevention, and chronic disease care.

At this moment in time, the development of accountable care organizations (ACOs) is the primary way that hospitals, physicians, and other providers are responding to this trend. However, the big question is: how will clinical laboratories be paid by ACOs?

An early answer to this question may be found in Arizona, where Sonora Quest Laboratories has already entered into contracts with several ACOs organized and operated by Banner Health, one of its two owners. According to Sonora Quest’s CEO, contract talks between his lab and the ACO quickly moved away from fee-for-service payment for lab testing in favor of value-based reimbursement.

“Labs must respond to this transition from acute care to wellness, illness prevention, and chronic care,” stated David A. Dexter, President and CEO of Sonora Quest Laboratories, LLC, and Laboratory Sciences of Arizona, LLC, both in Tempe, Arizona. “Instead of building their business by increasing specimen volume to achieve economies of scale, clinical labs must shift toward a businesses model centered upon delivering value.”

This spring, Dexter was a featured speaker at the 18th annual Executive War College, sponsored by THE DARK REPORT, in New Orleans, Louisiana. His topic was “Contracting with ACOs and Health Insurance Exchanges (HIXs): Early Lessons in Establishing Lab Test Value and Price.”

Sonora Quest Laboratories is a joint venture partnership between Banner Health in Phoenix, Arizona, and Quest Diagnostics Incorporated, in Madison, New Jersey. The partnership of a health system and the nation’s largest lab company puts Sonora Quest Laboratories in a strong position for the transition to value-based care that accountable care organizations (ACOs) will deliver under health reform, Dexter added.

“Value is going to be even more important in the coming months and years because the health system is moving away from volume,” declared Dexter. “This is a warning for all pathologists and clinical lab directors. The old lab paradigm that volume is your friend may not be true under the ACO model of care delivery.

“That’s because ACOs are going to transition over time from fee-for-service payment to population payment,” he explained. “As ACOs do this, that change will be truly transformational as clinical care concentrates away from acute care and emphasizes preventive care, wellness, and managing patients with chronic disease.

Essential Role of Lab Testing

“Lab work is essential to delivering illness prevention, wellness, and chronic disease management,” continued Dexter. “In fact, that work is right in our sweet spot because labs affect greater than 70% of all diagnostic decisions and our data represents more than 50% of the elements in electronic health records (EHRs). These numbers show that health information exchanges (HIEs), ACOs and HIXs will not be effective without lab test result data.

“In addition—and this is the key message I want to deliver—is that the formation of the ACOs and HIXs, in tandem with the expansion of Medicaid under Obamacare that takes place in 2014, all will drive a profound, fundamental shift in healthcare,” he emphasized. “How this unfolds and directly affects what we do as clinical laboratories is not easy to predict.

“The projections by experts indicate that the coming changes will be significant,” stated Dexter. “For example, Banner Health expects that ACOs will reduce hospital census rates by about 22%. This drop will cause a corresponding decline of 7% to 10% in hospital lab testing. That’s profound.

“Many of us have already seen significant shifts in our regional health insurance markets,” he noted. “In Arizona just three years ago, 64% of people were covered by commercial, traditional employer-based health insurance. Today that number has declined to 46%! “

Of equal significance, among those 46%, about a fourth of them are in high-deductible plans,” added Dexter. “That’s higher than the national average for high-deductible health plan enrollment, which is about 19%.

“By design, high-deductible health plans force consumers to focus more on their discretionary spending for their healthcare services,” he said. “That’s only natural. If you’re responsible for the first $3,000 to $10,000 of spending out of your own pocket, you will want to look long and hard at how you will spend that money.

“To be successful in this new marketplace, HIEs, ACOs, and HIX networks will need data,” noted Dexter. “You can think of an ACO as a mini-HIE. ACOs will need to connect to HIEs for robust exchange.

“Here in Arizona, our HIX is in development,” he continued. “We have a number of ACOs in different stages of deployment, and—in our HIE—we have eight health plans working collaboratively with major health care providers in the state in a Phase I deployment.

“Other markets will be different,” he added. “But what they all have in common is that lab data is essential for ACOs seeking to coordinate patient care and for HIXs serving all other elements of the healthcare marketplace.

“For this reason, labs are an enabler for the newly-reformed healthcare system,” stated Dexter. “But few of the people establishing ACOs and HIXs recognize this fact. They are focused on structure and governance. They often fail to see the value of lab data. That’s why pathologists and lab directors need to be out there waving the flag.

Lab Needs to Send Message

“Waving the flag is important, as our own experience has shown,” he said. “Here’s why: We have a national health plan that has a contract with a national lab that is a competitor of Sonora Quest Laboratories.

“That national health plan has already delegated those exclusive lives to the ACO in Arizona and the ACO is using Sonora Quest,” noted Dexter. “That’s significant for us because it means we have taken some of the business that would have otherwise gone to a national lab company.

“The bigger lab companies have economies of scale and significant IT capabilities.” he observed. “For those reasons, they may be better suited to serve ACOs than hospital labs in some places. But the deciding factor may be your lab’s value proposition—meaning how your lab delivers more value to the ACO and its providers.

“Stated differently, any lab that simply reports lab test results will probably be treated as a commodity,” said Dexter. “Even if it offers a low price per test, such a lab is vulnerable to losing the business if another lab comes along and offers more value to the ACO. This is why clinical labs need to do more that just produce lab results.

Labs Need to Offer Value

“Laboratories that just produce lab results generally will be last at the ACO contract table,” declared Dexter. “With few exceptions, that means such labs will not be ACO participants.

“In the case of Sonora Quest Laboratories, ACOs in our community see us primarily as a data partner, not so much as a lab,” he noted. “We recognize the value we can deliver as a data partner and the opportunities for us to be paid by the ACO for the value of the data and the clinical knowledge that we provide.

“This shift in our lab’s business strategy is important,” Dexter continued. “That’s because our nation’s transition to accountable care is a transformational change on a scale as yet unseen. It is essential that all lab directors and providers recognize a key point: Every provider in healthcare—including labs—needs to reassess and
establish its value proposition. Otherwise, that provider will not be successful in meeting the needs of its customers as they go through healthcare reform.

“In Arizona and in other markets around the country, it’s possible to see that the walls of traditional healthcare are shifting,” he commented. “As the walls shift, everyone in healthcare is hedging their bets. It means that yesterday’s competitor could very well be tomorrow’s collaborative partner. In the past two years, companies that once viewed us with a jaundiced eye as a competitor no longer view us that way.

“Here’s one example,” stated Dexter. “Among its many responses to the shift toward proactive healthcare, Banner is forming a joint venture with the largest insurance plan in the state, Blue Cross Blue Shield of Arizona.

“That means the largest hospital system in the state has formed a formal joint venture with the largest health plan in the state,” he said. “Such a move was almost unheard of just a few years ago; it’s transformational.

“Banner also purchased a Medicare Advantage health plan,” added Dexter. “This strategy, when taken to its height, makes it possible for Banner to eventually become an integrated health system similar to Kaiser Permanente in California or Intermountain Health System in Salt Lake City, Utah.

“Recognizing the need to shift away from acute care and toward wellness, illness prevention, and chronic disease management, Banner Health is currently building 24 new health centers around Maricopa County,” said Dexter. “Ranging in size from 6,000 to 120,000 square feet, these health centers will allow Banner to move to the episodic side of care and thus will no longer be focused exclusively on building volume on inpatient care.

“All these changes show the fundamental ways that healthcare is changing,” he stated. “In the clinical lab business, the old paradigm of growth depended on increasing the volume in diagnostic testing handled by a lab organization.

“Today, the new paradigm for growth in the lab business is diagnostic testing combined with information services,” he observed. “In fact, at Sonora Quest Laboratories, our vision is to be the trusted leader in diagnostic testing and information services.

Lab Data Represents Value

“But we believe it’s not enough to have the data and the technology to share it with providers,” stated Dexter. “We must also learn to leverage it to deliver the value that ACOs need, recognize, and for which ACOs are willing to pay.

“More specifically, labs have to find a way to deliver actionable information to providers to help them improve quality and reduce costs,” noted Dexter. “We all know providers—be they hospitals or physicians—are interested in reducing costs.

“The numbers show the opportunity,” he continued. “For example, an astounding 78% of total healthcare spending in the United States goes to treat patients with chronic disease.

“Next, just 5% of patients account for more than 50% of the total U.S. healthcare spending,” noted Dexter. “In contrast, nearly 50% of the U.S. population accounts for only 3% of the total healthcare spending.

“Where does this money go?” asked Dexter. “Hospital inpatient costs alone represent 31% of total spending and pharmaceuticals represent 23% of total U.S. healthcare spending. In contrast, national laboratory outpatient spending—including anatomic pathology—represents only 3.8% of total spending—or about $59 per patient encounter.

Part of the Solution

“These numbers show that labs are not the cost problem in the U.S. healthcare system.” he observed. “To the contrary, clinical labs should be a big part of the solution, which means we need to leverage the data we have to help ACOs manage patient care.

“Here’s how that works. In many ACOs, an insurer will designate a block of its patients—perhaps 5,000 lives—to an ACO,” said Dexter. “The insurer will then assign 100% of the financial risk of caring for those lives to the ACO. Essentially, to care for these patients, the insurer will give the ACO a flat fee payment for each member each month or each year.

Bundled Payment to ACOs

“Insurers also will be paying ACOs a bundled payment for patients with certain conditions,” he explained. “Insurers will ask ACOs to deliver all the care those patients need for specified conditions, such as asthma or diabetes, for a single bundled payment.

“At Sonora Quest Laboratories, we’ve put a lot of time and effort into learning how those bundled payments will work in Arizona,” said Dexter. “We cannot share that data and most of our numbers might not apply to other markets anyway.

“But I encourage all labs to understand how these bundled payment systems work in their markets,” he noted. “For the lab to be paid appropriately, it must know how each patient in an ACO will get care and how the lab will be paid for work done for each patient.

“Further, this will be true whether the patient is a Medicaid beneficiary, is in a Medicare Advantage plan, or is a commercial health insurance patient,” explained Dexter. “For each one, the differences in how bundled payments are developed will be significant.”

The executive team at Sonora Quest Laboratories has already engaged in payment negotiations with different ACOs. Several valuable lessons have been learned.

“The most important issue facing the lab industry is how ACOs and similar care models will pay for lab testing services,” noted Dexter. “Payment of lab testing services comes as a result of how payers adjudicate claims.

“Keep in mind that one major area of waste in the U.S. healthcare system is the huge amount of money that is spent on claims adjudication,” he said. “That opens the door for a clinical lab to add value by working with the ACO and the insurer to better manage the adjudication of lab test claims.

“Every lab director knows the problems that result when lab test claims are rejected,” noted Dexter. “That problem may get much worse in the future because ACOs are not set up to adjudicate claims. Thus, lab directors would be wise to anticipate this issue and develop strategies to help ACOs and payers efficiently process lab test claims.

“Next, labs are typically last to the negotiation table,” he added. “Most all the financial arrangements have already been set within the ACO. That’s a problem for clinical labs.

Claims Adjudication

“ACOs could partner with or contract with health plans to adjudicate claims and some will do so,” noted Dexter. “Keep in mind that, in moving to bundled payment for patients with chronic diseases, for example, these are complex cases and ACOs will not have all the cost data that health plans have. However, if an ACO is moving to bundled payment for patients with specific conditions, why would the ACO want to pay extra to have an insurer handle claims?

“Our lab saw an opportunity to address this issue,” he continued. “First, we took historical rates from our fee schedules, or capitated rates if we had those in place. We compared these arrangements to our revenue run rates.

“Next, we brought those numbers to our ACOs,” he said. “This allowed the ACOs to look at our revenue run rates as their cost run rates. It was these numbers that were the basis for our contracts with the ACOs.

“The intent by both parties is to make spending for lab tests revenue cost-neutral at the beginning of the ACO’s operation,” explained Dexter. “That was our approach. As a result, each one of our ACO product contracts is different. That was a surprise to us.

“We had another surprise regarding co-payments,” he said. “As I mentioned earlier, depending on the product involved, ACOs will expect patients to pay substantially larger deductibles and co- pays. We already have one ACO product in which patients pay the entire lab bill as a co-pay! We never anticipated that.

“High deductibles and co-pays for patients are ways that ACOs and insurers are shifting the downside of financial risk to patients,” noted Dexter. “But, for the most part, labs are not participating in the potential financial upside with their ACO partners.

“We looked at how our lab could share in the financial upside risk and had internal and external lawyers look at how to do so,” recalled Dexter. “Unfortunately, the preliminary result of that review is that sharing in the upside financial risk may not apply to labs. Every lab should do its own legal analysis on this question.

“Following that research, we viewed the issue in this way,” he continued. “If our lab testing is less than 3.8% of the total cost, why should our lab accept risk for such a small upside potential—especially when utilization is expected to increase with the management of chronic disease?

“Another last caution I would offer about financial risk and ACOs comes from our experience in Arizona,” he stated. “It’s been our experience that ACO infrastructure vendors tend to over-promise and under-deliver.

A Word of Warning

“We have examined a number of ACOs both in Arizona and in other states,” explained Dexter. “Two of the ACOs that we have been working with have already jettisoned and replaced their ACO infrastructure because they were dissatisfied with it. That’s to be expected as ACOs develop and lessons are learned. But it is certainly a lesson for labs contracting with ACOs because a lot of interface work may have to be modified: Be forewarned.”

THE DARK REPORT believes that Sonora Quest Laboratories may have signed contracts with more ACOs than any independent clinical laboratory, other than the two national lab companies. For that reason, the experience and insights shared here represent the first public discussion of how a respected independent lab company is actually transacting business with ACOs in its service region.

High Co-Payment Risks

One useful insight is that, in the earliest stages of ACO formation, the laboratory is in a position to offer a capitated rate to the ACO that is revenue neutral to both parties. Moreover, because the capitated rate eliminates the need for the ACO to spend time and money to adjudicate individual, fee-for-service lab test claims, it considers this arrangement to be added value.

This early experience provides insights that other pathologists and lab executives can use in their negotiations with ACO administrators. It also shows several different ways that lab leaders can develop services that are value-added to ACOs.

“…any lab that simply reports lab test results will probably be treated as a commodity.. such a lab is vulnerable to losing the business if another lab comes along and offers more value to the ACO.”

–David A. Dexter

“Today, the new paradigm for growth in the lab business is diagnostic testing combined with information services.”

–David A. Dexter

“labs are typically last to the negotiation table. Most all the financial arrangements have already been set within the ACO. That’s a problem for clinical labs.”

–David A. Dexter

“The intent by both parties is to make spending for lab tests revenue cost-neutral at the beginning of the ACO’s operation… As a result, every one of our ACO product contracts are different.”

–David A. Dexter

As ACOs Take on Many Forms, Lab CEO Offers One Workable Definition

AS THEY DEVELOP ACROSS the country, accountable care organizations (ACOs) are taking on many different forms.

In fact, David A. Dexter, President and CEO of Sonora Quest Laboratories, LLC, in Tempe, Arizona, warned that each ACO is uniquely suited to serve its own market and so it is not like another. As a result of seeing a number of ACOs under development, Dexter offers a workable definition.

“We’ve seen many of definitions of ACOs but the one I use most frequently is this: An ACO is essentially a partnership between health insurers (either for-profit, non-profit, or government), hospitals, and primary care physicians,” he said. “The ACO is designed to manage the entire continuum of healthcare for a set population of patients. The ACO’s goal is to improve quality and patient care outcomes and reduce costs.

“ACOs can be structured in different forms,” stated Dexter. “Banner Health, an ACO in Arizona, owns 800 physician practices and has affiliations with 1,500 physician practices. All these physicians are in what’s called the Banner Health network. They actually created their own non-profit entity with their own management team to contract with the Banner Health ACO.

“Also in Arizona, the insurer Health Net delegated a certain number of lives from its HMO into an ACO,” stated Dexter. “Aetna also delegated a certain number of lives into a typical ACO model.

“Meanwhile, Blue Cross Blue Shield of Arizona has developed a joint venture ACO with Banner Health System,” he continued. “My point here is that each of these ACOs has a different mix of lives that is unique. In general, this means that, if you’ve seen one ACO, you’ve really seen one ACO because each has a different structure and mix of patients.

“In the United States, the federal Centers for Medicare & Medicaid Services (CMS) has designated 32 Pioneer ACOs,” said Dexter. “Banner Health happens to be one. There are 33 health outcomes measures that CMS will use to monitor patient outcomes.

“In addition to the Pioneer ACOs, there are more than 400 other ACOs that CMS has certified and 200 others are under development,” he added. “It’s estimated that 25 million to 30 million people are already enrolled in these ACOs. That number is expected to rise significantly. For example, Banner Health currently has 185,000 members in its ACOs and it projects that number will increase to 1.2 million members within two years.”


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