Philly Blue Cross Contract: LabCorp In; Quest Out

Following an aggressive bidding war, IBC selects LabCorp and boots Quest Diagnostics from its network

CEO SUMMARY: Independence Blue Cross in Philadelphia decided to select Laboratory Corporation of America for its new eight-year managed care contract that took effect on July 1. However, the real story is the aggressive bidding war between the two national labs. Sources say LabCorp bid an aggressively low price of between $1.00 to 1.60 per member per month for routine lab tests, and, in exchange for that low rate, IBC agreed to exclude Quest Diagnostics from its network.

PHILADELPHIA IS KNOWN AS THE CITY OF brotherly love. But this summer, in this city, there is not much love between the two blood brothers.

On July 1, Laboratory Corporation of America took over the contract to serve members of Independence Blue Cross (IBC) in eastern Pennsylvania. This dislodged Quest Diagnostics Incorporated, which had held the IBC contract for seven years or more, according to sources.

These sources said that, over the next eight years, the IBC contract is estimated to be worth between $120 million and $150 million per year. It is a major managed care contracting coup for LabCorp, since IBC is believed to have more than 2 million members in Pennsylvania and more than 3 million nationwide, according to published reports.

During negotiations in the fall and early winter of 2013, LabCorp reportedly bid an aggressively low price for routine lab tests, a price that was attractive enough to win the bidding war against Quest Diagnostics for the IBC contract, sources said. Quest had been getting $3.75 per member per month for routine tests and even though Quest was willing to go lower, it was not willing to go as low as LabCorp’s offer of possibly less than $1.00 to $1.60 PMPM, sources told THE DARK REPORT.

In exchange for offering such a low PMPM rate, LabCorp insisted that Quest Diagnostics be eliminated from the IBC network and IBC agreed, sources said. For this article, THE DARK REPORT interviewed lab directors and contracting executives in Pennsylvania and the Northeast. All asked to remain anonymous.

Managed care contracting executives from a number of different lab companies have told THE DARK REPORT that the bidding wars between the two national labs for important managed care contracts are intensifying. More importantly, these observers believe that both national labs are employing aggressive contracting strategies intended not to just win them the business, but to exclude independent and clinical labs from a health insurer’s network.

 Market Strategy Precursor

That is why LabCorp’s play to win IBC’s Philadelphia regional market—even while insisting that Quest Diagnostics and perhaps other labs be excluded from the network—is likely to be repeated in other markets nationwide, sources said. Based on the IBC agreement and some other contract negotiations, multiple sources told THE DARK REPORT that the two national labs will become more aggressive at using managed care contract negotiations to eliminate lab competitors from health plan networks.

“This new strategy differs from what we’ve seen in past years,” stated one lab director in Pennsylvania. “Typically, a lab would negotiate with a payer because it wanted to get into a market or obtain preferred status. It might fight just to stay in a contract. But in past years, we didn’t see national labs telling payers to exclude their lab competitors as one of the terms of the managed care contract.

Targeting Competitors

“During negotiations in the past, labs would make the case to health insurers that their service was superior,” the lab director said. “Or they would offer special pricing in exchange for developing special programs for certain patients.

“Labs knew that physicians wanted to have a choice among lab providers,” the lab director added. “But now the game is for the two national labs to put other labs out of the network. The big guys dangle lower rates to a health plan in exchange for an exclusive contract.

“This tactic hits below the belt because now the winning lab no longer needs to compete on quality, service, or turn- around time,” emphasized this lab director. “With no other lab in the payer’s network, the winning lab is no longer obligated to perform to a high standard. And, once you lose your competitive edge, then service, quality, and attention to physician satisfaction and patient care go down. Today, these contracts are all focused on price.”

Narrowing the Network

Health plans have found that narrow networks help them to control costs and the national lab companies seek to take advantage of this strategy. “This appears to be the main strategy of the bigger labs,” noted a managed care VP at another lab. “As part of narrowing the network, a big lab will tell the health plan they can cut out-of-network spending by eliminating other labs as contract providers.”

A strategy like this creates a challenge, though, because it frustrates the doctors who want choice. For example, doctors in the Philadelphia market were mostly happy with Quest Diagnostics, sources said. “When doctors are unhappy, they may continue to use out-of-network labs and that drives up spending,” a lab director commented.

To control out-of-network leakage, representatives of LabCorp and IBC are expected to begin visiting those physicians who are not using the in-network labs. During these meetings, the representatives will ask what the doctors want from LabCorp in terms of service and quality. Then they will aim to deliver what the physicians want.

“But if the doctors still don’t stop sending tests to the out-of-network labs, then IBC may start to consider financial penalties,” a lab director said. “Further, in some cases, IBC may eliminate doctors from the network. Independence Blue Cross could also hit physicians with finacial penalties in 2015.”

Some of the Pennsylvania lab executives interviewed for this article said they are still in the IBC network. However, they observed that some patients were confused early this summer about which labs were in network and which were out of network. IBC sent a letter to members dated June 1 that said LabCorp would be the network laboratory services provider.

Market Confusion

IBC’s June 1 letter to physicians said: “Independence Blue Cross (IBC) has selected Laboratory Corporation of America Holdings (LabCorp) as its primary provider of outpatient laboratory services, effective July 1, 2014. Also effective July 1, Quest Diagnostics will no longer be included in the IBC network. In addition to LabCorp, all other laboratories currently in our network will remain as in-network providers with the exception of Quest Diagnostics.”

Even though the letter is clear that other labs remain in network, some sources said that a significant number of patients and physicians believed all work had shifted to LabCorp. This was such a problem that some labs felt the need to raise awareness of their network status.

In an effort to retain their customers, several clinical labs in Southeastern Pennsylvania took out advertisements in newspapers. These ads explained that the labs remained in the IBC network and would continue to serve their physicians and patients in the five counties of Southeastern Pennsylvania: Bucks, Chester, Delaware, Montgomery, and Philadelphia.

Contract Renewal Concerns

While these other labs were allowed to remain in the network for now, lab directors and contracting executives worry about what may happen when their labs’ contracts come up for renewal.

“At the moment, we are still in the IBC network,” said one lab executive. “I don’t know what’s going to happen when our contract renews but IBC has to give us notice before that date. Few labs of any size can survive on PMPM rates of $1 to $1.60 or so.”

“Actually, we anticipate that IBC will keep regional labs in its network for a while longer just to make the doctors happy,” predicted another lab manager. “I think there are two reasons why this will be true.

“First, LabCorp has a much smaller presence in Philadelphia and Southeastern Pennsylvania than does Quest Diagnostics,” she continued. “That is why IBC has probably allowed smaller labs in the area to stay in the network. It needs their phlebotomy sites and existing service infrastructure, which LabCorp does not have today.

“Second, IBC and LabCorp will have their hands full working with large numbers of physicians who must make the time-consuming and unwelcome switch from Quest to LabCorp,” she added. “That is another reason why IBC probably has left the local labs in the network. But many of us are concerned that once IBC and LabCorp have made the transition under this new contract, there will come a time when the local labs will find themselves excluded from the network, leaving only LabCorp.”

Will Physicians Switch Labs?

There is the larger question of whether the physicians will want to refer tests to LabCorp. It will take time to answer that question. During the seven years of Quest’s most recent contract with IBC, it had 50 patient service centers and a clinical lab in Horsham, just miles outside of the Philadelphia City Center. Its quality, service, and TAT made it a tough competitor, lab directors said.

Conversely, local sources stated that LabCorp must hustle to open PSCs and will suffer some because of a longer turn- around time. That is because it sends specimens out of state, sources said. As a result, physicians have not been getting the same day or next day results they received from Quest Diagnostics, several lab directors said.

Did Independence BC Contract Talks Revolve Around Only One Key Element: Lab Test Pricing?

FOR THE PAST SEVEN YEARS Quest Diagnostics Incorporated had the contract to serve members of Independence Blue Cross (IBC) in Southeastern Pennsylvania. It was getting a decent rate for routine testing of almost $4 per member per month, sources told THE DARK REPORT.

Quest also had an extensive list of esoteric, genetic, and molecular tests that were carved out of the PMPM rate. For these tests, IBC paid Quest on a fee-for-service basis, sources said. Getting FFS payment for these higher-cost tests is the key to making low PMPM rates for routine tests work, the sources said.

Under a Medicare Advantage contract with Quest Diagnostics, IBC expected to pay about $8 million to $9 million per year for lab testing. However, because Quest continually added more esoteric, genetic, and molecular tests to its menu, IBC’s lab costs rose, sources said. In a recent year, the total that IBC paid to Quest for that portion of the lab work was almost double—at about $15 million—from what it expected to pay, a lab executive said.

These sharp increases in payment are what opened the door for LabCorp to begin contract discussions with IBC last year, multiple sources said.

“Quest Diagnostics had its sales reps increase their efforts to detail doctors about molecular and esoteric tests, because these tests would be billed off capitation and as fee-for-service claims,” said one lab executive. “In fact, that’s what Quest and LabCorp do. They essentially discount deeply the routine tests to the payers. Then they go into the doctor’s offices and upsell those doctors by pushing the molecular and esoteric versions of tests. The next thing you know, the health plan is spending much more than what it should be spending.”

Once LabCorp saw an opening with IBC, its sales team initially offered a rate that was lower by 30¢ to 40¢ PMPM, another executive said. “They can offer this modest savings off the capitated rate for the routine tests because LabCorp is the king of upselling the esoterics and other tests. In our market, we think they are more effective at getting doctors to order more molecular tests than Quest Diagnostics.

Contract Renewal Talks

“During the negotiations with IBC, Quest wouldn’t go below $3 PMPM, at least at first,” noted a different lab manager from Pennsylvania. “But then at one point, we heard that Quest offered a cap rate that was below $2 and it planned to make up the difference with esoteric and other higher-priced tests. Those esoteric tests can total about 50% or more of a health plan’s total spending and that’s all billed to the payer at fee-for-service rates.”

When LabCorp offered a cap rate of $1.60 PMPM or less, sources speaking to THE DARK REPORT were not clear if IBC even went back to Quest for another bid. What is known is that IBC took the lower PMPM price and agreed to LabCorp’s demand to eliminate Quest from the IBC network, sources said.

The IBC contract positions LabCorp to greatly increase its share of the greater Philadelphia market. “Before losing the IBC contract, Quest was probably controlling as much as 80% of the $120 million to $150 million that IBC was paying yearly for lab testing,” observed one source. “Now Quest may struggle to hold on to as little as $20 million yearly of that market. That’s a huge hit for Quest. At the same time, LabCorp is primed to expand its market share of the Philadelphia metro.”

 

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