UnitedHealth’s Decision Reveals Lab Market Shift

UnitedHealth uses new Esoterix contract to expand doctor choice and control leakage

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CEO SUMMARY: News that UnitedHealth Group, Inc. added Esoterix, Inc. to its national laboratory services contract is a big story. UnitedHealth’s decision to expand the laboratory panel demonstrates that factors other than lowest price played an important role. The move to supplement its two national labs with a third laboratory option indicates that UnitedHealth’s existing lab panel was failing to meet specific expectations.

MANAGED CARE CONTRACTS for laboratory testing services in the 1990s were primarily negotiated on the basis of lowest price and a lab’s ability to provide coverage throughout a designated region.

However, the new national lab services contract between UnitedHealth Group, Inc. and Esoterix. Inc. was negotiated around different objectives. As noted in the lead story here, UnitedHealth has at least two different goals for this pact.

First, by adding Esoterix to the national lab test provider panel, it expands the choices available to its physicians. Second, UnitedHealth expects the Esoterix contract to help reduce leakage.

Goals Can Reveal Problems

Business goals are often intended to resolve business problems. From that perspective, we can reasonably conclude that UnitedHealth is having at least two problems with its existing panel of national lab test providers. One problem must involve physicians’ dissatisfaction with the laboratory services offered them (thus the need to expand their laboratory choices).

The second problem must be leakage that results from two sources: 1) physician unhappiness over poor lab service options; and/or, 2) the desire of physicians to refer their reference and esoteric lab tests to academic centers and other non-contract laboratories. These preferences may range from a physician’s unique lab service needs to his/her longstanding relationships that often began in medical school.

UnitedHealth’s decision to use the Esoterix contract as a way to reduce leakage connotes at least two probable facts. First, the most serious source of lab test leakage within UnitedHealth’s national lab contract arrangements must be specialty testing. Esoterix is not a “chem screen/CBC” laboratory. It offers reference and esoteric tests.

By selecting Esoterix as the third national laboratory provider, UnitedHealth indicates it is not as concerned about the leakage of routine tests as it is about leakage of high-value reference and esoteric tests. Such tests are reimbursed at much higher rates than chemistry panels and CBCs. Effectively, this leakage is much more expensive for UnitedHealth.

Dictating To Physicians

The action to improve physician choice probably means physicians are chafing at what they consider to be arbitrary limits on their ability to direct specimens to the laboratory of their choice. It is a well-demonstrated fact that physicians do not like to be told what to do by payers. It is highly likely that UnitedHealth has heard a significant number of complaints from physicians about the limited options for laboratory testing. Expanding the panel is one way to respond to those complaints.

Moreover, UnitedHealth’s expansion of the lab services panel also implies that the laboratory services delivered by the existing two national laboratories fail to meet the expectations of some physicians. If UnitedHealth was fielding a regular barrage of complaints from physicians about lab test service deficiencies, that would certainly be motivation for it to take the unexpected step of adding a third lab provider to its national panel.

Major Business Decision

One interesting question raised by the UnitedHealth/Esoterix contract is this: did general physician dislike of the two blood brothers play a role in UnitedHealth’s decision to expand its national laboratory panel?

In many regions of the United States, local lab competitors to the two oligopoly laboratory companies firmly believe that a significant number of physicians in their market harbor an outright distaste for either or both of these two companies. That distaste may date back years, when physicians watched a public lab company come into town, acquire the high-service local laboratory, then consolidate its testing into a faraway regional lab center. These physicians were then forced to endure lots of service breakdowns and other operational changes that displeased them.

Did a combination of this lingering discomfort and a natural inclination to rebel against a payer’s limited panel of laboratory options play a significant role in UnitedHealth’s assessment of why it needed to expand its lab panel? That question will be answered by whether or not Esoterix rapidly captures testing from UnitedHealth’s physicians.

Letting The Market Decide

The market will tell us. If Esoterix executes well and builds a steadily growing share of lab test volume, it will be one reasonable sign that service issues were a problem; or that physicians were waiting for an option that would allow them to switch away from either of the two blood brothers.

One fact should not be overlooked. This is not a casual business decision. UnitedHealth will devote considerable resources in money and management time to implement the decision to add a third laboratory to its national contract. That fact also reinforces the conclusion that physician dissatisfaction and the actual level of leakage, combined, are a significant problem within UnitedHealth Group.

For laboratory administrators and pathologists, the fact the UnitedHealth Group is willing to expand its laboratory provider panel is an important event. It could be an early sign that the dual strategies of economies of scale and a “one stop shop” contract approach preferred by many payers fails to meet the unique laboratory testing needs of physicians in their network.

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