Why Capitate Genetic and Molecular Test Prices?

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HOW MANY OF YOU LIVED THROUGH THE DECADE OF THE 1990s and experienced the free fall in the prices managed care plans paid for clinical laboratory testing? In California—at the peak of this insanity—some lab companies offered full risk, capitated contracts for as low as 20¢ PMPM (per member per month)!

Also during this decade, the nation’s largest public lab firms found themselves in dire financial straits. I know that when MetPath acquired Nichols Institute in 1994, its executives told the Nichols staff that, at that time, MetPath’s average revenue-per-requisition was about $25, its average cost-per-requisition was about $20, and its average revenue-per-managed care requisition was $10. This caused Metpath to lose $10 for each managed care requisition it handled.

MetPath execs noted that, in 1994, managed care was only about 10% of its total business. But their own strategic planning projected that continued growth in HMO enrollment would lift that number to as much as 60% of MetPath’s total business within five years. Some of you know how the MetPath story unfolded. Because of serious financial losses, its parent, Corning Corporation, spun off that company on December 31, 1996, thus creating Quest Diagnostics Incorporated.

Why do I remind you of those unhappy days? It is because one of the nation’s larger clinical laboratory companies has created a new business unit which is approaching the payer community and selected clinical laboratory organizations with a business plan that calls for it to offer full risk, capitated contracts for genetic tests and molecular diagnostics assays.

As you will read here, the new business is called BeaconLBS. It is an attempt by its lab testing parent to create a company that will manage the pre-authorization of expensive genetic and molecular assays. That is fine and well, as regular readers know that I support the free market as a source of innovation and added value to consumers.

On the other hand, how does any lab company have a winning financial strategy when it uses marginal cost prices to win business, with the expectation that Medicare and other fee-for-service business will offset the fully-loaded cost of performing those tests? Will BeaconLBS’s willingness to write full risk, capitated contracts with major payers lead to a downward spiral in the prices paid for these important genetic and molecular tests? Were that to happen, then every clinical lab in the United States would be forced to bear the resulting financial pain.

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