“Free Testing” Strategy Stirs the Pot in Tenn.

Quest Diagnostics runs afoul of major payer as it seeks to build specimen volume

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CEO SUMMARY: In Tennessee, the state’s Medicaid HMO plan has been at odds with Quest Diagnostics Incorporated, which is using the “free testing” strategy to expand its share of the market. In recent months, TennCare Select has taken active steps to insure its physicians understand that Quest Diagnostics is not a contract provider for “included testing” and is only a provider for “excluded testing.”

“ FREE TESTING” IS STILL A STRATEGY used by some national laboratory companies. In recent months, its use in Tennessee has created a dust-up between Quest Diagnostics Incorporated and Blue Cross/ Blue Shield of Tennessee’s (BCBS) TennCare Select program, the state’s Medicaid HMO.

This dust-up between BCBS and Quest Diagnostics is a good example of the negative effects that result from use of the “free testing” strategy. It also illustrates why continued use of the “free testing” strategy by the nation’s largest laboratory companies has the potential to bring negative financial consequences down on the entire laboratory testing industry.

To understand this threat posed by continued use of the “free testing” strategy, it is important that laboratory directors and pathologists know about several dimensions in this unfolding story. The first element involves Medicare compliance standards and when the use of “free testing” meets the requirements of a specific fraud alert published by the Office of the Inspector General (OIG) in December 1994.

Next, it is helpful to understand how Quest Diagnostics’ use of the “free testing” strategy put it in conflict with the TennCare program. Quest Diagnostics is not a contract provider for TennCare Select’s primary laboratory testing agreement. The dispute between these two companies provides a real-world example of why use of the “free testing” strategy does not always create a win-win outcome for either the clinical lab or the health insurance plan.

The third dimension involves short- term and long-term ramifications to the entire laboratory industry that result from continued use of the “free testing” strategy by the industry’s largest companies. For lab executives and pathologists with long memories, it parallels the financial damage done throughout the 1990s as a consequence of the decision earlier in that decade by the public laboratory sector to bid for HMO contracts using marginal cost pricing.

Understanding The Strategy

First, an explanation of the “free testing” strategy. As used by national laboratory companies, it seems to be applied in two basic situations. In the first instance, if the lab company held a managed care contract and lost it during the rebidding process, it wants to protect its access to the non-contracted specimens from its client-physicians.

It will approach physicians with an offer to waive testing fees for that HMO’s patients as a way to encourage the physician to continue sending his/her non-contract lab testing their way. Under this arrangement, the physician does not have to split specimens between one or more laboratories. Instead, the national laboratory will accept 100% of the physician’s laboratory specimens, perform the requested tests, and report the results.

No Bill Sent by Nat’l Lab

But for patients covered by the contract which excludes the national laboratory, no bill will be sent to the health plan, the referring physician, or the patient. The lab company writes off this business as a way to retain access to non-contract specimens, including Medicare specimens.

This is the marketing strategy used by Quest Diagnostics in Detroit last year, after Joint Venture Hospital Laboratories (JVHL) wrested the last major exclusive HMO contract away from Quest Diagnostics in a competitive bidding process. JVHL is a regional laboratory network that represents hospital lab outreach programs.

The contract was with the Health Alliance Plan (HAP), involving about 125,000 lives in the HMO. On May 1, 2002 JVHL became the contract provider. Around that time, Quest Diagnostics sent its sales reps into physicians’ offices that served HAP beneficiaries and began offering “free testing” for HAP HMO patients as a strategy to retain access to the non-HAP specimens (which include Medicare patients) and overcome JVHL’s competitive advantage as the contract lab provider. THE DARK REPORT was first to cover this story and describe how all the public laboratory companies had formal corporate policies governing use of a “Waiver of Charges to Managed Care Patients” policy. (See TDR, August 26, 2003.)

Second Situation

The second situation where national lab companies use the “free testing” strategy is when they are in a regional market and they do not hold managed care contracts. Because they are not a contract provider, they find themselves at competitive disadvantage to the laboratories holding those contracts. In order to build specimen volume and market share, they approach physicians and offer to waive testing fees for patients covered by insurance plans to which they are not a contract lab services provider. One benefit from this arrangement is that the physician will not have to split specimens between one or more laboratories.

This is the situation in Tennessee. For several years, LabOne, Inc. of Lenexa, Kansas has held the exclusive lab testing contract for TennCare Select, the state’s Medicaid managed care plan. Tennessee is a state where Quest Diagnostics currently has a relatively small market share. As it began to beef up sales and marketing efforts in Tennessee in recent years, it found that LabOne enjoyed significant competitive advantage because of its lab testing contract with TennCare Select. One reason was because of the relatively high proportion of Medicaid patients in Tennessee.

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“Free Testing” Offered

To overcome LabOne’s advantage with its exclusive TennCare contract, sales reps from Quest Diagnostics began to offer “free testing” arrangements to physicians in Tennessee. The structure of these arrangements is designed to meet the requirements of the OIG’s fraud alert of December 1994. That fraud alert described how and when a provider could “waive charges” for the proportion of a physicians’ referral work that was covered by a managed care contract that excluded the provider, while continuing to accept and charge for all the other patients referred by the physician. (See page 7-11 for a more complete explanation.)

In Tennessee, it appears that Quest Diagnostics’ use of the “free testing” strategy attracted enough physicians to create problems for Tenncare Select. The problems go beyond “leakage.” As most lab managers know, when an exclusive lab testing contract exists between an insurance plan and a laboratory, any specimens tested by a non-contract laboratory have “leaked” out of the primary contract. Among other consequences, it means the health plan will pay a higher-than-contracted rate to the non-contract lab, which raises the health plan’s budgeted expenses for laboratory testing services.

For TennCare Select, there were several unwanted consequences from the “free testing” strategy implemented by Quest Diagnostics to physicians in Tennessee. Because Quest Diagnostics waives charges for TennCare patients, TennCare did not get bills from Quest Diagnostics. But TennCare also does not get accurate utilization data on those patients and does not get lab test data for tests performed under the “free testing” arrangements that the lab has with client-physicians. This negatively impacts the ability of TennCare to compile complete and accurate HEDIS reports, to monitor utilization, and to measure outcomes.

Over time, Quest Diagnostic’s marketing efforts apparently caused a growing number of physicians to switch their laboratory testing business to Quest, including the TennCare Select specimens. Eventually TennCare noticed this pattern and the diminished number of lab tests for beneficiaries enrolled in this program, along with the impact it had on accurate and complete reporting for HEDIS, utilization, and outcomes assessment.

TennCare Select Reacts

In August, TennCare Select sent a letter to physicians specifically stating that Quest Diagnostics was not a “participating provider in TennCare Select for all laboratory testing services.” The letter further stated that it had requested that Quest Diagnostics specifically release a “written notice of clarification to providers that their [contract] relationship with Blue Cross/Blue Shield of Tennessee, Inc. had not changed. Providers should be informed that Quest Diagnostics is only contracted to provide those laboratory services identified by the existing exclusion list.”

To respond to TennCare’s request to clarify its contract status with the TennCare lab testing contract, Quest Diagnostics sent a letter to physicians in Tennessee, dated August 28, 2003. The letter is reproduced on the previous page. In it, Quest Diagnostics describes its current contractual relationship with TennCare Select.

Reaction By Payers

This running disagreement between Quest Diagnostics and TennCare Select highlights a fascinating dimension about the use of “Waiver of Charges to Managed Care Patients” strategy by laboratories to work around the fact that they do not hold a contract with key managed care plans. As demonstrated by TennCare’s public steps to insure that its network physicians know which laboratory holds the contract for “included testing,” payers can view the “free testing” strategy as detrimental to the interests of its beneficiaries and the network of providers it has developed.

This may be counter-intuitive, since many would expect managed care plans to consider “free testing” as something that helps lower the overall cost of its healthcare services. However, there are powerful reasons why this is not true. Clients and regular readers of THE DARK REPORT know that reducing medical errors and improving the quality of healthcare services have become major goals within the American healthcare system.

Emphasis on Outcomes

Pressure on providers and insurers to demonstrate the quality of their service and publish outcomes is shifting emphasis away from utilization control (a primary objective of the closed-panel HMOs introduced during the 1990s). Now the emphasis is on measuring outcomes and collecting accurate information to demonstrate that outcomes and patient safety in an insurer’s network are improving over time.

To accomplish both goals, health plans must collect complete and accurate data. This goes beyond simple utilization data. Payers want to see clinical data, including lab test results, and use this data to measure outcomes. If “free testing” has been done by laboratories outside the health plans contracted provider network, the long- term effects of losing this information outweigh the short term benefits of not having to reimburse for those tests.

In the last 15 months, THE DARK REPORT has briefed its clients on two examples where major regional health plans (in Michigan and Tennessee) have publicly declared their objections to an out-of-network laboratory using the “free testing strategy.” Both examples demonstrate that there are more negative risks to this marketing strategy than the obvious exposure to potential allegations of Medicare fraud and abuse if the strategy is implemented inappropriately.

Now A Hot-Button Issue

Uneven compliance within the laboratory services industry has become both an emotional and financial issue with growing numbers of laboratory administrators and pathologists. In stories which follow, THE DARK REPORT will provide more details on compliance issues. One story will reproduce the OIG’s December 1994 fraud alert and describe how some public laboratories have established corporate policies to utilize this fraud alert as a sales tool. This will be followed by a legal analysis of compliance issues triggered by the “free testing” strategy.

Building from this information, THE DARK REPORT will offer predictions about how and why the “free testing” strategy may lead the laboratory industry into another cycle of financial cutbacks reminiscent of capitated contracts and full risk agreements offered by laboratories in the 1990s.


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