3 Blood Brothers Differ On Surcharge Strategies

National labs take different approaches toward repeal of New York’s laboratory test surcharge

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CEO SUMMARY: United we stand, divided we fall. On the issue of laboratory test surcharge repeal in New York, the three national labs took independent positions. Was the clinical industry served by this lack of unanimity? More importantly, do the actions of two of these national laboratories reveal a possible predatory attitude toward independent commercial labs and hospital laboratory outreach programs?

SHOULD THE LABORATORY INDUSTRY show a united front in efforts to repeal New York’s 8.18% surcharge on laboratory testing? Most laboratory executives would probably say yes.

After all, here’s an unprecedented, unwarranted tax on a single category of healthcare provider: independent licensed clinical laboratories. No other class of non-hospital healthcare provider is required to pay the surcharge.

Further, every impact of the surcharge would be negative to clinical laboratories, while money from the surcharge was earmarked to benefit hospitals. Given this basic analysis, it should be a simple decision for any licensed laboratory in New York State: oppose implementation of the surcharge and seek repeal of the enabling legislation.

When the New York State Clinical Laboratory Association (NYSCLA) convened meetings to discuss this issue, it found general agreement among independent laboratories. However, there was neither consensus nor support by all three of the blood brothers, Laboratory Corporation of America, Quest Diagnostics Incorporated and SmithKline Beecham Clinical Laboratories. Of the three, only SmithKline has supported and participated in the programs organized by NYSCLA member laboratories.

. . . there was neither consensus nor support by all three of the blood brothers, Laboratory Corporation of America, Quest Diagnostics, Inc. and SmithKline Beecham Clinical Laboratories.

“Both LabCorp and Quest had already quit NYSCLA about one and a half years ago,” stated Marvin Numeroff, who was president of NYSCLA at that time. “When this surcharge issue popped up, both labs reacted independently from NYSCLA. Each hired a lobbyist and is pursuing their own strategy in Albany.”

As noted in earlier issues of THE DARK REPORT, NYSCLA’s strategy focused on two areas: a lawsuit to obtain injunctive relief and a campaign to repeal the legislation.

The linchpin strategy of the surcharge repeal effort was to alert the public that New York State was taxing laboratory healthcare services for the first time. This was accomplished by including a notice in every laboratory test bill sent to patients.

Regular Meetings

“During the fall of 1996 we met repeatedly with lawmakers and regulators over this laboratory test surcharge,” stated Kirby Hannan, who represents NYSCLA in legislative matters. “On one hand, it was made clear to us that any publicity would create unfavorable con- sequences with legislators. On the other hand, after four months of meetings it became obvious to us that they considered the deed a ‘fait accompli.’ There would be no satisfactory response to our request for reconsideration.”

Educating the public exposed the lab industry to risk and controversy with some lawmakers. However, it proved to be the one strategy which produced results.

“Obviously, delivering 100,000 patient bills per day to constituents with notice of a new tax scheme hit a sensitive nerve with the overtaxed public,” said Hannan. “Lawmakers were not pleased, but this sustained public outpouring caused them to respond to the surcharge issue. Bills to repeal the laboratory test surcharge have been sponsored and entered in both the Senate and the Assembly.”

Would this have occurred without public pressure? “I think not,” replied Hannan. “Constituent response really made the difference on this issue. The educational campaign to the public turned out to be our most effective strategy in the campaign to repeal the surcharge.”

Neither Quest nor LabCorp supported the public education campaign. Both companies declined to send information on the surcharge with their patient bills. That was not the case with SmithKline, which actively supported this effort.

SmithKline also helped in funding the NYSCLA lawsuit, which went forward without money and support from LabCorp and Quest. Both laboratories are not participating in the NYSCLA lobbying initiatives to repeal the surcharge.

“Whether or not the laboratory test surcharge is repealed this summer, the process sure revealed a lot about the corporate attitudes of all three national laboratories,” stated a president of one independent laboratory in New York. “Among my peers, there is definitely a feeling that LabCorp and Quest are getting a free ride should the lawsuit prevail and the surcharge get repealed. We’ve been doing all the work and putting up all the money. Success benefits all laboratories, including those two.”

Our Opinion…
Inter-Lab Competition Affects Cooperation

IN THE ROUGH-AND-TUMBLE WORLD of the free market, every laboratory views its self interest differently. No one should be surprised to see the three national laboratories act in opposition to the common interests of independent labs and hospital laboratories.

For example, just three years ago, independent commercial laboratories in California were banding together to discuss forming what is now called the Preferred Laboratory Access Network (PLAN) Their goal was to create a statewide managed care contracting consortium. This would permit them to bid for contracts exclusively held by the national labs. Managers from National Health Laboratories (NHL) showed up at early meetings and threatened to sue PLAN for anti-trust violations if they proceeded. NHL’s intimidation did not succeed. PLAN obtained a favorable ruling letter on the network from the Department of Justice and proceeded with organization.

We observe that most national laboratory industry meetings take place without either the regular participation or attendance of a significant number of the general managers from the larger regional laboratory sites operated by the three blood brothers. In that respect, they are isolating themselves from changes in the mainstream thinking within our industry.

Because of the intense competition within the laboratory industry, lack of unanimity in supporting the repeal of the New York laboratory test surcharge should not be surprising. But is there middle ground? As the clinical laboratory marketplace evolves in new directions, many laboratory executives are watching the three national laboratories to see if they have reformed their ways from past patterns of below-cost bids for managed care work. The low-ball price levels which resulted are what now threaten the financial health of the entire industry, themselves included.

Different Attitudes

“During the past several years, I’ve noticed different attitudes by the three national laboratories in how they supported New York’s clinical laboratory association,” he continued. “SmithKline seems to appreciate the value to local communities of both hospital-based and free-standing laboratories. Certainly SmithKline recognized the value of patient bills in educating the public. It is my opinion that one reason SmithKline joined independent laboratories in sending notices with patient bills was was also to show a subtle sign of support to the smaller community-based laboratories.”

Hannan had interesting opinions as to the motives of LabCorp and Quest. “After watching their actions in recent years on a variety of issues affecting clinical laboratories in New York, I believe that both LabCorp and Quest see the surcharge as encouraging further consolidation among smaller laboratories. Such consolidation would serve their long-established goals of increasing market share.”

Further evidence that Hannan’s opinion has merit comes from a knowledgeable observer. “Both Quest and LabCorp retained lobbyists of their own to work the surcharge issue. There is evidence that someone representing LabCorp is working to prevent the repeal of the surcharge, for reasons which I do not know.”

LabCorp’s Position

LabCorp Investor Relations Director Pam Sherry explained the company’s position. “Our corporate counsel confirms that LabCorp has never been part of an industry coalition in New York. All lobbying on the surcharge supported by LabCorp has been done through the American Clinical Laboratory Association (ACLA). I can also definitely confirm that we are not trying to maintain the surcharge.”

Marvin Numeroff offered another reason why Quest and LabCorp probably view issues like the surcharge differently than NYSCLA members. “For the most part, members of NYSCLA own and operate their own laboratories. An owner of a business certainly thinks about issues differently than an employee who represents a large company.”

Surcharge Vote Approaches

As the time to vote on repealing the laboratory test surcharge approaches, laboratories in New York State will maintain efforts to educate lawmakers about its negative impact upon clinical laboratories. Another consequence of the repeal effort is that differences in how the three national laboratories seek to position themselves within the industry have surfaced. It demonstrates how difficult it will be for the laboratory industry to address similar concerns in the future behind a united front.


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