CEO SUMMARY: It’s a new trend and gathering momentum. At managed care contract renewal time, more hospitals and health systems report much stronger pressure from health insurers to accept deep cuts to laboratory test prices. At the same time, managed care companies are getting smarter at designing health benefits plans that motivate and/or incentivize patients to choose lower-cost network laboratory providers. Hospital laboratory outreach programs need a response to these developments.
LIKE NEVER BEFORE, health insurers are putting strong pressure on hospitals to dramatically reduce the price of their outpatient and outreach laboratory tests.
Across, the nation, hospital lab administrators are telling THE DARK REPORT that—in current contract discussions— payers are clearly more aggressive about wanting substantial reductions in lab test prices. More to the point, payers now persistently demand that hospital and health system labs accept deep discounts to existing hospital lab test price schedules.
THE DARK REPORT has tracked this trend since early evidence surfaced about 18 months ago. In this issue, THE DARK REPORT provides the first analysis of this important development to be published for the laboratory testing industry.
One visible example of this trend is a health plan called “site of service” option. It was launched by Anthem Blue Cross Blue Shield in New Hampshire in January, 2010. It involves outpatient/outreach services for lab testing and ambulatory surgery.
As you will read here, patients who use Anthem’s three network lab companies have zero out-of-pocket expenses. Anthem describes the site of service option as giving patients “cost saving, value-based benefit options.”
However, since introduction of the site of service plan by Anthem, hospitals across New Hampshire—particularly rural and critical access hospitals—have watched their lab test volumes shrink. At the same time, patients are asking hospitals to collect their lab specimens, then send those specimens to one of Anthem’s in-network laboratories for testing.
On pages 8-10, the CEO of a rural, critical access hospital in New Hampshire explains how Anthem’s site of service insurance product is eating away at the financial and clinical capability of her institution. With her hospital laboratory receiving fewer specimens, it means a reduced in-house lab test menu, along with less revenue to support the hospital’s entire clinical service offering.
What the Evidence Indicates
The timing of this trend is not a coincidence. The fingerprints of the national lab companies can be found on much of the evidence that is available to the public.
Over the past decade, the two national laboratory companies have regularly lost market share to local hospital and health system outreach programs in community after community. There are many examples of well-run hospital laboratory outreach programs that have enjoyed impressive annual rates of growth in specimen volume and revenue.
Over these same years, both Quest Diagnostics Incorporated and Laboratory Corporation of America have been criticized by Wall Street analysts and investors for their inability to capture more market share of office-based physician laboratory test referrals.
To counter the cumulative competitive threat of hundreds of hospital and health system laboratory outreach programs, each of the two Blood Brothers has developed a similar strategy to leverage their one unquestionable competitive advantage over smaller lab testing organizations.
That advantage is the economies of scale that accrue to both national laboratory companies because of their high volumes of specimens and their huge regional testing facilities. The traditional way to leverage these economies of scale was to give major health insurance companies deeply-discounted prices for lab tests. Independent lab companies and hospital lab outreach programs found it impossible to match these deeply-discounted lab test prices.
Thus, these same labs were excluded from the payer’s lab networks. That left the two national labs as the primary network lab providers, from which they expected to leverage new physician clients and access the pull-through fee-for-service specimens needed to offset the losses expected from deeply-discounted contract prices for lab tests.
That strategy has not been fully successful. Substantial numbers of office-based physicians continued to prefer and use their local hospital outreach programs. Neither of the two national labs were able to consistently reduce the rate of leakage in ways that satisfied most managed care plans.
Physicians’ role in this story is their resistance to efforts by managed care plans to steer patients to the lower-cost network labs. Managed care plans could only do so much to enforce physician adherence to the in-network labs providers and reduce leakage before angering the doctors.
In response to this situation, it appears that the new strategy of the two national laboratories is to educate and continually remind payers about the much higher prices charged by many hospital laboratory outreach programs.
It is reasonable to interpret the evidence and conclude that, if the two national labs could not shift leakage in their favor, they would begin a campaign to educate health insurers about the higher prices payers were paying for hospital lab outpatient and outreach tests. Then, health insurers would go to the negotiating table with these same hospitals and be more persistent in demanding that hospitals accept a lower contract price for outpatient/outreach lab tests.
For hospital labs, these developments now make it essential to know the accurate cost of lab testing. This information can then be used to better negotiate fair lab test prices when renewing managed care contracts.