CEO SUMMARY: New national lab contracts that LabCorp and Quest announced in May could disrupt the lab testing market in ways regional labs can exploit, experts said. Health plans entered these new contracts after realizing that the exclusive network contracts do not work, one lab consultant explained, adding that large national labs will compete with hospital outreach programs. Also, local labs may be able to provide services in areas where the health insurers have coverage gaps.
FTER A DECADE OF SOLE-SOURCE LAB TEST NATIONAL CONTRACTS, both Aetna, Inc., and UnitedHealthcare (UHC) announced the end to that strategy in May. Each of the two major health insurers said new national contracts that include both Laboratory Corporation of America and Quest Diagnostics Inc. would be effective on Jan. 1.
The fact that both payers made the same decision at about the same time signals that the healthcare system in 2018 is significantly different than it was in 2007. Ten years ago, financial analysts and lab experts said Aetna and UnitedHealthcare were trading exclusive national laboratory provider status for rock bottom lab test prices.
But now, 11 years later, fee-for-service is on the way out and value-based reimbursement is gaining momentum. This means health insurers need their providers—including clinical labs—to deliver more than low prices.
Instead, health insurers want to contract with those clinical laboratories and other providers that can improve patient outcomes, help physicians reduce unnecessary utilization, and lower the cost of care. All of these goals are positive for smaller regional clinical laboratories that do not have the volume to match the low test prices of the billion-dollar national lab companies.
Local Access Needed
What independent clinical labs and hospital lab outreach programs often have is more convenient local patient access, faster turnaround times for reporting results, pathologists and clinical chemists who know the local doctors and individual patients, and the ability to maintain a complete lab test record for inpatient, outpatient, and outreach results using the same methodologies and reference ranges.
Some experts who advise labs on working with health insurers have said that the new managed care contracts the large health plans have with national lab companies will create opportunities for nimble local labs. For example, health insurers still need regional labs to fill gaps in their lab networks.
“It is reasonable to assume that those health plans—and even the national lab companies themselves—may be interested in signing contracts with small and regional labs,” stated Steve Stonecypher and Andrew Stimmler, Managing Partners with Shipwright Healthcare Group LLC, in Greensboro, N.C.
A Time to Exploit Turmoil
The contracts LabCorp and Quest announced in May could create turmoil in the market for clinical lab services that regional laboratories can exploit, Stonecypher and Stimmler added.
On May 24, UnitedHealthcare announced that it signed new long-term contracts with Quest and LabCorp and that, in those contracts, it would collaborate on value-based contracting. Forbesreported that, as part of the new contracts, UHC will bring to lab services the same aligned incentives and enhanced patient experience that UHC has with more than 1,100 hospitals and 110,000 physicians in accountable care organizations.
In these new deals, UHC was renewing an existing contract it has with LabCorp. Under that contract, LabCorp remains as UHC’s exclusive national laboratory provider until the end of this year. On Jan. 1, UHC will begin a new long-term partnership with LabCorp that also allows Quest Diagnostics to be an in-network lab for all UHC plans covering its 48 million beneficiaries.
Contract Terms Expanded
The next day, Aetna and LabCorp announced extended and expanded contracts they originally signed in 2007. Under the new agreement effective Jan. 1, LabCorp would become a preferred national laboratory for almost all Aetna members. The expanded agreement will provide about 20 million eligible members with in-network access to LabCorp’s testing. LabCorp was already an in-network lab for several million Aetna members in certain markets, the companies said in a joint press release.
One publication characterized the Aetna and UHC deals as opening up their lab contracts in a way that suggests that the health insurers no longer favor exclusive contracts. Exclusive deals are not worth the limits they impose on members, said AIS Health, a newsletter company.
One lab expert THE DARK REPORT interviewed agreed, although he also said he could not comment on the record about the specific contracts. “What many labs don’t see is that health plans are realizing that the exclusive network contracts do not work,” he said. “They just end up with leakage costs and access issues from the excluded national lab company.
“That’s why Aetna and UHC are bringing in both national lab companies,” continued the executive. “That way, their members have choice that allows the plans to work steerage mechanisms against the more expensive hospital laboratory outreach programs.
Outreach: The Coming Battle
“It’s sad to say, but it’s true, many smaller labs are struggling,” he added. “That means the next real battle will be between the biggest lab companies and the hospital lab outreach programs.”
This comment is similar to what theAIS Health newsletter reported when it said that health insurers might be more interested in seeing how competition between the two national lab companies could improve care for Aetna and UHC members. Under the new national deals, the lab companies will compete on quality metrics to prove they can serve health plan members well, the newsletter said.
Another lab executive who asked not to be named said his company questions how Aetna and UHC will view the contracts they have with hospitals in light of these agreements. “Will they leverage the new agreements to lower fees from hospitals or eliminate some of the hospital agreements?” he asked. “Do these new deals have the potential to affect hospitals’ decisions about whether to remain in the outreach lab business?”
As part of the new contracts, Forbesreported that UHC executives said they would collaborate with the diagnostic test companies on a variety of value-based programs while aligning incentives, and improving patients’ experience.
A Chance to Fill Gaps in Care
“For all these reasons, regional labs have an opportunity,” commented Stonecypher and Stimmler. “Payers have always had gaps in their coverage for clinical lab services,” Stonecypher said. “Even when Quest and LabCorp had their previous contracts with UHC and Aetna, there were gaps. So, there also will be gaps in patient access after these contracts become effective on Jan. 1.
“Each one of those gaps is an opportunity for a regional laboratory because Quest, LabCorp, UHC, and Aetna are going to need to backfill those gaps in their coverage,” he added.
In addition, he commented, the large national clinical labs provide what health plans want: data to support the delivery of value-based care. If regional labs can’t provide that test-result data, then health insurers may not be interested in working with them, he said.
“Every national payer that we’ve talked to emphasizes that they prefer to send work to the national labs because those labs have the data, the scale, and the price they want,” Stonecypher said. “Also, the national labs offer one-stop shopping.
“This means that, if LabCorp and Quest don’t have what a health insurer needs in certain areas, then the insurer will contract with regional labs,” he added. “However, it remains administratively complicated and costly to manage multiple contracts. That’s why big health insurers have national contracts and are paring down their networks.
“Some regional labs are providing the data that payers want and some are not providing it,” Stonecypher explained. “But the big labs are providing those results routinely. That’s what health plans want and need.”
Stimmler added that regional labs may provide the data, but it may not be in a format the health plans can use. “The data could be spotty or difficult to decipher,” he said. “Or it could just be a small amount of data versus what the larger labs can provide.”
To take advantage of any opportunities that exist to fill gaps in the large national contracts, regional labs and hospital outreach labs should evaluate their strengths to see where they might be able to support Aetna and UHC, Stimmler recommended.
“Ask yourself what your lab is doing differently that the national labs are not doing,” he said. “Once you know that, make sure the payers know it too. Don’t expect the payers to be aware of that or to know who you are.
Outreach: The Coming Battle
“Identify what your lab can do well operationally that Quest Diagnostics or LabCorp can’t do,” continued Stimmler. “Identify the things that your lab has that it can use to advantage to win managed care contracts with payers.”
These new developments in the lab testing marketplace demonstrate how healthcare’s ongoing transformation creates new challenges for health insurers. More attention is being placed on improving patient outcomes and reducing the cost of care. Local labs and hospital outreach labs should seize this opportunity by showing health insurers how they can deliver more value from their lab testing services.
Contact Steve Stonecypher at firstname.lastname@example.org or Andrew Stimmler at email@example.com.
LabCorp, Quest Diagnostics Outline Steps to Provide Value-Based Care to Insurers
IN THEIR RESPECTIVE CONFERENCE CALLS WITH WALL STREET ANALYSTS, executives from both Quest Diagnostics and Laboratory Corporation of America outlined how they will deliver value-based care under the new managed care contracts with UnitedHealthcare (UHC) and Aetna in the coming years.
LabCorp CEO David King said he expects the net result of the contracts for LabCorp to have a negative effect on revenue and profit next year because LabCorp will lose some patients as customers. “I will say that, just as we have said from the beginning, given the number of covered lives in each of those plans, it is highly likely that we’ll lose more in United than we’ll pick up in Aetna,” he commented. Not only are there more covered lives in the UHC contract that could move to Quest, but LabCorp has a larger percentage of those lives than Aetna has, he explained.
To make both contracts work, LabCorp will use the data it has from patient test results and integrate that data from its Covance subsidiary and from its contracts with Walgreens where it is adding lab testing in retail stores, he added. In the second quarter, LabCorp had operations in 16 Walgreens stores, he said.
After meeting with health insurers recently, King explained what they want from clinical labs. Payers want to know how their patients are doing, where there are gaps in care, and they want LabCorp to identify opportunities to treat patients more efficiently so that the insurers can receive bonus payments under Medicare’s Star Ratings system, he explained.
“They (insurers) also want to know in a health system, for example, how is my patient cohort performing against comparable patient cohorts,” King added. “How are my physicians performing against comparable physicians both internally and externally?”
This is the information that LabCorp aims to deliver to health plans and other labs should do the same.
Quest Chairman, President, and CEO Steve Rusckowski had similar comments, saying Aetna and UHC are partnering with Quest to reduce laboratory spending and bring down the overall cost of care.
In addition, Quest CFO Mark Guinan explained what Quest aims to deliver under the UHC contract. In general, the UHC arrangement is a traditional fee-for-service contract, he said, but there are incentives for Quest if it can reduce the cost of care. What Quest gets paid will vary depending on its performance, he added.
“When we talk about value-based contracting, as I referenced earlier, there are incentive payments that we can earn by saving them money,” stated Rusckowski. “When I say saving them, I’m talking about not just United but obviously, the healthcare system and especially the patient.”
Managing Patient Care
In addition, Quest will aim to reduce costs by how it helps physicians and other providers manage patient care. “So price is one thing, but the level of activity for a patient with a given condition is also a driver,” he said. Some labs might have lower prices per test but the work of those labs might end up costing health insurers more because physicians and hospitals have to provide more care for patients with some conditions, he explained.
Therefore, Quest will focus on the total cost per interaction with a patient and aim to save money “by doing things that are medically appropriate at a good price,” he added.
“And to the extent this saves money for the system and overall stakeholders, some of that will come back to us,” commented Rusckowski. “So there are incentives for Quest Diagnostics.”