Connecticut Hospital Labs Win HMO Test Contracts

Statewide regional laboratory network enjoys growing managed care business

CEO SUMMARY: Connecticut Hospital Laboratory Network, LLC was formed in 1996 with the specific goal of winning managed care lab testing contracts. During the past five years it has steadily increased the number of patients covered by such contracts. Along the way, it has learned important lessons on how to price laboratory testing services and how to effectively negotiate managed care lab testing contracts.

STATEWIDE MANAGED CARE contracts for lab testing services are the norm in geographically-com- pact Connecticut. This has motivated 100% of the state’s hospital labs to participate in Connecticut Hospital Laboratory Network, LLC (CHLN).

“We quickly recognized two realities about managed care contracting in our state,” said Greg Weisenberger, Executive Director at CHLN. “First, because so many insurance companies have their headquarters in and around Hartford, experiments and innovations in contracting for lab testing services tend to be common here. We often see things before they are introduced in other parts of the country.

Statewide Lab Contracts

“Second, because of Connecticut’s rather compact geography, insurers usually contract for lab testing services on a statewide basis,” he explained. “Obviously, this makes it difficult, if not impossible, for individual hospital lab outreach programs to easily gain provider status.”

In response to this particular managed care contracting environment, all of Connecticut’s 31 hospitals are members of CHLN. “Our network is owned by 29 hospital organizations,” noted Weisenberger. “CHLN represents 31 individual hospitals and a total of 33 hospital labs or labs affiliated with hospitals.

“CHLN has two strong cards to play in the managed care contracting arena,” he continued. “One, we represent 100% of the acute care hospitals and hospital labs in Connecticut. Two, we have 138 patient access points within the state. This far exceeds that of any national lab doing business within Connecticut.”

Incorporated in 1996 as an LLC (limited liability corporation), CHLN’s primary strategic goal is to obtain managed care contracts on behalf of its hospital laboratory members. “From the beginning, CHLN has pointedly focused on winning managed care contracts,” recalled Weisenberger. “Shared testing, group purchasing, and other functions take a back seat to the primary objective of maintaining our member labs’ access to patients at acceptable levels of reimbursement.”

Managed Care Contracts

CHLN must be doing something right. Currently it participates in contracts involving six major insurers, representing access to 1.1 million patients. CHLN participates in many of these contracts as part of the “lab network” contracting model in partnership with Quest Diagnostics Incorporated. CHLN, on its own, is currently bidding for additional contracts representing another 165,000 covered lives.

Quest Diagnostics Incorporated, which operates a major lab facility in Wallingford is probably the major commercial lab competitor in the Connecticut market. “CHLN’s first managed care contract was originally established jointly with SmithKline Beecham Clinical Laboratories (SBCL),” stated Weisenberger. “This relationship has continued evolving since SBCL’s acquisition by Quest Diagnostics in 1999.

Relationship With Quest

“Another relevant fact about this competitive marketplace is that as many as 90% of our member hospital labs use Quest Diagnostics for send-out testing,” he said. “Our hospital lab members are keenly aware that, on one level, Quest Diagnostics wants to serve them as a reference laboratory, but on another level, Quest Diagnostics wants to directly capture as much of the physicians’ office testing as possible. This creates a ‘dynamic tension’ that continually frames the relationship between these hospitals and CHLN’s relationship with Quest Diagnostics.”

During its formative period, there were several primary champions of the regional laboratory network. Like regional lab networks in other areas of the country, it was these committed individuals who provided the early drive and leadership to sell the lab network concept and help it become operational.

“Managed care was a clear threat and hospital labs recognized the need to respond with an effective business strategy,” stated Weisenberger. “That motivated labs interested in becoming members of the network to rapidly move past issues of trust and control and squarely address the business problems that concerned them.

Strong Financial Standing

“This unity of purpose allowed us to organize rather quickly,” he added. “Each owner hospital was required to make a capital contribution of $10,000. We are proud to note that, six years later, the capital accounts of our lab members have increased almost yearly. The financial organization of our regional lab network has allowed us to fund expanded services without drawing down the original capital.”

Connecticut Hospital Laboratory Network is organized so that lab test reimbursement flows directly to CHLN. “CHLN takes a portion of the capitated reimbursement each month to cover administrative expenses,” explained Weisenberger. “We then distribute the balance to our members under a pre-agreed formula.

“Each laboratory test is assigned a Relative Value Unit (RVU). Monthly we tally the RVUs done by individual labs and pro-rate the capitated payment pool based on each lab’s relative share of the total RVUs done under that contract. This arrangement has worked well for our members,” declared Weisenberger.

“We’ve learned a lot since we became operational in 1996,” he said. “Probably the most important management lesson for us was to understand the relationship of test prices to the actual cost of testing.

“When we first started, we were eager to get our first contract,” he explained. “At that time, capitated rates for lab testing were in the range of 65¢ to 85¢ PMPM (per member per member). We didn’t realize that this price, based on actual utilization rates, was equivalent to probably 10% to 15% of the Medicare fee schedule.

“Over time, we’ve learned how to analyze our data and accurately determine utilization and costs for each managed care contract,” noted Weisenberger. “That’s allowed us to be more knowledgeable in negotiations.

“In the beginning, we wouldn’t say no to contracts that were financially unacceptable,” he added. “Now we’ve learned to do a financial analysis and then say ‘no.’ We only agree to profitable contracts. That’s a great accomplishment for a group of scientifically-trained laboratorians.”

According to Weisenberger, capitated rates have increased in recent years, to CHLN’s benefit, but CHLN also understands how carve-outs impact the actual reimbursement paid as part of a capitated lab testing contract. “Whereas in earlier years you could find cap rates as low as 85¢ in Connecticut, now rates are moving past $1.85.

“More importantly, we’ve learned to exclude a variety of tests from the capitated rate,” stated Weisenberger. “These are reimbursed outside the capitated pool. Examples of procedures excluded from the cap pool are anatomic pathology, esoteric and genetic testing, thin layer Pap smears, and similar tests.

“The other good news in our healthcare market is that rates for testing done by PPOs is increasing over time,” he added. “These rates are frequently above Medicare. Most importantly, what has helped us defend and sell higher prices is improved information. We have data and use it to support our contract proposals.”

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Clinical Info Services

Information plays an important role in the next phase of CHLN’s development. “Currently we look at claims data,” Weisenberger said. “The next step is for us to accumulate and use clinical data. We’ve established a clinical data committee that includes lab administrators and information technology specialists to study and develop an implementation plan for CHLN.

“Managed care plans want us to provide clinical data and they are asking for our timetable to comply,” he noted. “We recognize that clinical data is the next competitive service we must offer. Our lab network will need to support health insurers with services that support disease management programs of clinical conditions like diabetes, high cholesterol, and asthma.”

During CHLN’s organizational phase, it was envisioned that pathologists would form a parallel network to pursue contracts in tandem with the lab network. “That hasn’t occurred,” stated Weisenberger. “In 1996, the original plan was for the state’s anatomic pathology groups to form their own LLC.

Status Quo For Pathology

“During the next two years, 14 of the 17 private pathology groups in the state agreed to participate,” he continued. “But the general sentiment was that individual pathology groups were doing just fine by contracting through other entities, like IPAs, which were not capitated. For this reason, the anticipated relationship with the pathology groups was never realized.”

Connecticut Hospital Laboratory Network demonstrates that regionalization continues to be a viable method for hospital labs to maintain access to patients and develop new business skills in managed care contracting, sales, marketing, and collaborative management.

The ever-delicate relationship between Quest Diagnostics and CHLN also demonstrates that both types of laboratory organizations continue to need each other if they are to provide the full range of lab testing services demanded by their managed care customers.

Finally, during the past five years, CHLN has sustained a financially-viable network organization. This noteworthy accomplishment provides the business platform for CHLN to move into the next challenging area of lab testing services: converting raw data into useful information for payers, physicians, and patients.

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