CEO SUMMARY: During the past seven months, competition in the Northeast has intensified. Decisions by UnitedHealth and Aetna to exclude a national laboratory from their respective provider panels has forced many physicians to reconsider their choice of laboratory provider—creating an opportunity for independent lab companies that are regional network providers. However, acceptance of contract prices based on a discount from Medicare fees may have negative consequences.
NEW YORK’S LABORATORY SERVICES MARKET is almost seven months into a free-for-all fight for market share. The trigger was managed care contract decisions by UnitedHealth Group, Inc., and Aetna, Inc., to grant exclusive national status to Laboratory Corporation of America and Quest Diagnostics Incorporated, respectively.
Both of the national laboratory companies are using their exclusive national contract status as a lever to wrest office-based physician business away from their competitors. At the same time, a number of independent laboratory companies in New York hold regional contracts with UnitedHealth and Aetna as in-network lab providers. This allows them to also compete for business in most regions of the state.
However, the latest round of managed care contracting wars is having unwelcome consequences to the lab industry in New York State. According to Thomas Rafalsky, long-time President of the New York State Clinical Laboratory Association (NYSCLA), these exclusive contracts have driven prices down and driven lab work out of New York.
“Most independent laboratories in New York hate these exclusive contracts,” Rafalsky said. “Recent decisions by major payers to further restrict access to their laboratory provider networks are harmful to the independent lab sector.
“At the same time, the national labs have intensified their bidding war, causing payers to drive down the prices they offer all laboratories,” he continued. “We’ve heard that the prices on the exclusive contracts are based on a fairly low percentage of Medicare rates. That means the national labs have created a bidding environment almost like a price war. In that environment, the Medicare program would be more than justified to use a competitive bidding approach for lab services.
Competitive Bidding Threat
“Across the laboratory industry, there is universal opposition to the pending Medicare demonstration project for competitive bidding of laboratory test services because laboratory services are not a commodity and should not be treated like a commodity,” observed Rafalsky. “However, in the current managed care contracting and pricing environment, Medicare may ask itself: ‘Why can’t these services be put out for bid?’ We all know that, to properly serve the lab testing needs of clinicians, it requires a great deal of personal attention and support. But, when a major lab bids a percentage of Medicare prices to get an exclusive contract, why wouldn’t Medicare want to benefit from that same price point?”
Rafalsky’s comments notwithstanding, some independent laboratories are taking advantage of the most recent managed care contracting wars between the two blood brothers. Bio-Reference Laboratories, Inc., (BRLI), of Elmwood, New Jersey, reported an increase of 29% in revenue for the quarter that ended April 30 compared with its results for the same quarter last year. Operating income rose by 32% and patient volume rose by 19%. (See pages 7-9.)
Another company finding a favorable market for lab services is Sunrise Medical Laboratories in Hauppauge, New York. Last week, Sonic Healthcare Limited of Melbourne, Australia, agreed to acquire Sunrise for $148 million. (See pages 3-4.)
For Sunrise CEO Larry Siedlick, exclusive contracts do not necessarily mean that all other labs are shut out. “Certainly we have experienced nice growth since both of those situations developed earlier this year,” he said.
“These contracts are exclusive but in reality, it depends on what you mean by ‘exclusive.’ One company might say, ‘I’m the exclusive national provider now,’ and you could read that in two ways,” said Siedlick. “It can mean you’re the only lab that has an exclusive contract with a particular managed care plan to provide services in every region of the nation. Or it can mean that you’re one of the network labs, but you are the only lab with the infrastructure and ability to provide nationwide coverage.
“The big national labs like to say they are the exclusive national providers because that can cause doctors to believe that no one else is in the network,” Siedlick explained. “But all the communications you see from United Health and Aetna make reference to the fact that regional laboratories are participating as part of those plans. That’s where there are openings for labs like ours.
Compare Service Levels
“Our model is to go and get that work from the referring doctors for ourselves,” Siedlick said. “And so far, we’ve been successful. Typically, step one is to make the doctors aware that your lab is a contracted, network provider. Step two is where you can come out a winner as the physicians compare service levels and understand why your lab is able to provide high-quality service.
“In addition, doctors are splitting specimens when they can,” Siedlick commented. “In earlier years, when there were six to eight lab companies operating nationwide, these labs essentially taught referring doctors to use multiple laboratories. In the Long Island and New York City markets, most physicians use multiple laboratories.”
Limiting Access To Patients
For Rafelsky, however, the exclusive con- tracts have not created an opening in the market. “Exclusive contracts haven’t opened up any avenues of communication between the labs that were excluded and referring physicians,” Rafalsky commented. “When the networks get constricted and labs get eliminated, that’s a negative because access to those test referrals can be the difference between financial life and death for some independent laboratories.”
What remains true for the lab industry is that competition for physician test referrals remains intense. As Rafalsky notes, the current managed care contracting war is likely to cause some casualties among independent labs in New York State.