CEO SUMMARY: There’s a managed care contracting play-book that seems to be working better for Laboratory Corporation of America than it does for Quest Diagnostics Inc. On July 1, LabCorp became the exclusive national lab provider for Independence Blue Cross of Philadelphia. For the past seven years, this contract had been held by Quest Diagnostics. These contract negotiations offer a window into the evolving contracting strategies of the national labs.
TO WREST AN IMPORTANT MANAGED CARE CONTRACT away from its major competitor, Laboratory Corporation of America recently employed a strategy it had used successfully seven years earlier against Quest Diagnostics Inc.
In 2007, LabCorp won an exclusive, 10-year national contract from UnitedHealthcare. As part of that agreement, Quest Diagnostics was excluded as a network provider. (See TDR, October 16, 2006, and February 19, 2007.)
Now LabCorp has taken another contract from its rival, Quest Diagnostics, in an almost identical manner. This time the prize was the large contract from Independence Blue Cross in Southeastern Pennsylvania. The contract could be worth between $120 million and $150 million annually for 2 million IBC members in Pennsylvania and more than 3 million members nationwide, sources said.
During its investigation into this contract award, sources told THE DARK REPORT that LabCorp followed almost the identical playbook it used in 2007. LabCorp pursued three elements in this new agreement with IBC. First, it offered an aggressively low per-member-per-month price for routine tests. Second, it worked to carve out esoteric tests from the PMPM contract price so it would be paid for these tests at fee-for-service rates. Third, Quest Diagnostics was excluded from the IBC network.
This is similar to what happened in 2007 when LabCorp took the national contract with UnitedHealthcare and Quest was excluded as a UHC provider Multiple sources contributed to this story and the preceeding story on pages 3-6. All sources asked to remain anonymous.
New Contract Strategies
This latest managed care contract award has aspects that are consistent with other payer contracts negotiated in recent years that involved one or both of the national lab companies. As most regional labs are learning, the strategies used by the national labs today are based on offering deeply-discounted prices for routine testing while leaning hard on the payer to exclude the winning national lab’s primary competitor and as many as possible of the winning company’s lab competitors from the insurer’s network.
However, narrow networks didn’t happen with the IBC contract award, just as it didn’t happen with the UnitedHealth contract in 2007. Both health insurers recognized that LabCorp needed time to expand its patient service centers and other infrastructure in key cities and regions (areas where Quest Diagnostics had extensive service infrastructure). Thus, both payers wanted to keep other regional labs in their networks so that doctors would be happy with their choice of lab providers.
There are two more similarities in the story of the IBC contract in this year and the UnitedHealthcare contract in 2007. First, in each set of contract negotiations, while LabCorp was offering a very low PMPM rate for routine tests, Quest Diagnostics was unwilling to reduce the price it wanted from the payer in both negotiations, sources said.
Second, sources say that, with both insurers, as the time to renew the existing contract approached, business relations between Quest and the health insurers were strained at best. This was all the opening LabCorp needed to get its foot in the door and push it wide open with each payer.
Prospects Looked Dim
Relative to the IBC contract, multiple sources have told a similar story that runs along these lines: Last fall, there was talk at Quest’s headquarters in Madison, New Jersey, that the IBC contract was up for renewal and that the prospects for retaining the largest contract in Pennsylvania were not good.
“When a contract comes up for renewal, it makes everyone nervous in the lab business,” stated one source. “At Quest, the talk was that there would be negotiations with IBC over the fee schedule. That’s never a good sign. Further, before the renewal was announced early this year, there was talk that LabCorp was negotiating and was interested in getting Quest Diagnostics eliminated from the network.”
In 2007, LabCorp had offered UHC a very low rate for routine tests. Last fall, it did the same in negotiations with IBC. In that way, what happened with UnitedHealthcare happened again during the negotiations with IBC, sources said. And, there was the additional blow that Quest Diagnostics found itself excluded as an in-network lab for UHC members in 2007 and again this year for IBC members.
One unknown aspect of the IBC contract is whether LabCorp is on the hook to reduce out-of-network spending (called leakage). During the negotiations with UHC in 2007, it is believed that LabCorp had a clause in the contract that called for the lab company to guarantee that it would move a target amount of leakage back into the network, or it would pay the difference.
What is known on this point is that, for its part, IBC is attempting to curb out-of- network spending by sending out-of-net- work reimbursement checks directly to the patient. As a consequence, the out-of-network lab now must chase the patient to collect its money. Sources said that the out-of-network lab doesn’t even get an EOB from Independence Blue Cross. Rather, IBC sends the EOB directly to the patient to satisfy state law.
Does a managed contract award like this make a difference in market share? There are rumors on the street that since the July 1 effective date of this contract, patient requisitions have increased by 6,000 per day for LabCorp, with a comparable decline seen at the Quest Diagnostics lab in Horsham, Pennsylvania.
At $40 per requisition, that would represent a swing of about $60 million per year in revenue. However, the question is, at such a low capitated rate, will LabCorp be able to make money on the Independence Blue Cross contract ?
Is the Strategy Now to Bid Low on Cap Rates, Then Upsell Docs to Order More Esoteric Tests?
IF PAST IS PROLOGUE, then perhaps LabCorp’s next moves can be anticipated. Back in 2007, to offset the meager income it got from UnitedHealthcare’s deeply-discounted PMPM rate for routine testing, LabCorp boosted its sales program to encourage more physicians to order larger volumes of esoteric tests that were reimbursed at higher fee-for-service rates.
Competitors to LabCorp watched this element of LabCorp’s strategy unfold. These sources say that, with the UHC contract in hand, LabCorp instructed its sales team to go into physicians’ offices and detail those doctors on why, how, and when they should order more sophisticated esoteric tests over some of the traditional assays that are still clinically useful, but were reimbursed as part of the PMPM capitated rate.
This was a two-pronged sales strategy. One prong called for the sales reps to show physicians ways that they could “replace” a traditional routine test (paid by UHC in the PMPM capitated rate) with a more sophisticated esoteric test (paid by UHC on a fee-for-service basis). The other prong called for sales reps to introduce new esoteric tests to physicians and show how these tests could help provide advanced care to the patient.
New Esoteric Tests
This sales approach represents a new twist on the classic definition of “pull through,” where the lab uses its managed care contract status to get into physicians’ offices and gain access to the Medicare and other fee-for-service lab referrals. In this new twist, the lab is using a low cap rate for routine testing as a way to win the payer contract. Then the lab can upsell physicians to expand the overall types and volumes of esoteric tests they order for their patients that are reimbursed at fee-for-service rates.
“There’s a lot of money in esoteric testing,” one lab director said. “That’s why LabCorp acquired Genzyme, Monogram, and other highly-specialized labs. Those labs offer primarily esoteric tests that LabCorp can have its sales reps upsell to office-based physicians.
“Specialty testing for cancer is a huge business opportunity for labs today,” he continued. “That is equally true for cardiac marker tests, endocrinology tests, and similar tests for diabetes and other chronic diseases.
“The idea is to have doctors order those reference and esoteric tests and then persuade the health plan that physicians need these test results in order to identify chronic and costly conditions in patients early,” added the lab director. “The argument is that use of expensive lab tests in this manner helps health plans control costs over time.
More Expensive Tests
“One example of how this specialty esoteric testing is changing the nature of the market is cholesterol testing,” he stated. “At the most successful labs today, about 25% of the volume of cholesterol testing is now in the form of esoteric tests. Labs want to convince health plans that these expensive tests are needed as part of patients’ annual physicals.”
LabCorp is likely already pushing these types of esoteric tests to IBC’s physicians in Southeastern Pennsylvania, sources said. “When labs push new esoteric tests, they tell physicians that they need to keep up with new technology. They say that any lab still offering routine testing when a more sophisticated esoteric test is available is not keeping pace with changes in the development of specialized testing,” a source told THE DARK REPORT.
In an effort to control costs, some health plans keep the most common esoteric tests on the regular fee schedule and don’t let labs carve them out. Health plans are doing this for some cardiac tests, prenatal assays, and certain tests for women’s health, sources said.