Labs Should Build Payer Relationships to Improve Commodity Pricing

“Health plans are interested in improving outcomes and saving money on complex, expensive cases because that’s where the money is. At the same time, that’s an opportunity for labs to help health plans cut costs while also improving quality. ”
—Kerry Kaplan, President, Healthcare Solutions

CEO Summary: At the most recent Executive War College, Kerry Kaplan, President of Healthcare Connections in Natick, Massachusetts, discussed the results of his national survey of health plan executives on their attitudes toward clinical laboratories. It will be no surprise that these managed care executives consider lab testing services to be a commodity. What will be a surprise are Kaplan’s recommendations on how laboratories and pathology groups should develop partnerships with selected payers, rooted in added value services that generate ample reimbursement. In this first of a two-part series, Kaplan also delivers a dose of reality to laboratories as he advises them on how to prepare for the marketplace changes coming in the next five years.


EDITOR: Before this year’s Executive War College, conducted last May in Miami, you interviewed nine executives from a diverse group of health plans nationwide specifically to learn how they viewed laboratory services and what labs should know about their changing needs. What did you learn?

KAPLAN: Lab directors and pathologists won’t be surprised to learn that, for the most part, health plans are generally disappointed with what they get from the clinical laboratories with which they work.

EDITOR: One response to that statement is that laboratories are equally disappointed with the managed care industry. But setting that aside, your objective in conducting this survey was to identify how laboratories could better meet the needs of health plans and be an added-value provider in the future—and thus earn higher reimbursement for these services. What was the most important insight you gained from these survey interviews?

KAPLAN: One common theme is that many managed care executives view laboratory services as a commodity. Another finding is that few laboratories have invested the time and resources needed to develop a more productive relationship with key payers in their communities. Until labs have such relationships, lab testing services will be treated like a commodity by health plans.

EDITOR: Our American healthcare system is undergoing transformation. For example, THE DARK REPORT has covered the predictions of experts, including McKinsey & Company, that physician groups, hospitals, and health insurance companies must create new integrated care models and compete for patients in ways unseen for several decades. I’d like to start with this topic, and how this transformation will create positive opportunities for laboratories in their dealings with health plans.

KAPLAN: The problem is that most health care providers—including laboratories—are not preparing for the major reshaping of the American healthcare system that has commenced. I frequently describe the American healthcare system as being perfectly poised for the 20th century. We are stuck with a healthcare system that regularly adopts technologies and methods long after they have become common in other sectors of the economy.

EDITOR: Are health plans and providers ready to move into the 21st century? The conflict between ever-lower payer pricing and the frustration of clinicians seems to be ongoing.

KAPLAN: Right now, there’s a big disconnect between what’s important to clinicians and what’s important to payers. Healthcare is clearly moving in a direction of paying for performance and paying for responsiveness to the needs of patients. I stress this fact to all my clients.

EDITOR: But that trend is contrary to existing arrangements between payers and providers.

KAPLAN: Correct. Until now, most healthcare providers, including labs, have operated as if they were running a protected public utility. If you’re running a public utility, you have no reason to address market needs. You simply supply the service and collect your fees. But the market will change drastically over the next five to 10 years because of pressures building up within healthcare. These pressures include rising costs, reduced reimbursement, and increased demands for services from an aging population.

EDITOR: Lab directors and pathologists are familiar with all these issues.

KAPLAN: Recognize that these pressures are causing the healthcare system to both implode and explode at the same time. It guarantees we will have a different healthcare system in the future. That is why I advise my provider clients to prepare for this different future.

EDITOR: Looking at clinical laboratories, what steps do labs need to take to prepare for the future, particularly when contracting with health plans?

KAPLAN: It’s simple. In the future there will be winners and losers. Labs that don’t understand these changes and fail to change in fundamental ways will be the losers. Conversely, winning labs will understand the emerging value drivers in healthcare and evolve to meet those needs.

“…there is still an advantage for small labs. That advantage involves being a little more agile, a little more mobile, and a little more aggressive compared with national labs.”
-Kerry Kaplan

EDITOR: You are talking about strategy and execution, and a willingness to adapt to healthcare’s evolving needs.

KAPLAN: That is easy to say, but it is difficult for laboratory organizations to implement. Last year (May 2007) at the Executive War College, Dave King, the CEO of Laboratory Corporation of America, explained how and why LabCorp was among the winners in the lab marketplace. Fundamentally, King was noting that the success of LabCorp involved thinking strategically and then putting the resources behind those strategies in each and every market in which they serve.

EDITOR: Certainly, LabCorp’s 10-year exclusive contract with UnitedHealthcare was a strategic business initiative. It caused widespread ripples in the laboratory marketplace status quo.

KAPLAN: Yet, one lesson from King’s presentation is that there is still an advantage for small labs. That advantage involves being a little more agile, a little more mobile, and a little more aggressive com- pared with national lab companies.

EDITOR: Can you explain how labs can be more agile, mobile, and aggressive?

KAPLAN: To be more agile, mobile, and aggressive requires thinking strategically and then executing that strategy, just as LabCorp works to do this on a national level. In reality, succeeding in any healthcare market requires effort to develop a comprehensive growth plan (a strategy) and commitment to stay with that plan (putting the resources in place to support that strategy). It also requires a certain level of sales and marketing expertise. So, if your lab doesn’t have this expertise, you might want to hire someone who does.

EDITOR: How do you recommend laboratories develop a winning strategy as our healthcare system transforms itself?

KAPLAN: When it comes to health plans, my advice is to develop a multi-payer sales plan. Laboratories need a plan for each individual payer in their community with which they want a working relationship.

EDITOR: Why would a lab not want to work with a health plan in their region?

KAPLAN: One reason is that certain payers may not pay enough for laboratory testing services. Or they may not reimburse quickly. Whatever the reason, don’t feel compelled to work with every health plan. Just focus on the plans with which your lab wants to work.

EDITOR: How should a laboratory develop this strategy?

KAPLAN: My multi-payer strategy has three steps. Each step involves analyzing your lab’s internal resources and using your internal resources to meet your customers’ needs.

EDITOR: What is step one?

KAPLAN: Step one is to identify the health plans in your market with which you want to work. In most markets, there’s a Blues health plan, a for-profit plan, such as Aetna, Cigna, or UnitedHealth, and there may be a local or regional plan.

EDITOR: Once the lab has identified the target health plans, what is the next step in developing the strategic sales plan?

KAPLAN: Step two is to identify four key individuals in each health plan on your target lists: the CEO, the COO, the medical director, and the head of large case management. It is essential that you meet these executives and get to know them personally.

EDITOR: Often it is quite difficult to get appointments with these people.

KAPLAN: True. However, now it’s time to do some creative networking. Find out who within your organization knows these people and how you can make connections with them. Send a list out to your employees and ask who knows them. Do you know them from church, the kids’ sports leagues, and do they live in your neighborhood, for example? Your goal in finding out who knows these executives is to develop a relationship that involves more than just being a vendor of a commodity.

EDITOR: That seems simple enough. In other words, you’re using your lab’s internal resources to foster an external relationship. Is that right?

KAPLAN: Exactly. And that leads to step three. In this step, the lab director or lab CEO tailors a business strategy that addresses the unique needs of each targeted health plan. This strategy is the heart of your lab’s multi-year sales plan. Now you can see why a multi-year sales plan can also be called a partnership. It’s a partnership, because you’re developing a relationship with each health plan to deliver the best health care to patients at the best price, and your aim is to do it over several years.

EDITOR: It can be quite time-consuming for the lab’s leadership to cultivate these personal relationships.

KAPLAN: This does take more effort up front if your laboratory does not have existing relationships with the four executives from each targeted payer. However, once you’ve built these bridges, and have a true partnership, you’ll be working together and meeting frequently. So, you’ll know the specific needs of each of your health plan partners.

EDITOR: What you describe is quite different than how most regional or local laboratories currently handle their managed care relations.

KAPLAN: I would respond by saying that the failure to build these partnerships is one reason so many local labs find themselves excluded from important managed care contracts—and why they are frequently offered pricing that treats lab testing as a commodity.

EDITOR: That’s true because most labs don’t understand the unique needs of payers in their communities. Therefore, they do not offer services for which the payer is willing to offer higher reimbursement.

KAPLAN: This is where the partnership approach pays off. And don’t forget— developing a multi-year strategy and sales plan involves meeting a number of needs at once for each payer on the target list. It’s not a strategy of bidding one penny less per member per month than your competitor bids for each payer’s book of business. Rather, it is determining the specific needs of the health plan to which your laboratory can provide a solution. And, you may be surprised to find that most labs currently do not deliver what plans want. That was clear to me from the survey we conducted.

EDITOR: What are the most fruitful sources of added-value to payers?

KAPLAN: Lab directors should ask of health care payers, ‘What are your major cost concerns over the next 18 to 24 months?’ And, ‘What can laboratories do to help you address these concerns.’ The responses that we got from our survey of health insurance executives are examples of what a lab director will hear and it will vary by payer.

EDITOR: With the emphasis on improving healthcare outcomes, is there an effective way for labs to learn what clinical objectives have greatest priority with a payer?

KAPLAN: That’s a sweet spot for a lab to bring value to the payer. I advise labs to have a clinician, such as a pathologist or Ph.D., present when getting the answers to these questions. By necessity, if I were a lab director, I would need someone on my relationship development team who is a clinician. That way, when I meet with the medical director or the large case manager, the clinician on my team can interpret what the medical director or case manager needs from the lab. That is a key. Remember that the sales manager has very specific skills, and that’s different expertise compared with someone trained in medicine. To compete effectively and build that win-win relationship with health plans, your lab needs that extra level of clinical expertise.

EDITOR: This seems a bit obvious, so won’t some labs grouse that what you’re saying is basic marketing and sales communication 101?

KAPLAN: Yes, they may say that. But remember, the more thorough and sophisticated your execution of this strategy, the more likely you are to match your lab’s services to the most important needs of the health plan. It generally takes diligent research and lots of effort. Further, by following these steps, you will do the classic SWOT analysis of your laboratory. You will do a thorough assessment of your strengths, weaknesses, opportunities, and threats. Even though these steps seem preliminary and perhaps obvious to some, they are absolutely critical to success in competitive markets. And that’s what we have today: highly competitive healthcare markets. As I said earlier, we are no longer operating as a protected public utility.

EDITOR: Most laboratory management teams don’t take the time to do this type of analysis as part of their managed care contracting effort.

KAPLAN: And look at the outcome. Too often, local laboratories are excluded from important managed care contracts in their communities. By doing an internal and external assessment, you identify that your laboratory is capable of meeting the needs of the key payers on your target list. These capabilities are what you leverage with the health plan to be a valued provider and earn better reimbursement.

EDITOR: Your common theme here is that laboratories should take the effort to offer a health plan more than simply lowest price.

KAPLAN: Generally, regional labs do not have the same economies of scale as the national laboratories have. So competing on price is going to be a losing strategy for most local laboratories. On the other hand, by matching your lab’s capabilities to the health plan’s unmet needs, you can develop and implement a multi-year sales plan that transitions you from being a commodity vendor to being a commodity vendor plus a partner with selected payers in your market. Being a commodity vendor plus a partner will help you to work with health plans to reduce healthcare costs and improve quality. That’s your goal: reduce costs and improve quality, and get paid more when you do.

“Lab directors should ask of health care payers,
‘What are your major cost concerns over the next 18 to 24 months?’”
-Kerry Kaplan

EDITOR: Essentially, you’re saying that labs need to adopt the goal of the entire health system: reduce costs and improve quality. Is that correct?

KAPLAN: Health plans are interested in both controlling costs and improving quality. They might be more interested in reducing costs today, but improving quality is becoming more important than it was a decade ago. And pressure for health plans to contribute to improving quality will increase steadily going forward.

EDITOR: Kerry, we need to stop here. In our next discussion, will you address specific ways that these health plan executives identified as ways for laboratories to add value to payers and earn additional reimbursement?

KAPLAN: Yes. We can discuss specific strategies that laboratories and pathology groups can use to shift contract negotiations away from “lowest price.” Also, I have recommendations about how laboratories can use evidence-based medicine (EBM) and genomics to their financial benefit in managed care contracting discussions.

EDITOR: That promises to be useful information for our clients and readers.

KAPLAN: Good. Stay tuned, everyone. What comes next has lots of power and potential for labs to turn the tables on health plans!

Health Plan Executives and Survey Questions They Answered About Laboratory Test Services

TO PROVIDE LAB DIRECTORS AND PATHOLOGISTS WITH INSIGHTS about how the health insurance industry views laboratories and diagnostic testing, Kerry Kaplan, President of Healthcare Connections, a healthcare consulting firm, in Natick, Massachusetts, interviewed nine managed care executives.

Each was asked three questions about how clinical labs can meet the needs of health plans more effectively. In a presentation to the Executive War College on Lab and Pathology Management last May in Miami, Florida, Kaplan shared his findings. This interview was based on that presentation and a follow-up discussion with Kaplan.

These nine executives were surveyed:

  • Jack Friedman, CEO, Providence HealthPlans, Portland, Oregon
  • Greg Culley, M.D., Medical Director, Capital Blue Cross, Harrisburg, Pennsylvania
  • Mary McWilliams, CEO, Regence, Seattle, Washington
  • Mike Cropp, M.D., CEO, Independent Health, Buffalo, New York
  • Pam Kalen, VP, National Business Group on Health, Washington, D.C.
  • Dwight Brower, M.D., Medical Director Blue Cross Blue Shield, Baton Rouge, Louisiana
  • An unnamed former Wellpoint Executive, Richmond, Virginia
  • Dennis Batey, M.D., CEO, Presbyterian Health Plan, Albuquerque, New Mexico
  • Lee Newcomer, M.D., Senior V.P. of Oncology, UnitedHealthcare, Minneapolis, Minnesota

These three questions were asked: (The interviews were done either face-to-face or over the telephone.)

  1. What are your major cost concerns over the next 18 months?
  2. What is the status of evidence-based medicine now and in the future?
  3. What is your advice to laboratories?


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