CEO SUMMARY: It often takes two to four years before payer coverage and reimbursement become stable. During that time, NorDx Laboratories wants the vendors who sell it new molecular assays to have some “skin in the game.” It accomplishes this by negotiating contracts that link the contract’s renewal to NorDx’s success in getting both payers and physicians to understand and accept the molecular test.
PAYERS AND PHYSICIANS NO LONGER rush to accept every new diagnostic test entering the marketplace. For that reason, laboratories must have a strategy to address the best time and circumstances for acquiring and offering new assays based on molecular technologies.
At NorDx Laboratories of Scarborough, Maine, that strategy can be described as “buy right and make the vendor a partner” in the laboratory’s success with the new assays it acquires. “We developed this management strategy out of necessity,” stated Stan Schofield, President and CEO of NorDx.
“Our laboratory needs to offer clinicians the latest in new diagnostic tests, but we cannot afford to lose money on these tests,” he said. “Yet, payers are slow to cover these tests. Reimbursement is frequently insufficient to fully cover our costs for these tests. For these reasons, it is logical that our best partner in developing a new test is the vendor which manufactures it.”
However, Schofield’s laboratory is careful to do its homework before it even launches contract negotiations with a diagnostic manufacturer. “Look before you leap!” he advised. “Once your lab signs a contract to acquire these tests and offer them, it must live with downstream financial consequences if payers either resist accepting these tests or fail to reimburse an adequate amount.
Evaluate Payers and Docs
“A financially successful molecular testing program starts with more than just a careful evaluation of the diagnostic technology itself,” continued Schofield. “Before entering into vendor contracts, two important constituencies should be evaluated.
“First, meet with your lab’s important payers. In advance of launching the new test, you need to know whether they will cover this test, how much they intend to reimburse for the test, and what type of educational support they will need to make positive decisions on both points,” he said.
“Second, determine how physicians in your area will react to the availability of the molecular-based test you intend to introduce,” advised Schofield. “One good place to start is to meet with key clinical leaders in your lab’s service area. What if they react poorly to the science behind the test or its use in clinical settings? You need to be forewarned about what types of objections you may have to overcome to successfully introduce a new molecular-based assay.
“Physician education is critical if any new laboratory test is to be accepted,” he added. “This is particularly true of many new tests based on molecular technologies. Before most physicians will change practice patterns and order new lab tests, they need to learn about the clinical studies and documentation which support the use of those new diagnostic tests.
“NorDx has learned that these first two steps need to be done before any contract is signed with a diagnostic manufacturer,” added Schofield. “Because we’ve done our homework, we can negotiate terms which meet the needs of physicians in our region and best reflect the speed with which major payers are expected to accept these molecular-based assays.”
“At this point in the molecular revolution, NorDx finds itself dealing with most or all of these issues with every new diagnostic test that incorporates new molecular technology,” he said. “For that reason, we’ve learned valuable lessons about how to evaluate these new tests. It’s helped us to develop a customized implementation pro- gram for our laboratory. The goal is to maximize our ability to offer clinicians these tests and bill for enough reimbursement to fully recover our costs to provide such tests.
“When it comes to negotiating a contract for new molecular-based lab tests, our laboratory has learned three key lessons,” noted Schofield. “These reflect my opening admonition of ‘look before you leap!’ NorDx only starts negotiations after it has done its homework. It takes lots of time and resources to do this right. And because management resources are limited, at times, it can be frustrating.
“Lesson number one is that the vendor contract has as much to do with the clinical and financial success of the molecular-based tests covered by that contract as any other factor.”
“Lesson number one is that the vendor contract has as much to do with the clinical and financial success of the molecular-based tests covered by that contract as any other factor,” he declared. “For that reason, NorDx is a tough negotiator and has several requirements.
“First, NorDx does not enter contracts that are fixed term or open- ended. Rather, our contracts are structured to ‘renew’ based on reimbursement changes and clinical acceptance. The contract defines these factors in ways that are relevant to our laboratory,” explained Schofield. “Second, our contracts include clauses that allow us to put the vendor on notice about these key issues. We have a mutual 90-day ‘out’ clause.
“Our contract philosophy is that the vendor should partner with NorDx on these new molecular tests,” he added. “Clauses such as the two mentioned above force the vendor to pay attention to changes in coverage criteria and reimbursement. We understand that the reimbursement situation today for new diagnostic tests is often fluid and unstable. It may take two to four years after the introduction of these new tests before they achieve a stable level of reimbursement.
Sharing In Financial Risk
“That’s one reason why we want our vendor to be as closely tied to coverage criteria and reimbursement as we are,” he continued. “They have experience and resources to lobby payers in ways that NorDx doesn’t. Most importantly, it helps protect our laboratory from downstream financial losses if payers and clinicians fail to embrace the new test.
“The second key lesson we’ve learned involves balancing the needs of the patient and the physician with the economics of reimbursement,” said Schofield. “The NorDx implementation strategy specifically includes clinicians. This process is becoming more complicated for laboratories than ever before. We find that we must introduce every new assay to each physician in a unique way that relates its clinical benefits to that physician’s practice. Fortunately, physicians are beginning to understand these new parameters.
Key Lesson Number Three
“Key lesson number three is to do a full cost analysis before buying a new test,” advised Schofield. “We don’t take anyone’s word on this point—neither vendor nor payer. In particular, don’t ever let the vendor do the cost analysis for your laboratory and then rely on that cost analysis in your purchase decision.
“NorDx always does its own analysis,” he said. “The first time or two it can be time-consuming. But our management team now has an accurate template, developed with the help of our financial experts. The assessment of costs we do now is invariably more accurate than any done by outside sources.
“Key lesson number four is always, always, always create a competitive bidding situation among competing vendors,” stated Schofield. “Frequently there are enough vendors offering similar assays that we can invite more than one to respond to our RFP (request for proposal).
“In fact, my favorite adage around here is ‘competitive bidding is a laboratory manager’s best friend!’ Competitive bidding has helped NorDx avoid many of the downstream financial burdens that result from poorly-crafted vendor contracts. We may be a tough negotiator at contract time, but the resulting agreement creates a better ongoing working relationship with the successful vendors,” declared Schofield.
Minimizing Financial Risk
The experience of NorDx Laboratories demonstrates why the introduction of new molecular assays continues to be a financially high-risk decision for many laboratories. This is particularly true if the new molecular assay only makes a modest clinical improvement over existing methodologies. That is why NorDx decided the best strategy was to negotiate contracts with vendors that made them “partners” in the clinical and financial success of the tests they manufacture.