Two Blood Brothers Use “Free Testing” Strategy

Nation’s two biggest labs implement strategy to counter hospital lab outreach competition

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CEO SUMMARY: It’s a business strategy that Quest Diagnostics Incorporated and Laboratory Corporation of America use in selected areas where they have lost exclusive managed care contracts to regional lab competitors. In order to retain access to a physician’s fee-for-service testing business, each lab company is willing to waive HMO testing fees in specific situations that conform to an OIG fraud alert.

HERE’S A STORY WITH FUTURE implications for the ongoing profitability of clinical laboratory testing services delivered to physicians’ offices.

THE DARK REPORT has learned that the two blood brothers have quietly implemented a corporate-wide policy with wide-ranging implications for the entire laboratory industry.

In situations where a national lab loses an exclusive managed care contract, it will selectively approach a physician with an offer to waive testing fees for that HMO’s patients as a way to encourage the physician to continue sending his/her non-contract lab testing their way.

In effect, they are using “free testing” as a market tool to compete against
smaller regional labs which may have won the exclusive HMO contract in an open bidding process.

“This is precisely the situation we see in Detroit,” stated Jack Shaw, Executive Director of Joint Venture Hospital Laboratories (JVHL), a regional laboratory network owned by nine of the region’s integrated health systems. “In open, competitive bidding, JVHL won the exclusive lab testing contract offered by Health Alliance Plan (HAP), an HMO with 125,000 members. (See TDR, March 11, 2002.)

“That contract had formerly been held by Quest Diagnostics,” he continued. “Since May 1, when the new contract took effect, sales reps from Quest have approached certain physicians and offered to waive lab testing fees on their HAP patients if the physicians will continue to send all their other lab testing work to Quest.

“Having one of the national labs offer free testing is a new competitive dynamic in Southeast Michigan,” said Shaw. “Over ten years, JVHL has worked hard to compete in traditional ways on value and service at a competitive price. HAP selected JVHL over Quest for exactly those reasons. Quest’s decision to compete by offering free testing is an unexpected twist and circumvents the business objectives established by the lab testing contract between HAP and JVHL.”

Why HAP Selected JVHL

In particular, one important reason why HAP selected JVHL is because the regional laboratory network could provide more complete sets of lab test data on HAP patients than either of the two blood brothers. HAP would thus have more complete utilization data, as well as higher HEDIS scores. Both are important benefits to a health insurer.

“This contract was negotiated on features other than price,” explained Shaw. “Since HAP was interested in the fuller sets of patient lab test data that JVHL could provide, Quest’s efforts to divert HAP specimens directly erode that benefit.

“Moreover, as director of a regional laboratory network, I am concerned that a national lab like Quest is using its economic power to offer free testing to doctors in our city, subsidizing this ‘free testing’ with profits from other segments of its national business. How do the regional labs of JVHL, which generally offer a higher level of service than out-of-town lab companies, get the economic capability to match such ‘free testing’ marketing ploys?”

From the payer perspective, the “free testing” offer creates its own problems. THE DARK REPORT spoke to a Detroit-based payer familiar with aspects of the HAP-Quest situation.

This insurance company executive noted two specific concerns which a “waiver of charges” scheme would trigger at his insurance plan. “First, we would be concerned that physicians, who are often unfamiliar with all the clauses of their multiple managed care contracts, may sign one of these disclosure agreements without realizing that they may actually be in violation of the OIG fraud advisory,” he said. “I think neither the physicians nor the laboratory sales reps probably understand all the legal implications of what the physician is being asked to do.

“Second, we negotiate a detailed contract with our chosen laboratory provider for specific business reasons,” he continued. “Thus, to have a non-contract laboratory try to convince our providers to not use the contracted laboratory is a situation which would raise some serious business, legal, and ethical issues for us.”

“Below-Market” Pricing

Hospital administrators and pathologists involved in laboratory outreach programs should be alert to the use of this “free testing” sales ploy by the two blood brothers. It is a marketing tactic which uses the economic clout of the national lab companies to subsidize a “below-market” pricing scheme to selected physicians.

In the sidebar at left, THE DARK REPORT provides information about the OIG fraud alert upon which the “waiver of charges to managed care patients” tactic is based, along with a basic analysis of at least five legal concerns which could come into play whenever a laboratory company offers this type of arrangement to an interested physician.

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