Contracting Update: In Tough Environment, Labs Need to Get More Creative, Aggressive

Contract killers aren’t just confined to reruns of The Sopranos. That was the message sent to attendees at G2 Intelligence’s Lab Contracting Workshop last month. Although the presenters strived to remain upbeat, the messages they delivered at both the conference and in subsequent interviews contained a blunt and clear-eyed message: Renumerative contracts with payers are becoming extraordinarily difficult to obtain these days. “With respect to lab contracting, this is the most difficult period we’ve seen,” said Michael Snyder, a principal with Clinical Lab Business Solutions in Cherry Hill, N.J. And it’s only the beginning, he added. Getting a provider contract used to be a “clerical process where you filled out paperwork and provided CVs, and you either got approved or disapproved,” said Eric Bettinger, chief financial officer of ClearPath Diagnostics in Syracuse, N.Y. That is no longer the case. “It’s become a much more personalized process” where labs and pathology practices are very closely vetted, Bettinger observed. The pressure from regional insurers is not as acute, according to Bettinger. However the national players such as Aetna—which recently cut its rates to labs and pathologists well below Medicare (see article on page 1)—are where most of the difficulties are being found. Doubtful Future Those labs and practices that don’t adjust to the brutal operating environment are in for a fate suffered by a variety of misguided or unfortunate characters on The Sopranos. “I don’t know how many community hospital labs will survive even the next three years,” said Patty A. Sipes, senior vice president of sales and marketing for PAML, the Spokane, Wash.-based laboratory. “It is truly becoming an environment where take-it-or-leave-it pricing can be presented,” Snyder said. And according to Bettinger, labs are in a guessing game as to what each health plan is willing to pay. What is driving this hostile operating environment? There are a number of factors. Many can be traced to the Affordable Care Act, the most dramatic aspects of which will be introduced next year. The initial premiums announced by health plans competing in the California and Oregon exchanges were on the low side and excluded large numbers of providers—strong indications that the payers plan to be vigilant about cost control. Cuts to Medicare through the sequester and a variety of outcome improvement initiatives connected to the ACA are also piling on. And an increasing number of Medicare patients are moving into Medicare Advantage plans, which are also ratcheting down costs. The scenery isn’t any more attractive among the current commercial book of business. According to Snyder, at least a quarter of employer groups have shifted to high-performance or so-called “narrow” provider networks that focus on keeping costs down while heaping ever-higher deductibles and copayments into the arms of their workers. As a result, both constituencies want more data on price transparency. There is also a push by plans to deliberately steer patients into the cheapest possible care option. “I’ve seen plans that will pay the members to go to a lower-cost provider and send them a check for 10 bucks,” Snyder said. “What the health plans are looking for is, ‘who can give us a full package? Who can help lower our costs?’” Sipes observed. Limited Leverage Moreover, by representing little more than 3 percent of total health care expenditures, labs do not have a significant amount of leverage with health plans, if they have any leverage at all. “To the health plan industry, [labs] are beige,” Snyder said. But representing just a small portion of the health care buy is not the only problems labs have. According to Snyder, most have done little to prove their value to payers and have remained focused on volume rather than quality metrics. “There is no recognized quality standard. I hear this a lot from health plans,” Snyder said. Some Possible Options The labs are not without options. They can move to carve a role out for themselves in accountable care organizations, yet another face of the ACA. However, Snyder in particular is pessimistic about this notion. “Labs have very little impact in putting together an ACO deal,” he said, even though national labs such as LabCorp and Quest Diagnostics have repeatedly told analysts that the ACOs need their services. The expansion of the Medicaid program in at least half of the states is expected to bring in millions of previously uninsured individuals in the coming years who will require laboratory and pathology testing and follow-up assays. However, Medicaid pays a fraction of Medicare or commercial rates, making it challenging for many labs to eke out a profit serving those patients. “It is certainly a growth area, and I think we will have to manage that growth with [Medicaid’s] compressed margins,” Bettinger said. “There may be some tests we can’t do, but you have to be careful. It’s tough to cherry-pick tests with your . . . clients.” Instead, the focus for labs in order to persevere is on the management of chronic conditions, such as kidney disease. Snyder noted for example that the proper identification and management of a chronic kidney disease patient—with lab results used to closely monitor their condition—can prevent them from progressing into a case of end-stage renal disease and the inevitable dialysis and hunt for a transplant donor. “That’s a savings of $60,000 per year per patient,” Snyder said. If labs can pitch a way to accomplish those kinds of savings, the health plans are likely to listen. IT Is a Must-Have However, labs cannot achieve such savings and the other efficiencies desired by payers within a vacuum. Much as the HITECH Act has connected hundreds of thousands of physicians to electronic medical record systems over the past several years, labs are also going to have to invest in health care IT. “The data piece is huge. . . . [P]hysician connectivity is the biggest item when we talk with plans,” Sipes said. She suggested partnering with other entities that can help provide the IT component more readily. However, labs should continue to emphasize the non-IT items that they handle well, such as turnaround times, customer service, physician loyalty, and the quality of the pathology work that they do, Sipes added. ClearPath, for example, clearly communicates the quality levels of the services it provides on a daily basis, such as how often it pulls slides and performs second screens on Pap smears. Closer Contact Labs will never disappear entirely since they play a critical role in health care delivery. But labs and pathology practices will have to make a greater effort to gain contracts. One of the things that Bettinger emphasizes is face-to-face meetings with top-level health plan executives in order to make ClearPath’s business case more clearly. This is being pursued particularly after a contract proposal may initially be turned down. “Our physicians meet with the health plan’s chief medical officer, and they can specifically talk about what differentiates them,” Bettinger said.