Focus On: Lab Institute: Laboratories Facing Serious Challenges, But There’s Light at the End of the Tunnel

The tone at the 31st annual Lab Institute, held Oct. 16-18, 2013, was somber but not without hope as more than 500 people from clinical and anatomic pathology laboratories and related industries confronted the serious challenges currently facing the diagnostic community. With Medicare and private payer reimbursement for lab tests constantly under attack, many speakers and attendees acknowledged that not all laboratories will survive continued cuts and the fluid dynamics of today’s health care marketplace. To survive, labs will need to be nimble, willing to consider different business models, and open to serving as consultants in patient care. “I hate to be a downer, but our industry is in for really tough times. Most independent laboratories won’t continue to be here,” said Robert Babkowski, M.D., the laboratory medical director for Stamford Hospital in Connecticut. “With more high-deductible insurance, patients will price shop. Mrs. Smith will call around to see who has the lowest price for the panel she needs. . . . At the end of the day there will be extreme consolidation and a race to the bottom.” Dave King, chief executive officer of LabCorp, agreed that labs are in “the most challenging environment we have ever been in,” which makes it ever-more imperative for labs to be more aggressive and specific about conveying critical messaging to lawmakers. “Congress needs to understand us better, and it is incumbent on us as an industry that we [do a better job of teaching them],” said King during a conversation with Dennis Weissman, founder and executive editor of G2 Intelligence. Laboratory executives must reach out to their local senators and congressmen and invite them to tour their labs so they can understand the true value of what labs offer. This is especially true of the small, community labs that feel disproportionate effects of payment cuts. King noted that small labs need to survive because they serve lines of business that national labs may not always pursue, such as serving nursing homes. “The community labs and services they provide are fundamental to health care,” he stressed. The sad truth, however, is that not all labs will survive as payment for lab tests continues to decline. A test that was reimbursed by Medicare at $10 in 1984 when the Clinical Laboratory Fee Schedule (CLFS) was implemented today is reimbursed at only $8.33 today, according to G2 calculations. Based on inflation, that test should be paid at more than $22. Medicare has cut payment to clinical labs by almost 12 percent since 2010 and more cuts are expected. Many labs have already cut costs as much as they can to cope with continued cuts, noted Alan Mertz, president of the American Clinical Laboratory Association (ACLA). “Now we’re cutting into bone,” he said. Clinical laboratories could face additional Medicare reimbursement cuts of 14 percent over the next 10 years if Congress decides to adopt President Obama’s proposal to extend the 1.75 percent cut to the CLFS for eight more years. Labs were already facing Medicare cuts of 23 percent over the next 10 years from reductions enacted in the Affordable Care Act, a 2 percent rebasing, and sequestration, according to Mertz. The 1.75 percent cut, enacted in 2010, is currently due to expire in 2015, but the president has proposed extending it to 2023. Lawmakers looking for a way to pay for a fix to the sustainable growth rate used to set Medicare payment for physicians could potentially adopt the proposal, which would reduce test reimbursement by an additional $9.46 billion over 10 years. “We are clearly on the table for another cut,” said Mertz, adding that a lab copay and competitive bidding are also possibilities but are less likely to be approved this year. “I’m most worried about the cut to the fee schedule.” ACLA is actively fighting further reduction to reimbursement for laboratories and pathologists and recently helped get support from lawmakers in stopping cuts proposed by the Centers for Medicare and Medicaid Services (CMS) as part of its Physician Fee Schedule rule. A total of 115 representatives and more than 40 senators signed on to a letter sent to CMS administrator Marilyn Tavenner opposing the cuts. The letter notes that the proposal to cap payments for anatomic pathology services at the Hospital Outpatient Prospective Payment System levels would result in cuts of 26 percent to independent laboratories. While he is hopeful that CMS will respond to lawmakers’ concerns, John Scott, vice president of the division of advocacy at the College of American Pathologists, notes that labs and pathologists should prepare for the worst. “We have to plan for the end game because CMS does not have to listen,” he said. “We have to be ready.” Light at the End of the Tunnel It’s clear that the reimbursement outlook is troubling and the current market dynamics are being disrupted by loss of payer contracts, the growth of accountable care organizations, and care delivery models moving from fee-for-service tied to volume to payment for value. However, speakers at Lab Institute were quick to point out that there are still many opportunities for laboratories, from developing new business lines, to leveraging the data that they collect and payers want, to becoming a partner in cost control and patient care. A value market means providers have a new set of needs, ranging from population management to cost management to care coordination, explained L. Eleanor Herriman, M.D., MBA, director of advisory services for G2 Intelligence. Labs must position themselves as partners in health care if they are to be viewed as valued players in the marketplace. This means working with clinicians on test interpretations, testing plans and interventions, prevention of complications, and better quality metrics. By capturing that value, labs have a hand up in negotiating with payers and within new payment structures. “Labs can prosper from current market turbulence by leveraging new technologies and traditional expertise and delivering information services that advance clinical decisionmaking, thereby generating clinical value far beyond the 3 to 5 percent of health care spending that testing comprises,” said Herriman. For example, labs can contribute to a 36 percent decrease in care costs by conducting rapid molecular testing to identify pathogens and working with the pharmacy to recommend antibiotics to clinicians. Other areas where labs can have a concrete impact on costs: reducing costs from acute renal failure by implementing new biomarker testing for earlier diagnosis and nephrologist intervention to stop progression to later stages; reducing costs from hyponatremia by consulting with clinicians on test ordering, interpretation, and management decisions; and reducing costs from pneumonia readmissions through rapid molecular testing. Herriman gave several examples of laboratories that partnered with other health care providers to create value and save money. One large regional reference lab—PathGroup (Brentwood, Tenn.)—partnered with the largest oncology contract research organization (CRO) to create a new model for recruiting patients from community oncologists. PathGroup created a next-generation sequencing tumor profiling panel to identify patients eligible for clinical trials based on their tumor mutations/pathways. This created value for the CRO through faster and more accurate recruitment and provided a new source of revenues for PathGroup. Another lab, Health Diagnostic Laboratories (HDL; Richmond, Va.) has developed a business model that helps primary care physicians detect cardiometabolic disease earlier, treat appropriately, and manage patients’ adherence to treatment plans. A study published in the September 2013 issue of Population Health Management found that advanced cardiometabolic testing paired with follow-up health management from HDL resulted in a 23 percent decrease in patients’ overall health care costs in two years when compared to a control group. HDL has also developed a partnership with the Washington Redskins to screen players, with opportunities for game sponsorships, fan fitness challenges, military veteran screenings, and a fitness expo. All of these activities help promote brand awareness for the lab and seem to be helping HDL’s bottom line. According to Tonya Mallory, CEO of HDL, the company is growing at an astounding 5 percent per week. Advantages of Smaller Labs While most labs will find it hard to compete with the national labs on price, smaller labs do have some advantages when it comes to community relationships and name and location recognition, says Richard Nicholson, CEO of West Pacific Medical Laboratory (Sante Fe Springs, Calif.), which has grown from revenues of $2.5 million in September 2010 to more than $25 million today. Nicholson recommends that community labs comarket with a specialty provider to find ways to differentiate themselves from the big labs. Smaller labs also sometimes have the edge when it comes to customer service, since they are integral parts of the communities in which they operate. Nicholson advises recruiting “small-company people,” those who want to feel valued and involved. Since community labs can’t compete with the large labs on salary and benefits, they will need to offer different kinds of incentives and benefits—such as allowing all employees to have a say in the company and to feel valued. For small labs, it’s all about personal relationships and flexibility, according to Nicholson. Those that can find a market niche and learn to adapt to market changes will survive. Those that don’t may not survive. “There definitely will be more consolidation, but there is still a need for community labs,” said Nicholson. “It’s all in how you position yourself.” Takeaway: Despite the serious challenges facing the laboratory industry, opportunities abound. Labs that are nimble and can adapt will survive, while those tied to old ways of doing business will not.