Feature Story

For labs, managed care still a sticky business

November 2001
Karen Southwick

Managed care may be down, in terms of membership growth and public reputation, but it’s certainly not out.

In fact, for laboratories attempting to negotiate contracts with managed care organizations, the atmosphere has not changed. "I have not noticed the contracting environment becoming more or less hospitable as HMO enrollment has leveled off," says Paul Valenstein, MD, a pathologist who is chief operating officer of Allegiance LLC, a physician-hospital organization that includes a hospital system and 750 physicians in primary care and specialty practice. Even though HMO membership is declining, he notes, other types of managed care, such as preferred and exclusive provider organizations, are gaining members.

Dr. Valenstein, who spoke at the CLMA annual meeting on the laboratory’s role in the integrated health care system, cautions pathologists and laboratorians that managed care is here to stay. "Managed care will evolve but not disappear," he says.

However, the typical hospital-based laboratory is too small of a health care segment to negotiate effectively on its own with managed care organizations. "The clinical laboratory represents about three percent of the health care premium," he says, "which makes it hard to get on the radar screen" of managed care organizations, or MCOs. So labs must extend their reach.

"In a competitive market, you can’t successfully approach an MCO as a hospital-based laboratory," Dr. Valenstein says. Although the traditional contracting approach is to expand geographically by joining together with other labs, another alternative is to become part of an integrated delivery network, or IDN, which includes hospital services and different physician specialties.

In fact, Dr. Valenstein warns, over the next decade or so, "if you don’t become part of some sort of larger system, you may get excluded from a large portion of the outpatient market or participate only on a steeply discounted fee-for-service basis. Payers will negotiate fees only with larger systems," he says.

In Dr. Valenstein’s experience, MCOs are more willing to engage in "give and take" negotiations on a capitated contract. For non-risk contracts, such as discounted fee-for-service arrangements, the MCO will usually present its reimbursement rates as a "take it or leave it" proposition.

Dr. Valenstein’s laboratory is a preferred provider in managed care laboratory contracts worth $11 million annually. One of those contracts is through a consortium that includes other laboratories, and two are through Allegiance, which is based in Ann Arbor, Mich. Allegiance is an IDN that delivers a range of services; they include inpatient and outpatient hospital services, primary care, and pathology, radiology, cardiology, and other specialty services. "Allegiance providers serve about 120,000 HMO members in commercial and Medicaid plans in southeastern Michigan," Dr. Valenstein says.

Becoming a preferred laboratory provider brings with it responsibilities as well as opportunities. First, at-risk providers need to concern themselves with "leakage"—members who use out-of-network laboratory services. "Are your patients going to someone else when they should be coming to you? Is there another preferred provider in your area? Is money going out the door for a specialized test that you don’t have the capacity to perform?"

Second, the preferred IDN laboratory has to be vigilant about overutilization. "This means communicating with test-ordering providers who are part of your IDN," Dr. Valenstein says. He advises laboratories to get past utilization figures from the MCO during the contract bidding process. Once the contract is accepted, you have to be able to track the use of your services, he adds.

Third, the IDN laboratory must report test results back to the MCO for MCO accreditation. "MCOs look at quality accreditation differently than hospitals," Dr. Valenstein notes. For managed care, the chief quality agency is the NCQA, "rather than the CAPfor laboratories and JCAHO for hospitals," Dr. Valenstein says. NCQA is interested in population-level data, such as what percentage of members get Pap tests every three years or what percentage of diabetics have glycohemoglobin under control. "The MCOwill want these laboratory data to calculate quality scores for their membership. Unfortunately," Dr. Valenstein says, "a hospital-based laboratory may not be set up to provide this information."

In reporting laboratory results to the MCO, "you must have the ability to match the MCO’s membership number with your laboratory test result." But the MCO membership number is usually stored in the hospital billing system while the laboratory result is stored in the laboratory computer system. For an MCO, the medical record number means nothing unless a membership number is attached. "If you don’t have the capability to make the required link, you better stay away from this type of contract," Dr. Valenstein warns.

To get a leg up when negotiating contracts, show a managed care organization that you will be able to improve their NCQA quality scores, Dr. Valenstein advises. One way to improve performance is by instituting patient reminders to come in for, say, a Pap test. When Dr. Valenstein’s integrated delivery network began to send patient reminders, "we saw upward trends in all of our quality indicators."

Finally, it’s a challenge to figure out whether the laboratory is making money on managed care contracts, Dr. Valenstein acknowledges. "The problem is not determining revenue from a contract," he says. "This can be readily calculated for both fee-for-service and capitated contracts. In fact, it’s slightly easier for capitated contracts."

The real problem is ascertaining costs. "A laboratory’s estimate for contract-specific costs is highly dependent on how its costs are allocated," he says. For instance, some labs allocate all of their fixed costs to the inpatient business and consider outpatient contracts as incremental business. That makes outpatient contracts look more profitable than at a facility that allocates fixed costs across both outpatient and inpatient lines of business. Dr. Valenstein’s laboratory assigns some fixed costs, such as the physical plant, exclusively to inpatient care, but spreads most other costs, including management, equipment, and information systems, across both inpatient and outpatient activity.

Estimating contract profitability in an IDN is even more complicated, however, because laboratory services represent only a small portion of the contract. "It is more important to ensure that the overall package is favorable to the network than to ensure that the laboratory portion is profitable," he adds.

Dr. Valenstein urges pathologists to get involved with the IDN management if they expect to sit at the table during MCO contract negotiations. "If your horizon does not extend beyond the laboratory, you will not be at the table during managed care contracting, unless you are part of a very large commercial lab," he says. "That’s because serious negotiation is difficult with more than four or five people in the room. There is no space for hospital laboratory leadership," Dr. Valenstein says.

If laboratory leaders are not involved directly in negotiations, they should make sure they work out a flexible arrangement with the IDN negotiators in advance. One example is an up-front agreement that the laboratory will not be carved out and will receive a certain percentage of the contract, whatever it turns out to be worth. Once negotiations are completed, the laboratory’s share can be computed.

Karen Southwick is a writer in San Francisco.