Xifin CEO: Time to tune up negotiations with payers

Many independent and hospital laboratories in the past two years have been successful in negotiating away their contracts that are tied to the current Medicare fee schedule, White said, adding that payers understand that tying rates to the fee schedule will cause a downward spiral. “They’ve been receptive to altering the way they market against current fee schedules. And those that are tied to the Medicare fee schedules have fixed the fee schedule at the 2017 rate and are negotiating off of that.” Not ideal, she added, because even the 2017 rates are not truly market based.

“We have to identify all of the private payer pricing we’re getting that’s below cost, or at an unsustainable level, and renegotiate those areas very well with the payers.”

Coverage is one of the biggest problems now, she said, with payers having spent a lot of time “figuring out how not to pay us.” Laboratories can negotiate coverage criteria too: “Who knows better than the lab performing the test under what circumstances the test should be ordered?”

At the same time, helping physicians with decision support is critical, White said, as is patient pricing transparency.

The changes in reimbursement are leading to other changes in the lab testing industry. For independent laboratories, one is that investor funding is improving for specialty labs with limited menus or proprietary assays. “Investors were sitting on the sidelines” when they were trying to predict the reimbursement structure, White said. “Now that they know, we’re seeing investment come back in. That means more molecular, proprietary testing labs resurface and specialty labs”—cardiovascular, pain, pharmacogenetics, genetics—“come into play.”

“Even as this pricing was coming into play, we saw a lot of labs specializing in specific disease types, and we’ll see that specialization trend continue,” she said. And physicians will continue to partner with specialty labs, mostly to keep pace with new tests. “Specialty labs really assist in that process of optimizing the physician’s order.”

The number of independent labs offering standard test menus will continue to decline, “because that type of testing is the lowest-margin testing.”

In addition, consolidation, partnerships, and joint ventures will continue.

• “Labs with high Medicare and Medicaid mixes in rural areas and nursing home labs will probably cede a lot of that market to regional hospital outreach labs” with better margins.
• Reference labs performing esoteric testing will continue to leverage their economies of scale to partner with outreach laboratories.
• Industry consolidation in routine testing will accelerate “because labs will need economies of scale to support the new cost structure and new reimbursement structure.”
• Independent labs will “move more and more to create joint ventures with hospital labs.”

Hospitals have a big advantage in the new environment, White said. Ninety-two percent operate their own lab; three-quarters of them have an outreach program. The latter is “essential to the hospital lab’s cost structure. They have higher margins and can gain some of this market at a better cost than independent clinical labs” in some of the rural areas with large Medicare populations.
Hospital laboratories themselves have financial advantages.

“Their in-network status is excellent,” she said. They have most, if not all, of the payer contracts within a region, and physicians prefer to use a single laboratory rather than multiple labs. Reimbursement rates are significantly higher than for independent laboratories. (Patient copays are higher too, White noted, but the in-network status mitigates that in some ways.)
“We also see that as laboratories shift their menus to more specialization, hospitals will be able to absorb more of the routine testing in their regions at a better cost margin.”

MACRA will continue to drive physicians to the hospital for population health management so they can report their quality metrics and obtain reimbursement, White said. “So hospital labs have a ready-made population of physicians for ordering laboratory tests.”
For hospitals, the limited menu of outreach labs is a disadvantage, but a wide and diverse menu can be achieved with complementary partnerships. Fewer phlebotomy centers is another disadvantage, but here, too, partnerships (with pharma chains, for example) help. Outreach’s higher cost structure is a drawback but one that can be modified with outreach development. And “the inadequate financial systems within hospitals are all being upgraded now in the laboratory sector,” White said.

In addition to capturing more revenue with stronger financial systems, White sums up the strategies laboratories can use to offset the impact of PAMA:

• Diversify the test menu and expand specialty testing capabilities.
• Use workflow automation to remove clerical decision-making and achieve labor efficiencies.
• Reduce the total cost of billing to below four percent while achieving bad debt targets.
• Leverage the hospital to negotiate better lab pricing.

“It’s important for us as an industry to understand that the fee schedules are so far outdated that we have to tune up our negotiating tactics with payers as we move forward,” White said.

Sherrie Rice is editor of CAP TODAY.