STUDY FINDINGS: ANALYTICAL RESULTS
This section characterizes the impact of managed care and health market change on the practices of PHLs, and describes how PHLs are responding to uncertainties in the clinical laboratory marketplace. While our findings are based on information from all the sources described in the methods section, the poll of PHL directors has been particularly useful in quantifying answers to our fundamental questions. Findings from our literature review, case studies, and interviews with laboratory experts provide more qualitative, descriptive findings that complement the poll results.
Impact of Managed Care on PHLs
The presence and growth of managed care has posed significant financial and organizational challenges to the clinical laboratory market as a whole. Because managed care organizations (MCOs) emphasize cost reduction, often have limited (or exclusive) arrangements with suppliers and service providers, and may tend to treat, not test, public health officials have been concerned that the growth of managed care would have negative impacts on the functions and practices of PHLs. Specifically, PHL stakeholders proposed two main hypotheses on managed care's possible adverse effects on the functions of PHLs:
Results of our poll show that PHL directors believe managed care is having an adverse effect on PHLs practices and functions. Twenty-one of the PHL directors (43%) stated that managed care had an adverse impact on their laboratories' functions (see Figure 15 below).
Figure 15: Managed Care Impact on PHLs
Reduced PHL Testing Volume
The most frequently reported impact of managed care was a reduction in the number of specimens submitted to the laboratory for testing. Seventeen of the 49 PHL directors (35%) reported that managed care had led to a decrease in the number of specimens sent to the laboratory. Reports of testing decrease as an impact of managed care were directly related to the level of managed care penetration in the state. PHLs in states with high managed care penetration had a greater probability of associating managed care with reduction in testing volume. Some PHL directors specified the types of tests for which volume was decreasing, and others indicated specific initiatives (e.g., Medicaid managed care) as contributing to a general decrease in testing at the PHL.The results from the poll are corroborated by our findings from the case studies and interviews. The Tennessee PHL director reported that TennCare, the state's managed Medicaid program, has indirectly resulted in a reduction in test volume for the state's PHL. The PHL traditionally conducted much of the patient testing for the Medicaid population. However, with the implementation of TennCare, Medicaid patients were covered by MCOs that chose to subcontract for laboratory services with large independent reference laboratories like LCA, thereby bypassing the PHLs.
Other state PHLs have also suggested that managed care is indirectly affecting their testing volume, either for all tests or for specific tests that are of public health importance and do not necessarily affect the treatment of individual patients (e.g., blood lead testing). Kansas's state PHL estimates that it has seen a 5-8% decrease in testing volume, due in part to the presence of managed care. States such as Connecticut, Maine, and Wisconsin have also noted decreases in the number of specimens seen by the laboratory. Four other PHLs have reported a decrease in the number of blood lead tests performed by their laboratories.
Concerns About Reporting
Another concern of PHLs is that MCOs' member-driven focus (rather than public health / population-driven focus) will reduce disease reporting and thereby hamper national disease surveillance activities. While we did not uncover any empirical evidence to support this contention, three PHL directors, two state epidemiologists, and a CDC official in laboratory systems expressed concern that MCOs may not be accurately reporting true infectious disease incidence in their populations to state health agencies (e.g., since they may be less inclined to test).
Difficulty in Obtaining Payment
Several PHL directors reported concern related to difficulty in obtaining reimbursement from MCOs for testing services rendered for their members. For example, Florida's PHL director reported that some managed care clients seek treatment at a county health department without authorization from the managed care organization, have tests performed by the PHL, then face MCO refusal to pay the PHL for testing services. Similarly, in New Hampshire, the PHL noted that it performed infectious disease testing for MCO providers B who sent specimens to the PHL for testing B only to have the MCOs refuse reimbursement because the PHL was not their contracted laboratory. The Texas PHL director echoed the problem of free-riding' off of PHL services by MCOs for their Medicaid members, and its inability to obtain reimbursement from MCOs for its testing services.
Inherent in this comment is the conviction of many PHL directors, as expressed in our interviews, that a central mission of PHLs is to provide laboratory services to disenfranchised populations, regardless of their ability to pay. While providers in the health care system will typically establish financial terms with payers before delivering services, the labs almost universally provide services first and seek payment retrospectively. As noted in some of our interviews and discussed later in this document, proactive establishment of relationships with MCOs and other payers would help to mitigate this problem.
Improved Collaboration With Private Constituencies
A few PHLs in our informal poll reported positive impacts from the growth of managed care. According to our informal poll results of PHL directors, among the positive impacts identified by PHL directors were increased collaboration between the PHL and the state health agency, and an increase in specialized types of reference testing by the PHL.
In Virginia, the recognition of managed care and the pressure to be cost conscious have prompted the state PHL to strengthen its partnership with the state health agency, particularly the Office of Epidemiology. In Kentucky, the state PHL has begun its strategic planning process for the laboratory, which coincides with the Kentucky Department of Health's overall strategy development initiatives in response to increased managed care presence.
Another example of collaboration, due in part to the growth of MCOs, is the Washington State Clinical Laboratory Advisory Committee (CLAC). With membership from both the public and private sectors, this program has assumed a proactive leadership role in shaping the laboratory delivery system in Washington state. Results from this program (described in more detail below) include improved communication, consensus on reimbursement issues, and pilot programs in the area of clinical guidelines.
Impact of Other Health Market Change on PHLs
In addition to the direct pressures that PHLs report from the presence of managed care, there are a number of other health market forces that may be contributing to the uncertainty of the laboratory services marketplace for PHLs.
The major concerns focus on potential privatization of public health functions, trends in the private clinical laboratory market (e.g., emergence of large reference laboratories, hospital laboratory consolidation), and diminishing fiscal viability of some PHL testing services. Specifically, PHL stakeholders proposed three main hypotheses on the possible impact of change in the non-managed care health market on the functions of PHLs:
Figure 16: Impact of Other Health Market Changes
Our poll results found that PHL directors believe that non-managed care health market changes are having adverse effects on PHL practices and functions. Of the 49 PHL directors responding, 27 reported some impact on laboratory function due to non-managed care health market changes, with PHL directors from 20 states (41%) reporting adverse impacts on laboratory functions due to these changes (see Figure 16 above).
Reduced PHL Testing Volume
The most commonly reported adverse effect of non-managed care health market change was the reduction in specimens being sent to the PHLs for laboratory testing. Of the 15 PHLs reporting a reduction in testing volume, 8 attributed the decrease to increased presence of private laboratories, 2 attributed the decrease to both private laboratories and hospital consolidation, and 5 did not specify the cause of the testing decrease.
These findings were corroborated by our case studies and interviews. For example, South Carolina's (SC) PHL noted that commercial laboratories had become more aggressive in the market, expanding their product lines to include testing services previously associated with the PHL, consequently leading to a decrease in the PHL's testing volume. However, SC reported that other health market changes such as hospital consolidation did not have an adverse impact on the PHL's function. Also, Oklahoma reported that some county health departments sent specimens to the private laboratories rather than the state PHL based on cost. Other state PHLs, such as Ohio, New Jersey, and Missouri, reported that the combined effect of hospital consolidation and the growing presence of private laboratories (e.g., large, independent reference laboratories, niche specialty laboratories) have led to a decrease in the overall number of specimens sent to their laboratories for testing.
Other PHL directors reported the specific types of testing that were being affected by commercial laboratories and hospital consolidation. In New Mexico, the state PHL discontinued its pap smear testing service because private laboratories were performing most of them. In Minnesota, fungal serologies and testing for cytomegalovirus, which previously had been performed by the state PHL, are now being outsourced to Associated Research and University Pathologists, Inc. (ARUP), a private reference and esoteric testing laboratory in Utah. Finally, Rhode Island's PHL reports that it has lost some (approximately 10%) of its environmental testing volume due to commercial laboratories charging a lower rate for certain environmental tests.
Increase in Volume of Some Expensive Tests
Another reported effect of non-managed care health market changes has been an increase of PHL testing volume for very specialized, expensive tests. PHLs commonly perform tests that are clinically and epidemiologically important, but, due to high cost and low volume, are not commercially viable. Often characterized as the free-rider effect, PHLs report that commercial laboratories, in attempting to conserve resources, rely on PHLs to perform some esoteric tests at no cost. Wisconsin's PHL hypothesized that commercial laboratories basically drive prices down in a price sensitive market, thereby leaving the PHL with the most expensive tests to perform. The four PHL directors reporting an increase in testing volume attributed this increase specifically to hospital consolidation. Several PHL directors documented the case of tuberculosis testing as a prime example of this trend. New Hampshire's PHL noted that the hospital laboratory consolidation resulted in an increase in its testing volume for TB, and that one of the independent laboratories in NH discontinued its in-house TB testing function as a result. Michigan's PHL has also experienced increases in clinical TB specimens, and suspects that the reason for the increase is that the state PHLs do not charge fees for tests associated with diseases of public health importance.
Erosion of Disease Reporting
A third reported impact of non-managed care health market change has been the erosion of disease reporting efforts. Several states reported that large, national reference laboratories with regional testing centers pose a threat to the national disease surveillance effort. Michigan's PHL director noted that private, out-of-state laboratories are often unfamiliar with the disease reporting laws and regulations pertaining to the state from which the specimen originates. As a result, there are instances in which bacterial/viral isolates are not being submitted to state laboratories, thereby jeopardizing public health surveillance mechanisms. In Arizona, some physicians use private laboratories such as LabCorp and SmithKline Beecham for newborn PKU testing. These private laboratories send the tests out of state for testing, and the infants are lost to follow up by the state health agency. In other cases, Arizona's PHL director reports that some out-of-state commercial laboratories decline to report cases of reportable diseases altogether.
Potential Positive Effects From Consolidation
Despite the trend toward reporting negative impacts, a few PHLs in our informal poll reported positive impacts from other health market changes. According to our informal poll of PHL directors, among the positive impacts identified by PHL directors were increased collaboration between the PHL and other private laboratory entities, and a decreased burden of state PHL CLIA '88 responsibilities.
Once again, the interviews and case studies confirm the poll results. As a result of market changes, Washington's PHL has been able to forge a close working relationship with the University of Washington's Department of Laboratory Medicine on laboratory issues. Also, Kansas reported that because of hospital laboratory consolidation, the portion of CLIA '88-regulated laboratories that the state PHL must survey and monitor has decreased by 15%.
PHL Responses to Health Market Change
This section describes how state PHLs are responding to health market changes, including the growth of managed care. The types of responses range from specific subcontracts for select services negotiated between some state PHLs and private laboratories and/or MCOs, to various types of public-private collaborations (e.g., formation of public-private Clinical Lab Advisory Council in Washington State). In other instances, the PHL responses have involved proactive strategic planning of the laboratory's operations to better meet the needs of the MCOs and of the larger group of laboratory service purchasers. In addition, some state PHLs have discontinued certain types of laboratory services that directly compete with the larger, independent reference laboratories.
The collaborations between PHLs, MCOs, providers, and commercial laboratories vary tremendously in scope and duration. In our informal poll, 15 PHL directors (31%) reported either a contractual or other type of collaborative relationship with MCOs, providers, or private laboratories (see Figure 17) in their state, but information on the level of interaction suggested very limited and specific arrangements.
Of these contracted or other types of collaborative arrangements, most were between PHLs and private laboratories, with only five relationships reported between PHLs and MCOs. Interestingly, the probability that a state reported being involved in collaborations with managed care organizations or commercial laboratories was unrelated to the level of managed care penetration in the state. Of the 34 PHLs reporting no current involvement in contractual or collaborative relationships, seven reported an interest in future contracting with MCOs. However, it should be noted that failure to indicate a future interest in contracting with MCOs does not necessarily indicate that such an interest does not exist on the part of the laboratory.
Figure 17: Public/Private Collaboration
Our poll of PHL directors found six PHLs reporting involvement in collaborative arrangements with MCOs or commercial laboratories B three specified that the collaboration was with the MCOs, and three specified that the collaboration was with commercial laboratories. The nature of these collaborative arrangements included joint participation in disease surveillance programs, drug resistance surveys, and dialogue on clinical laboratory issues that affect both public and private laboratories.
Several of the collaborative efforts can be characterized as preliminary in nature. For example, in Vermont, the state PHL, 15 hospital-based laboratories, and a private commercial laboratory are beginning to meet formally to discuss laboratory issues of common interest. The North Carolina PHL is entering into a dialogue with private laboratories about the effect of hospital consolidation on all parties. New Mexico's PHL is also in the process of working with MCOs, the state health agency, and hospitals to conduct statewide surveys of anti-microbial resistance.
Collaboration Around Specific Public Health Priorities
While not reported in our informal poll, interviews with PHL directors revealed that state PHLs, North Dakota and Oregon, have worked specifically to open communication lines with MCOs and private laboratories to avoid duplicative efforts in laboratory services. In North Dakota, the state PHL director negotiated an arrangement with Blue Cross of North Dakota whereby Blue Cross would no longer pay for HIV, TB, and prenatal hepatitis testing, since the state PHL was already funded by the state to perform these tests.
In return, Blue Cross notified its providers to send these specimens to the state PHL, and the health department benefited from obtaining more specimens for disease surveillance purposes.
In Oregon, a state which did not report formal collaboration/contracting, the PHL works with private laboratories to ensure continuity of testing for tuberculosis. The PHL has the state's largest tuberculosis testing capacity. Under this arrangement, private laboratories generally culture the sputum sample and isolate an organism that might be suspected as TB, then send the sample to the state PHL, which performs genetic probing and confirmation testing for TB. The state also performs antibiotic resistance testing for TB. Since the state laboratory gets state funding for this type of TB testing, both the public and private parties benefit under this arrangement.
The CLAC: A General Model for Communication
In the State of Washington, a public-private venue called the Clinical Lab Advisory Council (CLAC) is shaping the laboratory delivery system. The CLAC was created by the PHL director in cooperation with the Office of Laboratory Quality Assurance and a range of private laboratory interests in the state. The CLAC was initially conceived as a response to the fragmented laboratory system and the need for dialogue between stakeholders in the laboratory community. It currently serves to address these needs, as well as a range of other issues raised by membership.
Council membership is composed of 16 representatives of the following groups: (1) major laboratory professions (i.e., laboratory scientists, laboratory managers, medical assistants, pathologists); (2) managed care organizations; (3) hospitals; (4) physician office laboratories; (5) independent reference laboratories; (6) other health or medical associations; and (7) the state department of health. Full meetings of the CLAC occur periodically; in addition, the Council has appointed advisory work groups to develop recommendations on issues such as:
Both public and private sector interests indicate that they have benefited significantly from the CLAC. The PHL also uses key members of the CLAC informally as a sounding board to test likely reaction to new policies and procedures.
Public-private collaborations or contracts in laboratory services B to the extent that they exist at all -- are in their formative stages. Because of both the newness and limited number of examples of public-private collaboration in the laboratory field, the topic has not been thoroughly studied and is not well understood. Despite many PHLs reporting collaborations of some type, our interviews and case studies suggest that collaboration in this field has been progressing slowly as a whole.
Laboratory directors hypothesize that there are two key barriers to collaboration: (1) managed care's lack of awareness of PHL functions and capabilities; and (2) PHL directors' concern over private sector motives and priorities in procuring laboratory services. Several managed care interviewees in our study were, in fact, unaware of the traditional role of PHLs within the larger public health infrastructure. Moreover, cost-driven procurement of laboratory services was generally cited by both private and public stakeholders as catalyzing change in the industry, both in terms of increasing competitiveness and in decreasing activities for PHLs.
An alternative explanation for the lack of collaboration that was articulated in a few of our interviews with individuals from the private sector was that commercial laboratories or MCOs simply had little to gain from collaboration. As businesses, commercial laboratories are closely focused on turning a profit in an increasingly difficult and competitive environment.
PHL Contracts With MCOs and Private Laboratories
Nine PHL directors reported involvement in contractual arrangements: four specified contracts with MCOs, four specified contracts with private laboratories, and one specified contracting with a provider. In terms of the scope of these activities, five PHLs reported outsourcing testing services to commercial laboratories. Examples of these tests included adenovirus typing, liver enzyme typing, and other esoteric testing. In addition, four PHLs reported insourcing tests from commercial laboratories; one of these laboratories reported providing TB testing services for a private laboratory, while the other three did not specify the type of testing insourced.
The interviews and case studies lent further credence to the notion that, despite large reported numbers of interactions, public-private collaborations in the laboratory marketplace are limited in scope. The following examples describe contracts in which PHLs performed work on a contractual basis for MCOs and/or commercial laboratories:
Minnesota's PHL has had two contractual arrangements with MCOs and, recently, with private laboratories. However, both contracts have comprised a very small percentage of the laboratory's overall budget, and the contracts were not renewed. The PHL had a small contract with HealthPartners, an MCO in Minnesota, in 1995 to provide laboratory testing for pertussis. The contract was fee-for-service (i.e., billed per sample) and essentially covered the cost of materials used by the PHL. However, during the course of the contract, the PHL only received 250 samples to test, far fewer than originally projected. The second contract involved a company called Viromed, a private full-service microbiology laboratory, whereby the PHL was contracted to perform adenovirus typing tests. The state PHL is the only laboratory in Minnesota with the appropriate antiserum (provided to the laboratory by the CDC). In 1996, Viromed approached the state PHL regarding a purchase order arrangement whereby the PHL performed testing for 100-150 specimens at a per-culture cost for one calendar year, the contract was fulfilled at the end of 1996 and was not renewed for 1997.
In Tennessee, under the TennCare managed Medicaid program initiated in 1994, the state PHL was required to seek contracts with MCOs for testing that it provided to local health departments treating TennCare patients. In 1995, the state PHL sought contracts with all twelve TennCare MCOs, and obtained only three extremely limited contracts (revenues from these contracts comprise less than 5% of the overall PHL budget). In part, these contracts were precluded by the fact that one MCO operates its own laboratory, and two other MCOs have exclusive arrangements with private laboratories. The contracts with the MCOs are limited to the testing of specimens sent in from local health departments, and prices were negotiated based on what Medicaid had reimbursed prior to TennCare. As with all other user fees, revenues generated through these contracts were passed back to the state. The laboratory did not have a billing system to accommodate these tests, and subcontracted with the public health departments to provide this function. Thus, for every test, the laboratory paid the public health departments a $2.70 processing fee.
In California, with the advent of MEDI-CAL (California's managed Medicaid program), a private reference laboratory, UNILAB, has joined in a multi-faceted contracting arrangement with public providers of laboratory services in Alameda County. These contracts are designed to respond to MEDI-CAL cost-pressures. In order to go after MEDI-CAL contracts alone, each of the county providers and UNILAB would face redundancy and extension of areas of weakness within each organization. Thus, the strategy is to use joint contracting to develop full areas of laboratory services at sustainable rates. The arrangement specifies the following: a) public hospitals will do routine/emergency inpatient testing; b) the county PHL will provide its traditional services to county hospital and LHD clients, with expected volume increases from improved coordination; and c) UNILAB will perform more esoteric, complex, and less rapid turnover testing. UNILAB receives its testing volume through the county providers' established community presence, and in turn, UNILAB provides oversight and coordination for the system. However, despite reports from UNILAB that the contract has created initial Amutual gains@ for all parties, the county PHL reports that the arrangement has not produced the anticipated testing volume increases, and in some cases, testing volume has actually decreased.
New Jersey's PHL also performs some limited work for Roche Laboratories (now part of LCA). The contract includes performing viral isolations, tuberculosis reference work, and salmonella testing.
Several PHLs also have arrangements to outsource some of their laboratory testing to commercial laboratories. For example, in New Mexico, the state PHL outsources pap smear, chlamydia, and polymerase chain reaction (PCR) testing to private laboratories. In addition, Wyoming's PHL sends liver enzyme specimens for testing to Quest Diagnostic's testing center in Denver, CO. Finally, West Virginia's PHL reports utilizing private laboratories for overflow purposes. For example, West Virginia's PHL recently had staff turnover of cytotechnologists, and, subsequently, the PHL contracted with some private laboratories to process and conduct pap smear tests for a brief period of time until the cytotechnologists were replaced.
Several PHLs are in the process of obtaining contracts with MCOs. In Michigan, the state PHL recently entered into an agreement with the Michigan Department of Corrections to provide HIV viral load testing for their inmate patients, and, as a result, the parties are now discussing using the PHL as a laboratory testing subcontractor to the MCO that provides care to the inmate population. In addition, state PHLs in Arkansas, Florida, and Maine are looking at ways of bidding for MCO contract work for laboratory services in the near future.
Other PHL Responses to Managed Care and Health Market Change
Aside from engaging in contracting with MCOs and/or private laboratories for clinical services and collaborating on laboratory issues with the private sector, a number of state PHLs have, or are beginning, strategic planning efforts to address the changes in the clinical laboratory services marketplace. These responses include narrowing down the types of testing performed by the PHL and tailoring PHL testing services to suit potential managed care clients. The following examples illustrate some of the different state-level responses to managed care and other health market change that were uncovered by our interviews and case studies.
The Michigan state PHL (called the Bureau of Laboratories) is seeking to shape managed care activities to be responsive to public health needs. By narrowly defining their testing functions to encompass only tests of public health importance or specialized tests best centralized for purposes of cost and quality, the Bureau has enhanced its ability to establish collaborative relationships with private sector laboratories as well as other state and local public health agencies. The Bureau has used this ability to influence state policy, outlining the responsibilities of MCOs with regard to laboratory testing and disease reporting. Additionally, it has cultivated relationships with private sector laboratories to ensure that the Bureau can continue to serve its traditional public health functions even as hospital laboratory consolidation and other health system changes proceed.
Michigan is also engaging in collaboration activities as part of the state's overall response to health market change. The PHL in Michigan has traditionally avoided competing with reference laboratories by refraining from providing routine diagnostic tests. In addition, Michigan has formalized the notion of public-private collaboration in laboratory services by creating the position of Managed Care Coordinator at the PHL. The Managed Care Coordinator is responsible for maintaining communication with MCOs and private laboratories, and ensuring that MCOs support the state's testing and disease reporting programs as more of the state's Medicaid population moves to managed care. It should be
noted, however, that beyond the implementation of this position, most of Michigan's efforts are in the planning stages (see below).
Aside from strategically avoiding competition with the private sector, the Bureau's success can be attributed to its commitment to active advocacy for laboratory issues and its experienced leadership, which facilitates steady access to state funding and opportunities to participate in high level decision-making within the Department of Community Health. Recently, the Bureau played a significant role in drafting the state's latest request for proposal (RFP) for MCOs seeking to provide services to the managed care population. The Bureau ensured that issues relevant to disease reporting and specimen/isolate submission were included in the RFP. The part of the RFP most directly contingent on the Bureau's involvement was a table describing the various duties of the health plan, the local health department, and the Michigan Department of Community Health with regard to initial testing, reference testing, confirmatory testing, and disease reporting (see Michigan Case Study Report, Appendix D).
Other states that have used the approach of avoiding direct competition for select testing services with the private sector include Massachusetts and Vermont. Massachusetts's PHL recently decided to discontinue its Lyme Disease testing service because it was losing much of its business to the private sector laboratories in this area. Similarly, Vermont does not duplicate laboratory services, such as HIV testing and syphilis testing, which are performed by private laboratories in the state, and the PHL supported the state health department's decision to outsource chlamydia and gonorrhea testing to the private laboratories. However, Vermont's PHL has retained and continues to perform some testing services that the private laboratories do not currently perform (e.g., water testing, food-borne illness, salmonella, yersinia, hepatitis testing). New Mexico PHL officials, in anticipation of managed care, are prioritizing those functions specific to assessment, quality assurance, and policy development, and plan to discontinue clinical chemistry tests and other routine, patient-specific diagnostic tests that compete with private laboratories.
In New Jersey, on the other hand, the shift of health care delivery to MCOs has elicited a competitive response from the public health infrastructure, and the PHL in particular. Interviews indicated that PHL officials were not confident in their ability to rely on direct state funds to ensure long term financial stability, and, therefore, have embarked on a plan to improve efficiencies across all public health laboratories in the state (i.e., county and local laboratories as well as the state PHL) in an effort to obtain contract work from MCOs. In addition to streamlining processes across the state, the PHL has recently made capital investments, allowing it to perform clinical chemistry tests and other routine patient tests on a larger scale.