Smiling patient and doctor

Community labs inhabit a unique healthcare ecosystem whose fragile balance is under threat. These small-to-medium-sized laboratories serve physician offices, nursing homes, and assisted living facilities, often in rural communities. While most of the testing that community labs perform consists of routine, high-volume tests—such as complete blood counts, metabolic panels, prothrombin time, and other essentials—the mainstay of these organizations is service, including geographic reach by courier, fast turnaround times, and phlebotomy for long-term care residents.

Community labs have been under financial stress for some time, both from the changes Congress is making to the clinical laboratory fee schedule and from tough tactics by private payers seeking to contain costs. Most recently, Congress overhauled the lab fee schedule with the Protecting Access to Medicare Act of 2014 (PAMA). This law temporarily fixed the infamously broken sustainable growth rate (SGR) formula that underpays physicians. But to do so, PAMA will set Medicare rates for lab tests as a median of private payer rates, which are heavily discounted compared to current Medicare pricing.

In a comment letter to the Centers for Medicare and Medicaid Services, AACC wrote that “these payment rates may force many smaller community laboratories, hospitals, and physician office laboratories to either scale back or discontinue their testing. If this were to occur, it could have significant ramifications for patient access to testing, particularly in rural and other underserved areas.”

In fact, experts anticipate that the routine, high-volume tests that are the bread and butter of community labs likely will be cut at least 20% under PAMA—if not more over time. The same law also affects nursing homes with a value-based purchasing program expected to save Medicare $2 billion over 10 years.

How will community labs survive a steep decline in Medicare reimbursement, even as their nursing home and physician clients face cuts of their own? In addition to lobbying Congress, their strategy focuses on the personal service and deep roots in their communities they’ve always taken pride in.

Unfortunately, few in Congress seem to be paying attention, according to long-time lab consultant Michael Snyder. “The leverage is entirely with the big labs and the health plans, making the reimbursement problem look increasingly insurmountable for small laboratories,” Snyder said. “On top of this, because PAMA is a funding mechanism for the [Affordable Care Act] and the SGR fix, few on Capitol Hill seem to care about its effect on small labs. They have bigger fish to fry now.” Snyder previously is the principal of Clinical Lab Business Solutions, a laboratory management consulting firm.

Squeezed Out
Even before PAMA and the ACA, community labs faced an increasingly difficult market. Hospitals have accelerated their spending spree to buy up physician offices, pulling volume back into their own laboratories. And what business is left among remaining independent physicians is getting harder to hold onto.

One part of the problem with private payers is their drive to aggressively control costs, sometimes paying 50% below Medicare reimbursement. For example, UnitedHealthcare routinely demands labs accept only 45% of Medicare to stay in network, Snyder noted. “Small labs can’t survive at that kind of reimbursement—and that’s if they can get into the network in the first place,” he said.

The second problem with private insurers is the drive for narrow networks. As employers see costs rise, they increasingly accept fewer and fewer providers in order to get the best deals. For example, Home Depot signed an exclusive agreement with a large, national lab that involves at least 1 million people, including employees and family members, Snyder noted.

“In New Jersey, there is a health plan that is primarily owned by hospitals, and yet their primary lab provider is Quest,” Snyder said. “Just absolutely obtuse. But it’s because of the way the decision-making is made and because the labs aren’t getting in front of people.”

When it comes to making deals, the large, national labs go straight to CEOs of the insurance companies, and sometimes engage in what Snyder called “predatory” practices. The big labs will offer low pricing that’s hard to refuse, but on the condition that most or all of the insurer’s current list of labs get cut out. “If an insurer is willing to carve out even large independent labs like Bio Reference and Aurora Diagnostics, what chance do little community labs have?” Snyder said.

A Unique Niche
Annette Iacono, vice president and general manager at Brookside Clinical Laboratory in Aston, Pennsylvania, described a business that couldn’t possibly be more opposite to the big-name national labs most consumers know. Iacono’s father started the lab in 1966, growing it from one employee to 120 today.

Like many community labs, Brookside mainly serves long-term care organizations, along with some physician offices. Brookside’s phlebotomists arrive around 4 a.m. each morning to get their assignments. They have to be quick but careful as they make their way around the nursing homes, which ask for same-day results to manage elderly patients with multiple chronic diseases. Phlebotomy is one of the lab’s largest expenses, for which Medicare pays $3.00 per draw. “There’s a lot more to it than just picking up specimens in a box outside a doctor’s office,” Iacono said.

While Iacono expressed deep frustration with Congress, she believes that the vital services her lab provides, and its ability to weather other regulatory and reimbursement storms in the past, will eventually win the day. But if cuts under PAMA do occur as many expect they will, is her business sustainable? “Personally, I can’t even think that way,” she said. “I have to believe that we’re nimble enough, and lean enough, to do what we have to do.”

Iacono did report limited success negotiating directly with private payers. For example, Aetna at one point had an exclusive deal with a large, national lab. After working for several years, Iacono finally found someone at Aetna who would listen. “I told this person, it’s up to you how to run your business, but that national lab will not come into these nursing homes and draw blood, and if they do, it’s going to be at their leisure,” she said. After that conversation, Brookside was back in as a network provider.

Taking Their Story to the Hill
Judy Kennedy, the marketing manager for Pendleton, Oregon-based Interpath Laboratory, has made several visits to Capitol Hill with her son, who also works for Interpath. Begun in 1964, Interpath is a regional lab with approximately 400 employees.

Congress receives mixed messages from laboratory advocacy groups, some of which are more focused on reimbursement for novel, esoteric tests, Kennedy said. “I think they hear from certain lab groups that the new tests really need higher reimbursement, while the older, routine tests are this archaic technology that needs to be changed,” she said. “But these routine, tried-and-true tests are the ones clinicians depend on, and without them, we would not have a healthcare delivery system.” Kennedy and other laboratories partner with the advocacy group, the National Independent Laboratory Association.

Kennedy also hears that, for example, labs should be able to run routine tests much quicker and cheaper than in the past. “In part, that’s true,” she said, “but all my other costs have gone up. My couriers drive 10,500 miles every day. That’s the difference between Washington, D.C. and the places we serve patients in Oregon, Washington, Idaho, and Nevada.”

Ultimately, Kennedy also believes that the superior service her lab provides will win over payers and providers. “We maintain close relationships with clients, and our service reps hold routine, in-depth conversations with them on a regular basis to make sure that they’re happy,” she added. “It might seem corny to say this, but building real relationships with our clients and the fact that they trust us is what makes the difference.”