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Managed Care And The Physician Office Testing Market: The Final Nail In The Coffin?
by Dr. Sheila Dunn

Have your sales of lab products into the doctor's office market declined in the last few years? Do you see more small hematology and chemistry analyzers collecting dust than generating revenue for your accounts? Would you like to help your accounts reclaim what was once - and still is - a profitable venture?

In part one of this three part series, we explore some of the reasons why physician offices (and POLs too) are hesitant to invest cherished capital for new technology.

Back in the 80's, lab instruments sold by the boatload on the premise that "this instrument will run itself and make lots of money." If you aren't old enough to remember when any distributor rep worth his/her salt closed at least one lab instrument placement a month, some with only one call, imagine this scenario:

It's 1986. You spend one day with a lab product manufacturer rep, do 5 demos, and close 3 instruments. At the end of the month, you realize $20,000 in gross sales dollars at a 30% GP. Each subsequent month for the next few years, you realize an additional $4,000 in reagent business at 25-30% assuming you didn't lose the base supply business to a competitor.

Sound impossible? This was common in the mid-80's, and many dealer reps took full advantage of the feeding frenzy. I am not making this up. For those readers without a lot of mileage, the following short history lesson reminds us that "what goes around, comes around":

Prior to the mid-seventies, all lab tests, except simple microscopic exams, were performed in hospital and referral labs staffed with highly trained scientists. The paradigm in the healthcare industry was that large labs were better because they produced test results less expensively than other labs.

During the last two decades, Medicare's direct billing requirements as well as innovations in technology put sophisticated lab tests within reach of physician offices. Encouraged by distributors and manufacturers, physicians by the thousands jumped on the bandwagon to generate additional practice revenue from office-based labs. Ten years ago, two thirds of all physicians had office-based laboratories.

The POL heyday was in full swing. Lab manufacturers and the distributors who promoted their products were selling lab equipment and test kits like hotcakes. Granted, some physicians tested in their offices because it provided better patient outcomes and convenience, but many physicians tested primarily to reap the financial rewards. For practices with enough volume, a lab wasn't just good medicine, it was also good business.

So what happened? Why have some physicians given up on in-office testing? Why did some manufacturers stop allocating resources to this market? And most importantly, why have many distributor reps jumped ship instead of helping their customers through these turbulent times?

Even though office-based testing is as natural a part of primary care practice as the blood pressure cuff, many distributor reps shy away from selling lab products because they can't overcome the objections voiced by confused and frustrated customers.

In the last decade, three factors have dealt a blow to the in-office testing market: CLIA'88, changes in Medicare reimbursement, and managed care. Take a moment to consider the facts, then learn some retorts for common customer objections.

In effect since1992, CLIA'88 may have caused over half of physicians to eliminate some or all moderate and high complexity tests. Why? Government intrusion into the practice of medicine influenced some physicians; others perceived the hassles of compliance to be too costly and difficult for on-the-job trained people to handle. Not to mention physicians' perceptions of federal CLIA agents bedecked in trenchcoats and packing uzi's. Despite their initial fears, POLs who stuck with the program have fared well. CLIA inspections have, for the most part, been educational instead of punitive. In fact, less than 50 POLs nationwide have been sanctioned with closure or denial of Medicare payments because of shoddy quality practices. Moreover, CLIA fees are minimal, accounting for only a few pennies per test.

The negative impact of CLIA'88 on lab sales is declining. Even though the number of tests that are classified as CLIA-waived is growing by leaps and bounds, last year the number of physician office labs that performed moderate or high complexity tests increased by over 10%. Currently, of approximately 140,000 primary care sites, over 36,000 physicians operate moderate or high complexity office labs.

So enough about CLIA already. To overcome customer's objections about regulatory requirements, explain that CLIA fees are negligible, CLIA quality requirements are minimal (virtually every manufacturer does a good job providing CLIA compliance materials), and inspections are a piece of cake for the majority of POLs. The government has recently replaced the on-site inspection with a paper checklist for some "good-performing" labs. Say good-bye to the trenchcoat and uzi objection.

In early 1996, Medicare began to covertly discourage physicians from ordering large panels of tests, by either downcoding to a less lucrative payment or denying payment altogether. Now, physician offices must pair appropriate diagnosis codes (ICD-9's) with lab CPT codes. This hassle factor exists whether tests are performed in-office or at a referral lab.

Innovative distributors who enjoy a large base of POL business save their accounts the aggravation of resubmitting claims for payment by providing them with a list of appropriate ICD-9 codes to justify lab tests performed in-house. This list is available through local Medicare carriers or local "mega labs" such as SmithKline, LabCorp, or Corning Clinical Labs.

Despite the hassle of proving medical necessity, Medicare payments for lab tests are still obscenely lucrative. For instance, Medicare reimburses approximately $11.70 for a CBC (CPT 85024) and private pay patients are typically charged $20 - $25. Considering that a CBC costs less than a few dollars to perform (including CLIA fees and instrument and reagent payments), POLs enjoy a margin unheard of in most businesses, especially the distribution industry! When was the last time you sold a $3.00 product for $25.00? OK, well maybe only in Mayberry are markups of 1500% the modus operandi, but let's get real. Depending on an account's payor mix, lab revenues range from moderately profitable to very, very profitable.

Lab testing has real intangible benefits that, in the long run, contribute to a lower overall cost of doing business (and that's the name of the game under capitated managed care plans). So, if you understand the economics of the new healthcare industry, and share this information with your accounts, you'll be a hero. Use your business savvy to help them succeed - and an office-based lab will do just that.

Managed care affects office-based testing in the sense that some HMOs slash the traditional 1500% markup on reimbursement - or worse- some plans stipulate that all tests must be sent to referral labs.

The number and kinds of managed care plans varies from state to state and even within communities in a given geographic area. For instance, the entire state of Virginia has about 10% HMO penetration, but one urban area (the city of Richmond) has a whopping 62% penetration. Yet one has to drive only 15 minutes outside of the city and there is virtually no managed care! This variation in managed care penetration occurs throughout the country, In fact, no state currently has more than 41% overall managed care penetration.

Managed care has barely gained a foothold in states with large rural populations which still enjoy an overwhelming amount of traditional fee for service medicine. Examples are Idaho, Wyoming, Montana, the Dakotas, Mississippi, and West Virginia.

Nationally, about 550 HMOs claim more than 50 million members. Three-quarters of private practice physicians have at least one managed care contract and these doctors derive about a third of their revenue from managed care. Most managed care plans offer physicians discounted payments from a specified fee schedule. Only about 15% of managed care plans pay capitated amounts to physicians.

In response to the restrictions that managed care plans place on in-office testing, many physicians object to starting or upgrading an office-based lab. Their fears mostly stem from the uncertain future of the shape of healthcare to come and, most importantly, declines in medical reimbursement.

Sorry folks, but WE sold them on the idea that the main benefit of "near-patient testing" was to generate revenue. As medical distribution professionals, the onus is now on you- and you alone- to seize this opportunity to help your accounts clear the hurdles and capitalize on an important way to reap financial rewards in this changing industry. Today, consumers as well as the lab industry and front line providers of health care acknowledge the value of lab test results at the point of care. America's industries are quickly learning that to succeed in today's competitive environment, a business must be service-oriented, and healthcare is no exception. No longer will the American public tolerate a decline in services, i.e., patients that once enjoyed the convenience of office-based testing will not tolerate a system that requires them to make an extra trip to the office or a pharmacy. Most importantly, employers (who, incidentally fund the managed healthcare system) are beginning to realize that lost time from work is much more expensive than the few pennies saved per month on employee health care premiums.

If you still doubt that office-based testing is the way of the future, consider this: In hospitals across America, much of the lab testing has moved from the central lab to patient rooms, emergency rooms and ICU's. Although initially skeptical, even hard-core professional laboratorians have changed their paradigm and embraced near-patient testing. They now admit that testing at the point of care provides faster turnaround time which expedites treatment; reduces patient morbidity; reduces length of stay; and lowers the total cost per patient.

The pendulum is definitely swinging back in the direction of office-based testing. If this is true, then why do some managed care companies insist that lab tests be performed by a mega-lab with rock bottom prices? Why aren't all managed care contracts written with provisions for office-lab payments?

There's lots of good reasons. If you didn't know the difference between a CBC and a glucose test, you would certainly opt for the cheapest provider of the test. Trust me, the bureaucrats that write managed care contracts do not know the reason why a $20.00 CBC performed in a doctor's office is indeed less expensive than one offered by a mega-lab for $2.00. The medical community must, in the interest of the consumer (the patient) enlighten managed care companies as to the true value of lab testing.

Who will advocate on behalf of better patient care? Certainly not the doctors who see the office lab only as a way to generate revenue. The patients? Maybe. Many physicians are now attempting to regain a modicum of control and demonstrate to managed healthcare plans how office-based testing achieves the objectives of all parties involved: lower cost, better patient outcomes, and more satisfied customers. Expect these enlightened, proactive practices to come out on top in the coming years.

To achieve one's career goals in a managed care environment, distributor reps must help their accounts to succeed, i.e., be profitable. This requires a whole new way of looking at reimbursement and revenue generation. Changes in payments to physicians compel us to show our accounts how to "change the shape of money." Next month's continuation of this article focuses on why office-based testing remains the wisest investment a primary care physician can make. Stay tuned...

PART II - benefits of POL testing (why it's really less expensive than a mega-lab) and the economics of capitation.

PART III - how distributor reps can help their accounts achieve their objectives. Success stories and tools needed to succeed will be given.

About the Author:
Dr. Sheila Dunn heads Quality America, Inc., an Asheville, NC-based company that assists medical manufacturers and distributors as well as healthcare professionals to survive and prosper in this rapidly evolving industry. Quality America's publications include "Managed Care: Strategies for Success", "Lab Testing: Get Your Fair Share From Managed Care", and "Satisfaction Guaranteed1", a patient satisfaction primer. For information about Quality America's products or services, call 828-645-3661. (Go to detailed Dunn biography)


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