The PHLs we studied are operating in a highly fluid and challenging environment. While the function of PHLs varies from state to state (each is unique with respect to its approach, the services it offers, and its history), every PHL serves a pivotal role in linking the private and public sectors. Funded by public sources, PHLs are typically intertwined with the private sector as regulator, arbiter of policy concerns, and sometimes competitor as the provider of tests or services.
As detailed in this report, directors of PHLs see fundamental change on both the public and private sides of this complex ledger. On the private side, PHLs see managed care and independent laboratories growing in strength, as well as rapid technological change in both clinical and information technologies. On the public side, PHLs see a re-definition of the public health safety net, reliance on managed care to address public health needs, and tightening state budgets.
This study presents a framework for understanding PHLs in the context of the larger laboratory services marketplace and fundamental changes to the health care system. To develop this framework, we polled PHL directors from every state, interviewed numerous laboratory stakeholders in both the public and private sector, conducted in-depth case studies of three PHLs, and also carried out secondary research.
The purpose of this final section is to summarize what we learned through this study with reference to two fundamental issues: (1) strategic positioning of PHLs and their core functions relative to health system change; and (2) critical policy issues the state and the federal government will face over the coming decade. We also acknowledge the limitations of our study and suggest avenues for further research.
Impact of Managed Care
The initial purpose of the study was to characterize the relationships between PHLs and managed care organizations in the context of health system change. There is universal concern in the public health community about managed care. Despite some isolated examples of positive effects of managed care on PHLs, such as increased reference testing for select areas and better coordination with the state health department, our results suggest that managed care is creating considerable anxiety in PHLs. In most cases, the impact appears to be modest or even minimal, but the novelty of this topic suggests to PHL directors that we have only observed initial effects.
PHLs serving as traditional providers of testing services for Medicaid populations have seen reductions in testing volume and diminishing testing areas as these populations have entered coverage under managed care. Although this effect was reported in seventeen states, when quantified, its magnitude appeared to be relatively small. The effect did, however, vary with the strength of the managed care presence in a state - states with high levels of managed care penetration had a greater probability of reporting decreased testing volume due to managed care. Some PHLs report small reductions in all types of testing volume, while other states report reductions for only certain types of specimens (e.g., blood lead).
Several PHLs have reported difficulty in obtaining reimbursement from MCOs for testing services rendered to its members, and a number of PHL directors believe MCOs' lack of awareness of, and responsiveness to, disease reporting requirements are negatively affecting the PHLs' disease reporting efforts. We did not uncover any formal information to support this latter contention, but it may well be correct - establishing this link is beyond any of the data we encountered in conducting this study.
A critical shortcoming in the current debate (and a limitation of this study) is that there is currently no mechanism through which adverse effects on PHL function can be quantified. While there are data showing decreases in the number of samples for selected tests, this may well be due in part to reductions in unnecessary testing or the growth of commercial laboratories. Furthermore, despite constraints in many PHL budgets, there is no tangible indication that PHLs are having difficulty achieving their core objectives. This is an issue of major public health importance that merits further study.
In response to managed care's increasing reach, some PHLs have pursued contractual relationships with MCOs. However, despite much discussion on this topic at conferences and among the PHL directors, very few of these contracts currently exist:
In addition to the above cases, a few states (e.g., Arkansas, Florida, Maine, and Michigan) have indicated that they are attempting to establish some type of contractual relationship with MCOs. These activities are currently in the discussion stage.
Our results clearly show the PHL directors are highly anxious about the impact of managed care. However, the adverse effects of managed care cannot be supported empirically, raising the possibility that these fears may in fact be misguided. Managed care is only a small part of broader changes affecting the laboratory infrastructure, which include consolidation of hospital labs and the growth of large commercial laboratories. Further, these changes present significant opportunities to improve the provision of laboratory services and the collection of meaningful data on which to base policy advice.
Our results also show that there has been little proactive leadership from the public sector in shaping the laboratory delivery system. With a few notable exceptions (e.g., the activities in WA state), lab directors, state decision makers, and the federal government have done little to strengthen the PHL infrastructure. There is no single and clear locus of responsibility for such matters within the CDC or elsewhere within HHS. At present, one of the weakest parts of this infrastructure appears to be information systems, but the entire system needs to be reviewed carefully to prevent deterioration of this important aspect of our public health infrastructure.
Evolution in Laboratory Infrastructure
While the initial focus of this study was to explore the relationship between PHLs and managed care, over the course of the study, other environmental factors proved equally, if not more, important influences on the PHL operating environment.
Private Clinical Laboratories
Hospital-based laboratories have traditionally dominated the private laboratory industry. However, as managed care strengthens, hospitals merge, and independent reference laboratories grow in prominence and market share, the laboratory industry - mirroring the health care system generally - is rapidly consolidating. Three large reference laboratories (Quest, LabCorp, and SmithKline Beecham) now control over 15% of the total clinical laboratory services market.
Cost pressures are a major catalyst of change within the industry. Important market trends include increasing costs per test as test methods have become more sophisticated; decreasing reimbursement levels per test; and a shift from fee-for-service testing to capitated contracts. Cost pressures have been created both by the private sector (as MCOs with huge market power have demanded volume discounts and risk sharing from laboratory vendors) and from the public sector (as HCFA(now known as CMS) cut its reimbursement rates for outpatient laboratory tests by 15% over the period 1993 to 1996).
The dynamics of the laboratory services marketplace bear directly on the operations of PHLs. PHLs are facing new competition in traditional service areas, and are seeing their established relationships with providers erode as increasingly powerful private laboratories take advantage of scale, capacity for quick turnaround of results, better information handling, and full service packages, to garner exclusive contracts with MCOs and their associated physicians and hospitals. In addition, private laboratories are tackling new testing areas (e.g., environmental testing) that initially lacked commercial viability, further encroaching on the traditional domain of the PHLs.
As with MCOs, PHLs are responding to these new pressures by attempting to form partnerships with private laboratories. These arrangements seek either to subcontract specialized services from the private laboratories to the PHLs, or in some cases, to delineate areas of activity by outsourcing key tests from the PHLs to the private laboratories. As with managed care, the partnering arrangements to date are few in number and limited in scope:
In sum, trends in the larger laboratory services marketplace are posing serious challenges to PHLs. This marketplace is characterized by overcapacity and consolidation, intense cost and price pressures, and increasing domination from large private laboratories. Managed care's impact on the PHLs is less a consequence of direct MCO interactions with PHLs than of a laboratory industry that is restructuring itself to respond to broader health market changes.
Laboratory Information Systems
Improvements in Laboratory Information Systems (LISs) are also transforming the laboratory services environment. In the private sector, large laboratory companies are making significant investments in the development of information resources in hopes of streamlining the core testing business and entering the healthcare data analysis arena. Development of such systems is being hastened by the presence of commercial software vendors and data standards such as LOINC.
Although there is strong interest in such ideas in the public sector, there is less activity and fewer resources to support existing enthusiasm. A few innovative pilot programs have been funded by the CDC, including a pilot study of the transmission of laboratory test results between managed care and the state PHL in Washington. The relatively small size of these markets has served as a deterrent to the development of more capable commercial software, and, while a few companies have ventured into this realm (e.g., EPIC), most PHL software has been developed in-house. The net result is that most PHLs are still using paper records for much of their activity.
On balance, it appears that PHLs may be falling behind in the construction of information infrastructure. If this proves true, it will be increasingly difficult for PHLs to continue operating efficiently. It will also hinder efforts to lighten the disease reporting burden of healthcare providers.
Models for Relationships
Our interviews and case studies revealed a number of models for relationships between PHLs, MCOs, and commercial laboratories that reflect different attitudes about the core functions of PHLs and the very different current configurations of PHLs relative to testing. These diverging (but not mutually exclusive) approaches also have implications for the federal role in promoting the public health infrastructure through laboratory services.
Provide Services As A Subcontractor To MCOs
As managed care's presence grows, PHLs can take advantage of their strengths by subcontracting with the new locus of care - MCOs. The array of state PHLs have both core areas of expertise (e.g., rabies testing, blood lead) and often close relationships with safety net providers that result in test volume (e.g., clinical testing for indigent populations served by LHDs). By obtaining subcontracts to perform testing in these areas for these populations, PHLs can preserve and fortify their key strengths. In Tennessee, the PHL has not been entirely successful in its bids to subcontract with the TennCare HMOs. Still, this lack of success appears to be largely a function of late action - the PHL did not approach the HMOs until well after TennCare had been implemented (the PHL generally feels it was left out of initial TennCare policy development). Other elements of the public health infrastructure in the state (e.g., the LHDs) have successfully re-engineered themselves to compete on the open market for HMO contracts.
Most of those interviewed believe that building tangible demand from managed care is not a viable model for PHLs in the long term. Dependence on user fees is potentially a major liability for the public health infrastructure in that it may put the state's capacity to respond to public health at the mercy of market demand. Furthermore, most PHL directors acknowledge that private concerns will ultimately be able to offer tests less expensively than the state can. For these reasons, most PHLs are reducing their capacity to provide patient care testing rather than increasing it.
Establish a Testing Network in Collaboration with Other Vendors
Another approach that PHLs might try is to develop joint contracting arrangements with other laboratory services vendors to create full service and full population coverage that is attractive to MCO clients. By formalizing its position in a local or regional network, leveraging its core functions, and partnering with other players to create "soup-to-nuts" laboratory services, a PHL can preserve and possibly grow its value proposition in the market. The UNILAB example in Alameda County does not appear to be living up to its initial promise, but most believe that this fundamental concept is logical and could prove successful with more effective implementation.
Actively Manage Activities of MCOs through Contracts
One option for future PHL positioning is to use state procurement vehicles to delineate different roles and responsibilities for key laboratory stakeholders. Michigan is using the Medicaid contracting process to define a constructive relationship between PHLs and MCOs that contract with the state. The approach entails identifying policy priorities (e.g., disease surveillance and reporting); specifying core roles for each segment of the public health department; and stipulating areas of, and processes for, interaction between the MCOs and the various public health entities. This is an activist role for the state, but one that appears to be palatable to the private sector, provided that the state is clear and reasonable about requirements.
Shape the Delivery System Through Dialogue / Collaboration
We uncovered some innovative models to stimulate dialogue and collaboration among laboratory stakeholders, often originating with, and guided by, forward-looking PHL directors. These models hold promise for ensuring private sector awareness and understanding of key public sector functions in laboratory testing. The most advanced example of this approach is Washington State, which has established a Clinical Lab Advisory Council (CLAC) to shape the laboratory delivery system and to open communication with the state. Its representation includes both public and private laboratory stakeholders throughout the state, and it has advisory groups that develop recommendations on a full range of laboratory issues, from integration to practice guidelines to licensure. The improved dialogue and interactions may facilitate PHLs' efforts to preserve vital elements of the PHL infrastructure.
Core PHL Function
A central concern of both state and federal actors is the definition of core PHL functions and activities. This subject has been closely studied over the years by the Association of State and Territorial Lab Directors (ASTPHLD) and by a number of PHL directors. As discussed above, the function of PHLs varies dramatically from state to state. The notion of a core set of activities is particularly charged, because it defines the appropriate role of the PHL in the safety net.
Traditional Definition of Core Services
Historically, public health laboratories (PHLs) have focused activities on specified core functions. Considered broadly, these functions encompass activities in support of the three charges of all public health entities: (1) assessment, (2) policy development, and (3) assurance.3 PHLs perform functions directly associated with these objectives, as well as testing activities that are excluded for various reasons from the practices of commercial laboratory service vendors. Examples of PHL core functions include:11
By performing these functions, PHLs provide state health officials with empirical information critical to assessing community health status, evaluating the success of existing public health initiatives (e.g., childhood lead abatement programs), and developing new policies related to disease prevention. Additionally, PHLs provide the specialized testing support needed in times of outbreaks or upon the occurrence of unusual diseases.
While the primary source of funding for state PHLs is state government, this varies by state. All states receive support from the CDC in the form of training and information, and some receive some outside funding from the CDC through grants. User fees (e.g., those associated with prenatal screening or other tests provided to the public) can be an important source of funding for some state labs.
Issues Inherent in Health Market Change
Changes in health markets and environment faced by PHLs naturally raise the question of whether the core functions of laboratories must change in response, or - to take a more activist position - whether more leadership from the laboratories can improve the public health. Our study suggests that while the overall charge of laboratories (e.g., involvement in assessment, assurance, and policy development) remains constant, many of the tactics used to achieve these goals must change in the context of health system and technological innovation.
There will always be a heated debate over what laboratory services belong in the public sector. PHL directors typically maintain that states can often provide services less expensively and of a higher quality because there is no profit motive. Commercial laboratories typically maintain the opposite position. We would not presume to judge this debate, but would point out that every situation is unique and that neither side is always correct.
There are some services that most agree belong in the public domain. These services typically include tests that are not commercially viable as well as those that are critical to ensuring that emerging infections are identified. Most MCOs will also not assume responsibility for environmental testing (e.g., lead and water) on their own, and it is unclear whether they will ultimately pay for population health management when there is no immediate payoff in reduced costs.
PHL viability in generating revenues is a central issue in defining core PHL functions. Public health officials are split on this issue between those that believe that PHLs need to show value and avoid "dumping" of patients by assessing user fees, and those that believe that user fees establish a perverse relationship with the private sector and may discourage indigent patients from seeking services and should not be assessed. Most states have established a middle ground by assessing user fees on some services in some cases; others leave the decision to the LHDs.
Another fundamental issue is whether direct patient care testing generally considered an "assurance" function is core. Over the years, many PHLs have done a considerable amount of direct patient care testing (e.g., STDs, HIV, TB, neonatal screening) and, in some cases, have derived significant revenues from such activities. Although such testing has often been provided in conjunction with counseling, case management, and other public health services, others have not. The debate in this area centers not around the reporting of results, but rather whether the state should be engaged in de-facto competition with the private sector.
Most neutral observers agree that quality assurance remains a critical function for PHLs. While regulators will never be popular with industry, assuring the quality and consistency of testing is a core public function, particularly in the area of infectious diseases. However, quality assurance needs to be updated relative to information technology; private sector stakeholders expressed strong and legitimate concerns about the cumbersome nature of regulatory intervention in most states.
Finally, policy development also needs to change in response to changes in the healthcare system. The notion of public-private partnerships has come into vogue, and, as the Washington experience shows, can be used proactively by states to help shape the delivery system. Policy development in laboratories also needs to come to terms with the growth of managed care, which is an important policy goal in most states. The Michigan experience demonstrates that states can use state managed care contracting proactively to forge a stronger safety net.
Positioning PHLs for the Future: The Federal Role
It was striking to us how many times interviewees stressed the need for federal leadership. While our report stresses the need for proactive change among states in defining, protecting, and enhancing the role of PHLs, some consideration of the federal role is clearly in order. The fragmentation of responsibilities vis-à-vis the labs within the CDC, as documented above, is of particular concern to effective support of PHL functions. The themes that emerge in this regard are laboratory system structure, information technology, and facilitation of communication.
Structure of Laboratory System
Just as the laboratory system in the private sector is consolidating in light of new technology and the need to achieve economies of scale, many believe that consolidation would also be desirable in the public sector. Why should there be 50 state PHLs when geographic borders bear little relation to population centers and disease burdens?
The argument for status quo is typically rooted in political imperative and the need for states to control the full scope of public health services. However, while there is undoubtedly a role for some form of laboratory in every state, this does not mean that all laboratories need to be equally capable. Indeed, there is already considerable variation across states in services provided, and, as we have shown, many states contract out to have tests carried out in other state or private laboratories.
The notion of regionalization needs to be more carefully studied by the CDC. Issues that need to be considered include the capacity of state laboratories to perform complex reference testing, economies of scale in purchasing new capital equipment, mechanisms for laboratory funding, the current role of Medicaid funding, and categorical grants.
Information Technology
A central finding of this report is that there appears to be a widening gap between the public and private sectors in the area of information technology. Private sector funding appears to be outstripping public funding, and, as a result, the information infrastructure is simply not being built in PHLs. While the CDC does have a number of small grants in this area, they have been insufficient to generate substantial activity. Building information infrastructure is a clear priority of the present Administration, and applications to public health function should be further explored by the CDC or DHHS.
Unfortunately, the locus for leadership in this area has yet to be identified on the federal level. Leadership might come from the Health Information Systems and Surveillance Board (HISSB) within the CDC. However, there are clearly other divisions and agencies that have a strong interest. In addition, commitment would also need to emanate from the states, as most PHL funding continues to come from state governments. Current interest in integrated information systems for public health and knowledge-based systems among SHAs affords an opportunity to strengthen information technology in PHLs, and significant focus on this issue from federal government is needed.
Outreach and Communication
One of the challenges faced by the PHLs is that their routine services - while clearly important contributions to the maintenance of public health - are generally outside of the public eye. Indeed, typical PHL operations imply that PHLs will rarely take center stage in any standard public health activities.
The more successful PHLs, and those that have more positive outlooks on PHLs' future, share some common features. These PHLs work hard at outreach and communication to ensure that public health agencies, state and local government, MCOs and providers, other laboratory stakeholders, and the general public are aware of and informed about the PHL's unique value and responsibilities. These PHLs are also actively involved in collaborative activities among stakeholders and strategic planning for such activities.
While the efforts of these few PHLs are noteworthy, national leadership is needed to heighten awareness of PHLs' importance, build ties among laboratory stakeholders, and help set the agenda for public-private cooperation. Individual PHLs cannot be expected to shoulder the entire burden of outreach and communication. Not only should effective national leadership help preserve core PHL activities, it should also buoy the morale and leadership within the PHLs, thereby helping them to help themselves.