Public Health Laboratories and Health System Change . 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:

  • The New Jersey PHL performs viral isolations, tuberculosis reference work, and salmonella testing for LabCorp (LCA).
  • The New Mexico PHL outsources pap smear, chlamydia and PCR testing to several private laboratories.
  • The Wyoming PHL contracts with Quest to perform liver enzyme testing.
  • The West Virginia PHL has utilized private laboratories to deal with volume overflow during temporary periods of staff shortages.
  • The Illinois PHL has a contract with private laboratories to provide clinical testing for Chicago public health clinics.
  • In Kentucky, some esoteric tests required in support of local health department primary care clinic activities are performed by private labs under contract with the state PHL.

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.