As the private sector counterparts to PHLs, and also as an increasing source of competition, private clinical laboratories are a central element of the PHL operating environment. The American Society for Microbiology defines the clinical laboratory as, "...a place where materials derived from the human body are examined for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or assessment of, the health of human beings."(13) Clinical laboratories perform a wide range of services, from routine tests to sophisticated genetic tests, and many of them also perform various environmental testing services. There are also simple diagnostic test kits marketed to physician offices and, in some cases, directly to consumers. Clinical laboratories may be operated by universities, hospitals, physician offices, and free-standing facilities.
Several key trends in the competitive clinical laboratory testing marketplace today are overcapacity, increased outpatient testing volume, and intense price pressure from payers (e.g., managed care, Medicare). Private clinical laboratories, like their PHL counterparts, are struggling to meet the challenges of the rapidly changing health care market. The laboratory testing industry is restructuring rapidly and dramatically in response to these trends. Hospital laboratories are actively pursuing networking opportunities with outside laboratories to capture more testing volume, while others are consolidating their laboratory operations to reduce costs. In addition, large independent reference laboratories have emerged as major players in the industry, competing effectively on a national level for outpatient laboratory testing business.
This section presents a brief overview of the market for clinical testing services, including an estimate of market size, identification of the various laboratory stakeholders, and discussion of key trends in the industry. The section also describes how changes in the clinical laboratory market may affect PHLs.
-
Structure of the Market
-
Nationwide, the clinical testing market generates $30 billion in sales annually, and currently there are approximately 150,000 clinical laboratories in the United States (including PHLs). Clinical laboratories typically fall into one of three major categories: hospital-based laboratories, independent reference laboratories, and physician office laboratories.14
Previously an industry dominated by hospital-based laboratories, the clinical testing industry is rapidly consolidating, with larger independent reference laboratories acquiring increasing market share. In 1995, hospital-based laboratories comprised 55% of the total market, independent clinical laboratories made up 37% ($11 billion in sales for 1995), and physician office laboratories comprised 8% of the market. The independent reference laboratories represent the fastest growing segment of the clinical laboratory industry. 15
Figure 11: Market Share of Major Reference Laboratories, 1995
Several mergers and acquisitions in the clinical laboratory market during the past five years have resulted in the formation of large independent reference laboratories that now control a significant portion of the independent reference laboratory testing market (Figure 11). The merger of National Health Laboratories and Roche Biomedical Laboratories in 1995 to form Laboratory Corporation of America (LCA) created the largest laboratory system in the industry, with 1995 sales of $1.7 billion. ega-labs, such as LCA, SmithKline Beecham Clinical Laboratories, and Quest Diagnostics, have positioned themselves well to bid for managed care contracts because of their high volume, quick turnaround, and low cost-per-test approach to laboratory services.
-
-
Trends Affecting PHLs
-
The growth of managed care has had a significant impact on the operations and profitability of clinical laboratories during the past five years. Cost reduction is the major driving force in the industry, and laboratories are in the process of planning strategically to adapt to these changes. As a result, the key market trends in clinical testing services reflect the heavy influence of managed care. These trends include:
- a decrease in reimbursement for laboratory testing services
- a shift from fee-for-service to capitated, full-risk contracts for laboratory services
- rapid consolidation of hospital-based laboratories and emergence of large, independent reference laboratories Cincreases in types of services offered by clinical laboratories
- heavy investments in laboratory information systems
Figure 12: Trends in Laboratory Revenues and Costs Over Three Decades
Adapted from: Ash KO, Clinical Chemistry 42:5, 822-826, 1996
The steady decrease of laboratory revenues per test has been a major adverse trend for clinical laboratories in the 1990s. Coupled with an increase in the cost per test performed, profits have been shrinking, and clinical laboratories have been attempting to improve their operating efficiency in order to sustain their profitability (see Figure 12).
There are several possible explanations for these adverse trends. First, the emergence and rapid growth of managed care has resulted in an increase in the number of capitated testing contracts and a concomitant decrease in fee-for-service work. Fee-for-service work, in which the laboratory bills for every test it performs, generates a higher profit margin. (16) In contrast, capitated contracts entail a fixed price to cover all of the testing for a client (often based on the number of covered lives), regardless of how many tests are actually performed. At Quest Diagnostics, capitation-based laboratory work increased approximately 20% in 1996 over the prior year; and while capitation currently makes up 15% of Quest's total volume, it generates only 6% of Quest's total net revenue.(17) Quest, along with SmithKline Beecham and LCA, has lost money on some of its capitated contracts. These larger reference laboratories negotiated very low capitation rates to capture managed care contracts with the expectation that exposure to large numbers of physicians would allow the laboratories to acquire the fee-for-service testing business from physicians who participate in the managed care plans (most physicians serve a mix of managed care and fee-for-service patients). However, with a shrinking fee-for-service patient base, these expectations have yet to be realized.
Changes in government reimbursement of clinical laboratory services have also affected the revenue stream of clinical laboratories. Between 1993 and 1996, Medicare reduced its reimbursement rates for outpatient laboratory tests by 15%. Medicare is also controlling test utilization by requiring physicians to demonstrate that a test is medically necessary before it will reimburse for chemistry profiles.17
The emphasis on cost-reduction has resulted in another major industry trend: the consolidation of hospital-based laboratories and the emergence of large, independent reference laboratories. In 1985, there were over 7,000 independent clinical laboratories operating in the U.S.; today, only 4,500 exist.16 Hospital-based laboratories, in an attempt to offset the decline in inpatient tests and compete against large independent reference laboratories for outpatient tests, are consolidating their laboratory functions and, in many cases, networking with other laboratories to capture more testing.17 A common type of consolidation involves the formation of core laboratories, which run non-STAT 18 high-volume tests from a central laboratory, with rapid testing performance at laboratory branches located at each participating hospital. The recent mergers of seven large independent reference laboratories to form Quest, LCA, and SmithKline Beecham Clinical Laboratories have resulted in a re-shuffling of the market for outpatient tests. These three large laboratory networks currently hold 43% of the reference laboratory testing market and are aggressively pursuing the inpatient testing market that was once dominated by hospital-based laboratories.
The competitive nature of the clinical testing service market, along with the demands for efficiency and quality from managed care clients, has resulted in a rapid expansion of products and services of clinical laboratories. For example, LCA has developed a line of specialty laboratory services (see Figure 13 below):
Figure 13: LabCorp Specialty Services
Disease/Topic Area Specific Laboratory Test Source: LCA homepage, www.labcorp.com 1997 Allergy Cost-effectiveness screening Regional profiles
Immunotherapy
Ambulatory Monitoring Holter ECG
Blood pressure
Patient-activated event monitoring
Oncology DNA ploidy analysis Tumor markers
Genetic oncology
Serial monitoring
PCR technology
Kidney Stone Management Comprehensive metabolic evaluation profiles Computer-assisted diagnostic analysis
Treatment evaluation
Paternity Testing Paternity testing Reproductive Evaluation Andrology Endocrinology
Genetics Molecular genetics Chromosome analysis
Maternal serum screening
Substance Abuse Testing Regulation compliance (SAMHSA/DOT) Extensive testing profiles
Quality control
Specimen retention
Biological Monitoring Metals Solvents/Chemicals
Pesticides
PCBs
Organ-specific probes
Industrial Hygiene Air analysis Environmental analysis
Drinking water
Lead and asbestos
Several of our interviews with private laboratory stakeholders also noted that process improvements (e.g., rapid pick-up and turnaround on routine tests, expanded laboratory information system capabilities, enhanced customer service efforts), have been initiated in response to the needs of their customers.
Despite the obvious economies of scale in testing and the potential for quality control that large private clinical laboratories have, many in the public sector remain concerned about the private clinical laboratories' capacity to serve the public interest. On price, for example, some PHL directors point to the experience in neonatal screening, where some states have succeeded in offering more screens for a fraction of the price offered by private laboratories.
Whether such discrepancies are due to the efficiency of consolidation, public subsidy of testing, or clinical laboratory profits is an important analytic question that has not yet been addressed.
-
