Public Health Laboratories and Health System Change . Tennessee State Case Study



The Tennessee case study report consists of four sections: (a) PHL Interview Findings; (b) Private Clinical Laboratory Interview Findings; (c) MCO Interview Findings; and (d) TennCare Interview Findings.

The Tennessee case study focused on the experience of the state public health laboratory (PHL) with TennCare, the statewide Medicaid managed care program operating in Tennessee. Since TennCare's inception in January 1994, the state PHL has sought to obtain contracts with managed care organizations (MCOs) serving TennCare patients. The site visit consisted of four interviews with representatives from a number of organizations including: the state PHL, TennCare administration, a TennCare MCO, and a large private clinical laboratory. We met for four hours with Dr. Michael Kimberly, Director of the Tennessee state PHL, and his two assistant directors, who head the Microbiology and Environmental Laboratory divisions of the state PHL. The meeting included a tour of the Tennessee PHL facilities at the central office in Nashville. We then met with the following individuals for one to two hours each: Medical Director of TennCare, Vice President for Provider Relations of an MCO serving TennCare patients and contracting with the state PHL, and Regional Manager of a large private laboratory company operating in Tennessee.

The interviews were designed to gain a more thorough understanding of the following: (a) the TennCare contracts the state PHL maintains with three of the MCOs serving TennCare patients; (b) the political and financial issues surrounding the development of these contractual relationships; and (c) the impact TennCare and other health market changes have had on the Tennessee PHL. We met with a representative of the private laboratory industry to document the private laboratory environment in Tennessee. For all interviews, in addition to asking interviewees questions pertaining to their organizations' role in Tennessee's health care market and their relationships with the state PHL, we asked about their perception of the unique value (if any) of the state PHL.

Public Health Laboratory Interview Findings

Interviewees at the PHL included three laboratory officials: the Director of the Tennessee Public Health Laboratory, the Director of Public Health Microbiology Laboratories, and the Director of Environmental Laboratories. Our interview with these officials focused on following topics:

state public health laboratory infrastructure

managed care and public health laboratories

laboratory stakeholder interactions in the state

other health issues involving health market changes and PHLs

public-private collaborations in clinical laboratory services

unique value and the future of PHLs

State Public Health Laboratory Infrastructure

Tennessee's central state PHL is located in Nashville. The state also operates branch laboratories in Memphis, Jackson, Knoxville, and Johnson City. In total, Tennessee's state PHL staff consists of 186 full time equivalents (FTEs). The PHL's budget for FY 1996 was $9.5 million, and 95 percent of funding for state PHL activities in Tennessee is derived from state revenue. The laboratory originally requested a budget of $11.2 million, but has been regularly required to revert funding back to the state after certain budget line items (e.g., travel) have been frozen. In addition to these line item freezes, the state has required the laboratory to maintain a ten percent staff vacancy rate (i.e., no new hires) over the last several years. The PHLs budget from the state has remained constant since 1994, corresponding to reduction, in real terms, due both to inflation and the need for the laboratory to make accommodations for federal COLA adjustments. In the state legislature, while some public health services have been identified as possible candidates for privatization, no privatization of PHL functions has occurred. While the laboratory does generate fees for genetic and environmental testing services, the revenue from these tests is passed on directly to the state.

Scope of Laboratory Services/Core Laboratory Functions

The state PHL serves 89 state-run rural health departments and six metropolitan health departments, providing testing for their populations. The state PHL performs a range of testing, including: genetic screening, STD testing (e.g., syphilis, chlamydia, gonorrhea), HIV, TB, bacteriology (microscopy), immunology, and virology. In addition to conducting statewide genetic screening for Tennessee, the PHL conducts genetic screenings for the State of Mississippi, and (on a limited basis) for the nation of Colombia. In addition, the laboratory performs environmental testing services involving organic chemistry (i.e., pesticides, herbicides, PCBs), inorganic testing (including heavy metals, nutrients, air filters), and aquatic biology. The PHL also serves as a reference laboratory, performing speciation and typing of specimens. Finally, the PHL assumes responsibility for training its staff on state rules, regulations, and guidelines relevant to laboratory testing.

Laboratory Information System Resources/Process Automation

While the PHL has systems that automate environmental testing and newborn genetic screening tests, most microbiology testing at the laboratory is not yet automated. The comprehensive range of services offered and budgetary limits to the purchase of new equipment have precluded full laboratory automation.

The laboratory does not currently use a laboratory information system for microbiology testing services, however the laboratory is planning on contracting with the company that created the Patient Tracking Billing Management Information System to develop a system that will be able to electronically transmit billing, ordering, and other test specific information for the laboratory. The system will give the PHL electronic connectivity with all clients, including county health departments and the CDC (for the purpose of disease reporting).

The PHL currently operates a LMIS system for environmental testing services that has slowly replaced paper-based records within the laboratory (including branch locations). The state PHL reports that this system has contributed to improvements in test turn-around time. The system was paid for through the Department of Environmental Testing's equipment budget.

Managed Care and Public Health Labs

Prior to TennCare, there were no formal relationships between the PHL and any MCOs. With the creation of TennCare on January 1, 1994, the state cut local health department funding on the premise that patients who were previously cared for by the health departments would now be served by TennCare MCOs; this prompted state-run rural health departments to seek contracts with MCOs to serve as primary care providers, as did the metropolitan health departments. The state required the state PHL to obtain contracts with the MCOs for testing that it provides to TennCare patients. In 1995 the state PHL sought contracts with all of the (twelve) TennCare MCOs. However, it has only obtained three such contracts to date. These contracts were precluded, in part, by the fact that one MCO (Prudential) operates its own laboratory, and two other MCOs have exclusive arrangements with private laboratories.

The state PHL's three MCO contracts are very limited, covering only testing of specimens sent in from local health departments. In cases where confidentiality is paramount, the state PHL is often the provider of choice for local health departments, and in some cases, of private physicians. Prices were negotiated based on what Medicare had reimbursed prior to TennCare. As with all other user fees, revenues generated through these laboratory contracts are passed back to the state. The laboratory did not have a billing system to accommodate these tests, and subcontracted with the local metropolitan health departments to provide this function. Thus, for every test, the laboratory must pay the public health departments a $2.70 processing fee. The advent of TennCare, and the subsequent decreasing patient volume of the local health departments have resulted in a reduction in testing volume for the state PHL. The state PHL was not included in the TennCare planning process, and it feels that the limited contract opportunities that do exist are an "afterthought" to the entire TennCare planning process.

PHL Interactions with Other Organizations in the State

The PHL considers its relationships with the public health departments to be very strong. The laboratory considers its relationships with hospitals to be strong but often one-sided; when the hospital laboratories need assistance, they call on the state PHL, but the PHL reports that this situation is rarely reciprocated. The PHL also considers its relationship with the CDC to be somewhat one-sided in that it will often respond to CDC requests for assistance, but the PHL has difficulty obtaining information/assistance from the CDC. The state PHL believes that private laboratories consider the state PHL to be a source of competition for testing services. This is surprising to the state PHL because it does not perform clinical testing. In fact, the PHL reports that it has experienced hostility from private laboratories in the few situations where the laboratory has had direct contact with private laboratory personnel.

Public-Private Collaborations in Clinical Laboratory Services

According to the state PHL, no examples of public-private collaboration in clinical laboratory services have occurred in Tennessee.

Unique Value and the Future of Public Health Labs

The PHL confirmed the three core state PHL functions identified previously in this study. In addition, the PHL suggested that environmental testing services and the provision of testing services to the uninsured are part of PHL responsibilities.

The PHL believes that the future of state PHLs is in jeopardy and that they are an undervalued and vital public health resource. The PHL noted that when public health functions are operating effectively, the public is relatively unaware of them, and as a result, there is a lack of understanding of their importance. The future of the state PHL's core functions depends upon the ability of the lab to maintain a broad array of and capacity for more general laboratory services because specialized core functions cannot survive independently.

Private Clinical Laboratory Interview Findings

We spoke with the Regional Manager of a large private clinical laboratory serving the state of Tennessee and other regions of the United States.

Private Laboratory Practices and Resources

The private laboratory interviewed for this study performs 15,000 tests per day, and employs a 130 person staff in middle and western Tennessee. The laboratory operates two daily charter flights from Nashville (with a wide network throughout the state of ground couriers) to transfer samples on a daily basis to its central testing facility in Kentucky.

The private laboratory is automated in many areas of its operations, including billing, reporting, and tracking. In the future, the laboratory's information systems capability may become a service that provides analytic and information support to MCO clients.

Market Environment for Clinical Laboratory Services

There are three major independent clinical laboratories in the state. All laboratories provide the same basic services. The laboratories can be distinguished based on differences in the following support service criteria:

turn-around times

pick-up and specimen processing


LIS capabilities

ability to handle rapid response "stat testing"

The interviewee was unwilling to disclose specifics about the company's market share in the state. MCOs are increasingly requiring capitated laboratory contracts, which are financially unattractive for the laboratories. The more routine tests are often capitated (e.g., pap smears, urine tests, CBCs), whereas more specialized tests (e.g., oncology) remain fee-for-service. MCO business is treated as an opportunity for "pull-through" business. By offering services to managed care physicians, the laboratory gains access to testing for non-managed care patients. Private laboratories are lining up with hospitals to form alliances, and private laboratories are increasingly servicing clients in remote, rural areas.

Public-Private Collaborations in Clinical Laboratory Services

According to our interviewee, there are no collaborations in clinical laboratory services in Tennessee, and the lab does not see value in collaborations with PHLs.

Unique Value of the Public Health Labs

The interviewee had little formal understanding of traditional public health functions. The interviewee identified the role of the state PHL as serving as providers of testing services during disease outbreaks. The interviewee believes that even some of the traditional public health lab tests (e.g., rabies testing) could easily be taken over by private labs. The private laboratory felt that the state PHLs cannot offer the scope of services offered by private laboratories, and would have trouble competing on other factors such as price, capacity, and quality. For example, the state public health lab does not offer the specimen handling, economies of scale, capacity, or high service level that private labs offer.

Managed Care Organization Interview Findings

We spoke with the Vice President of Provider Relations for a managed care organization operating exclusively in Tennessee (primarily in middle Tennessee). The managed care organization offers commercial packages (serving approximately 260,000 members) and also serves 87,000 TennCare members.

Managed Care and Laboratory Services

The MCO provides medically necessary, non-experimental laboratory services to its members; these services are the same for both the commercial and TennCare MCO members. The MCO allows providers to use several different private and hospital laboratories in the state. Currently, the MCO contracts with any laboratory that will meet the MCOs fee schedule. In the future, the MCO may try to limit the number of laboratories in their network to negotiate better rates. The MCO also allows local health department (LHD) providers to send samples to the state PHL. LHDs are used by TennCare members of the MCO when there is a shortage of providers in an area. Additionally, a few select LHDs also provide specialty services where there is a shortage of providers.

The MCO is in compliance with all credentialing standards for its ancillaries, including the National Committee for Quality Assurance and CLIA. In terms of contracting, the MCO's contracts with labs are based on discounted fee schedules.

Managed Care and Public Health Laboratories

Relationships between Public Health Labs and Managed Care Organizations

The MCO does not consider the state PHL to be different from any private laboratory serving TennCare patients in that it believes that the PHL needs to market its services better in order to capture new MCO business. Furthermore, if the state public health lab wants to increase the amount of TennCare specimens, then the state public health lab needs to market its services.

Managed Care Environment in the State

HMO and PPO penetration in Tennessee is 18 to 20 percent. The interviewee believes that the state provides excessive regulatory oversight of MCOs within the TennCare network and that the state should minimize its role in the program once MCOs are awarded contracts. The MCO is currently reviewing its full-risk capitation contracts for laboratory services in order to determine their commercial viability for the future.

Unique Value of the Public Health Labs

The MCO interviewee had little formal understanding of traditional public health functions. The interviewee believes that the MCOs will perform more benchmarking, outcomes analysis, screening, and monitoring of their patient populations, and that this will largely replace public health monitoring activities. Although the state PHL provides specialty services such as serotyping, the MCO does not see any value in this information for its own strategic purposes. The interviewee felt that unless private labs are required by the state to perform some of the high-cost, unprofitable tests, the state public health lab will continue to have trouble competing in the Tennessee clinical testing services market.

TennCare Interview Findings

We interviewed the Medical Director of TennCare (Tennessee's Medicaid and managed care program) for this study.


TennCare became operational on January 1, 1994. Originally there were 12 MCOs involved with TennCare. Today, there are 10 MCOs offering 11 plans (Blue Cross Blue Shield offers both BlueCare and BlueCare of East Tennessee) and a total of 1.2 million TennCare recipients.

TennCare provides a flat per member per month capitation rate to MCOs who provide the entire package of Medicaid services although long-term care and dual eligibles are carved out. The LHDs lost $15-20 million in funding with the implementation of TennCare under the rationale that previously uninsured patients would now be treated by TennCare MCOs instead of the LHDs.

The LHDs responded by obtaining contracts with TennCare MCOs to provide the following services: immunizations, STD screenings, family planning, TB treatment, and prenatal services. In addition, some rural local health departments (LHDs) geared up to serve as primary care providers. For years, LHDs had been real partners with Medicaid. Therefore, with the implementation of TennCare, LHDs worked almost immediately to develop relationships with TennCare MCOs. In contrast, according to TennCare, since the state PHL did not want to become revenue dependent, the PHL did not actively pursue similar relationships with MCOs. For example, our TennCare interviewee noted that the PHL did not and has not developed a billing system for tracking TennCare specimens and payments.

MCO contracting

All ancillary services for TennCare members are the responsibility of the MCOs. Our TennCare interviewee confirmed the points on laboratory service contracts that our MCO interviewee had made. The MCOs have developed a number of sub-contracting relationships (e.g., dental, pharmacy, laboratory services) to meet these needs. These sub-contracting relationships are a combination of fee-for-service and capitation. In terms of laboratory services, MCOs initially used any number of labs, but the current trend is increasingly towards exclusive relationships with large private labs. For example, LabCorp currently has an exclusive contract to perform all of the testing for state government facilities, including LHDs, in Tennessee.

Lab Stakeholder Interactions in the State

TennCare's interaction with the state PHL has been minimal. Most of TennCare's interaction with the state PHL occurs indirectly through the local health departments. Because TennCare contracts with MCOs for all medical services, TennCare administration does not work directly with laboratory stakeholders.

Future of TennCare

For the first two and a half years of TennCare, the state worked on developing a system for capturing accurate utilization data from the MCOs. Now the state is beginning to use this information for quality assurance analysis. TennCare will be able to create utilization patterns and profiling by MCO, regions, and providers at a very high level of detail. They are developing report cards based on core indicators, and laboratory testing is likely to receive some attention. The state is taking steps to revise the finances of TennCare to maintain financial viability and to re-open enrollment for the uninsured populations (currently, enrollment is limited to Medicaid eligible patients).

Unique Value of the Public Health Labs

Our interviewee felt that the state PHL needed to refocus its operation to better suit the needs of the market. The lab cannot continue to work as before because they need to adapt to the managed care environment. Operationally, this may require the lab to rethink its position of lack of reliance on user fees as a funding source. The state PHL does have an important role in ensuring patient confidentiality for certain types of tests. In addition, the PHL is also important for supporting some of the core functions of the public health community. Our interviewee also validated the core functions of PHLs. Finally, our interviewee noted that for some of the PHL's major core functions, such as outbreak surveillance, the lab needs to maintain a broad array of and capacity for more general laboratory services because specialized lab functions cannot survive independently.