Public Health Laboratories and Health System Change . 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

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, 1997
Allergy Cost-effectiveness screening

Regional profiles


Ambulatory Monitoring Holter


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


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




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.