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Public Health Laboratories and Health System Change: Executive Summary

Publication Date
Oct 5, 1997

As part of its ongoing research program in public health infrastructure, The Office of the Assistant Secretary for Planning and Evaluation (ASPE) of the Department of Health and Human Services (DHHS) commissioned The Lewin Group to study the relationship between public health laboratories (PHLs) and managed care organizations (MCOs). As the study progressed, it was broadened to include the impact of health system change (including managed care) on PHLs.

Historically, PHLs have had a central role in public health assessment, policy development, and quality assurance. The PHLs have also maintained a strong working relationship with the Centers for Disease Control (CDC) and other federal health agencies on issues of disease surveillance and control, and laboratory quality assurance. Similarly, the laboratories have been closely connected with a range of private sector organizations, most notably hospital and physician office laboratories, where the bulk of patient care testing was performed.

The dynamic health care environment is posing many new challenges for PHLs – changes in both the public and private sector have made it increasingly difficult for the PHLs to fulfill their missions. On the private side, PHLs see managed care and independent laboratories growing in strength, hospital laboratories consolidating, and 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 increasingly constrained budgets as state coffers have shrunk.

The purpose of this study was to understand how the relationship among PHLs, MCOs, and other stakeholders in the laboratory services market has changed, and the resulting implications for the state and federal government and for the PHLs. Study methods included a structured literature review, interviews with more than 50 public and private stakeholders, an informal poll of state PHL directors, and detailed case studies of three states that have PHLs with relationships to MCOs and/or private laboratories.



The PHLs are part of a broader public health infrastructure responsible for assessment of public health needs, assurance that needs are met, and policy development. But while the state laboratories share this overarching philosophy, the structure, organization, and financing of each state laboratory is different. Each PHL also resides in a unique health system and operates a unique laboratory information system. Therefore, it is understandable that each has pursued a unique strategy in addressing the central issues that we studied.

Managed care and the growth of large commercial laboratories are issues of great concern to PHL directors. We found that nearly half of the PHL directors believe that managed care is having an adverse effect on PHLs. Nearly half of the directors also believe that other health market change, such as the emergence of large private clinical laboratories and hospital consolidation, is negatively affecting PHLs. The main areas of concern include:

Reductions in testing volume

PHLs serving as providers of testing services for Medicaid populations have seen the number of specimens submitted to them decrease as MCOs have taken responsibility for the care of Medicaid patients. In some cases, reductions have been significant enough to stimulate operational change within the PHL. These reductions in test volume may be due to MCOs using their preferred private laboratory vendors, and possibly to decreased testing on the part of the MCOs. Although this was the most common "adverse" outcome reported (noted by roughly a third of the PHLs), it did not appear to have much of a substantial impact on most of the labs we studied.

Reduced reporting of diseases

Several PHLs believe that 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 contention, but it may well be correct – establishing this link is beyond any of the data that we encountered in conducting this study.

Difficulty in obtaining payment for tests with associated fees

A few PHLs reported difficulty in obtaining reimbursement from MCOs for testing services rendered to MCO patients. This result, while not widespread, demonstrates the lack of formal channels of commerce between MCOs and PHLs.

Competition from large commercial labs

The laboratory industry is rapidly consolidating, with the historical dominance of hospital-based labs giving way to increasing market power of large, national reference labs. These labs take advantage of scale, quick turn-around, powerful IT systems, and full service packages to garner exclusive contracts from MCOs and their associated providers. In addition, private labs are starting to tackle traditional PHL testing areas that previously lacked commercial viability (e.g., environmental testing). As these trends develop, PHLs not only lose testing opportunities, but also contacts with traditional allies in the private hospital labs. Indeed, the impact of managed care on PHLs may be more directly evident as restructuring occurs in the lab industry in response to larger health market forces.

However, there is little credible evidence to support many of these perceptions. As we explored the evidence that was available, we found that in most cases, the impact appears to be modest or even minimal. There is currently no mechanism through which most effects on PHL function can be effectively quantified. While the novelty of this topic suggests to PHL directors that we have only observed initial effects, it is possible that the concerns expressed by PHL directors are overstated – the result of understandable anxiety created by the uncertain and rapidly changing landscape of the public health infrastructure in general, and the laboratory environment in particular. For example, while there are data showing sample decreases for selected tests, this may be due in part to reductions in unnecessary testing. Furthermore, despite constraints in many PHL budgets, there are only limited empiric indications that PHLs are having difficulty achieving their core objectives. A number of lab directors also reported reduced PHL activity in disease outbreak investigation and epidemiologic follow-up; again, concrete quantification of these reductions and their impact is lacking.

A substantial minority of PHL directors saw significant opportunity for the laboratories to assume a more proactive role in helping to shape the laboratory delivery system. Because public and private laboratories have such different objectives, there are many areas in which collaboration may be beneficial to efficient operation of laboratory services and promotion of public health. Overall, we believe that there are at least four models for interaction in the laboratory environment that are worthy of consideration:

Provide services as a subcontractor to MCOs

The array of state PHLs have both core areas of expertise (e.g., rabies and blood lead testing) and close relationships with safety net providers that result in test volume (e.g., clinical testing for indigent populations served by local health departments). By obtaining subcontracts to perform testing in these areas for these populations, PHLs may be able to preserve and fortify their key strengths. However, to date there are only a few cases of state PHLs serving as subcontractors to MCOs, and these instances have shown very limited success as sources of revenues or testing volume for PHLs. Most of the PHL directors interviewed do not believe that building tangible demand from managed care over the long term will be a viable model.

Establish a testing network in collaboration with private sector 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. Although the currently existing applications of this model to date do not appear to be living up to their initial promise, most believe that the fundamental concept is logical and could prove successful with more effective implementation.

Actively manage the activities of MCOs through contract bidding

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 and partnership

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 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.


Changes in health markets and the environment faced by PHLs naturally raise the questions of whether the core functions of laboratories must change in response or whether more leadership from the laboratories can improve public health. Our study suggests that while the overall charge of PHLs (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.

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. The function of PHLs varies dramatically from state to state. The notion of a core set of activities is particularly charged, because it defines, in part, the appropriate role of the PHL. There is 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, whereas commercial laboratories typically maintain the opposite position. Anecdotal evidence is available to support either side of this debate.

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. Still, PHL viability in generating revenues is a central issue in defining core PHL functions. Public health officials are split on this issue between those who believe that PHLs need to show value, and those who believe that user fees establish a perverse relationship with the private sector and may discourage indigent patients from seeking services. Another fundamental issue is whether direct patient care testing is a core function. Again, the debate centers on whether the state should be engaged in de facto competition with the private sector.

Most neutral observers agree that 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, 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.

Policy development also needs to change in response to changes in the health care system. The notion of public-private partnerships has come into vogue and, as has been shown in Washington State, 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 managed care contracting to forge a stronger safety net.

Federal leadership is needed in a number of areas to support development of the nation's laboratory infrastructure and to help the PHLs redefine and solidify their substantive roles in each of the three core PHL activities. The fragmentation of the PHLs' mission is reflected at the federal level – the CDC has the most active involvement with state PHLs yet there is no single and clear locus of responsibility for PHL activities within the CDC nor elsewhere in DHHS. As noted above, there is no unified, common theme among PHL strategic plans, and centralized leadership is likely a necessary (but not sufficient) condition for a common purpose to be realized. Increased federal guidance could be particularly useful in assessing the regionalization of some laboratory services, in supporting information infrastructure development, and in facilitating communication between public and private concerns.