NEW YORK — With payors and industry consolidation putting downward pressure on test pricing, some in the clinical lab space have in recent years begun exploring alternatives to the fee-for-service models that have traditionally dominated the business.
The most prominent such effort is the Clinical Lab 2.0 initiative proposed in 2017 by the Project Santa Fe lab coalition, which aims to leverage testing and test data to impact patient health at the system and population level, allowing labs to better demonstrate their value to the healthcare system and capture a larger portion of that value.
In addition to helping labs maintain and expand revenues in the face of declining reimbursement — particularly for routine testing — Lab 2.0 advocates argue that such a shift is necessary to fit into the changing landscape of the larger healthcare system, where many expect value and risk-based care arrangements will dominate in coming years.
It is a compelling notion, but a challenging one to implement, facing a number of legal, administrative, and technical hurdles, and thus far there are relatively few examples of existing lab business models rooted in the Lab 2.0 idea.
Perhaps the most ambitious implementation of such ideas to date has come from New Mexico-based reference lab company TriCore, whose former CEO Khosrow Shotorbani is one of the founders of Project Santa Fe as well as its president and executive director.
TriCore has developed a subscription service that it sells to payors through its Rhodes Group subsidiary that provides them with lab data and insights that help them manage various patient populations such as individuals with diabetes or schizophrenia or pregnant women.
Rick VanNess, director of product development at the Rhodes Group, gave the example of data that the company provides Blue Cross Blue Shield of New Mexico's Special Beginnings prenatal program.
"I'll tell Special Beginnings, 'Hey, a woman was just diagnosed yesterday, [and] based on the [lab] data, I can tell she is probably going to give birth on Dec. 1,'" he said, noting that this rapid notification allows Blue Cross Blue Shield to more quickly reach out to the woman to ensure she begins prenatal care in a timely manner.
From there, Rhodes uses its lab data to flag any risk factors like gestational diabetes that may emerge and, ultimately, to quickly notify BCBS when the woman delivers so the insurer can make sure she receives appropriate postpartum care.
VanNess said Rhodes now aims to take its offerings a step further, beyond simply selling lab data to payors to using that data to identify patients who need certain tests and to perform those tests if they show up at a TriCore facility.
He cited the example of a patient with schizophrenia who might come to a testing center for a neutrophil test required for managing his medication.
"I can see that he also needs an A1C, and I know that the payor wants him to have that, so I am going to order the A1C," he said. The lab would only get paid for the A1C, however, after it manages to close any care gaps — meaning, in this case, that the patient saw their doctor to arrange management for diabetes if the test shows it is needed.
"That's our next phase of value-based care, to say to the payor, 'I'll take action'" to close a care gap identified by lab data, VanNess said, adding that in exchange for taking on that risk the lab would charge six to seven times the normal rate for the test.
VanNess said such arrangements are primarily targeted to insurers working with Medicare Advantage and Medicaid managed care organizations as well as certain private insurers for which hitting certain patient care benchmarks is particularly important.
"You say, OK, I know you are a three-star Medicare Advantage plan. If you get to four stars, you are going to get an extra $100 per member per month," he said. "That's why you are going to pay me."
The process is far from straightforward, though. Before it can begin actively ordering testing for patients who need it, TriCore will need to establish safe harbor arrangements with its customers that will allow it to offer such testing without violating federal anti-kickback laws. It is currently in the process of doing so, VanNess said.
He noted that questions about anti-kickback laws were what originally led TriCore to purchase the Rhodes Group and establish it as its provider of lab data products. The concern, VanNess said, was that providing the data and insights could be viewed as offering a benefit to induce payors to use TriCore's lab services.
"Our legal team [decided] it was just too tricky," he said.
Recent revisions to the federal Stark Law and Anti-Kickback Statute have provided carve-outs for healthcare providers designed to make it easier for them to coordinate care for their patients and participate in value-based care arrangements. For instance, hospitals are now able to reward outside providers for hitting outcome goals that result in better coordinated care and reduced hospital admissions.
Labs, however, were not covered by these carve-outs, which means implementing Lab 2.0-type business models will continue to face the legal complexities TriCore has had to negotiate.
This may be one reason few labs have joined TriCore in trying to package and sell their test data to outside payors.
"The business model for Lab 2.0 — meaning that we look at our own data, we bring our wisdom and understanding of what that lab data means, and then we work with providers, affiliated or unaffiliated, to deliver better healthcare services — is a business model that has not clearly come into view," said James Crawford, senior VP of laboratory services at Northwell Health and a leading proponent of the Lab 2.0 idea.
He said that to his knowledge, TriCore is the only example of a lab company currently generating revenue in this manner.
Many of the labs and lab personnel involved in developing and promulgating the Lab 2.0 idea have been part of large integrated healthcare systems like Northwell, Geisinger Health, or Intermountain Healthcare and have to date focused on demonstrating the value of lab data for managing patients within those systems as opposed to packaging and selling data to payors outside the system, Crawford said.
Crawford said that in years when Northwell has been in contract negotiations with payors, he and his lab colleagues have floated Lab 2.0-type programs but have gotten little traction.
He said that these efforts had faced a number of challenges, one of the foremost being that in such negotiations, the lab is often viewed as a commodity where the goal is to get testing for the lowest price possible.
"There's no room for Lab 2.0 in that conversation, so you don't even get to begin the conversation," he said.
Additionally, there is the fact that payors already have lab and claims data. Whether they are putting that data to larger use is another question, but it presents a barrier, nonetheless, Crawford said. "They ask, why do we need to pay more to the lab that is generating this data? We already have the data."
This feeds into a third challenge, which is that to provide payors with value they might be willing to pay for, labs need the resources to both generate lab data products and demonstrate their value to patient care. Most labs don't have that capacity currently, and it is difficult to build it out without being certain it will ultimately generate revenue.
"If you're not being funded to generate those data, then you don't have credibility to say, 'We can do this,'" Crawford said. "And you also have not necessarily built the program to deliver it."
He said that at Northwell, the lab views the hospital system as a proving ground for its Lab 2.0 efforts.
"We are piloting Clinical Lab 2.0 risk-based projects in hopes of generating data that we could then bring forward to payors on a future occasion," he said.
"Each health system or each lab has approached the question in different ways," said Gaurav Sharma, a pathologist and laboratory medical director at Henry Ford Health in Detroit.
"At Henry Ford, our priority is to control costs associated with high-cost genomic testing," he said. "We wanted to focus on making our existing in-house testing and our send-out testing more convenient, more rational, and more cost-effective for our own clinicians."
Like Crawford, Sharma noted that most labs don't currently have the data analytics resources needed to package their data for outside users.
"There is only a small set of labs that have that analytics capability in house that allows them to integrate or collaborate with nontraditional customers of labs like payors or state health departments," he said, adding that actually closing patient care gaps — as VanNess and TriCore envision doing in the future — is the ultimate and perhaps even more difficult goal.
"Finding the problem is not the main task; most value is created by solving the problem," Sharma said. "Using laboratory data, you can find individuals who are at risk of a certain condition, but at the end of the day someone has to address and correct that. There are clinicians and specialists who are not part of the lab who need to follow up and actually solve the problem."
"Ultimately it all depends on the direct patient and clinician interaction," he said. "The local lab must work with the local clinical groups' priorities and create information that is useful and available to them."
Lena Chaihorsky, cofounder and VP of payor innovation at diagnostics consulting firm Alva10, suggested that despite the challenges presented by declining test reimbursement and broader shift to value-based care, labs will still be able to prosper under a more straightforward fee-for-service model, provided the industry is able to effectively highlight the value of lab testing in managing patient care.
"Before we get to a world where labs are going to be selling A1C data to payors, there is a whole value-based care success that we can achieve and that we are in the process of achieving," she said. "That is going to occur, and it is occurring when insurance organizations and health systems utilize the lab data that they have and utilize high-value diagnostic tests appropriately."
Chaihorsky predicted that under value-based care models, labs will become more prominent as providers come to recognize their ability to better target the right care to the right patients and avoid unnecessary treatment and expense. She expects this will translate initially into an increase in lab volumes and then into an increase in test pricing.
While efforts by private and government payors to drive down test payments and the eagerness of many healthcare systems to sell off their laboratory assets would seem to run counter to Chaihorsky's projections, there are indications that things could play out as she envisions.
For instance, Quest Diagnostics has in recent years shifted to more value-based contracts and has scored price increases for some such contracts. Last year, former Chairman and CEO Steve Rusckowski said that around 30 percent of Quest's health plan revenues "are tied to value-based elements" and that this figure could grow to "about 50 percent over the next few years."
During a recent webinar on value-based care, Brian Burns, VP of managed care strategy at lab consulting firm Lighthouse Lab Services, said that he believed that under plans using the per-member, per-month billing often employed in value-based care arrangements — in which providers are paid a fixed amount per member regardless of the services used — lab utilization had gone up.
Under such plans, "payors are really trying to invest in and continue to drive chronic care management," he said. "Lab tests are fundamentally critical to the conversation of population health management or chronic disease management."
And while reimbursement for routine testing continues to get squeezed, spending on advanced diagnostics continues to grow. For instance, the Medicare Payment Advisory Commission's 2021 report to Congress on the Protecting Access to Medicare Act found that while "overall utilization of CLFS laboratory tests remained relatively flat" after the implementation of PAMA, "aggregate Medicare CLFS spending increased" from $7.1 billion in 2017 to $7.6 billion in 2019, with this increase "predominantly driven by [a] spending increase for new, high-cost tests in the molecular pathology, multianalyte assays with algorithmic analyses, proprietary laboratory analyses, and genomic sequencing procedures categories."
Nonetheless, Crawford suggested that labs should take seriously the need for new business models to match coming changes in how testing, and healthcare more generally, is paid for.
"The laboratory industry needs to take every opportunity to develop these skill sets and the relationships with our medical colleagues and build the programs in advance of the tipping point of risk-based care," he said.