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What providers and health plans still find challenging about lab services

By Sally KimChloe Bakst

November 9, 2021

    Providers and health plans generally view labs as both a commodity and a necessity when it comes to providing care. However, these two stakeholders have different approaches when managing lab costs. For systems and hospitals, lab services may be more than a necessary expense—they can also be a strategic asset. For health plans, labs are a cost center, so the aim is to minimize unnecessary spend by controlling out-of-network claims and evaluating the necessity of pricey genetic testing panels.

    Through a comprehensive literature review, research interviews, and two lab decision-maker surveys, Advisory Board has identified the biggest labs-related challenges for providers and health plans. Understanding where the pain points lie can help identify where there are opportunities for partnership and cross-stakeholder support.

    Slide deck: 3 questions health plan leaders are asking about labs

    Health system challenges span data, staff, and margins

    Health systems face three primary lab challenges: inadequate data informatics, staffing shortages, and margin pressures.

    Pain point #1: Inadequate data informatics

    Health systems struggle to adequately incorporate lab data into their electronic health records and parse out the cost and revenue per lab test. Payment for hospital inpatient and outpatient testing is largely bundled, and most hospital billing platforms do not distinguish lab test codes from broader billing codes. This limits health systems' ability to determine their lab's financial performance and to identify any downstream clinical cost savings. Without a way to integrate lab data into their system or accurately assess test-specific cost and revenue data, it is difficult for providers to analyze lab data for use in clinical pathway recommendations and financial decision-making.

    Pain point #2: Staffing shortages

    Health systems are currently struggling to fill lab staff positions, due to staffing shortages and the lack of qualified personnel for emerging areas, such as genomics. For systems running their own labs, the shortage of lab technicians is particularly challenging. This is true for general lab services and for developing specialties like genomics. Health systems not only lack the in-house expertise to evaluate the necessity and value of new genetic tests, but also struggle to find experienced genetic testing personnel and follow-up counselors. This significantly limits their ability to provide expansive genetic lab services. 

    Pain point #3: Margin pressures

    Health system-owned lab programs face substantial margin pressure, both from high and rising costs, as well as from decreasing reimbursement. On the cost side, running a hospital lab requires large capital investments for purchasing and maintaining equipment. In addition, lab staff wages have increased at an annualized rate of 3% from 2016-2021, which has a big impact given that  labor accounts for 44 to 68% of system lab costs, according to Advisory Board analyses.

    Beyond costs, regulatory and federal reimbursement changes have led to declining lab payment rates. Another challenge is unpaid lab bills, or collections, which health systems often do not pursue due to the low reimbursement per test of routine labs. However, the high volumes of these low reimbursement tests add up over time.


    Health plans are challenged by reimbursement changes and new tests

    Compared to health systems, health plan pain points surrounding labs are largely focused on financial challenges. Looking to our health plan survey results, the top two lab challenges are regulatory and reimbursement changes and the rapid development of new, specialized tests.


    Pain point #1: Regulatory and reimbursement changes

    Private payers are monitoring the regulatory changes impacting Medicare because, through decreasing reimbursement and competitive dynamics, there may be indirect impacts on private payer rates as well. Productivity adjustments in the 2010 Affordable Care Act cut 1.8% of the Medicare lab fee schedule. Additionally, changes in Protecting Access to Medicare Act of 2014 (PAMA) resulted in a 28% average rate cut for the top 20 lab tests reimbursed by Medicare and has reduced overall Medicare lab payments by 10%. The second round of PAMA cuts and reporting has been delayed to January 2022 but these reductions in Medicare reimbursement can have widespread impact across the lab industry, where Medicare currently reimburses a higher amount for lab services than commercial payers do.

    Pain point #2: Rapid development of new tests

    New genetic tests have a much higher price tag than routine labs, which give rise to additional necessity determinations and utilization concerns.  Some industry analysts are confident that the rise in genetic testing will cause health plans to start prioritizing labs and asking more from lab benefit management companies. 


    Where lab companies can step in

    Many of these challenges represent opportunities for lab companies to reach out to both providers and health plans with targeted partnership opportunities. Lab companies should explore the following areas for potential investment and partnership:

    • Genetic testing support. Genetic testing has become a high-priority area for health systems and plans as precision medicine and targeted treatment continue to grow at a rapid pace. Systems and plans are both prioritizing genetic tests over routine testing due to their high unit costs. Lab companies should explore ways to improve the integration of these tests into care delivery processes and help providers and payers assess their clinical utility and potential ROI.
    • Wraparound lab data solutions. Systems and plans have difficulty controlling lab costs, tracking financial data, and ensuring network alignment. Health plans are interested in wraparound services such as automated claims processing. Health systems are beginning to consider using robotic process automation to improve the efficiency of their labs. Consider creating (or better marketing) services that allow for a seamless labs delivery and data experience.

    3 questions health plan leaders are asking about labs

    Download the slide deck

    Download our ready-to-use slides to learn the three questions health plan leaders are asking us about labs, and our answers. 

    • How are health plans trying to manage lab spend?
    • What’s next on the horizon for plans in the field of labs? 
    • Is home testing going to be the future of labs?
    Download now

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