For labs, opportunity knocks as wallets close

Karen Titus

August 2013—Robert L. Michel doesn’t claim to have all the answers to all the problems laboratory medicine now faces. But as editor-in-chief of The Dark Report, the industry intelligence publication, he knows what those problems are chapter and verse. He also sees where future problems lie.

Michel shared his analysis at the opening session of The Dark Report’s Executive War College, held in New Orleans in April. As it turns out, journalism’s well-known axiom, Follow the money, works equally well in medicine. Michel walked his audience along the money stream, showing where it flows in health care—and where it dries up.

The government, of course, is one of the clinical laboratory industry’s biggest customers, if not its wisest or most focused. The federal government pays for defense, education, and public works, among other things, as well as for health care. And it’s done so at a fairly consistent clip. Federal spending as a percentage of gross domestic product, Michel reported, hovered slightly above 20 percent, on average, between 1960 and 2010. Unfortunately, federal income doesn’t match outflows—it averaged about 18 percent in that same period.

With the most recent recession, the gap between revenue and spending widened. Federal revenues dropped to just under 15 percent of GDP, while spending bumped up to nearly 25 percent of GDP. That has since evened out a bit. But while federal revenues have returned to 18 percent, spending is still at 25 percent—and projected to rise to more than 26 percent by 2021 if current expected levels remain.

By now, that gap, and what the federal government should do about it, are familiar discussions to all but cave dwellers. Spend less! Tax more!

But the latter, said Michel, won’t happen. The gap between federal receipts and spending has persisted at least as far back as 1929. Average spending over more than eight decades has been 18.3 percent (apart from an Alps-like spike during World War II), and average receipts have been 15.3 percent. Pathologists and other laboratory personnel need to understand, he said, “that no matter what they talk about in Congress, Congress cannot raise federal taxes enough to make up this gap. This truly is a spending gap,” one that has remained consistent since the days when Herbert Hoover held office.

States face their own perpetual budget crises. Citing a New York Times article from June 21, 2011, Michel noted that states faced a collective $176 billion shortfall in meeting their public pensions obligations (although some states are operating in the black). “Illinois is the poster child for this. They’re $37 billion short of meeting an 80 percent goal for funding their public employee pension trusts,” he said. Ohio is $23.9 billion short; New Jersey, $18.8 billion.

That doesn’t mean states are failing to spend on health care. The variety here is striking, too. Among the states, said Michel, citing an April 8, 2013 Wall Street Journal article, Alaska leads the way, spending $9,128 per capita (2009 figures); Washington, DC, spends $10,349 per capita. Utah controls its purse strings more tightly, spending a low of $5,031 per capita.

The elections in 2010 failed to simplify matters. “The American people didn’t change anything,” Michel said, re-electing president Obama and leaving the Senate and House in the hands of, respectively, the Democrats and the Republicans. “The political commentators don’t want to acknowledge that, but the people voted the status quo, probably because they don’t trust anybody.”

But if the financial and political scenes are complex, Michel’s message was not: “My point about the money is that, particularly at the federal level, there’s not enough, and there’s not the political will to do what needs to be done to fix it.”

That means labs need to be savvy about the health care marketplace, mostly because of the upcoming end to pure fee-for-service reimbursement. The office-based physician sector of health care is undergoing transformation, for example. And the economies of scale created by Quest and LabCorp—the obvious way to grow and maximize profits in a fee-for-service environment—are no longer the reliable income generators they’ve been for decades. Or, as Michel put it: “There’s trouble in River City, because bundled reimbursement and value-based reimbursement [are] heading down the pike.” Unfortunately for labs, the danger isn’t a pool table.

Along with changing reimbursements, labs are experiencing a change as office-based physicians move from being owners to employees. Hospitals and health systems are buying physician practices, and major health insurance companies are acquiring large medical group corporations. “Even employers have started opening up clinics and medical service facilities within their own offices and factories.”

If the physician is an employee, who decides which lab the medical practice will use? “It’s going to be the owner,” Michel said, answering his own question. If the owner is a hospital, it’s logical the work will go to that hospital’s lab. If the owner is an insurance company, the loss-leading rates that Quest and LabCorp offer might prove attractive. “The point is, it will not be the doctors themselves deciding which local laboratory or national laboratory they want to use.”

Relatively recent data from the Medical Group Management Association’s physician compensation and production survey helped Michel make his point. Physician-owned medical practices dropped from 70 percent in 2002 to less than 50 percent in 2008. Meanwhile, hospital-owned practices increased from 20 percent to more than 50 percent in that same period. By 2011, physician ownership of groups approached 30 percent, while hospital ownership was pushing 60 percent.

Furthermore, said Michel, data (based on an analysis by the Accenture consulting firm) from the MGMA and the American Medical Association show that even as the number of physicians was estimated to grow between 2000 and the present, from 683,000 to 793,000, the percentage of those who are independent was projected to drop, from about 57 percent in 2000 to 33 percent in 2013.

Something else has changed as well: greater emphasis on outpatient versus inpatient testing. By design, medical homes and accountable care organizations want to keep people out of the hospital. From 2004 to 2010, he noted, Medicare outpatient services grew at double-digit rates while hospital inpatient discharges per fee-for-service beneficiary declined.