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What lies in wait for office labs?

June 2003
Thomas Dolan

Before elections, the networks often use a focus group in a small midwestern town to tap the sentiments of the nation. If you were to adopt the same strategy to find national trends in physician office laboratories, Brinks Family Practice in Princeton, Ind., might fit the bill.

The practice has five providers, and its COLA-certified moderate-complexity laboratory, which performs about 65,000 tests annually, had been growing until this year, says laboratory manager Beth Schmitt, MT(ASCP). An increasing percentage of Brinks’ tests are H. pylori and strep screens, which were granted waived status in the past few years.

“But now we’re basically in a holding pattern. Managed care is just now moving in, and I’m starting to run into some companies that require laboratory work to be sent to a specific lab,” Schmitt says.

“I’ve been able to negotiate with all but a couple of insurance companies, but I don’t want to bring any more tests in house until I’m sure we’re getting reimbursement.” Static Medicare reimbursement levels persist, she notes. Although there was a 1.1 percent increase this year, “that’s the first we’ve had in the last five years.”

While Medicare has the lowest reimbursement levels, other insurers follow suit eventually, so Schmitt uses Medicare payments to judge whether to bring in new tests. Her laboratory added glycated hemoglobin, even though it doesn’t have a high reimbursement, because offering the test in-house improves patient care, she says. “But there are some tests I’ve refused to bring on board because they simply were not cost-effective.”

For example, “one of the bigger HMOs here has contracted with one of the reference laboratories, and we’re under capitation, so I don’t do any of their laboratory work here,” she says. “I send it to the reference laboratory, because the HMO would pay pennies. I can’t do it for what they would pay.”

The spotlight in the laboratory industry has shifted from POLs to issues such as HIPAA and tort reform. But is it fair to say that physician office labs throughout the country are in a holding pattern?

Some accreditation officials and regulatory consultants think so. Others, including some vendors, predict that even if POLs diminish in number, their test volume will continue on a steady growth curve—especially as the number of waived tests increases.

COLA, previously known as the Commission on Office Laboratory Accreditation, is the second-largest accrediting agency of POLs (after CMS). It continues to inspect about 6,700 POLs, but it has seen a small, slow drop-off in the POL market as some laboratories close or move to waived testing.

“There are new people creating moderately complex laboratories all the time, but there’s more attrition than new laboratories being created, because of mergers, buyouts, and so on,” says Verlin Janzen, MD, secretary of COLA and laboratory director at Hutchinson Clinic, Hutchinson, Kan. “And there’s a certain percentage every year that convert from moderately complex to waived testing.”

Consolidation in the practice of medicine means that many offices have combined, so “there have been fewer POLs, and those that remain tend to be a little larger,” says Harry Zemel, MD, member of the CAP Board of Governors and of COLA’s board of directors. “There are still going to be some small clinics and small offices in rural America that will always resist being bought out. But they’ll diminish.”

The trend is inevitable, he says. “There isn’t that big void out there in being able to provide credible laboratory services out in the boonies. Now any laboratory has access to all the major reference labs. So I think the physician office may ask: Why do we have this laboratory here at all?”

“From what I see and hear, there seems to be a move for laboratories to deal mostly with waived testing,” Dr. Zemel adds. “This way they avoid
a lot of CLIA rules and regs, and certainly they don’t have nearly the level
of commitment on quality control and quality assurance and things of that nature.”

Margaret Skinner, MD, CAPgovernor and vice chair of COLA, agrees: “A number of the smaller POLs seem to be trending toward doing only waived tests, which don’t go through a formal accreditation process, although CMS may drop in and take a look.”

What is driving the conversion to waived tests?

“Manufacturers are switching to developing more and more waived machines or instruments approved by the FDA for patient use, even for such analytes as hemoglobin A1c and prothrombin times,” says Cyril Hetsko, MD, chief medical officer of COLA and clinical professor of medicine at the University of Wisconsin, Madison. “Waived tests tend to be much more expensive per test, but the incentive to go with waived tests is that the POL doesn’t have to go through an accreditation process. The government has allowed this possibility to occur, and industry is pursuing it.”

Jane Dale, MD, a pathologist at Mayo Clinic, Rochester, Minn., and a member of the CAP’s EXCEL Advisory Committee, oversees laboratories at several small satellite facilities affiliated with Mayo Clinic, some COLA-accredited and some CAP-accredited. As the technology has improved, she notes, tests that were once considered esoteric now can be performed reliably in a small setting.

“It wasn’t that many years ago that you had to send hemoglobin A1c to a reference laboratory, and now they have essentially point-of-care tests that, when performed as described by the manufacturer, can be just as accurate as those performed in a highly skilled laboratory,” she says. “And that’s the direction the manufacturing industry is going.”

This does not mean all of the waiver decisions have been well thought out, says Dr. Dale. “The pro-time INR test is waived, and while it is simple to perform, I find it hard to consider that you could do no harm with the test if you did it wrong. Clearly you could do some real harm if grossly abnormal results are taken as truth. So I think one of the challenges is to make sure personnel who are trained can also say, ‘Does this result make sense?’”

Dr. Dale would like to see all POC devices built in such a way that erroneous results cannot be produced. “So if the amount of specimen
is inadequate, then somehow the instrument is smart enough to realize
this, and no result is generated. Those kinds of fail-safe mechanisms are really important.”

She would also like to see laboratory and medical staff work together to select the tests that truly need to be done to support the day-to-day management of patients and leave aside less critical tests.

Costs and regulatory measures are hastening the trend to waived testing, says COLA board member Amelia Tunanidas, DO, a staff physician at Firestone Health Care, East Palestine, Ohio. One of her two offices has a waived laboratory, and the other has a walk-in clinic with a moderate-complexity laboratory. The latter is fairly common in Youngstown, Ohio,
she says.

“The lipid panel is becoming more cost-prohibitive, as are some of the specialty tests like thyroid levels, because of what the laboratory needs to do for proficiency testing to maintain its certification,” says Dr. Tunanidas. “Reimbursement is so low that unless you have a high volume, you basically will refer these tests to a hospital laboratory.”

In part, that’s because hospitals can afford to be accommodating. “They’re weighing the advantages of getting a patient as an inpatient versus losing the patient to another institution,” she says. “Competition is keen for patients, so hospitals are going to look at high-volume primary care practices like this clinic to feed them inpatient volume so they can get the DRG. I believe it’s purely economics. The patient is a variable and hot commodity—more so than the physician at this point.”

As more POLs move to waived testing, COLA’s primary market has
been shrinking, Dr. Skinner says. In response, the organization is working
toward expanding its laboratory accreditation capabilities.

“COLA is looking to diversify its product offering,” Dr. Tunanidas says, “so it’s looking at a variety of environments and products that can be offered to not only physician laboratories but also other markets where they traditionally haven’t done as much accreditation. For example, community hospitals, nursing homes, and other types of laboratories like industrial as well as international markets.”

COLA is also looking into standards for waived offices, probably taking an educational role, she says. “But I don’t think they would be involved yet, unless new guidelines are drafted by the federal government indicating that perhaps waived testing would need more regulation.”

There is a difference, Dr. Tunanidas notes, between waived POLs and moderate- or high-complexity POLs in the way they acquire new tests. “Waived-test laboratories usually work with a brokerage firm, a medical supplier who deals with a variety of vendors and brings the products being offered to them at their equipment fairs, whereas at an accredited laboratory I believe you’ll see a direct interaction between the vendors themselves and the laboratory director.”

“Regarding moderate-complexity laboratories, many vendors are going back to their drawing boards and developing technologies that are equitable for the current marketplace in the health care environment,” she says.

Dr. Janzen contends that the shifting of tests to reference laboratories by managed care organizations is leveling out. “This is an issue we talked about five or six years ago at different POL meetings. I don’t hear that it’s as big an issue now,” he says.

However, some POL managers say it is an important factor in how they run their business. Steven Frank, MT(AMT), is laboratory manager of Sunrise Medical Associates, a practice on Long Island with two physicians and one physician assistant. The group performs about 1,000 billable tests a month (counting panels as a single test), many on the Ace clinical chemistry system from Alfa Wassermann. His moderate-complexity laboratory is certified every two years by the state of New York. But he is careful to weigh the costs of adding new tests.

“Outside pressure from physicians and vendors to increase test menus can be devastating to a lab’s bottom line,” Frank says. “Choosing the wrong tests can make your lab a very unprofitable venture.”

Third-party payment is the problem. “The first thing we do when we get a test order is look at the insurance and decide whether we can do some or none of the tests. We deal with a lot of different companies, and while with Medicare we can do everything, we can’t do testing with all of the others because they have contracts with reference labs,” he says. “So all we can do is draw the specimen and send it out.”

Thomas Sodeman, MD, a member of COLA’s board of directors and chairman of laboratory medicine at North Shore Long Island Jewish Health System, views the pressures on POLs and the market segmentation differently: “Most managed care organizations, Blue Cross/Blue Shield as an example, have lists of tests they recognize can take place in a POL environment that they will pay to that physician. That list is under continuous review, but it certainly includes the most common tests—CBCs, pro-time or PTT, basic electrolytes, potassium, pregnancy, and depending on the specialty, some other specific tests.”

“So I don’t see insurers restricting POL testing as much as trying to direct non-office work to a small group of laboratories that they contract with at a financial advantage,” he says.

Even though Quest Diagnostics and Laboratory Corporation of America can command the lowest possible cost per test, hospitals who want to get into the outreach business and service physician offices can compete effectively for POL business, Dr. Sodeman says.

“Hospitals have to have a laboratory anyway, so they have to pick up a large level of fixed costs. They have the equipment, the space, and the technology, but they don’t have the infrastructure for the couriers, marketing, IT issues. So they tend to serve small clusters of physicians around them that are admitters and like to have results done the same way for their office patients,” he adds.

The formation of major systems such as North Shore LIJ, which has 18 hospitals and $3.2 billion in revenue annually, has allowed the creation of large central laboratories that can support extensive outreach. And POLs are responding. “North Shore LIJ has been in the business of servicing doctors’ offices for two and a half years,” Dr. Sodeman says, “and this year that component will exceed the amount of in-house testing we do.”

“We’re functioning like any other commercial laboratory, and the physician offices will continue to do the level they want to do, but at a regional center this work is going to be done here,” he adds. “It’s not going to be sent across state lines to some lab 200 miles away. It’s kept local, so they have the same references and the same methodology as when their patients get admitted to the hospitals.”

Another advantage North Shore LIJ can offer POLs is its cumulative data system. “The patient database incorporates all our hospital inpatient and outpatient work, but also the physician office work. So if the patient is seen in the hospital and gets discharged, and the physician orders lab work later, he can go into our computer database through the Internet and see all that data,” Dr. Sodeman says.

Commercial laboratories and hospital outreach programs remain
important to POLs, especially given the unpredictable recent history of FDA waivers. CBCs are probably the most important tests doctors want to do that aren’t waived, says Sheila Dunn, president of Quality America Inc., a regulatory consulting firm in Asheville, NC: “Companies making these analyzers have been trying to get them waived since 1992, and it hasn’t happened.”

The most recent waiver granted, for rapid HIV testing, was fast-tracked
for political reasons, she says, while the FDA has refused to give a waiver
to a company with an arguably important public health test for prostate-specific antigen.

Dr. Janzen views the rapid HIV test as an example of a test waived more for public health reasons than because of pressure from POLs. There isn’t any one test that internists or family practitioners are clamoring to get waived, he says: “A lot of their main tests are already waived. Probably the one test that isn’t yet is a CBC, but I think the likelihood of something like that ever becoming waived is low.”

Physicians are still a little upset, however, about the Gram stain being classified as a high-complexity test except when done on cervical or urethral specimens. “Since CLIA ‘88, physicians are almost not doing any Gram stains, and that has affected the way they take care of people with community-acquired pneumonia,” says Dr. Janzen. “In my opinion, it’s totally ridiculous that it should be anything but a waived or at most a moderate-complexity test.”

Inevitably, the shrinking number of POLs is affecting manufacturers. “Sometimes when regulations are made we don’t always understand or consider all the potential unintended consequences,” Dr. Janzen says.
“One is that back before CLIA there were manufacturers making instruments
and machines for what ended up being moderate-complexity tests fairly routinely.”

“There were four or five choices for doing chemistries in POLs, and likewise in hematology. With more and more of the market going toward waived testing, the manufacturers are saying, ‘Why spend all this R and D money for a market that’s not going to be there?’” he adds. “So particularly small POLs are having less and less of a choice—and in some cases they have no option to do certain tests.”

POLs that conduct nonwaived testing may have to make changes for the CLIA final regulations that went into effect April 24, Dunn says. In combining the quality assessment standards for moderate- and high-complexity testing, the rule changes mean POLs will have to do more method validation. “When you bring on a new nonwaived test,” she says, “now CLIA requires a series of experiments to prove that the manufacturers’ claims about accuracy, precision, and reportable range are correct.”

Some question whether the test systems POLs use, which generally contain built-in controls, will suffice to meet the new regulations. However, Dunn believes the Centers for Medicare and Medicaid Services will iron out specifics of method validation and built-in controls when its guidelines are published in October.

The rules will have the most impact, she predicts, on offices that conduct only waived tests and are considering adopting non-waived tests such as CBCs or immunoassays. The new barriers could convince some to stick with waived tests.

The CLIA changes will have “some impact on POLs,” Dr. Sodeman agrees, especially those that run higher levels of moderate-complexity tests. “Most POLs don’t do moderate-complexity tests, so they’ll have to start complying with the rules we’ve had on assay performance. Will that drive some of them out of the market? I don’t think so, because the vendors will come in and do a lot.”

From the growth of public on-demand testing, it’s clear that some
consumers in some states have a new perception about when and how laboratory tests should be ordered. Dr. Hetsko says, “You can go to a supermarket in Phoenix and have your prostate-specific antigen done, blood, thyroid, or anything you want and will pay for.”

But does on-demand testing figure in POLs’ future? Richard Jefferson,
sales and marketing director of Antek Healthware, Reisterstown, Md.,
says it does. The increasing number of states that permit direct access testing promise to beef up POL revenues as well, he says. “A lot of our laboratories we sometimes refer to as ‘vet labs,’ because the patient bypasses Medicare and the insurance companies. They order and pay for tests with their VISA card.”

“That still helps POLs, absolutely,” he adds. “Today’s patients want these tests run because they have been educated by the media, and in general are more concerned about and involved with their health care than ever before. The biggest trend is immunoassay tests, not chemistry, and the POL has access to very sophisticated immunoassay products. Chemistry and hematology tests are the most reimbursement-regulated, but immunoassay tests still have a very good margin.”

If patients turn to Quest or a pharmacy in their local mall for those tests, Jefferson doesn’t see it as a problem for POLs. ‘“They’re competing, but a guy who gets back a high HDL will take it to his doctor, who will run another one, so it all grows the overall demand,” he says.

Dr. Janzen does not believe many physicians would advocate direct testing: “This is not something being driven by physicians but by reference laboratories and some entrepreneurs. It’s not going to benefit physicians financially. I think most physicians—not all, but most—would say it’s better to see the physicians and see what’s going on and do directed testing based on what the issues are.”

Advances in technology are far more likely to affect the direction POLs take. Dr. Zemel predicts more tests will be waived as higher-end tests become ever more complex.

“Then, taking their place at the high end, will be tests for proteins in molecular biology, where they can measure genetic output. It’s a moving continuum of testing. The laboratories that do moderate- and high-complexity testing will be faced with newer high-complexity testing, and the old tests will be passed on at the back end as waived tests,” he says.

One thing hasn’t changed, Dr. Hetsko says—Medicare and Medicaid reimbursement that is not keeping pace with the times. “It’s a problem for any kind of outpatient facility, whether for laboratory tests or other physician services. To the degree that laboratory tests are separately reimbursed, Medicare and Medicaid are falling way behind in keeping up with the cost of living,” he says.

Nevertheless, some in the industry continue to view POLs as a promising market. Antek’s laboratory information and practice management systems are popular with POLs, and Jefferson sees the sector continuing to expand. About 60 to 70 percent of the 1,300 laboratories where Antek has installed lab information systems are POLs. “If you look at a chart of POL growth since 1986, it’s grown about two percent per year,” he says.

He gives a workshop at Clinical Laboratory Management Association meetings on the future of POLs and what is likely to kill them. “But every time they throw new regs at them—CLIA, OSHA, and now HIPAA—nothing stops them because the demand is from the patient side. There’s always someone wringing their hands and talking doom and gloom, but the statistics speak for themselves,” says Jefferson.

Dr. Janzen thinks the POL area is relatively quiet: “The new regulations have some people wondering, but CLIA’s been implemented, we’ve all been through two or three or four cycles of inspections, and POL issues just aren’t as high on the priority list of most physicians. They have bigger fish to fry with Medicare reimbursement, tort reform, and malpractice.”

“There’s been a constant erosion” in POL business, he adds. “It varies by region of the country, depending on how different Medicare carriers handle things, but most POLs really don’t look at the laboratory as a revenue stream. They’re not going to lose huge dollars. It’s more of a way to take better care of patients." Anne Paxton is a writer in Seattle.