House Joint Resolution (HJR) 233 of the 1994 Session requested the Joint Commission on Health Care to study the impact of managed care system practices on the quality and competitiveness of medical laboratory services.

While not specifically stated in HJR 233, the contracting methods used by managed care companies to secure medical laboratory services for their enrollees were the focus of this study. Most managed care companies (e.g. Health Maintenance Organizations and preferred provider organizations) contract with one large regional laboratory, often on a capitated basis, to provide laboratory services to their participating physicians and enrollees. In return for a high volume of services, managed care organizations are able to negotiate discounts which lower the cost of services to physicians and patients.

Some smaller laboratories have voiced concern that the contracting practices of managed care organizations result in lower quality services, and eliminate physicians and patients' choice of where to have their testing performed. They also contend that these contracting practices are causing smaller labs to close down, leaving a few dominant labs to control the market. Lastly, the smaller laboratories argue that in order to survive in the marketplace, the reimbursement provided to medical laboratories should be on a discounted fee-for-service basis, rather than a capitated basis.

While four national/regional labs hold a substantial share of the market, we were not able to find any research that analyzed the differences in cost and quality between large and small labs. The smaller laboratories were not able to provide any research, studies or data to support their claim regarding quality of services. The managed care organizations interviewed as part of this study stated that they receive few if any complaints from physicians or patients regarding the quality of laboratory services. Moreover, several of these organizations stated that the discounts negotiated through their contracting practices reduced their costs by 50% or more.

An issue which directly impacts medical laboratories is the passage of House Bill (HB) 840 by the 1994 General Assembly. This legislation provides that managed care organizations and other insurers cannot deny or limit benefits for enrollees who receive services from any pharmacist or "ancillary service provider" so long as the provider accepts the managed care organization or insurer's level of reimbursement that is paid to network providers. HB 840 did not specifically define "ancillary service provider." However, subsequent to the completion of this study, the Bureau of Insurance issued Administrative Letter 1994-8, in which it stated its position that the statutory definition of "ancillary service provider," as provided in HB 840, is extremely broad, and that unless and until the statutory definition is made more restrictive, any person or class of persons that provides services that support, facilitate or otherwise enhance medical care and treatment meets the definition of "ancillary service provider." Thus, medical laboratories currently are considered ancillary service providers, and managed care organizations may not prohibit persons from receiving services from a laboratory as long as the laboratory accepts the level of reimbursement the managed care organization provides to network providers.

Our review process on this topic included an initial staff briefing which you will find in the body of this report followed by a public comment period during which time interested parties forwarded written comments to us on the report. In many cases, the public comments, which are provided at the end of this report, provided additional insight into the various topics covered in this study.