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Health care reform and the clinical laboratory.

Some say clinical laboratories are a significant cause of the ever-increasing cost of health care. How will they fare in the Clinton plan to reform the system?

THE WOMAN WAS HIT by a truck and sustained multiple fractures. Despite a transfusion of two units of packed red cells, her hematocrit fell from 37% to 28%. Rather than treat her obviously severe internal hemorrhaging, staff members at the private hospital to which she was first taken put her back in the ambulance and sent her nearly 30 miles to a second institution. Why? Because she had no health insurance. At the second institution, a public hospital, a ruptured aorta was discovered, but the institution lacked a chest surgery service--eliminated due to budgetary cutbacks.

Miraculously, this 21-year-old patient's blood pressure held long enough for her to be transferred to a third hospital for surgical repair of her aorta. As bad as her case may seem, not all of the nearly 300,000 uninsured Americans who are refused care at hospital emergency rooms each year|1~ are so fortunate.

Whatever the outcome of the proposals by the President's Task Force on National Health Care Reform--scheduled to be presented after this issue of MLO goes to press--the issue of access to affordable, quality care is one that will be with us for a long time.

* Access denied. The case of the aforementioned accident victim illustrates the so-called "dumping syndrome." Although it is now receiving legislative attention in some localities, this problem persists and underscores not only the fraying of the nation's medical safety net but, more ominously, the plight of its millions of uninsured and underinsured citizens.

The now-familiar figure of 35 million Americans without health insurance is based on the U.S. Census Bureau's Current Population Survey, which found this to be the average number of people lacking coverage in an average month in 1990. It was no less than 13.9% of the population, up 1.3 million from the previous year, representing the largest such percentage since the passage of Medicare and Medicaid in 1965.

* The uninsured. Who are these people? Approximately two-thirds of them or 13% of the full-time work force are employed workers and their families. About one third of the nation's unemployed are also without health insurance, according to the survey.|2~

Further, almost no career offers a guarantee of insurance. In 1990, the only occupational group with universal coverage were judges and legislators. Twenty-nine thousand physicians, 18,600 lawyers, 52,500 members of the clergy, 270,000 teachers, 58,000 professors, and 90,000 engineers were uninsured.|2~

* Inequity. The problem is greater for nonwhites. One in every five employed blacks is uninsured, as is one in every three full-time employed Hispanics.|2~ Both groups are more likely to work for low wages in smaller businesses.

The scope of the crisis does not end there, however. Add to it the problems faced by those who are denied coverage due to preexisting conditions and the problems of the underinsured--the 50 million of us who, while partially covered, would be bankrupted by a major illness. Also there are an increasing number of people facing "job lock"--those forced to stay in unwanted jobs for fear of losing health coverage.

The net result is a tide of dissatisfaction. When the Harris poll surveyed random population samples in 10 industrial nations in 1990 to determine the percentage of individuals who were satisfied with their health care, the U.S. lagged far behind Great Britain, Japan, France, Germany, and Canada.|3~

* The great irony. Diminishing access to care is inextricably linked to the cost of that care. Table 1 shows U.S. health care costs, estimated to have been $809 billion in 1992 or 13.4% of the gross national product (GNP). This is more than any other nation on earth. Most other industrial nations have stabilized health care spending at 8% or 9% of their GNP.|4~

The great irony is that for the last 20 years, U.S. health care policy has been aimed at containing the growth in cost. The creation of HMOs, DRGs, utilization review, and a whole raft of other bureaucratic measures has had no lasting impact. Our costs continue, perhaps inexorably, to rise.

* Technology, the driver. Analysts attribute the upward spiral of health care inflation to many causes, but by all accounts one of the largest contributors has been the growth in technology. Fully 70% of the increase in health costs between 1970 and 1980 has been so credited.|5~ A "medical-industrial complex" is said to have grown in the U.S. that may, in fact, surpass its military-industrial forerunner.

Clinical laboratories, utilizing as they do a major portion of the nation's burgeoning medical technology, are clearly part of the problem. The question is, can they also be part of the solution?

* MD's need to know. Modern clinical laboratories began in the 19th century in the homes and offices of individual physicians. Before the advent of Medicare and Medicaid in 1965, hospital charges for laboratory services tended to be nominal.

By the late 1960s, however, the hospital clinical laboratory assumed its now-familiar centrality to the diagnostic enterprise. This was not because of any specific demands newly articulated by patients, nor was it due to any farsighted vision on the part of hospital planners. No specific health policy caused the growth of labs. That was brought about by physicians' insatiable need to know. This need made laboratory-generated information evermore key to diagnosis.

* Shifting costs. In 1968, two changes to the Medicare program were introduced. These changes proved to be pivotal in determining the subsequent price of laboratory services:

Itemization instituted. Hospitals were required to convert from their previous practice of charging on a per diem basis to a system of itemized charges.

Allowance eliminated. The 1% allowance that Medicare had previously provided for "unidentified costs" was eliminated. This portion of the payment had been regarded by hospitals as Medicare's contribution to their profit, bad debt, and charity allowances.

In response to these Government policy changes, hospitals began the now universal practice of cost shifting: paying for other necessary but TABULAR DATA OMITTED incompletely reimbursed services by marking up the charges on lab tests billed to Medicare. In turn, this led independent labs to raise the prices of their services to hospitals.

* Inflation. Laboratory price inflation had begun. Laboratories, both hospital-based and independent, now had money to invest in all the new capital equipment--hematology counters, chemistry analyzers, and HPLC and RIA equipment--coming into existence at this same time.

Independent laboratories, in particular, were dramatically transformed. Freestanding clinical labs steadily grew in parallel with their hospital counterparts, offering regionalized availability of less frequently performed procedures. By the late 1960s, they became high-volume, high-efficiency testing factories that essentially did laboratory work wholesale for hospitals and physicians' offices. In the process, they gave new meaning to the concept of "economy of scale" as applied to laboratory medicine, and created a business environment more closely resembling free market competition than did any other segment of the clinical lab industry.

* Make or buy. All of this was, in part, due to lack of any financial incentives in the health care system for their clients (hospitals and physicians) to "make" rather than "buy" these less-often-performed tests. With the advent of DRGs in 1984, those incentives began to appear.

At that time, Medicare reimbursement for laboratories was placed on a carrier-wide fee schedule. Hospitals reacted by reducing the length of stay per admission. Hospital laboratories began founding outreach programs to compete with the independents for outpatient and physicians' office testing that had not previously been important to them.

* Balloon payments. Subsequent piecemeal attempts by Federal policy makers to control costs have been characterized by some as "the balloon payment syndrome." Attempts to ratchet down expenditures in one segment of the industry often led to compensatory increases elsewhere.

As the venue of testing shifted with the advent of policy-driven profit incentives, the net affect on the health care system was an expansion of the scope of cost shifting and another round of inflation in overall charges.

* Utilization intensified. Throughout the 1970s and 1980s, economic pressures on clinical labs built momentum. Computerization and automation became widespread and these, coupled with increasing recognition of the value of lab management, resulted in the achievement of new levels of efficiency.

Studies of several laboratories' operating costs during the period show that total production cost per test significantly declined when corrected for inflation.|6,7~ This was achieved in spite of the expense of acquiring new technology and the increase in indirect costs.

Some wonder why these improvements seem to go unrecognized in the current public debate about health care reform. The reality, however, is that the very same databases reveal the real cost per patient increased markedly during the same period.

The long-term increase in laboratory utilization has two principal components:

Increased intensity. The matter of test intensity raises real questions about the cost-effectiveness of routine laboratory work. The questions will not be answered until patient outcomes are carefully and systematically linked to test intensity.

No such data are currently available, but data are available to indicate clearly that test intensity varies enormously from physician to physician within the same DRG.

Expanded menu. New technology seldom reduces the overall intensity of testing. In fact, it often has a disproportionate impact on the total cost per admission. Newer, more esoteric tests are typically costlier to perform.

Thus there is a sense that gains in operating efficiency within labs have been more than offset by other factors. Laboratory costs overall are increasing and the lab continues to be seen as part of the problem.

* The prospect of reform. According to historian Harold Bauman, the United States has been "verging on national health insurance since 1910." He describes a national pattern of surge-and-retreat that has occurred in four waves since that time, and predicts that an acceptable solution will perhaps be found in the 1990s.|8~

As many as 40 different major health insurance reform bills were introduced in the House and Senate by 1992. This past March it was reported that the Clinton Administration was considering replacing Medicaid with a system of private insurers.|9~ In addition, a steadily growing number of state governments are enacting health reform measures. In yet another signal that reform is urgently needed, the Federal government recently endorsed Oregon's controversial program of health care rationing.

Despite all of this, the U.S. remains one of the only industrialized nations without some form of national health program that assures universal access to care.

* The new proposals. The ideas being discussed at the national level could have profound effects on clinical laboratories.

Regarding their likely impact, Pauly et al made an important statement in a recent report to the Department of Health and Human Services on laboratory utilization when they said: "Medicare must decide what tests it wants to buy, and what tests it wants beneficiaries to receive. If it can do so, the question of where tests are produced and how they are billed can be relegated to secondary importance."|10~.

Former Surgeon General C. Everett Koop has put forward four key points to be included in any health care reform. In an interview with Adam Smith on the Public Broadcasting Service (February 1993), he proposed cutting administrative costs, reforming malpractice law, conducting more and better health outcomes research, and getting serious about providing preventive medicine. Keeping in mind the opinions of Koop and Pauly, four basic principles must be addressed in any national reform of the clinical laboratory profession that is intended to insure universal access to quality laboratory services.

The proposals for health care reform being discussed at the national level tend to fall into one of four types of plans: voluntary, employer mandate, single payer, and hybrid.

* Voluntary plans. This category, typified by the Health Insurance Association of America and Heritage Foundation plans, includes many plans that would not guarantee universal access. Voluntary plans offer various combinations of tax incentives, small market insurance reforms, employer options, and individual policy purchase incentives to achieve coverage. Cost containment, if addressed at all, is accomplished through administrative streamlining, tort reform, copayments, deductibles, and "competitive strategies" that include the extension of managed care. All plans in this category would retain Medicaid for the poor.

Impact on labs: These plans would have the least impact on business as usual. The most profound effect would likely stem from the extension of managed care. This will greatly complicate billing arrangements, especially for independent labs. For hospital labs, managed care will tend to ratchet down lab reimbursement without changing the system of internal allocations and cost shifts within hospitals that continues to keep list prices high.

Managed care may streamline third-party billing from hospitals but may tend to emphasize further utilization-review bureaucracy for hospital labs. President Bush's health care reform proposal was a voluntary plan that was to be accompanied by large-scale Medicare cuts.

* Employer mandate plans. These plans can be further subdivided into two basic types: strictly employer mandate plans, and so-called "pay or play" plans.

Examples of such plans are the one put forward by Bill Clinton during the 1992 Presidential campaign|11~ and those developed by the Pepper Commission and such noted economists as Alain Enthoven and Richard Kronick. Strict employer mandate plans, also termed "play or else," impose legal requirements on employers to provide health insurance benefits for all employees.

Universal access is achieved by extending a publicly funded program (like Medicare and Medicaid) to all uninsured. In some versions of employer mandate plans, employers are required to either provide health care coverage directly to their employees (play) or be assessed via a payroll or other tax to help provide for a general health care plan (pay).

These plans would be administered by existing private health insurers or by state and/or Federal government agencies. Some employer mandate systems would also eliminate Medicaid for the poor, as the Clinton Administration is reportedly considering. Cost containment would be achieved in one of four ways:

* In essentially the same fashion as in voluntary plans.

* By extending some form of Medicare payment to all providers.

* By imposing Government spending caps.

* Through a system of capitation payments or through competition among managed care providers.

Impact on labs: Systems of this sort will affect labs differently depending mainly on the proposed mechanism for cost containment.

Plans that would operate via current mechanisms or by extension of Medicare could represent a predictable evolution of current practice. Plans that would operate via universal capitation or global budget mechanisms would likely tend toward the bundling of laboratory costs with other patient costs. This will discourage the current pattern of internal cost shifting by hospitals and encourage a cost-plus approach to laboratory pricing.

* Single payer plans. Programs in this category would more radically restructure the financing, administration and, to varying degrees, the delivery of care. Proposals that imitate the German or Canadian systems would fall into this category.

Two examples before Congress include the Physicians for a National Health Program and Rep. Pete Stark's Mediplan Health Care Act of 1991. Of these plans, some would essentially extend Medicare to encompass the entire health care system, while others would depend on state administration of a single payer for health care expenditures, either independently of one another or with Federal oversight. Still other systems would operate the single payer through a Federal agency. One, the Dellums Bill, would create a single National Health Service analogous to the health care system of Great Britain (which may be considered true socialized medicine).

* Impact on labs: Clinical laboratories under global budgets would be reimbursed on a cost-plus basis from uniform fee schedules with mandatory assignment. Laboratory services may tend to be regionalized to the maximum extent--achieving economies of scale, volume-quality improvements, and reduced duplication due to the lowering of competitive pressures that encourage the proliferation of hospital labs.

Under a truly socialized system, laboratories would become state-owned entities and laboratorians would become civil servants. Most single payer plans do not create this situation. New and different organizational forms for laboratories may be possible.

* Hybrid plans. A few of the plans being analyzed at the Federal level are hybrids of the aforementioned categories. They involve multiple choices of health care insurance providers administered (on an "open enrollment" basis) by state governments. Under this type of system, cost containment is determined by managed caps on the Federal contribution to the states' budgets for health care. The Health Security Partnership and Representative Oakar's Comprehensive Health Care for All Americans Act fall into this category.

Impact on labs: These plans could affect labs in any or all of the ways noted for other systems of health care reform.

* Long past; short history. Laboratory medicine is a discipline with a long past and a short history. Healers and would-be practitioners of all stripes have tried to use the examination of body fluids for diagnosis since ancient times.

Early this century the potential economic impact of laboratory overutilization was already being debated. Add space-age technological advances to the equation and you have the dilemma currently being analyzed and argued at both ends of Pennsylvania Avenue.

Whatever the outcome of this debate, the uniquely American demand for the best possible health care, immediately, and for free, will suffer some form of modification as health care in the United States becomes universal.


1. National Health Expenditures, 1986-2000. Washington, DC: Division of National Cost Estimates, Office of the Actuary, Health Care Financing Administration; 1987: 1-36.

2. Current Population Survey, March 1991: Technical documentation. Washington, DC: Bureau of the Census, Department of Commerce; 1991.

3. Blendon RJ, Leitman R, Morrison I, Donelan K. Satisfaction with health systems in ten nations. Health Aff. 1990; 9(2): 185-192.

4. Centre recerche economique demographique et statistique. Eco-Sante. Paris, France: C.R.E.D.E.S.; 1989.

5. Newhouse JP. An iconoclastic view of health cost containment. Health Aff. 1993; 12(supplement): 152-172.

6. Steiner J, Root JM, White DC. Laboratory cost and utilization containment. Clin Lab Management Rev. September-October 1991; 5(5): 372-383.

7. Tydeman J, Morrison JI, Cassidy PA, Hardwick DF. Analyzing the factors contributing to rising laboratory costs. Arch Pathol Lab Med. 1983; 107: 7-12.

8. Bauman H. Verging on national health insurance since 1910. In: Huefner RP, Battin MP, eds. Changing to National Health Care. Salt Lake City, Utah: University of Utah Press; 1992.

9. Pear R. Clinton considers stopping Medicaid under health plan. New York Times. March 29, 1993: 1, 12.

10. Pauly MV, Mennemeyer ST, Eisenberg JM, Reardon LB. Assessment of the effects of reimbursement policy on the utilization of clinical laboratory testing and propensity of physicians to perform in-office testing. Contract HHS-100089-0017 Task 1 Report. Philadelphia, Pa: Abt Associates; 1991.

11. Clinton B. The Clinton health care plan. N Engl J Med. 1992; 327(11): 804-807.

Suggested reading

Himmelstein DU, Woolhandler S. The National Health Program Chartbook. Cambridge, Mass: Center for National Health Program Studies; 1992.

Caring for the uninsured and underinsured |special issue~. JAMA. 1991; 265(19): 2,491-2,592.

Figure 1

Reforming clinical labs: Four principles

PRINCIPLE 1: Eliminate cost shifting and administrative waste

* Manage laboratories as true cost centers, directly and solely accountable for the cost and quality of their operations.

* Provide incentives to optimize cost and quality rather than profit margins.

* Locate testing rationally, based on providing the most cost-effective care, by leveling the playing field between hospital and independent laboratories, including the elimination of discounting below cost.

* Balance cost and quality benefits of near-patient and Stat testing with economies of scale and quality of regionalized testing.

* Eliminate needless duplication of laboratory services and promote the formation of regional laboratory networks that operate in a cooperative, rather than a competitive, mode.

* Develop global budgeting mechanisms for laboratories with separate capital and operating budgets.

PRINCIPLE 2: Actively manage laboratory utilization

* Redefine laboratory directorship to include concrete responsibility for monitoring and managing the medical appropriateness of laboratory use.

* Develop national consensus practice guidelines and standards of care for laboratory use by clinicians.

* Institute tort reform of medical malpractice to eliminate laboratory use patterns dictated by "defensive medicine."

PRINCIPLE 3: Formalize and plan technology assessment and transfer on a nationwide basis

* Create (and fund adequately) specialized R&D institutes for evaluation of the clinical efficacy and cost-effectiveness of new test procedures.

* Develop and routinely utilize clinical patient outcome measures of laboratory quality.

* License laboratories by analyte in conjunction with an enforced certificate-of-need process.

PRINCIPLE 4: Expand the role of laboratory medicine in promoting health

* Provide test menus that directly support preventive medicine (nutritional assessment testing, for example).

* Promote home testing and increase direct public access to preventive and screening testing.
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Author:Bissell, Michael G.
Publication:Medical Laboratory Observer
Date:Jun 1, 1993
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