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The clinical laboratory in a competitive environment.

There's widespread interest today in using marketplace force, including price competition, to reshape health care delivery and drive down its costs. As a result, the health cae industry--including the clinical laboratory and its professional personnel--faces new challenges for survival and growth.

In the public sector, budget problems have driven governments at every level to tigethen control over their health spending programs. Among the steps taken are significant changes in the methods used to pay for Medicare and Medicaid services. Governments are also encouraging wider use of alternatives to traditional health care deliver for publicly supported patients.

Private employers are looking at ways to slow the rapid growth of health benefit expenses, too. They are pressing insurers for detailed information about health costs and about the use of services by covered employees and dependents. More and more, they want premium costs to reflect only their own employees' claims history--not that of a larger group of public or private patients.

When insurance companies don't respond to these demands, employers often shift to self-insurance or take other steps in the marketplace to control health care spending. In fact, self-insurance is radily becoming the most prevalent from of health insurance in the United States. Many employers are also showing keen interest in direct price negotiations with selected health care suppliers.

Other fundamental forces are reinforcing the competitive environment for health care. One of these is the condition of the American economy.

Public and private concern about health care spending is especially intense in periods of slow economic growth or decline, high government deficits, recessions and high unemployment, or high inflation. Governments and businesses then face more severe economic problems. The burden of health care spending is more acutely felt.

Another factor influencing the course of health care is a new demographic landscape. As the 21st century approaches, changes are occurring in the composition and distribution of our population.

America is aging: The number and proportion of older citizens keep growing steadily. This significant alternation in the makeup of our society will account for almost all of the increased demand anticipated for health services in the future.

Shiftin patterns of settlement also affect the markets for health care. In some communities, particularly in the South and Southwest, expanding populations and thriving economies are spurring more demand for health resources and services. In other communities, however, many health care providers will face the problem of preserving economic viability when demand for their services levels out or even declines.

The future supply and distribution of health care personnel--especially the number and type of physician specialists--will also have a dramatic impact on the organization, delivery, and costs of health care. The number of medical practitioners per capita is increasing steadily. In some communities, there's already strong competition for a limited pool of patients.

This competition is certain to intensify and spread. As physicians free themsleves from traditional dependence on hospitals and other community institutions, they will provide more services in ambulatory settings. This may be especially true of diagnostic activites.

Technological developments have made compact automated blood analyzers available for ofice use without a heavy capital investment. It a physician is able to confirm or exclude a preliminary diagnosis on the spot with one or two tests, that leads to more outpatient encounters and less hospitalization.

Much of the rapid change in store for the clinical laboratory and other suppliers of health services will come from the Federal Government. It's the largest purchaser of health services, and it is under pressure to restrain health spending. The private sector has tended to follow Washington's lead in recen years, rather than initiate change.

As the 99th Congress convened in January, deficit reduction and continued financing of the military buildup headed its agenda, but interest in tax increases was minimal. That makes a no-growth policy likely for the Government's domestic spending programs, including publicly financed health care.

Medicare's trust fund solvency problems will also be debated intensely within the executive branch and by the new Congress. The Federal Government will continue its political commitment to financing medical care for the aged and the disabled--that's not in question. It's unreasonable to assume that Congress would allow Medicare to go broke. But keeping the program afloat will, at some point in the next few years, require another look at the relationship between Medicare income and costs.

Congress may deal with Medicare's financing problems in an omnibus or comprehensive manner instead of making piecemeal changes. If so, a politically acceptable solution will probably consist of three broad elements.

First, it's likely that beneficiaries will be asked to assume greater financial responsibility for Medicare protection, perhaps by sharing more of the cost, paying taxes on the value of benefits, or submitting to a means test. Congress could also delay the staring age for coverage or amend other eligibility requirements.

Second, Congress would consider tapping new sources of revenue to shore up Medicare. Among the many options are higher payroll taxes, earmarked excise taxes, and a value-added tax or some other kind of national sales tax. If any such steps are taken, there's also a strong likelihood that Congress will combine the Hospital Insurance (Part A) and Supplementary Medical Insurance (Part B) portions of Medicare into a single plan.

Third, the health industry can look for Congress to make more severe reductions in the prices paid for and the volume of medical services provided to Medicare beneficiaries. Many Washington observers expect that, in the short run at least, most of the financial help for Medicare will come from further reductions in payments to providers.

These actions are bound to cause a shaking out in the health care field. For many service suppliers, survival is at stake. The hospital industry, for example, is already seeing a slowdown in the growth of Medicare revenues under prospective payment and a shift toward the southern United States in the relative share of payments.

Hospitals are beginning to carefully assess with of their physicians are profit producers. Institutions faced with increased had debt risk and the need to cover losses by raising prices are eyeing mergers or other means of joining forces to gain access to capital markets, improve utilization of resources, and reduce excess capacity. We are also starting to see linkups of lab systems.

Other steps by hospitals to guarantee a steady stream of patients are likely to occur rapidly over the next few years. These include agreements with HMO and competitive medical plans, contracts with state governments and private purchasers as preferred providers of services, and affiliation arrangements and joint ventures with other institutions.

Two factors will raise the volume of physician services: increased practitioners per capita and more services eremoved from hospitals and rendered in physicians' offices, clinics, and free-standing ambulatory care centers.

As payers increasingly adopt fee schedules, competition for greater numbers of patients will heat up among physicians. More physicians will join group practices and health maintenance organizations or take salaried positions in hospitals. Physicians will also strive for ownership or an interest in hospitals, nursing homes, laboratories, and other health care organizations.

What about the clinical laboratory in this changing environment? How will it adapt as the Government and private purchasers strive to become aggressive and product buyers of health care on the basis of the best prices they can get in the marketplace?

Hospitals and independent laboratories will undertake cooperative ventures in response to competition from other hospitals and from new diagnostic services in the community. More fresstanding or independent laboratories will crop up to perform tests for hospitals because prospective payment changes the status of onsite hospital labs from profit centers to cost centers (potentially profit "eaters"). These laboratories will market their services locally to other institutions and to physicians as outpatient testing demand grows and inpatient demand declines. They will have the space, data processing capability, and instrumentation to absorb in creased test volume without expanding substantial capital or adding personnel.

Hospitals turning to outside testing may close down much of their own lab activity, except for blood banking and Stat tests. They can then use the vacated space for presumably more profitable services, such as outpatient surgery.

All these developments will have a significant effect on hospital laboratory personnel. Insitutions working out cooperative ventures will trim their laboratory staffs, demand more productivity from remaining employees, and look for generalists who can perform many different tasks rather than specialists.

In another strategy, two or more hospitals may combine their test volumes, with each having responsibility for certain types of testing. This reduces costs through economies of scale. As in-house operations become more efficient, some testing could move directly to bedside while more esoteric studies are sent to reference laboratories.

Some hospitals may perform more work than ever in-house, but only if it is cost-effective to do so as an alternative to joint ventures and other arrangements. That option is more difficult to follow if purchasers peg their payments at levels charged by independent laboratories.

If hospitals fail to control the cost of their own lab work in an increasingly competitive environment, they will have to increase test volume by marketing their services more broadly or leave the lab marketplace altogether.

To sum up, the public and private purchasers of health services can be expected to force further economies in the provision of health care. The Federal Government will probably try to broaden the reach of its prospective payment system and at the same time ratchet down payment levels. So both the volume of laboratory service and unit prices will come under even greater assault. Recent establishment of a national fee schedule for Medicare laboratory services marks only the start of this process.
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Copyright 1985 Gale, Cengage Learning. All rights reserved.

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Title Annotation:new economic forces in health care will affect medical laboratories
Author:Markus, Glenn R.
Publication:Medical Laboratory Observer
Date:Mar 1, 1985
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