Insurers invest in lab benefit managers amid growing scrutiny of PBMs

Next-generation sequencing technology can scan thousands of genes in a short amount of time to illuminate a single mutation. Laboratory clinicians use the technology like an investigator uses a magnifying glass, looking for clues about an individual’s diagnosis to develop the precise treatment for conditions such as Lou Gehrig’s disease or sickle cell disease.

The technology has become commonplace in lab offices, leading to accelerated demand from patients for genetic testing—and higher costs for payers.

Related: Insurance companies ramp up efforts to claw back money from providers

“We now live in the era of genomic medicine,” said Dr. Samuel Caughron, chair of pathology and medical director at AdventHealth Shawnee Mission in Kansas. “These tests are not cheap.”

The costs of genetic testing are rising the fastest among lab tests, which are one of the largest drivers of spending growth among health insurers. To address the price tag, insurance companies, including Medicaid and Medicare Advantage carriers, are increasingly relying on laboratory benefit managers. The intermediaries determine which doctors can order diagnostic services, which patients can receive the testing, which lab clinicians will provide it and how much insurance companies will pay for it.

How do lab benefit managers work?

The lab benefit manager role originated in the 1990s primarily to help health insurers, employers and other payers navigate negotiations with radiologists. Like pharmacy benefit managers—to which they are often compared—lab benefit managers’ decisions dictate patients’ access to services and the price paid.

If an oncologist wants to see whether a patient’s lung cancer tumor contains a gene mutation, they will take a sample of the tumor and send the biopsy to a lab. The lab clinician will likely go through a prior authorization process—either directly with the insurance company or with the lab benefit manager—explaining why the test is clinically necessary, sometimes using information from the ordering physician. If approval is granted, lab benefit managers establish how much the insurer will reimburse the lab for the service. If there’s a dispute over the bill, lab benefit managers will also review and edit the claim for the insurer.

How do they affect lab clinicians?

Insurance companies contract with lab benefit managers to help gather evidence to create coverage guidelines and prior authorization policies, along with enforcing updated practices. As insurers’ use of lab benefit managers has increased, prior authorization requirements have grown more complex and time-consuming for lab clinicians.

Labs generally operate under different software systems than providers, forcing labs to chase down paperwork from other clinicians—like the oncologist in the example above—supporting the medical necessity of a service. Additionally, lab clinicians usually retrieve patient samples before receiving insurers’ approval and have a tight timeline for testing before the sample expires, adding pressure to speed up the prior authorization process.

The prognostic element of the tests can also lead to pushback from insurers around clinical utility, said Caughron, who serves as president and CEO of MAWD Pathology Group, an independent medical practice, and chair of the economic affairs committee at the Association of Molecular Pathology.

“If I do a test on a patient’s cancer that does not find any mutations that specifically identified how that patient is going to be treated, you might say, ‘Well, that was a useless test,’” he said. “Yet, if you hadn’t done the test, you wouldn’t know that there wasn’t a mutation that was going to direct you to a specific treatment.”

Why do insurance companies pay them?

The COVID-19 pandemic led insurers to ramp up their investment in these services, either through paying independent companies or funneling more money toward the lab benefit managers they run. Some of the largest lab benefit managers operate under the umbrellas of UnitedHealth Group, Elevance Health and Cigna Group.

As the coronavirus spread, payment disputes between insurance carriers and labs that provided testing services became increasingly common, with many insurance companies suing lab testing companies over prices they were charging health plans.

All of this translated into a bump for companies that promised to ease contract negotiations between payers and providers, said Dr. Bill Kerr, CEO of Avalon Healthcare Solutions, a lab benefit manager.

Avalon—which works with 20 health insurance companies— doubled its revenue over the past 18 months, he said, with growth driven by insurer contracts aimed at reducing waste in routine lab work and smoothing administrative snarls in genetic testing.

Related: Major insurers to ease prior authorizations ahead of federal crackdown

The company inked a partnership in June with UnitedHealth Group’s Optum to automate genetic testing benefit management for third-party payers.

“The pandemic has been a case study that has taught the C-suite [of health insurance companies] that lab testing is complicated. It’s important, and it requires expertise,” Kerr said. “I don’t think that case study lesson is going to go away, even as COVID recedes.”

UnitedHealth declined to comment, and Cigna did not respond to interview requests. Elevance referred questions to insurance lobbying group AHIP, which did not respond to an interview request.

How have coverage requirements made a difference?

As regulatory coverage requirements grow, more insurers are contracting with lab benefit managers to navigate the territory.

Several states have passed laws requiring commercial and Medicaid insurers to cover testing for specific genetic mutations, neonatal screening and genetic counseling, and at least 67 bills related to genetic testing coverage are pending in state legislatures, according to Genetics Policy Hub, a legislation tracker operated by the Health Resources and Services Administration at the Health and Human Services Department.

Bills that would require Medicare to pay for genetic testing for patients with a family history of cancer, as well as genetic counseling for the diagnosis, treatment and management of a person’s disease, are pending at the federal level. Commercial insurers generally look to federal payment guidelines when establishing their payment policies.

What role does coding pay?

The coding system for genetic tests lags coverage requirements. In its absence, lab benefit managers can help insurance companies determine how much to pay.

There are not enough codes available to track each individual gene tested, which can make it hard for insurers to understand exactly what service was provided and to manage costs, said Dr. David Flannery, director of telegenetics and digital genetics at Cleveland Clinic’s Genomic Medicine Institute.

“The AMA has been looking into this to find ways to have more granularity about specific genetic tests,” said Flannery, who serves as a coding adviser for the American Medical Association. “Hopefully, at some point, you could have every gene have a specific code.”

Some codes are used to reflect a test performed for a panel of several genes, complicating matters for insurers as they struggle to identify a return on investment. Many carriers more strictly scrutinize coverage of such gene panel tests. Labs avoid using those panel codes and instead stack as many associated codes as possible to maximize reimbursement. Physicians use an average of nearly seven billing codes for each genetic test, according to Concert Genetics, a genetic testing management technology company that performs many of the same functions as lab benefit managers.

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The practice translates to insurer overpayments to labs, Concert Genetics CEO Rob Metcalf said.

“I think we want to see advances” in genetic testing, Metcalf said. “But we know that we have to see those advances in a financially reasonable and sustainable manner.”

What regulations are they subject to?

The Centers for Medicare and Medicaid Services does not have oversight of lab benefit managers, a spokesperson said in an email.

CMS contracts with Palmetto GBA, a subsidiary of Blue Cross Blue Shield of South Carolina, to perform lab benefit management functions on behalf of the Medicare program. It serves as an administrative contractor to enforce coverage policies, processes claims and resolves appeals with genetic testing providers. Palmetto did not respond to an interview request.

Some industry observers stress the need for more regulation of lab benefit managers. The companies’ role in the diagnostic supply chain means they have the same kinds of potentially conflicting incentives as pharmacy benefit managers, which have been the subject of several state and federal lawsuits alleging they overcharged public programs for drugs.

“It would be a mistake not to learn from what’s happened with PBMs and to be more proactive in what’s going on with the lab benefit managers,” Caughron said. “There are differences, obviously, but the reason these exist should be to improve the system and lead to better outcomes for patients. If they’re not accomplishing that, then that needs to be addressed.”

Like pharmacy benefit managers, lab benefit managers’ role as a middleman could lead companies to engage in spread pricing, in which they charge payers more than they reimburse labs for a test and retain the difference.

Several states have banned pharmacy benefit managers’ use of spread pricing. The Senate Health, Education, Labor and Pensions Committee advanced legislation this month that would forbid PBMs’ use of the practice nationally, beginning in 2025.

Committee chair Bernie Sanders (I-Vt.) and ranking member Dr. Bill Cassidy (R-La.) said they have not yet determined the timeline for a full Senate vote on the package.

Lab benefit managers could also receive a rebate from labs for recommending insurer coverage of a specific test, leading labs to compete over rebate sizes and ultimately drive up the test prices.

CMS should play a role in helping ensure lab benefit managers are properly determining how much taxpayer money is being spent on tests and in enabling patient access to tests, said Dr. Eli Cahan, a pediatrics resident at the University of Southern California who researched lab benefit managers as part of his master’s degree in health policy at Stanford University.

“I certainly do not think there’s been adequate agency attention paid to LBMs,” Cahan said.

Insurers’ investment in lab benefit managers could lead companies to create overly burdensome medical necessity guidelines to discourage use, Flannery said. CMS should require insurers and lab benefit managers to publicly report data on their prior authorization decisions for genetic testing, he said.

Avalon Healthcare offers a pricing model allowing insurers to pay the same amount for tests at all the labs across their network, Kerr said.

“We will take the risk of signing a contract with the labs. Some of those rates we sign up will be higher than the fee schedule we’ve given you, and some will be lower, and we’ll just take that risk,” Kerr said.

“Sometimes we make money on the spread, and sometimes we lose money on the spread in aggregate. We at least want to break even,” he said.

Avalon also offers insurers per-member, per-month pricing models, shared savings payment programs or flat contracts to administer the claims, Kerr said. The company does not collect rebates from labs, he said.

“I lived through being a health plan executive and some of the challenges of PBMs. We have very transparent pricing,” Kerr said.