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Pharmacy benefits managers (PBMs), the companies that administer prescription drug coverage for employers, municipalities, insurance companies, and the like, have taken heat for adding to the cost of drugs instead of controlling or lowering them. Sen. Ron Wyden (D-Ore.) has called PBMs “gnarled, confounding riddles.” An emerging parallel industry, laboratory benefits managers (LBMs), could be following in their footsteps.

Although the exact scope of work varies from contract to contract, the tendrils of laboratory benefits managers can extend from routine lab tests, such as cholesterol or HbA1c, to genetic tests, such as proprietary diagnostic tests for cancer, and even to digital diagnostics such as home blood pressure monitoring. In some cases, they may also manage MRIs or other forms of imaging and screening procedures like mammograms and colonoscopies.


These intermediary companies may be molding the shape of the diagnostics value chain, as suggested by a recent Health Affairs blog that I contributed to. They determine which diagnostics are covered (by constructing lists of approved tests, known as diagnostic formularies), the price insurers will pay for them (through confidential negotiations), and which companies will participate (through outsourcing and contracting).

Diagnostics: booming markets and ballooning costs

Laboratory benefits managers emerged in response to payers finding themselves overwhelmed by the booming diagnostics market. More than 4 billion tests are performed annually, at a total cost of $113 billion, and countless new assays are being developed every year.

This is particularly true in the realm of genomics, where more than 75,000 tests are on the market and 10 new ones are developed daily. Additionally, digital health (within which app-based monitors occupy a prominent position) is undergoing its own Cambrian explosion: More than 73,000 new health apps are developed yearly, adding another set of challenges to payers struggling to keep up. With the expansion of this vertical, laboratory benefits managers may be increasingly appointed to help interpret the noise through, for example, the management of digital health formularies.


In concert with the expanding volume of diagnostic testing, the cost is rising at multiples of the overall health care spend. And while the direct cost of excessive testing is nontrivial, accounting for an estimated 5% to 10% of total health care spending, the indirect cost is even greater, since false positives and negatives lead to costly downstream care. The average cost of recommended follow-up clinical actions after genomic testing ranges from hundreds to thousands of dollars per finding.

Another issue is the cost of inappropriate tests — those that should not have been ordered in the first place. In a survey of family physicians, nearly three-quarters of respondents believed that novel genomic tests will affect their practices within five to 10 years, though the majority said they are “not knowledgeable” about them. Currently, about one-third of genomic tests are inappropriately ordered. And since there’s little clinical evidence to support the use of most precision medicine diagnostics, many more tests may be misinterpreted and improperly acted upon. In the absence of consensus guidelines, follow-up costs to testing contingent purely on clinical judgment are an enormous source of ongoing uncertainty for payers.

The middlemen for diagnostics

The value proposition of laboratory diagnostics managers is analogous to that of PBMs. Laboratory benefits managers create formularies, negotiate with vendors, and manage the testing process. One laboratory diagnostics manager describes this as an “all-encompassing laboratory delivery model.”

For each test, the LBM defines whether it is covered, which vendor will provide it and at what cost, which patients are eligible to receive it, which clinicians can order it, and which labs, logistic agencies, and other third parties will deliver it.

If designed in a value-based and patient-centric manner, laboratory benefits managers have the potential to move medicine closer to the Institute for Healthcare Improvement’s Triple Aim of improving individuals’ health care experiences, improving the health of populations, and reducing the per capita costs of health care. Initial data reviewing the impact of this kind of laboratory management program has shown reduction of wasteful ordering practices in about one-quarter of cases, resulting in hundreds of dollars saved per avoided test over an eight-month period.

But if left to develop unmonitored, as happened with PBMs, the rise of laboratory benefits managers could worsen rather than ease issues related to health care costs and utilization without improving outcomes — and generating outsize returns for shareholders.

Little information exists on the relationships of commercial LBMs with third-party vendors, evoking the possibility of kickbacks, rebates and spread pricing, which would jack up costs for patients and payers. Equally little is known about the long-term impact these companies have on patient outcomes, clinicians’ use of diagnostic tests, clinician outcomes, or payer expenditures.

Ensuring vigilance in the evolving LBM marketplace

Laboratory benefits managers have been in existence since at least 1989. Their reach is substantial: Three of the four largest commercial insurers — with a combined 105 million lives under management — use laboratory benefits managers. These large insurers also offer Medicare Advantage plans, enabling LBMs to manage lab benefits for covered Medicare beneficiaries. These middlemen have been noted to exert “unprecedented” negative impacts on the profitability of other participants, such as diagnostics producers, across the ecosystem.

Although laboratory benefits managers have been around for three decades, there isn’t yet enough data to determine whether they will add value to the health care system or extract value from it. To assess the trajectory of this industry, there is a pressing need for objective evidence on the role of LBMs and their impact on various components of health care and health care players.

Most important is assessing the impact of laboratory benefits managers on patient outcomes. They have the power to cause delays in testing or substitute optimal tests with suboptimal ones, which would be clinically and economically unacceptable, as such manipulation can harm patients and produce downstream costs far in excess of marginal savings.

The influence of laboratory benefits managers on clinician workflows and on appropriate versus inappropriate use of diagnostic tests should also be continuously monitored. Novel approaches to quality improvement in care delivery — such as tools embedded in electronic health records seeking to limit clinicians’ ability to order ill-advised tests — tend to lose their effectiveness over time, even after showing early success. The introduction of new hurdles to care delivery can induce poor provider outcomes, such as burnout.

Finally, we also need better insight into the characteristics and activities of laboratory benefits managers. On the macro level, ownership and partnership dynamics between LBMs and third parties must be scrutinized to prevent noncompetitive or pseudocompetitive market conditions. On the micro level, transparency into negotiation tactics and cash flows are needed to ensure that the value created by LBMs is shared with broader society, rather than shareholders alone.

The transition to precision medicine will intensify the use of diagnostics, especially genetic testing, to guide individualized treatment. To prevent PBM déjà vu, payers, policymakers, regulators, clinicians, and journalists must serve as cautious stewards as the landscape for laboratory benefits managers matures.

Eli M. Cahan is medical student at the NYU School of Medicine who is currently on leave to complete a master’s degree in health policy at Stanford University as a Knight-Hennessy Scholar.

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