 market for the tests proposed for bidding. Hospital laboratories predominate; 78 of the 118 laboratories were hospital-based. Twenty-five of the laboratories were POLs, and 15 were independent laboratories. The largest size category had charges totaling $18.7 million. This category was composed of four independent laboratories and a single hospital laboratory network, each with at least $1 million in allowed charges. Charges for tests proposed for bidding were $16.0 million. These five laboratories accounted for 28 percent of the Tennessee Part B testing market, and a similar percent of the market for tests proposed for bidding. In the remaining size categories, hospital laboratories predominate. The second-largest category, laboratories billing from $400,000 to $999,999, contains 17 laboratories having a total market share of about 16 percent. Only one POL is large enough to fall into this size range. The next two categories were $300, 000-399,999 and $200,000-299,999. With 11 and 19 laboratories, respectively, each category accounts for about 6-7 percent of the allowed charges. The POLs tend to cluster in the smallest class, $100, 999. Table 3 provides a more detailed look at the largest laboratories. The allowed charges and market shares of these laboratories varied markedly. Although we do not identify the laboratories in Table 3, we note that the three largest national laboratories accounted for the top three Part B Medicare market shares in Tennessee. These three firms had a combined share of about 24 percent, and their payments ranged from $2.8 million to $7.0 million. Ten other laboratories had market shares of about 1 percent or higher. Hospital and independent laboratories each accounted for one-half of the top 10 laboratories in payments, although independent laboratories tended to cluster in the upper half of the top 10. Table 3 also shows the charges for tests proposed for bidding as a percent of total testing charges and the number of counties served by each laboratory. The percent ranged between 58 percent (one hospital laboratory) and 95 percent (one independent laboratory), with four-fifths of the firms exceeding 70 percent. Based on data from independent and physician office laboratories, breadth of service area roughly paralleled allowed charges. The two largest laboratories provided nearly statewide coverage, with one serving 88 of Tennessee's 95 counties and the other serving 85. The next two laboratories served about one-half of the counties. After that, only two other laboratories-one POL and one independent-served at least onethird of the counties in the State (data not shown). The specimen-origin proxy data suggest that at least three hospitals achieved coverage comparable to some of the largest independent laboratories, as measured by the number of counties served. Several other hospitals appear to have served at least one-quarter of the counties. However, no hospitals apparently provide statewide coverage.
We associated each county with a count of independent, hospital, and POLs serving it in 1994. The results suggested that the number of such laboratories serving a county and the share of county payments due to independent laboratories varied widely. Unsurprisingly, the number of providers was closely related to allowed charges. Rural counties-which account for about two-thirds of Tennessee counties-generally had low allowed charges, and were served by fewer laboratories of all types than urban counties. Fifteen counties were served by only one independent laboratory and, of these, five were served by only one POL. Thirteen of the 15 counties were rural. Almost all counties had at least one hospital laboratory physically present, and hospitals appeared to have large market shares in many rural counties. The data also suggest that rural beneficiaries often have laboratory tests drawn in urban counties, even when laboratory services are available in their own counties. This result is consistent with findings for other health services (Bronstein and Morrisey, 1990).

DISCUSSION
In this article we have described clinical laboratory industrial organization and the industry's current competitive and financial status; delineated an appropriate scope for laboratory competitive bidding; and portrayed a local Medicare laboratory market. For most areas of inquiry, no single source of information can provide a precise answer. Some of the available data were impressionistic, gathered from industry experts. Thus, we relied on multiple sources, and we qualified our conclusions in the text as necessary.
The qualitative findings suggested that, notwithstanding recent indications of increased concentration in the independent sector, the industry remains competitive. Hospital laboratories have a greater market share than we initially expected, and may be generally viewed as capable of providing price competition leading to lower Medicare fees. Large POLs may occasionally enlarge the pool of presumptive bidders. Moreover, firms need not necessarily feel constrained by concerns about antitrust violations. Extrapolating the DOJ antitrust framework to a Medicare competitive bidding scenario, it seems that in many areas there is an opportunity for laboratories, especially small-and medium-size ones, to affiliate to bid and deliver Medicare tests, without adversely affecting the longer term price-competitiveness of the local market. This may mean opportunities for firms to enhance their attractiveness as Medicare bidders on non-price dimensions such as rural coverage.
Our POS/CLIA file analysis of independent laboratory concentration suggested that not all local environments would be equally suited for mounting bidding pilots or policies. In our study we found that Tennessee's laboratory services market appears to be among the more competitive ones in its region. In contrast, another State market, North Carolina, was more dominated by independent laboratories and exhibited more concentration in the independent laboratory sector.
The recent financial difficulties of the largest national laboratories and the evidence of significant organizational restructuring do not in our view preclude testing Medicare competitive bidding for laboratories. Some industry participants think these developments are evidence that the industry structure will change from one dominated by national behemoths to one in which regional firms and networks of hospital laboratories or others hold sway over the routine-testing market in more localized areas. If this is so, then the routinetesting market may offer continuing opportunities for purchasers, including Medicare, to use market rivalries to obtain lower prices and better service. Similarly, to the extent that trends to consolidate and downsize have lowered laboratories' production costs, these trends may be positioning many providers favorably for the advent of Medicare competitive bidding. It is possible, however, that the financial difficulties, associated too with an overall tightening of payment policies by Medicare and other payers, may presage limited potential for additional Medicare savings. Even so, we believe Medicare may well benefit from a reordering of fees, if not a general price reduction. It should also be noted that most other sectors of the health care system have been undergoing major restructuring, but this has not dissuaded private and public insurers from seeking additional payment reform.
Our study of test procedures to put up for bidding found a highly skewed distribution of allowed charges by test. This implies that some of the complexity of bidding for the full spectrum of nearly 900 different laboratory procedures can be reduced by limiting the scope to the most common tests. For Medicare, this parsimony seems attractive. Unlike the two largearea, invited managed care competitions that covered all tests, Medicare may find it prudent to have as open a competition as possible, consistent with overall cost efficiency, for reasons of quality and public acceptance discussed earlier. This is facilitated by a simpler bidding procedure. Streamlining the test list will have little effect on potential cost savings, because the bulk of laboratory allowed charges will still be covered.
The State comparisons of test mix, as well as the comparison of the national test ranking against rankings for Tennessee and North Carolina, suggested that essentially the same set of tests could be used, perhaps with slight State-specific modification, no matter where the laboratory bidding is conducted. If Medicare were to use several competitions for benchmarking a programwide fee schedule, both the timeand space-related stability of the test list offer some evidence that the bidding results are generalizable.
Our findings from the claims-based study of Tennessee laboratory firms illustrate that, at least at the statewide level, it is possible to have a sizable group of providers from the three major sectors of the industry as apparently viable contestants for Medicare competitive bidding. The very largest laboratories are independent laboratories, but hospital laboratories are more common in the top 25 and among the entire list of laboratories paid $100,000 or more. It appears that HCFA can expect to obtain bids from reasonable numbers of both hospital and independent laboratories-laboratories that account for a substantial share of all Part B specimen testing-if it requires the largest laboratories to bid and if it is willing to evaluate at least 20 bids. The few POLs that rival hospital and independent laboratories in charges can be included as bidders to broaden laboratory representation and generate market information from the POL sector. In contrast to the Tennessee results, the data from North Carolina indicate that markets in some States may be fairly concentrated, at least in the independent laboratory sector. Thus, the results from the two State studies underline the importance of carefully selecting sites for bidding competitions.
The results of the State studies may also mean that where laboratory market structures resemble Tennessee's, Medicare for the most part can sidestep the politically sensitive question of POL participation in the bidding. With few exceptions, the POLs in Tennessee rank among the small laboratories for whom we assume bidding costs are not justifiable. This finding may be generalizable to other areas of the United States. As for the impact of competitively derived prices on POLs, that remains to be seen. Although the limited data available on POL costs suggests many POLs are profitable, expert opinion on the likely impact of competitive pricing is mixed. Some experts told us POLs would not necessarily be disadvantaged by pricing outcomes of Medicare competitive bidding, but others strongly disagreed.
Another implication of the Tennessee study is that requiring laboratories to provide statewide or large-regional coverage is probably not a desirable objective in all potential Medicare bidding arrangements, notwithstanding the examples of large-area contracts in the private sector. Very few laboratories approached statewide coverage in Tennessee. If such large-area coverage were required, most laboratories would probably have to form alliances to participate. Their