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Medicare Laboratory Payment Policy: Now and in the Future Summary The Committee on Medicare Payment Methodology for Clinical Laboratory Services studied many aspects of the current Medicare payment system, conducted original research, and heard testimony from many organizations representing the varied interests of laboratories and laboratorians. From the perspective of the beneficiary, the system is working. The committee could find no evidence that Medicare beneficiaries have difficulty getting necessary laboratory services. From the perspective of the laboratory industry, the system should be working better, with fewer administrative delays, geographic inconsistencies, and claims denials. From the perspective of the committee, the current system includes irrationalities, which could exacerbate current problems and jeopardize beneficiary access in the future. Medicare needs a more timely and appropriate method for integrating the proliferation of new technologies anticipated in the near future and simpler, more transparent administrative procedures. To this end, the committee recommends that the Medicare program implement a single, national, rational fee schedule that reflects the resources used to produce the services, simplify and open its administrative procedures, and collect data to monitor and assess the impact of the recommended changes. INTRODUCTION Clinical laboratory tests are a key component of modern health care. Through the examination of body fluids and tissues, laboratory tests reveal im-
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Medicare Laboratory Payment Policy: Now and in the Future portant chemical and biological information about the body.1 Laboratory tests represent a small share of health spending, but play a complementary and an integral role in good medical care. They help physicians to diagnose and treat patients. Technological changes in laboratory testing, both those currently in the pipeline and those anticipated in the near future, offer the prospect of new opportunities for diagnostic improvements. These changes, however, are often associated with expensive new laboratory tests and testing methodologies and will place an increasing burden on the payment system for timely, fair, and appropriate determinations of payment levels and medical necessity. Medicare, the federal program providing coverage of health care services for the elderly and disabled, is the largest payer of clinical laboratory services. It pays 29 percent of the nation’s laboratory bill for inpatient and outpatient services (Klipp, 2000). The Medicare Part B fee schedule for outpatient laboratory services accounts for approximately one-third of what Medicare spent for laboratory services, or 1.6 percent of its total annual budget, in 1998 (Gustafson, 2000). Although outpatient clinical laboratory tests are only a small portion of the Medicare budget, Medicare payment policy for laboratory services is significant because it influences state Medicaid and private payers’ policies and payment rates. Laboratory tests also influence health care expenditures far beyond their proportion of actual costs because decisions about the provision of other medical services often hinge on the results of laboratory tests. Designed in the early 1980s, Medicare payment policy for outpatient laboratory services is now outdated. Payments are not consistently related to costs, and while payment rates have been modestly adjusted for inflation, neither the rates nor the basic payment methodology has evolved to take into account technology, market, and regulatory changes. Laboratory interest groups testified that the outdated payment system has created serious administrative and financial burdens for laboratories, although systematic evidence of major problems for patients, physicians, Medicare, or private insurers is lacking. Theoretically, when prices do not reflect costs, they have the potential to inappropriately influence clinical decision making, inhibit innovation, waste taxpayer dollars, and limit beneficiary access to care. In the case of clinical laboratory tests, the financial incentives of the physician ordering the test are not directly related to the financial incentives of the laboratory conducting the test and receiving payment for it; however, the physician’s incentives could be subject to influence by the laboratories. Again, evidence of such effects is lacking. Clinical laboratory testing is in the midst of major technological innovations, and regulatory and payment policies must be able to accommodate positive changes. The mapping of the human genome and other scientific advances 1 Medicare covers clinical laboratory tests used to diagnose disease, screen patients to identify abnormalities, or monitor a patient’s condition. It does not cover other laboratory services such as screening for drugs of abuse, conducting forensic investigation, evaluating a person’s health for life insurance, and testing as a part of clinical research and drug development.
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Medicare Laboratory Payment Policy: Now and in the Future lead laboratory experts to expect major advances in clinical tests and methodologies in the near future, particularly in the areas of genetic testing, surface markers to identify specific types of cancers, pharmacogenomics to individualize drug treatments, and molecular-level tests. They foresee these diagnostic advances clearly; whether scientific advances for treatments will keep pace is less clear. Recognizing the problems of the Medicare outpatient payment system for clinical laboratory services, Congress mandated that the Department of Health and Human Services (DHHS) arrange for the Institute of Medicine (IOM) of the National Academies to examine the laboratory industry, including environmental and technological trends; to collect data on costs and payments for certain laboratory tests if possible; to assess current Medicare payment policy; to evaluate payment policy alternatives, including costs and other aspects of implementation; and to make recommendations to improve the system (Balanced Budget Act of 1997 [BBA]; Public Law 105–33). The IOM was selected because its unique advisory process uses groups of independent, volunteer experts to analyze issues and make policy recommendations. To conduct the study, the IOM formed a committee of 12 experts, including laboratorians, physicians, economists, health care administrators, and health policy analysts. The five committee meetings included open sessions for public testimony and data gathering. The IOM commissioned three background papers and a study on costs and payments for laboratory services. The committee focused on Medicare payment methodology, but related issues such as coverage policy and coding systems were also addressed. This summary highlights some of the key issues, conclusions, and recommendations from the full report. THE LABORATORY INDUSTRY In 1999, 170,102 clinical laboratories conducted 5.7 billion laboratory tests for both inpatients and outpatients in the United States (Tables 1 and 2).2 Approximately $35 billion was spent on the provision of clinical laboratory services. Although overall health expenditures have continued to rise faster than growth in the gross domestic product in recent years (Wolf, 1999), total expenditures for laboratory services provided in all settings atypically have declined (Klipp, 2000). Four main types of laboratories provide clinical laboratory services: Hospital-based laboratories: Hospital-based laboratories conduct more tests than all other types of laboratories combined. In 1999, 8,560 hospital-based laboratories (Table 1) conducted almost 3 billion laboratory tests (Table 2), pro 2 Generally, when this report refers to the clinical laboratory industry, it includes the three types of laboratories discussed below: hospital-based, physician office, and independent laboratories. Other laboratories will be discussed, but they typically do not bill under the Medicare Part B outpatient system. When manufacturers of laboratory tests, equipment, and chemicals are included, this will be specified.
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Medicare Laboratory Payment Policy: Now and in the Future viding services for inpatients and outpatients and some community physicians. Many hospitals operate more than one laboratory. Independent laboratories run some hospital-based laboratories. Independent laboratories: In 1999, 4,936 independent laboratories (Table 1) conducted 26 percent of laboratory tests in the United States, or 1.5 billion (Table 2), for physicians, hospitals, and other health care providers. These laboratories are often regional, serving large geographic areas, with single companies operating multiple laboratory facilities. Independent laboratories underwent rapid consolidation during the 1990s. Two large, multisite corporations now absorb more than half of the revenues of independent laboratories. Physician office laboratories: Most of the 105,089 physician office laboratories (POLs) conduct a low volume of simple, inexpensive tests that provide immediate, on-site results to physicians (Table 1). Large, group practice POLs provide a range of tests at volumes comparable to those of local independent laboratories. Other laboratories: Laboratory tests performed at end-stage renal disease centers, home health agencies, and nursing homes are frequently not paid out of the Medicare outpatient laboratory benefit. These “other laboratories” account for slightly more than 30 percent of all laboratory facilities (Table 1), but they conduct only 10 percent of all tests (Table 2). Because the laboratory industry is so diverse and data describing it are so limited, it is difficult to draw definitive conclusions about trends. The industry has been characterized both by periods of growth and by a variety of constraints. Currently, test volume is up, but Medicare spending for outpatient laboratory services is down. The laboratory industry appears to be both resilient and adaptable, but also vulnerable to environmental trends. For instance, managed care and federal cost containment measures initially cut into laboratory profits, but the major national independent laboratories not only have survived, but have now rebounded financially. Hospital-based laboratories expanded their outpatient and outreach services in response to declines in inpatient laboratory de- TABLE 1 Number of Laboratories by Type of Facility, 1999-Early 2000 Type of Facility Number of Laboratories Percentage of Total Hospital laboratories 8,560 5 Independent laboratories 4,936 3 Physician office laboratories 105,089 62 Other 51,517 30 Total 170,102 SOURCE: Health Care Financing Administration, 2000.
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Medicare Laboratory Payment Policy: Now and in the Future TABLE 2 Test Volume by Type of Facility, 1999-Early 2000 Type of Facility Volume (millions) Percentage of Total Hospital laboratories 2,958.2 52 Independent laboratories 1,514.2 26 Physician office laboratories 656.4 11 Other 597.1 10 Total 5,725.9 NOTE: Volume figures include both inpatient and outpatient tests performed for all public and private sector payers. SOURCE: Health Care Financing Administration, 2000. mand to the point where their market share is growing. The numbers of POLs declined in the late 1980s in reaction to federal regulatory policies, but they are now increasing, partially in response to an increase in the number of tests that can be conducted simply. Many factors affect the cost of providing laboratory services. New regulatory requirements increased costs for some laboratories; however the industry has also reduced costs through consolidation, automation, and other innovations that have simplified testing and administrative procedures. Future innovation in automation, test methodology, and information technology will require substantial investment but should also increase efficiency. More complex testing, particularly genetic testing, may routinely require specialized expertise to interpret the findings for the ordering clinician which will add to the cost of providing the test. The overall quality of laboratory testing is improving. Experts speculate on a number of technological-, regulatory-, and professional-related reasons. Portable testing equipment makes it easier to test patients at the bedside or during a visit to the doctor. In addition to convenience, testing closer to the patient leads to faster results that may facilitate diagnosis and treatment. Improvements in quality are seen in improved proficiency test results and fewer deficiencies during on-site inspections. Payment trends have the potential to affect beneficiary access to laboratory testing, although there is no evidence that they have done so. The lack of appropriate billing codes, Medicare coverage decisions, and payment barriers could delay beneficiary access to new technology. If it becomes more difficult to absorb reduced payments, the industry might no longer offer tests when costs exceed payments.
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Medicare Laboratory Payment Policy: Now and in the Future THE CURRENT MEDICARE PAYMENT SYSTEM Medicare currently pays for outpatient clinical laboratory tests using a prospective payment system (PPS) established in 1984 and based on 1983 charge data. The amount of payment is known before a service is delivered. Payments for 1,100 tests are set separately in fee schedules for each of 56 geographic jurisdictions, limited by national fee caps called National Limitation Amounts (NLAs). Payments are based on what laboratories charged in 1983, updated periodically for inflation. Laboratories accept Medicare fees as full payment— there is no beneficiary cost sharing. The Health Care Financing Administration (HCFA), the branch within DHHS that administers the Medicare program, and private contractors to HCFA known as carriers and fiscal intermediaries (FIs),3 make and interpret policy, set prices, and process claims. Most general policy decisions guiding program operations are made at the national level by HCFA within the constraints of congressionally set authority. Medicare contractors process and pay claims from laboratories. Traditionally, carriers have taken responsibility for developing local coverage policies that determine when particular tests are medically necessary and for calculating the local fee schedules, but some of this responsibility has shifted back to HCFA’s central office in recent years. Contractors review claims and may deny payment if they determine the service was not medically necessary in a particular case. There are inescapable inconsistencies in this process. Decisions about how much to pay for new tests are made both by the carriers and by HCFA. The payment system, thus, is complicated by the fact that decisions about both coverage and payment are made in each of the 56 distinct jurisdictions. GOALS FOR A PAYMENT SYSTEM To meet its charge, the committee first defined the goals that should guide payment policy. The following five goals are broadly applicable to the Medicare payment system and are specifically relevant to payments for outpatient clinical laboratory services. Beneficiary access: All Medicare beneficiaries should have access to appropriate services on a timely basis. Financial barriers should not limit beneficiary access to appropriate services. When it is medically appropriate, testing ought to be expedited. Flexibility: The payment methodology should have formal mechanisms to promptly recognize and determine payment for newly approved technology, to adjust payment levels when necessary, and to update payment amounts in 3 HCFA’s contractors include carriers, which process laboratory claims from POLs and independent laboratories, and FIs, which process claims from hospital-based and other institutional laboratories.
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Medicare Laboratory Payment Policy: Now and in the Future response to scientific and economic shifts in the health care environment that affect the costs of producing laboratory services. Transparency: The process for setting payment amounts and payment policies should be understandable and open to input from the public and providers. Value: Value encompasses the efficient production and appropriate use of laboratory services, as well as minimizing fraud, waste, and abuse. The goal is to produce a positive health outcome for the beneficiary using high-quality, appropriate health care services. Administrative simplicity and efficiency: The payment system should strive for simplicity and efficiency in its administrative operations for the provider, payer, and patient. ASSESSMENT OF THE CURRENT MEDICARE PAYMENT SYSTEM The committee conducted an extensive examination of the Medicare payment system for outpatient laboratory services and assessed the current methodology in light of the committee’s goals.4 Beneficiary access: The committee found no evidence that beneficiaries have difficulty obtaining outpatient clinical laboratory services. The current geographic locations, number of sites, and capacity of the laboratories generally provide adequate access for beneficiaries. The Medicare program imposes no financial barriers to outpatient clinical laboratory services for beneficiaries. Finally, the committee found no evidence that Medicare beneficiaries are being denied STAT (literally, at once) tests when medically indicated. Flexibility: The committee concluded that existing mechanisms for keeping payments up to date are inadequate. The inflation factor and the NLA level raise or lower fees across the board for all tests and do not provide adjustments to accommodate changes needed in payment levels for specific tests. The process for integrating new technologies into the payment system, including determinations of coverage, assignment of billing codes, and development of appropriate prices, is slow, administratively inefficient, and closed to stakeholder participation. These problems are likely to become increasingly important with the anticipated changes in laboratory technology and medical practice. Transparency: The committee concluded that the current payment system lacks “openness” and adequate procedures for stakeholder involvement. Clear and consistent information on how the system works and opportunities for the public and stakeholders to have input into decision processes are limited. Value: The committee found it had little data with which to judge whether Medicare spending in aggregate is too high or low, whether Medicare is 4 The examination included interviews with many HCFA staff, other stakeholders, and laboratory services and financing experts; testimony from industry associations; and a review of relevant program-related documents, data, and studies.
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Medicare Laboratory Payment Policy: Now and in the Future paying reasonable amounts for individual tests and services, or whether physicians are ordering tests appropriately. The committee concluded that Medicare purchases tests that meet Medicare standards for its beneficiaries with minimal or no beneficiary access problems. Medicare payment rates appear to be within the range of private payments (Appendix C). Administrative simplicity and efficiency: The committee concluded that administration of the Medicare outpatient laboratory payment system, with its 56 separate fee schedules and 56 separate processes for coverage determination, is unnecessarily complex and inefficient, particularly in the way the system incorporates new technologies and determines whether or not a laboratory’s claim should be paid. Since most of the fees on the 56 separate fee schedules are close to the NLA, this complexity is unnecessary. RECOMMENDATIONS After analysis of the current payment method and alternative policies, the committee reached consensus on 12 recommendations for improving Medicare’s payment system for outpatient clinical laboratory services. The committee’s choices were guided by its previously stated goals for an ideal payment system. The committee considered the administrative, legislative, and financial steps necessary to implement alternative payment methods. The committee’s recommendations provide broad, general policy guidance. The details regarding how recommendations are implemented could have a significant impact on ultimate implementation costs. The first six recommendations are interrelated and cascade from the first recommendation, which broadly defines the preferred payment system and flows into more detailed recommendations concerning specific elements of the system and its implementation. The first six recommendations focus specifically on payment methodology. They address issues such as how to establish the relative value of one test versus another and how to determine the relative resource use of different tests. They do not conclude whether current Medicare aggregate payments or the payment for a particular test is too high or too low. The final six recommendations focus on problems in the current system. These recommendations can be implemented independently or concurrently with the first six. They consider such issues as the structure of the claims-processing contractors and how to improve payment-related administrative procedures. Because changes in the current Medicare payment formula could require new legislation, implementation of many of the committee’s recommendations will entail congressional action. The committee recommends that HCFA, the administration, and the Congress work together to develop the necessary enabling authority and funding. RECOMMENDATION 1: Medicare payments for outpatient clinical laboratory services should be based on a single, rational, national fee schedule.
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Medicare Laboratory Payment Policy: Now and in the Future In effect, there is already a national fee schedule, since most services are paid at the National Limitation Amounts. Maintaining a system of 56 fee schedules that, in the vast majority of cases, pays a single, national fee is confusing to stakeholders and increases the burden of administering the system. A national fee schedule means a single set of payments for all outpatient clinical laboratory services, with adjustments for differences in local labor costs, prices for goods and services the laboratory purchases, and other relevant factors. The long-term goal of a national fee schedule is to establish relative payment amounts that accurately reflect the relative resource requirements of providing services, minimizing the financial incentives to overuse or underuse services. In other words, if Test A for one condition generally costs laboratories twice as much to produce as Test B for another condition, the payment for Test A should be twice as much as for Test B. The committee considers this important for promoting the clinically appropriate use of laboratory services and ensuring that beneficiaries continue to have access to services. The key building blocks of such a fee schedule include (1) a relative value scale; (2) a dollar conversion factor that translates the relative values into payment amounts; (3) any adjustments for laboratory, beneficiary, or other characteristics, such as geographic location; and (4) a mechanism for periodic updates. HCFA has extensive experience establishing relative values, fee schedule payment adjustments, and update mechanisms, particularly with the physician payment methodology. Moving to a single national fee schedule is a logical first step because it will make it easier to develop refined, resource-based relative payment amounts, will simplify the system, and will reduce some administrative complexities and inconsistencies. The committee makes additional, specific recommendations about how to move quickly to a national fee schedule and then recommends a process for refining and improving it. RECOMMENDATION 2: On an interim basis, relative payments for Medicare outpatient clinical laboratory services should be based on the current National Limitation Amounts. The NLAs are an appropriate starting point for the national fee schedule, but HCFA should move quickly to refine them. Moving to a national fee schedule based on the NLAs formalizes current, de facto Medicare outpatient laboratory payments. Use of the NLAs as a starting point should minimize dislocations and disruptions for laboratories, beneficiaries, and contractors. The committee does not make a recommendation on whether aggregate spending on clinical laboratory services ought to be increased or decreased, and it recognizes that projected spending levels are often an outcome of the budget process. The committee notes, however, that under current law, Medicare outpatient clinical laboratory fees will not increase or decrease through 2002. If Congress and HCFA were to maintain this requirement while implementing the new fee schedule (i.e., projected aggregate outpatient clinical laboratory spend-
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Medicare Laboratory Payment Policy: Now and in the Future ing remains the same), then current NLA levels would have to be slightly reduced to permit the few carrier fees currently below the NLAs to rise. A preliminary analysis suggests that a reduction of the NLAs by as little as 1 or 2 percentage points may be sufficient to maintain the current level of aggregate spending (Appendix B). If a more detailed study shows that larger reductions in the NLAs would be needed if Congress were to call for maintaining budget neutrality, then the new fee schedule should be phased in over two or more years to minimize disruptions. RECOMMENDATION 3: A data-driven consensus process for refining the new Medicare national fee schedule for outpatient clinical laboratory services should be developed. HCFA should explore alternative methods for gathering data to be used in the process. The committee believes that a data-driven consensus approach is most likely to be a practical and successful approach to refining the fee schedule. Several interdisciplinary groups, which include experts and stakeholders such as laboratorians and HCFA policymakers, could both review and refine the NLA-based fee schedule or develop a completely new set of relative values. The groups, using data from many sources, could focus on every test or groups of similar tests, selected fees that are noticeably out of line, or those tests that contribute most to Medicare spending. HCFA should examine the costs, potential value, strengths, and weaknesses of other approaches and methods for gathering data on costs and developing national relative values before refining or replacing the NLA-based fee schedule. The committee considered a number of approaches for establishing a relative value scale or relative payment rates.5 These approaches are not mutually exclusive and could be combined in various ways to refine the NLA. Four approaches merit further consideration. Each option has specific risks, potential disruptions, and different consequences, depending on how it is designed. The potential impact of each approach should be examined to determine whether some adjustment might be desirable to mute the risk of a negative impact on beneficiary access or on the practice of medicine. Micro-costing studies: HCFA would collect objective cost data related to specific services from laboratories, manufacturers, and other appropriate sources. The costs would include labor, equipment, supplies, transportation, and administrative functions such as regulatory compliance associated with the production of laboratory tests. The research could range from detailed cost studies of all laboratory services in a sample of all laboratories to targeted studies of selected tests and laboratories. 5 The committee recognizes that setting the right prices is a necessary factor, but not sufficient to ensure cost-effective, medically appropriate treatment in every case.
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Medicare Laboratory Payment Policy: Now and in the Future Competitive bidding demonstration: HCFA would solicit bids on a specified list of tests from laboratories in a selected service area. Submitted bids should reveal costs of production, and, therefore, could be used as the basis for establishing relative values. Negotiated fee demonstration: A demonstration in selected areas, based on a private sector model of negotiation, could be used by carriers and area laboratories to agree on a fee schedule. Like competitive bidding, this approach also provides a basis for developing national relative values. Charges: The charges employed by laboratories on each Medicare claim could contribute to the development of relative values. However, because of uncertainty about how closely current charges reflect costs, this option could be used initially in conjunction with another approach to evaluate the nature of the relationship between charges and costs. RECOMMENDATION 4: Medicare national fees for outpatient clinical laboratory services should be adjusted for geographic location. HCFA should also evaluate the need to adjust for certain other circumstances, particularly those likely to affect beneficiary access, and make recommendations to the Congress. Some costs, primarily labor and specimen transportation costs, may vary widely across the nation and between urban and rural areas, and would require an adjustment, as is made under most other Medicare payment methodologies. The committee does not support payment adjustments based on broad categories of laboratories, such as physician office, hospital-based, or independent laboratories; however, it is concerned that there may be situations in which lack of adjustment to national fees could affect beneficiaries’ ability to obtain needed services. The committee recommends that HCFA study whether adjustments for differences in costs may be desirable for the following: Qualified laboratories in sole community hospitals:6 These providers currently receive slightly higher Medicare outpatient laboratory payments. HCFA should study the implications for sole community hospitals of a new national fee schedule. STAT tests: The committee recognized that tests that must be conducted immediately for urgent or emergency care may present additional costs, but it could find no data to document a cost differential. If there is a need to recognize STAT tests in Medicare payments, care should be taken with the way in which 6 A sole community hospital is located at least 25–35 miles from similar hospitals, serves at least 75 percent of the local residents needing such inpatient care, and meets the detailed criteria contained in 42 C.F.R. 412.92. To be a “qualified laboratory” in a sole community hospital, the laboratory must provide clinical diagnostic tests 24 hours a day, seven days a week, in order to serve the hospital’s emergency room.
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Medicare Laboratory Payment Policy: Now and in the Future STAT circumstances are defined and their use should be monitored in order to minimize inappropriate use of the STAT designation. RECOMMENDATION 5: Processes should be put in place to refine and periodically update the fee schedule for Medicare outpatient clinical laboratory services. To remain viable, the fee schedule must respond to economic and scientific changes that affect the cost of providing services. Processes to refine and periodically update the fee schedule should include opportunities for industry and public input, review, and challenge. These procedures may vary for the different elements or building blocks of the fee schedule. Update factor: The update or conversion factor could be applied across the board to the current NLAs or to a fee schedule that is based on relative values. The process for updating the fee schedule should identify the responsible parties, the schedule for acquiring and analyzing data, and the factors that should be considered in developing the updated amount. Because the update factor will affect federal spending, it is likely to be established through the annual budget process. Although HCFA would ultimately be responsible for implementing updated rates, it might be appropriate to require the Medicare Payment Advisory Commission (MedPAC) or another suitable government agency to make recommendations to the Congress about the update factor. Payment adjustments: Review and revision of any geographic and other payment adjustments should include analyses of their likely effect on beneficiary access to laboratory services. Relative values: Periodic review of the relative values, however they were originally established, is essential for maintaining the integrity of the payment methodology. RECOMMENDATION 6: To incorporate new tests into the Medicare laboratory fee schedule, there should be an open, timely, and accessible process that is subject to challenge. The process and fees produced should not impede clinical decision making that is essential to providing appropriate care. The committee concluded that a consistent, public process for developing interim values for new laboratory services is essential for an effective payment system. HCFA should create a committee of laboratorians, pathologists, other physicians and scientific experts, health care policymakers, and economists to advise on setting interim relative values or national fees for new technologies. After interim relative values or fees for new services have been established, Medicare should allow time for diffusion of the new technology and stabilization of costs. The interim relative values for these new services should be re-
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Medicare Laboratory Payment Policy: Now and in the Future viewed and revised as necessary. Once they are “official,” these services would be included in the periodic review of relative values for the full fee schedule. RECOMMENDATION 7: HCFA should review alternatives to the current system for coding outpatient clinical laboratory services for claims processing. More accurate, open, and timely coding processes for new technologies as well as tests and services should be sought. The committee heard testimony from several sources that the application process for a new Current Procedural Terminology (CPT) code7 often adds to the time required to incorporate new technologies into the Medicare laboratory payment system. There are also problems with the inadequate specificity of the codes. Coding, the Medicare coverage process, and payment determinations are closely intertwined; tend to lack transparency; and can add considerably to the time required to incorporate a new test, new equipment, or a new testing methodology. The rapid development of anticipated new technologies will exacerbate this problem. HCFA should examine how to reduce coding delays within the current system and should explore alternative coding systems. RECOMMENDATION 8: The current policy of not requiring beneficiary cost sharing for Medicare outpatient clinical laboratory services should continue. Cost sharing is unlikely to significantly reduce overuse or increase the detection of fraud and abuse; it could create barriers to access for the most vulnerable Medicare beneficiaries; and it would be financially and administratively burdensome for laboratories, patients, and the Medicare program depending on its design. The committee recognizes the arguments supporting cost sharing elsewhere in the Medicare program. For laboratory services, however, the normal incentives of cost sharing are weakened because the patient does not initiate the use of laboratory services, usually has no contact with the laboratory, often has supplemental insurance that mutes the cost impact, and is unlikely to challenge the physician’s order. Cost sharing is also unlikely to lead beneficiaries to detect fraud and abuse. Cost sharing could create a barrier to appropriate use of laboratory services for chronically ill and financially disadvantaged beneficiaries, which could ultimately lead to greater program costs if deferred testing delays diagnosis and leads to more costly treatment. Finally, administering copayments is impractical because the cost to the laboratory of billing and collecting the copayment will often exceed the expected payment amount.8 7 The physicians’ coding system, called Current Procedural Terminology, Fourth Edition (CPT-4), is maintained by the American Medical Association. 8 A copayment of 20 percent would be less than $2.30 on average for the 100 highest dollar volume tests. The average number of tests per patient claim in some laboratories is
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Medicare Laboratory Payment Policy: Now and in the Future RECOMMENDATION 9: HCFA should discontinue use of International Classification of Diseases, Ninth Revision (ICD-9) diagnosis codes as the basis for determining the medical necessity of clinical laboratory tests. HCFA should assess the need for any approach to evaluating the medical necessity of individual laboratory tests prior to payment of a claim. In addition, HCFA should evaluate alternative approaches for identifying and reducing unnecessary or inappropriate laboratory testing. Determinations of medical necessity based on diagnosis codes were instituted to improve the appropriateness of testing and, in part, to discourage fraud and abuse related to physician self-referral. Since implementation of the Stark legislation,9 there has been less financial incentive for physicians to order unnecessary tests. In addition, experience has shown that the use of ICD-9 codes is not a sound basis for making judgments regarding the medical necessity of particular laboratory tests in specific patients.10 One of the fundamental problems with the approach that the contractors currently use to make a determination of the medical necessity of a particular laboratory test for a particular beneficiary at a particular time is that, in many circumstances, it is likely to give the wrong answer. Moreover, the current system is easily gamed, is administratively burdensome, and does not place sufficient responsibility on the physician. HCFA has developed a complex system of guidelines, some local and some national, including policies for 23 common tests, that advise physicians on what diagnosis codes constitute appropriate use of particular tests. The national policies for these 23 tests, recently developed under a negotiated rulemaking process (Neg Reg), are a considerable improvement over the many conflicting local medical review policies (LMRPs) that were in existence. The Neg Reg initiative, however, did not consider the underlying question of whether ICD-9 codes are a sound basis for determining medical necessity. The current system, although commendable in its intentions, is not effective in accomplishing its purpose. It creates a substantial administrative burden on laboratories and physicians, and the need for Medicare and its contractors to develop medical review policies to guide payment determinations. HCFA currently can document neither the extent nor the nature of medically unnecessary testing. HCFA should monitor laboratory test trends to identify increases in unnecessary tests if they occur. As a prudent buyer, HCFA should examine a number of other approaches for promoting clinically appropriate use of laboratory tests including the following: 2.5, but the cost of producing and sending a letter could be more than $5.00. There would also be costs from bad debts. 9 Under this legislation, physicians may not refer their patients to laboratories in which they or their family members have a financial interest. 10 The code ICD-9 is a five-digit number indicating the diagnosis or symptoms of a patient.
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Medicare Laboratory Payment Policy: Now and in the Future inclusion of outpatient clinical laboratory tests in the peer review organizations’ (PROs’) next scope of work; focused medical reviews of both prepayment and post payment, by contractors or PROs; development of approaches for identifying the inappropriate use of laboratory tests supported by the Agency for Healthcare Research and Quality (AHRQ); development of methods for holding physicians financially accountable for claims determined to be medically unnecessary; and creation of methods to detect and address fraud and abuse developed in conjunction with with the Office of the Inspector General (OIG). RECOMMENDATION 10: In its policy formulation processes, HCFA should provide opportunities for stakeholder input and develop better communication with contractors and other stakeholders when policies are being developed and once they are adopted. Many laboratory industry concerns about the Medicare payment system have their origins in the current lack of public input and the inadequate communication of policy decisions. Providers are more likely to accept Medicare payment policies, and accurately apply them, if they understand them and have the opportunity to participate in their development. RECOMMENDATION 11: HCFA should move promptly to consolidate the number of contractors processing all Medicare outpatient clinical laboratory claims, including claims from physician office laboratories (POLs) and hospital-based laboratories. The design of this consolidation should ensure that claims processing by regional laboratory carriers will not require major new billing procedures for POLs or hospital-based laboratories. Efforts should be made to strengthen local provider services and relations between carriers and laboratories. The committee believes that the standardization of program operations is an important aspect of the goal of administrative simplicity and efficiency. Thus, it supports the 1997 Balanced Budget Act mandate for the consolidation of clinical laboratory claims processors into four or five regional carriers and the designation of one carrier as the central statistical resource, and it encourages HCFA to implement this. The committee found that the current system of 56 carrier regions, with approximately 23 distinct carriers and 30 fiscal intermediaries, creates inconsistencies in the interpretation of HCFA policy and procedures, duplicates the cost of pricing new tests, and leads to variable interpretations of medical necessity for the same tests. Although it supports the standardization and consolidation of carriers, the committee recognizes the need for providers to have easy access to a contact within the carrier who understands the local health
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Medicare Laboratory Payment Policy: Now and in the Future care environment and can provide the necessary advice and service.11 Given the scope of this mandated change and the number of design issues yet to be decided, the committee cautions HCFA to monitor this change closely and beware of unintended consequences. RECOMMENDATION 12: HCFA should collect the data needed to effectively manage the performance of the Medicare outpatient clinical laboratory payment system. HCFA should collect baseline data to inform future policy considerations and additional data to measure the impact of policies, particularly on beneficiary access to care and on the diffusion of new technologies. Objectives and illustrative examples of baseline and performance measures related to the payment system goals set out by the committee include the following: Beneficiary access—Objective: Determine whether beneficiaries and physicians have adequate access to laboratory services. Possible measures include a sample survey of beneficiaries and physicians to obtain their assessment of any access problems and tracking changes in the number and distribution of laboratories participating in Medicare. Flexibility—Objective: Determine the effectiveness of methods to assign payments for new tests, adjust unreasonable fees, and update payment amounts. Possible measures include a comparison of Medicare and private payments for a broad sample of tests and health plans and tracking the average time needed to adjust unreasonable fees once the have been identified. Transparency—Objective: Determine how well stakeholders understand the processes for setting payment policies and their perceived ability to influence policies. Possible measures include a sample survey of laboratorians, carriers, and physicians to assess their knowledge and perceptions of HCFA’s policy processes. Value—Objective: Determine the quality and cost of outpatient laboratory tests purchased by Medicare. Possible measures include monitoring Clinical Laboratory Improvement Amendments (CLIA) certification and performance status and claims denial rates, reasons for the denials, and the percentage of claims ultimately paid. Administrative simplicity and efficiency—Objective: Determine how well the key payment processes work within HCFA and in a sample of laboratories, physician practices, and contractors. Possible measures include a comparison among contractors of basic internal processes to assess their relative efficiency. 11 In this report, the term “provider” generally refers to any individual or organization, such as a physician, laboratory, or hospital that provides care for Medicare beneficiaries. When reference to only one type of provider is intended, it will be specified.
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Medicare Laboratory Payment Policy: Now and in the Future CONCLUSION Congress and HCFA have the opportunity to fix the current payment system for clinical laboratory services averting the possibility of a crisis in the future. Payments for some individual tests likely do not reflect the cost of providing services, and anticipated advances in laboratory technology will exacerbate the flaws in the current system. Problems with the outdated payment system could threaten beneficiary access to care and the use of enhanced testing methodologies in the future, although the committee found no evidence of this now. Although radical changes are not called for at this time, implementing the committee’s recommendations will likely improve the efficiency of the system and ensure that Medicare beneficiaries continue to have access to high-quality laboratory services. REFERENCES Dyckman, Z., and B.B.Cassidy. 2000. Recent Developments and Trends in the Clinical Laboratory Industry (unpublished). Columbia, MD. Gustafson, T. January 20, 2000. Testimony before the IOM Committee on Medicare Payment Methodology for Clinical Laboratory Services. Washington, DC. Health Care Financing Administration (HCFA). March 2000 CLIA Provider Files. Klipp, J. 2000. Lab Industry Strategic Outlook 2000: Market Trends and Analysis. Washington, DC: Washington G-2 Reports. Merrill Lynch. 1999. Quest Diagnostics: Leader in Sector with Improving Fundamentals. reference #60126501. New York, NY: Merrill Lynch. Wolf, L.F. 1999. Medicare and Medicaid Statistical Supplement in Health Care Financing Review. Baltimore, MD: Office of Strategic Planning, Health Care Financing Administration.
Representative terms from entire chapter: