5
The Current System: How Well Does It Work?

The committee concluded that the current Medicare payment methodology is functioning well enough to achieve the crucial goal of unhindered beneficiary access to outpatient clinical laboratory services. It also concluded that some of the administrative complexities of the payment methodology are financially wasteful and harmful to laboratory services providers. The committee’s examination revealed significant problems and considerable room for improving the system.

The committee gathered information to determine how well the current system meets the goals identified in Chapter 1. Unfortunately, the information is quite limited. Much of it came from stakeholders and other parties involved with laboratory services.

BENEFICIARY ACCESS

The committee found no evidence that beneficiaries have difficulty obtaining outpatient clinical laboratory services.

There appear to be adequate numbers of laboratories and specimen collection stations so that beneficiaries are receiving needed services. The committee looked for evidence of even limited access problems, even if the causes could not be clearly attributed to the payment method.

General Access. The current geographic locations, number of sites, and capacity of the laboratories provide access for beneficiaries.



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Medicare Laboratory Payment Policy: Now and in the Future 5 The Current System: How Well Does It Work? The committee concluded that the current Medicare payment methodology is functioning well enough to achieve the crucial goal of unhindered beneficiary access to outpatient clinical laboratory services. It also concluded that some of the administrative complexities of the payment methodology are financially wasteful and harmful to laboratory services providers. The committee’s examination revealed significant problems and considerable room for improving the system. The committee gathered information to determine how well the current system meets the goals identified in Chapter 1. Unfortunately, the information is quite limited. Much of it came from stakeholders and other parties involved with laboratory services. BENEFICIARY ACCESS The committee found no evidence that beneficiaries have difficulty obtaining outpatient clinical laboratory services. There appear to be adequate numbers of laboratories and specimen collection stations so that beneficiaries are receiving needed services. The committee looked for evidence of even limited access problems, even if the causes could not be clearly attributed to the payment method. General Access. The current geographic locations, number of sites, and capacity of the laboratories provide access for beneficiaries.

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Medicare Laboratory Payment Policy: Now and in the Future The committee found no evidence that beneficiaries or physicians are encountering difficulties in obtaining needed laboratory tests. The Health Care Financing Administration (HCFA) has not received any complaints about access problems. Laboratory services are not a significant concern of consumer groups that speak for Medicare beneficiaries. There is no evidence of even limited problems, for example, in rural areas. The number of laboratories has increased nationally since the fee schedule was established in 1984. A study by the Office of the Inspector General (OIG) assessed the impact of the Clinical Laboratory Improvement Amendments of 1988 (CLIA) on the number of laboratories, and their distribution, with particular attention to rural areas. In 1995, CLIA had issued 151,658 certificates for laboratories, including multiple certificates for the same site—for example, two or more separate laboratories located at the same hospital center. In its analysis, which counted only one of the multiple laboratories located at the same site, the OIG found an average of 51 clinical laboratories for every 100,000 persons and nearly one site for every four physicians. Of the more than 3,000 counties in the country, only 66 had no laboratory site (38 of these had no physician medical practice site). Rural counties had nearly the same number of laboratories per capita as non-rural counties (OIG, 1995). Between 1985 and 1995, the number of Medicare beneficiaries increased by less than 3 percent a year. The number of laboratory tests performed on beneficiaries grew an average of 17 percent annually (OIG, 1995). The OIG found no evidence of an insufficient supply of laboratories or access problems. Between 1995 and March 2000, the number of CLIA-certified laboratories nationally grew from 151,658 (including multisite laboratories if registered or certified separately) to 170,000 (Dyckman and Cassidy, 2000). Although approximately 5,000 short-stay hospitals participate in Medicare (HCFA, 1998), there are currently 8,560 hospital-based laboratories, almost 5,000 independent laboratory sites, and 105,000 physician office laboratories (POLs) certified by CLIA (Table 2.1). Virtually all participate in Medicare. The committee found no evidence that POLs are denying access to Medicare beneficiaries, that beneficiaries are having difficulty finding a POL, or that physicians have reduced access since 1995. For beneficiaries who have difficulty reaching one of the 170,000 certified laboratories, independent laboratories run specimen collection stations.1 At such stations, there are staff who draw and collect specimens and transport them to the laboratory that performs the tests. Often the test is run overnight, and the physician has the results in the morning. Similarly, most physicians, even if they do not have a laboratory in their office, generally are willing to have their staff collect specimens for the convenience of their patients. A laboratory service picks up the specimens from the physician’s office on a daily basis. Collection 1   Because these stations are not certified under CLIA, there are no federal statistics available on their numbers.

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Medicare Laboratory Payment Policy: Now and in the Future stations and physicians’ offices significantly expand the options available to beneficiaries seeking access to laboratory services. Financial Access. The Medicare program imposes no financial barriers to outpatient clinical laboratory services for beneficiaries. Unlike other Part B services and supplies, there are no financial barriers for the beneficiary. Copayments and deductibles for laboratory services were eliminated in 1984. The President’s budget for FY 2001 proposed to reimpose the Part B 20 percent copayment for laboratory tests. The explanation given for including this proposal in the administration’s budget was to rationalize “… current cost sharing requirements…,” to help finance benefit improvements, and “…to prevent over-utilization and reduce fraud…” (Executive Office of the President, 2000). The administration’s proposed budget for FY 2001 projects $2.4 billion in Medicare savings (2001–2005) from the laboratory copayment proposal. The $2.4 billion in savings is expected to accrue mainly from Medicare paying laboratories at 80 percent of the carrier’s fee or the National Limitation Amount (NLA), whichever is lower. Medicare will also generate savings indirectly, from reduced payments for managed care beneficiaries because of lower fee-for-service spending.2 HCFA actuaries concluded that only a small, unspecified fraction of the savings would come from reduced utilization. Although the $2.4 billion in savings may materialize, it does not translate into the same amount of savings for the health system, because laboratories would bear an extra expense to bill beneficiaries for copayments and would likely accumulate bad debt. The fees for many laboratory tests are relatively low. The average fee for the top 100 tests by dollar volume was about $11.00 in 1998. A 20 percent copayment averages less than $2.30. A typical medical visit that results in lab tests includes only a modest number of tests. In some laboratories the average is 2.5 tests per claim. The cost to the laboratory is relatively high for billing the copayment and often would exceed the amount of money the laboratory would receive, even if all copayments were collected, since generating and sending a business letter is estimated to cost more than $5. Access to STAT Tests. The committee found no evidence that Medicare beneficiaries are being denied STAT (literally, at once) tests when medically indicated. There is obvious value to having access to test results quickly or almost instantly. Fast turnaround can mean starting the correct treatment sooner, convenience for the beneficiary, possibly a better treatment outcome, and potential cost savings. Under emergency conditions, STAT tests are essential and can mean 2   The Medicare formula for capitation payments to managed care organizations is tied, in part, to per capita spending for fee-for-service beneficiaries (MedPac, 1999).

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Medicare Laboratory Payment Policy: Now and in the Future the difference between life and death. Hospitals, particularly those with emergency rooms, must maintain the capacity to produce STAT results for patients with emergency conditions. In addition, as discussed in Chapter 3, many facilities are acquiring equipment to provide tests at the point of care. The extra 2 percent payment for qualified sole community provider hospitals offers some compensation for the extra standby capacity. Testimony to the committee indicated that laboratories could incur additional costs when they do a STAT test because the laboratory interrupts the routine of its staff and equipment. Sometimes expensive test kits designed for multiple specimens are wasted when only one segment is used for a STAT test. Hospital and emergency facility laboratories must staff to be able to perform STAT tests at all hours. The committee is not aware of any studies that systematically identify which tests might prove cost-effective when done on an expedited basis and under what circumstances. The committee found no evidence of restricted access to STAT tests for beneficiaries, even though Medicare laboratory payments do not distinguish between tests conducted STAT and those done with a 24-hour turnaround time or longer. Laboratories are all paid the same amount for the same test, regardless of turnaround time, by many private as well as public insurers. The committee notes, however, that some private payers do pay additional sums for tests (and other medical services) done on an emergency basis. The Current Procedural Terminology (CPT) Editorial Panel has not supported the use of code modifiers to report the emergency nature of medical services generally. For laboratory tests, specifically, the American Medical Association (AMA) does not consider a special code for STAT services appropriate, because STAT tests are considered a normal part of medical practice as are other emergency medical services. FLEXIBILITY The committee concluded that existing mechanisms are inadequate for keeping payments up to date. The inflation factor and the NLA level raise or lower fees across the board for all tests but 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. The growing number of laboratories indicates that Medicare beneficiaries are receiving the care they need and suggests that the payment system has adapted sufficiently to continue functioning in changing times.

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Medicare Laboratory Payment Policy: Now and in the Future Formal Mechanisms. As discussed in Chapter 4, some mechanisms permit adaptation to changes in the Medicare budget, financial environment, and technology. The size of the inflation factor for updating the carriers’ fee schedules is determined by the Congress during the budget reconciliation process. It can be set to reflect changes in the general economy or in general input costs for producing laboratory services. Congress can also use this mechanism to adjust federal budget exigencies, setting the update rate above or below the level of inflation. Congressional authority to set the level of the NLAs (the percentage of the median of the carriers’ fees to be used as a cap) constitutes another payment adjustment mechanism. It can be used to raise or lower the national caps on all fees across the board. This provided a means to address concerns that Medicare payments for laboratory tests were generally much higher than laboratory charges to physicians for the same tests. There are several other problems, however, that the system has not addressed. Since laboratory charges in 1983 were not linked to costs, some Medicare test fees, which were based on those charges, are inappropriately high or low. Additionally, both changes in technology that have made some testing techniques more efficient, and advances that have improved quality but cost more, have further skewed relationships between costs and payments. Adjustment of the inflation factor and the NLA level cannot remedy the problems of fees for individual tests. The “inherent reasonableness” mechanism was designed to modify fees that are grossly out of line. Unfortunately, this mechanism has been so impracticable that it has hardly been used at the national level. A recent General Accounting Office (GAO) report concerning durable medical equipment (DME) and supplies supports HCFA’s use of an expedited inherent reasonableness process, which could be used for laboratory fees as well (GAO, 2000). Once the final regulation for an expedited process is promulgated, it could provide a more practical approach for adjusting individual test fees. Sometimes the Congress has been asked to change particular fees that the laboratory industry or HCFA has considered too low or too high. For example, the 106th Congress raised the fee for certain Pap smears, and the administration asked Congress in its 2001 budget to reduce the fees for four other high-volume tests. These political interventions are not an efficient way to deal with individual test fees. HCFA needs mechanisms that operate on a regular review cycle, allow for off-cycle consideration of problems, and include input from various stakeholders and experts to provide validity and flexibility to the process. Coverage Changes. Over time, changes in medical practice affect the payment system. The recent negotiated rulemaking on coverage policies for laboratory tests is an attempt to move the payment system toward more evidenced-based coverage policies. It established a five-year cycle for review of national policies. If the committee’s recommendation on the use of the International Classification of Diseases, Ninth Revision (ICD-9) codes for prepayment review is implemented, it would be necessary to reconsider the use of such coverage policies.

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Medicare Laboratory Payment Policy: Now and in the Future New Technology. The incorporation of new technology into the Medicare outpatient laboratory payment system is an important challenge for three reasons: (1) the current fee schedule is based on laboratory charges in 1983; (2) many new tests, methods, and equipment developed since 1983 are not in the Medicare base year charge data; and (3) the rate of development of new testing technologies is growing. The process for incorporating innovation, including Food and Drug Administration (FDA) approval of a new technology, assignment of a code, determination of coverage by Medicare, and development of fees through cross-walk and gap-fill procedures, is considered problematic by stakeholders. Even the Congress criticized HCFA for not incorporating particular new technologies (for screening Pap smears) quickly enough (Congressional Record, H12512, Public Law 106–113, section 224). The committee could find no studies on Medicare’s impact on technological innovation or the availability of new technologies to beneficiaries, compared to other health plans. The committee did learn that some private payers wait until Medicare makes coverage decisions and sets fees for new technology before making their own decisions (Appendix C). It is clear, however, that HCFA’s method for setting fees for new tests is flawed. Some specific concerns about the current methods for incorporating new technologies into the payment system include the following: The process for deciding which tests and technologies are cross-walked or gap-filled is not publicly explained, based on published criteria, or inclusive of stakeholders. There is a duplicative, decentralized process for collecting data for gap filling that does not offer written instructions specifically relating to laboratory services for the carriers and has little public involvement. The legislatively mandated formula for calculating gap-fill test fees is likely to result in prices that are too low relative to costs because HCFA is required to base the NLA on 74 percent of the median of the 56 carriers’ fees. If the 56 carriers’ fees accurately reflect costs, then the NLA is likely to be unreasonably low. 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. The committee heard frequent complaints from the industry that it was unclear how carriers determined gap-fill fees, set claims-processing review procedures, and established local medical review policies (LMRPs). In addition, the industry questioned how HCFA decided which new tests should be cross-walked

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Medicare Laboratory Payment Policy: Now and in the Future or gap-filled and how the cross-walk code was selected. Some expressed the view that these processes could benefit from public input. Greater opportunity for stakeholder input could also bring additional useful information into the process. Publicly available clarifications of these procedures could improve provider compliance and reduce mistakes in claims submissions. Public input to policies and procedures is limited, particularly compared to the openness of the recent negotiated rulemaking exercise on national coverage policies. A number of recent improvements may increase transparency. All LMRPs for Medicare carriers are now available through the Web. This service would be more helpful to interested providers if the Web site were easier to use and if it were kept current. The negotiated rulemaking on coverage addressed several provider concerns—for example, the use of frequency criteria to deny claims for selected tests on grounds of medical necessity. Once the rule takes effect, contractors will be required to publish frequency limits for particular tests before they apply the limits in processing claims. VALUE The committee found it had little data with which to judge whether Medicare spending in aggregate is too high or too low, whether Medicare is 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 payments appear to be within the range of private payments. Paying the Right Amount. At the individual test level, it is unclear whether Medicare payments represent good value. The current payment system is based on historical charges, which may or may not reflect costs. An extensive search found no comprehensive, representative, reliable data on current or historical costs for the production of laboratory tests. The committee also has no basis for judging whether the current relationship between the fees for individual tests and their costs of production creates financial disincentives for physicians to order medically appropriate tests. The payment survey conducted for this study showed that Medicare fees for 22 selected, high-volume services fell within the range of payments used by several Blue Cross plans. Although the data are not conclusive, they do indicate comparability among fee schedules (Appendix C). The committee is unable to assess if the current NLA could be lowered further without jeopardizing beneficiary access. Similarly, there is no empirical basis to support claims by the laboratory industry that the NLA needs to be raised. The number of laboratories is growing, which implies that excessively low Medicare payments are not driving laboratories from the market. When examining new laboratory technologies, there is no mechanism within the current payment system and related regulatory processes that encourages consideration of the costs and benefits of covering new tests. Hence, new

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Medicare Laboratory Payment Policy: Now and in the Future tests are added to the laboratory fee schedules without consideration of their cost-effectiveness relative to existing tests. In certain narrowly defined cases, this may change, if new coverage criteria now under consideration are implemented. Once a test is approved for coverage, a fee is set, but the current payment method does not necessarily result in a price that accurately reflects the costs of performing the test initially or over time. Fraud and Abuse. Fraud and abuse lower the value of aggregate Medicare spending for laboratory services. The payment system, along with other aspects of the program, can affect the extent of fraud and abuse. The OIG considers clinical laboratory services particularly vulnerable to fraud, waste, and abuse. One indicator of value is the extent of such problems in the payment system. Some of the OIG’s largest civil settlements (hundreds of millions of dollars) are related to Medicare payments to clinical laboratory companies. According to the OIG, many fraudulent practices in the laboratory industry have been addressed in the past few years. The cases of fraud and abuse were not prevented, detected, or corrected through mechanisms within the Medicare payment system. Rather, they were identified by whistle-blowers and audits and dealt with through corporate integrity agreements, voluntary compliance plans, and legal proceedings. The OIG asserted that the inadequate controls used by contractors to detect and prevent inappropriate payments and the lack of any financial involvement and oversight by beneficiaries contributed to circumstances that have encouraged fraud and abuse. 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. Number of Carrier Jurisdictions. Since most of the individual test fees on the 56 separate fee schedules are close to the NLA, the administrative value of the original system is now greatly diminished. In fact, the committee believes it creates more confusion and administrative work than it is worth. Similarly, the existence of 56 sets of LMRPs creates confusion and administrative burdens for physicians, laboratories, and conceivably even beneficiaries because of overlap in the tests to which these policies apply, some overlap in definitions of medically necessary codes, and sometimes widely divergent lists of acceptable diagnosis codes. As with the 56 fee schedules, there is little justification for creating different LMRPs for each of the 56 jurisdictions.

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Medicare Laboratory Payment Policy: Now and in the Future New Technology. The gap-fill process for calculating new test fees suffers from inadequate administrative guidance and inefficiencies. The lack of guidance on how to analyze new technologies—what data to use, acceptable methodologies for estimating costs, and approaches to break down the scientific testing methods—ensures inconsistent analyses of varying quality and differing prices that are not necessarily related to actual costs. With additional guidance from HCFA, each carrier could perhaps conduct these gap-fill analyses more efficiently, but the greater waste is having the 56 carriers each doing separate analyses. Given the number of gap-fills each year, an average of 13 per year from 1994 to 2000, considerable staff effort and expertise is required. There is little reason to expect drastically different costs beyond differences attributable to geographic price variations and rates of diffusion.3 Claims Denials. The fact that 15 percent of the claims for the 100 highest-volume Medicare outpatient laboratory codes are denied by carriers is an indication of significant waste (Appendix E).4 There are various reasons for denying claims, discussed in Chapter 4, in addition to the lack of medical necessity. If some claims are paid after two or more submissions and others are never paid, there is substantial wasted effort on the part of the laboratory, physician, and contractor, compared with filing and processing the claim correctly the first time or knowing not to submit it at all. The requirements for documentation of medical necessity and processing of claims denials affect not only operational efficiency, but also the cost of providing laboratory services and aggregate Medicare payments to laboratories. The committee heard testimony that claims denials are a major frustration for the laboratory industry in dealing with Medicare. The committee could not locate any national data to show whether or not dealing with Medicare is more burdensome than dealing with other payers. The financial burden of all denials of payments, including those based on medical necessity grounds, falls upon the laboratory, not the physician who ordered the test.5 Likewise, it appears unfair to make the laboratory absorb the costs of performing a screening test (e.g., a Pap smear) in a circumstance in which adequate ICD-9 documentation is present, but unbeknownst to the laboratory and perhaps to the physician, the time since the last test was conducted is insufficient to meet coverage criteria. An Advanced Beneficiary Notice (ABN) is supposed to relieve the laboratory of this burden (making the patient responsible for payment when Medicare denies the claim); however, if the physician did not take the time to obtain a signed ABN, the laboratory is still responsible for 3   New tests will usually be more expensive to perform when they are first marketed because they may diffuse slowly and be conducted in smaller volume. 4   Data were not available on the denial rates of the fiscal intermediaries. 5   laboratories are not precluded from billing physicians for denied claims, but most are reluctant to do so because they see the physicians as customers, may assume it would not be cost-effective, or are unsure whether they could sustain a legal challenge.

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Medicare Laboratory Payment Policy: Now and in the Future the bill. Currently, the ABN process is complex and time-consuming, often requiring several minutes for a conscientious physician to help the patient understand the situation. The committee realizes that changes in the ABN form and process are under consideration and urges that any changes made be consistent with the goals of administrative simplicity and efficiency. The committee is concerned about the national, aggregate carrier denial rate of approximately 15 percent for all tests; however, it is particularly concerned with the variation in denial rates among carriers and across specific tests that, in some cases, amounts to more than 50 percent. Variation in denial rates is attributable, in part, to geographic variations in medical practice, patient needs, fraud and abuse, coverage policies, and claims processing systems among contractors. The committee was able to obtain data from HCFA specifying the grounds for claims denials only from POL claims, which showed that only 2.5 percent of POL claims were denied because they were found to be medically unnecessary. The committee heard testimony that claims-processing procedures can vary among carriers, in part because of unclear or missing instructions from HCFA and differing interpretations of instructions. If these explanations are significant causes of variations in denial rates within and among carriers, they suggest inefficient and ineffective administration. Medical Necessity. The committee finds that the use of ICD-9 codes as a basis for determining medical necessity is not only administratively cumbersome, but also ineffective. Under current law, the Medicare program is obligated to pay for items and services that are reasonable and necessary for the diagnosis or treatment of illness or injury unless Congress explicitly excluded them from coverage. Currently, HCFA’s main method for determining the medical necessity of reasonable, covered outpatient clinical laboratory services is to have its contractors perform computerized, pre-payment screening of the laboratory service claim form for particular ICD-9 diagnosis and symptom codes that are considered by the contractor to provide an indication of the medical necessity of particular lab tests. Although such use is a well intended attempt to prevent waste and fraud and promote higher quality care, the committee finds that it has undesirable and unintended consequences. In practice, if a claim for a laboratory service lacks an ICD-9 code that is among those that the local contractor considers to be evidence of the medical necessity for a particular test, the contractor’s computer system will deny payment for the test. While the diagnosis code is required generally on all Medicare claims, it appears to be used for pre-payment screening much more commonly for laboratory services than for physician services. HCFA can not identify what percent of laboratory claims are denied by pre-payment screening on medical necessity grounds, but testimony from the industry identified it as substantial and a major cost and frustration for the laboratories. The variations from carrier to carrier in what constitutes an acceptable ICD-9 code for a particular laboratory test add to the complexity of billing by providers that receive samples from more than one carrier area. To help providers,

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Medicare Laboratory Payment Policy: Now and in the Future some commercial software companies have designed billing software that flags laboratory test codes that require specific diagnosis codes for payment. Some laboratories highlight tests with an LMRP and provide the most common, acceptable diagnoses right on their claim form to help the physician. There is a fine line between such educational or administrative assistance and gaming the system. Because the contractors process claims for billions of laboratory tests, it seems administratively efficient to employ computerized screens for medical necessity. When only the ICD-9 code is used to determine the medical necessity of a laboratory test, however, an erroneous conclusion often may be drawn. Not only might it be wrong when it is used to conclude that a particular test is not medically necessary for a given patient (a false negative determination), but it also might be wrong when it is used to conclude that a test is medically necessary for a patient (a false positive determination). In technical terms the current approach is neither sensitive nor specific and may often be inaccurate. During the development of local and national medical review policies, committees attempt to identify all symptoms and diagnoses that might justify the ordering of a particular laboratory test. Although these symptoms and diagnoses may justify use of a particular test in some instances, it is not necessarily the case that they would justify the ordering of a particular test in all patients who have one of those symptoms or diagnoses. For example, the medical review policy for the measurement of the blood glucose level proposed in the Neg Reg process includes many symptoms and diagnoses that may be associated with diabetes, such as senile cataract and chronic bronchitis. In fact, it is much more likely that a person who has one of these associated diseases does not have diabetes than it is for such a person to have diabetes. Thus, in most instances, the fact that a patient has one of these associated diseases is not a good indication that the determination of a blood glucose level is medically appropriate. It is impossible to use an ICD-9 code approach to establish medical necessity with any degree of confidence in its accuracy. Although contractors do permit denied claims to be resubmitted with a different diagnosis code or additional information to justify the medical necessity of the test for a particular patient, in reality resubmission often is not administratively feasible and, hence, frequently is not attempted. Although pre-payment screening may be administratively convenient for the contractor, it is administratively burdensome for the laboratory, which must seek the information from the physician. Because the administrative costs of obtaining such information from the ordering physician may be high compared to the revenue that would be received for performing the test, many denied claims are not pursued. In contrast, false positive pre-screening determinations (i.e. determinations that a test is medically necessary, based on an ICD-9 code, when it is not) are never identified through the screening process. In effect, the ICD-9 becomes the sole determinant of medical necessity in most cases.

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Medicare Laboratory Payment Policy: Now and in the Future Information Systems. Laboratories are particularly frustrated when claims are denied on medical necessity grounds, even though the appropriate diagnosis code for the test is included on the claim form and there is no dispute about the coverage policy itself. Apparently, some carriers’ computer systems are unable to read all the diagnoses codes and match them against all of the test codes. Laboratories must resubmit the claim with a different diagnosis code at the top of the list to get a computer match with the test code. Claims with several tests and diagnoses may require multiple submissions before they are paid. This may represent a computer systems issue that could be addressed when the specifications for the regional laboratory claims processors are designed. Local Medical Review Policies. Although not all carriers need LMRPs for the same tests, the fact that carriers often have different LMRPs covering the same tests is an indication of inefficient management.6 Carriers decide to create an LMRP for various reasons. For example, one carrier may need a policy for a new test that is not marketed nationally, or different medical practices may lead to overuse of a particular test only in certain parts of the country. However, if the review policy is based on medical evidence, there is no justification for developing policy separately in multiple carriers instead of developing one policy at the national level and applying it in areas where needed. Also, in most cases there is no rationale for having many different ICD-9 codes approved for a test in one area but not another. The 23 national medical review policies developed under the negotiated rulemaking may eliminate many inconsistent LMRPs. Also, consolidation of the outpatient laboratory claims-processing functions into four or five regional carriers may reduce the numbers of duplicative coverage policies developed for each test and, possibly, inconsistencies among carriers, depending on how that administrative function is designed. For laboratories serving patients from multiple carrier jurisdictions, this consolidation is expected to result in a major administrative simplification. Administrative Efficiencies. Certain aspects of the claims payment process are administered more efficiently than the concerns discussed above. HCFA reports that contractors find laboratory claims relatively easy and inexpensive to process compared to other claims. Some provider representatives point to the electronic submission of claims and payments as an advantage of the current system and certainly an improvement over the traditional paper processes. OTHER ISSUES OF CONCERN The committee identified several important issues that are related to, but extend beyond, the Medicare laboratory payment methodology. A responsible analysis of these issues would take the committee beyond the scope of this study 6   This may also reflect the notion that local autonomy is necessary to deal with local conditions.

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Medicare Laboratory Payment Policy: Now and in the Future and beyond its charge. The committee considers these issues briefly with the expectation that others will pursue them in greater depth. Improving the Quality and Appropriate Use of Laboratory Services To date, most quality control and quality improvement efforts in outpatient clinical laboratory testing have focused on the laboratory itself and the accuracy of its test results. There is evidence of excessive and inappropriate use of clinical laboratory tests in the hospital inpatient setting, but there are no comparable studies of the use of laboratory tests in outpatient clinics and physicians’ offices (Axt-Adam et al., 1993; Hindmarsh and Lyon, 1996; van Walraven and Naylor, 1998). The extent of inappropriate outpatient testing is unknown. While laboratories may recognize orders that might be inappropriate and may offer expert advice or educational materials to the physician, the committee found little concerted effort to improve the appropriateness of test ordering in the context of patient care. Because laboratory payments do not represent a very large portion of the budget for Medicare, managed-care plans, third-party payers, or hospitals, these organizations have less incentive to focus on changing utilization patterns for laboratory tests than they do for other types of care. Other options to improve the quality of clinical testing require consideration: The Agency for Healthcare Research and Quality should support more research on the proper treatment of selected diseases and medical problems that includes attention to the use of outpatient clinical laboratory tests in the full context of medical care. Education for physicians by experts in the effective use of laboratory tests should target medical conditions likely to yield large returns and for which practice guidelines and scientific evidence exist. Both the public and the private sectors should encourage clinicians and laboratorians to work together to develop (1) educational materials incorporating cost-effective algorithms to improve utilization of tests, (2) assessments of tests required for specific diagnoses, and (3) care plans that include tests for the diagnosis and monitoring of the selected conditions. It is important to use educational methods that are acceptable to the audience and effective in changing practice patterns and health outcomes. Laboratorians and physicians should work together to conduct a systematic review of the full laboratory fee schedule to identify obsolete tests that no longer offer value and need never be used for any case. This would provide another opportunity for the various laboratory-related associations and physicians’ organizations to work together to update clinical practice. New tests and testing methods are supplanting old tests and raising the quality of care, but it is difficult for physicians to keep up with all the changes. As long as obsolete tests are coded and remain on the fee schedule, some physicians will order them and some laboratories will provide them. The list of obsolete codes could be presented to the

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Medicare Laboratory Payment Policy: Now and in the Future AMA’s CPT Editorial Panel for elimination from the CPT code listing. In addition, these same tests could be submitted to the local Carrier Advisory Committee for consideration of eliminating coverage for them. Once the codes are deleted and the information is clearly communicated to all stakeholders, physicians’ ordering habits and laboratories’ test menus would likely conform since there would no longer be a code and fee available for billing purposes. The above measures will improve the treatment and diagnosis of all patients, not only Medicare beneficiaries, and may also save Medicare and other payers money. These efforts should be considered, regardless of the type of payment methodology Medicare uses. Coding Process for Outpatient Laboratory Tests The clinical laboratory industry and manufacturers of laboratory tests and equipment testified that the current process for obtaining a CPT code is cumbersome and slow. The committee recognizes that obtaining a CPT code is only one piece of the complex and lengthy process required to identify and incorporate new technology into the Medicare program, but it is worthy of examination nonetheless. The AMA noted that the CPT code process operated on a 12-month publication cycle, but the full review and decision process to obtain a new code could take longer, depending on the timing of the submission of a coding suggestion. There should be ways to expedite this process for new technologies. Likewise, there are ways to shorten the process for incorporating new technologies into the laboratory payment system, even without coding changes, that should be undertaken in any case.7 The committee also discussed whether CPT codes or some other coding system, such as the International Classification of Diseases, Tenth Revision (ICD-10) or CLIA systems, might be more appropriate for identifying laboratory services. The ICD-10 coding system is reported to be more extensive than the current ICD-9 for diagnoses and symptoms and, in the United States, will also have codes for procedures appended. Developmental work is not complete, and ICD-10 was not ready for consideration by the committee. However, HCFA should consider whether ICD-10 could be useful for identifying outpatient clinical laboratory tests as it is currently envisioned or with minor adjustments during its development. An obvious concern is how new tests and technologies would be assigned a code within the system and how long it would take. The CLIA coding system identifies each test, testing equipment, or methodology and categorizes it according to complexity. Since CLIA codes are assigned relatively promptly following FDA test approval, this has some advantages. Its value for claims-processing purposes has yet to be explored. 7   See committee recommendations in Chapter 7.

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Medicare Laboratory Payment Policy: Now and in the Future Clearly, these coding systems were designed to serve many clinical and payment purposes beyond the needs of Medicare’s clinical laboratory payment methodology. Thus, changes in the systems and processes for coding clinical laboratory services may have serious repercussions for other providers and payers as well as for clinical practice. Similarly, coding system changes undertaken for other purposes may have a significant impact on laboratory payment methodology. The committee recognizes the complexity of these coding issues and supports a thorough examination of the issues before major changes are attempted. Fraud, Waste, and Abuse Most providers are honest and concerned principally with the well-being of their patients. The committee realizes, however, that opportunities for fraud, waste, and abuse exist under any payment system. Some in the laboratory and physician communities may take advantage of these opportunities. Some providers quickly learn to “game the system” legally, while others step over the line with more fraudulent practices; therefore, it is important to have in place both procedures for monitoring the payment system to detect unintended consequences and strong mechanisms for detecting and preventing fraud and abuse. One approach to fraud detection should result from the consolidation of carriers and the creation of a Central Statistical Carrier that can provide analyses of broad trend data. The OIG expects this centralized approach to be more useful than the current system for detecting national patterns of fraud. Another method for detecting waste, fraud and abuse is more extensive use of focused medical reviews (FMRs) designed to identify patterns of inappropriate or unnecessary testing. The FMRs could target particular laboratories and physicians, selected geographic areas, or specific tests that are expected to yield a high return. The use of FMRs by carriers, quality improvement strategies by peer review organizations (PROs), LMRPs, and national coverage policies for prepayment and postpayment screening of claims should be compared to determine the most cost-effective methods. Another approach to consider is designing mechanisms to strengthen the ability of laboratories to receive compensation from the ordering physician for the costs of tests determined to be medically unnecessary or insufficiently documented. CONCLUSION The committee concludes that the current Medicare payment system provides adequate access for beneficiaries to outpatient clinical laboratory services, but has many problems that are likely to become more serious in the future. The system needs an appropriate, flexible mechanism for making changes in individual fees that are out of line. The system needs a more open process for develop-

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Medicare Laboratory Payment Policy: Now and in the Future ing policy and making decisions about fees and clearer communications for presenting them. Changes are also needed in administrative procedures, particularly for the incorporation of new tests, to streamline procedures and make them more efficient. The committee was concerned with the lack of data on which to base a judgment of whether HCFA’s fees for individual services were set at an appropriate level and the lack of data on the frequency of inappropriate use. The committee believes that the shortcomings discussed in this chapter can and should be addressed. Time tends to exacerbate such problems because laboratory practice and the larger health care system continue to change, thus putting further stress on an already cumbersome and inefficient system. By taking action promptly, HCFA and the Congress can revise the payment system to better accommodate the technological advances expected in the decades ahead. In the next chapter the committee discusses alternatives for change. In Chapter 7 the committee presents its recommendations for changes in payment methodology. REFERENCES Axt-Adam, P., J.C.van der Wouden, and E.van der Does. 1993. Influencing behavior of physicians ordering laboratory tests: A literature study. Med Care 31, No. 9:784– 794. Dyckman, Z., and B.B.Cassidy. 2000. Recent developments and trends in the clinical laboratory industry (unpublished). Columbia, MD: CHPS Consulting. Executive Office of the President of the United States. 2000. Proposed Budget of the United States Government, Fiscal Year 2001. Washington, DC: U.S. Government Printing Office. General Accounting Office (GAO). 2000. Medicare Payments: Use of Revised “Inherent Reasonableness” Process Generally Appropriate. HEHS-00–79. Washington, DC: GAO. Health Care Financing Administration (HCFA). 1998. 1998 Data Compendium, 030407. Baltimore, MD.: U.S. Government Printing Office. Hindmarsh, J.T., and A.W.Lyon. 1996. Strategies to promote rational clinical chemistry test utilization [see comments]. Clin Biochem 29, No. 4:291–299. Comment in Clin Biochem 1997; 30, No. 4: 361, 363. Medicare Payment Advisory Commission (MedPAC). March 1999. Report to the Congress: Medicare Payment Policy. Washington, DC: MedPAC. Office of the Inspector General (OIG). June 1995. OEI-05–94–00130. CLIA’s Impact on the Availability of Laboratory Services. Washington, DC: OIG. van Walraven, C., and C.D.Naylor. 1998. Do we know what inappropriate laboratory utilization is? A systematic review of laboratory clinical audits [see comments]. JAMA 280, No. 6:550–558. Comment in JAMA 1998; 280, No. 6:565–566.