strengths and weaknesses of these options. The third section discusses other key design issues, such as updating the payment schedule, payment adjustments, and cost sharing by beneficiaries. Finally, the chapter concludes with a discussion of implementation considerations, including the legislative and administrative steps necessary for implementation and the paperwork and financial costs of introducing and using the various options.

The current payment system and its various elements were among the options considered by the committee. Since elements of the current payment methodology are discussed extensively in Chapter 4, they are mentioned only briefly in this chapter. Also, the committee’s assessment of the current system, discussed in Chapter 5, is not repeated here, but it did influence the discussion of the advantages and disadvantages of the various alternatives.


Type of Payment

The committee recognizes the general advantages of prospective payment and did not examine in depth any retrospective payment methods for clinical laboratory services.


Payment amounts can be determined on a retrospective or prospective basis.3 Retrospective payment means that the amount paid is determined by (or based on) what the provider charged or said it cost to provide the service after tests or services had been rendered to beneficiaries. Here providers have no incentive to hold down their charges or costs, and the payer has few mechanisms for controlling expenditures (Sing et al, 1998). In a prospective payment system (PPS), prices are set in advance and are known (or knowable) by all parties before care is provided.


Prior to 1984, Medicare paid clinical laboratories on a complicated retrospective system, similar to that used to pay physicians. The reasonableness of the charges was judged based on customary, prevailing, and reasonable criteria. Since the mid-1980s Medicare, as well as virtually all private payers, has moved to using prospective payment systems. The Health Care Financing Administration (HCFA) has paid for inpatient hospital services on a prospective basis since 1983. It recently implemented a prospective payment system for outpatient hospital care and is currently designing a PPS for the remaining specialized hospi-


Regardless of how the payment amount is determined, payment is made after the test or service is provided or the capitated period has elapsed and a claim filed.

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