7
Recommendations

INTRODUCTION

After analyzing the current payment method and alternative policies, the committee reached consensus on 12 recommendations for improving the Medicare system for outpatient clinical laboratory services (see Box 7.1 for a summary of the recommendations). The committee’s choices were guided by its previously stated goals for an optimal payment system. The committee considered 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 system 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, however, reflect a conclusion about 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.



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Medicare Laboratory Payment Policy: Now and in the Future 7 Recommendations INTRODUCTION After analyzing the current payment method and alternative policies, the committee reached consensus on 12 recommendations for improving the Medicare system for outpatient clinical laboratory services (see Box 7.1 for a summary of the recommendations). The committee’s choices were guided by its previously stated goals for an optimal payment system. The committee considered 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 system 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, however, reflect a conclusion about 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.

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Medicare Laboratory Payment Policy: Now and in the Future BOX 7.1 Recommendations 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 the Health Care Financing Administration (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. Recommendation 2: On an interim basis, relative payments for Medicare outpatient clinical laboratory services should be based on the current National Limitation Amounts (NLAs). 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. 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. Recommendation 5: Processes should be put in place to refine and periodically update the fee schedule for Medicare outpatient clinical laboratory services. 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. 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. 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. 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.

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Medicare Laboratory Payment Policy: Now and in the Future 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. 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. Recommendation 12: HCFA should collect the data needed to effectively manage the performance of the Medicare outpatient clinical laboratory payment system. RECOMMENDATION 1: Medicare payments for outpatient clinical laboratory services should be based on a single, rational, national fee schedule. The committee concluded that there is already, in effect, a national fee schedule, since a very significant share of services are actually paid at the national cap (Appendix B). Continuing to maintain 56 regional fee schedules that pay essentially national fees makes payment policy unclear to stakeholders and perpetuates an unnecessary burden of administering the system. Current Medicare payment policies for ambulatory laboratory services are unnecessarily complicated. Although the committee found no sound evidence that these policies currently pose a threat to beneficiary access,1 they have become increasingly cumbersome both to the clinical laboratories that provide services to Medicare beneficiaries and to the Health Care Financing Administration (HCFA) and its contractors. A national fee schedule allows the establishment of a single set of payments for all outpatient clinical laboratory services, adjustments for differences in local labor costs and prices for goods and services the laboratory purchases, and if appropriate, other relevant factors. Ideally, a payment for a test or service should reflect some notion of the relative value of resources required to produce it. That is, if Test A for one condition generally costs laboratories twice as much to produce as does Test B for another condition, the payment for Test A should be twice as much as that for Test B. This concept of resource-based relative values is important for a national fee schedule, since Medicare’s payments should not create financial incentives to provide certain services or withhold others. The current 1   See discussion in Chapter 5.

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Medicare Laboratory Payment Policy: Now and in the Future system of capped regional payments is not based on relative resource requirements, which could distort the price signals to providers, both across geographic areas and from test to test within each jurisdiction. The current system could ultimately compromise the appropriateness of care available to beneficiaries. The long-term goal for the single national outpatient clinical laboratory fee schedule is to establish payment amounts that accurately reflect the relative costs of services, minimizing the financial incentives to overuse or underuse services. Once a single national fee schedule is established, there ought to be regional adjustments to it. This is generally necessary in national payment systems because there are regional differences in input prices such as labor and supplies that could affect the cost of delivering laboratory services. The committee considers this long-term goal of a resource-based national fee schedule important both for promoting clinically appropriate use of laboratory services and for ensuring that beneficiaries can have access to services. The key building blocks of such a fee schedule include (1) a relative value scale (RVS); (2) a dollar conversion factor that translates these relative values into payment amounts; (3) any adjustments for laboratory, beneficiary, or other characteristics such as geographic location; and (4) periodic updates. The small amount of laboratory payments as a share of Medicare payments to all providers and suppliers, 1.6 percent, has made the committee question the wisdom of undergoing an expensive, extended study before moving toward a new national schedule. For the same reason, and because the current system does seem to provide the access beneficiaries need, the committee rejected the option of moving to any payment system that is radically different from the current fee schedule and could entail a complex, time-consuming transition and major dislocations. As a result, the committee makes specific additional recommendations about how to move quickly to a national fee schedule and then develop a process for refining and improving it that balances potential improvements against additional development costs. RECOMMENDATION 2: On an interim basis, relative payments for Medicare outpatient clinical laboratory services should be based on the current National Limitation Amounts (NLAs). The NLAs are an appropriate starting point for creating a national fee schedule, but HCFA should move quickly to refine them. There is no obvious relationship between the NLAs and relative costs; however, the committee concluded that there are several reasons to use NLAs as a first step toward developing a national, rational fee schedule. First, moving to a national fee schedule based on the NLAs simply formalizes what has already become de facto Medicare outpatient laboratory payments. Second, using the NLAs as a starting point for a new national fee schedule should minimize dislocations for laboratories, beneficiaries, and contractors. The NLAs are already essentially a national fee schedule, so official adoption of NLAs in this capacity should cause minimal disruptions for stakeholders. This is important to the committee primarily be-

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Medicare Laboratory Payment Policy: Now and in the Future cause of the apparent lack of beneficiary access problems under the current payment system. Finally, the very limited evidence available suggests that current Medicare payment rates are generally within the range of those of other payers, in terms of both relative values and dollar amounts (Appendix C). Regardless of whether this occurs because other payers follow Medicare’s lead in pricing or for some other reason, it suggests that Medicare’s rates have some degree of face validity within the industry. It appears that Medicare payments generally are within the range of market prices at which laboratories are willing to sell their services. The committee had no basis, beyond the discussions in Chapter 5 and above, to determine whether Medicare should increase, decrease, or maintain the current level of aggregate spending on outpatient clinical laboratory services. In any case, it makes sense to move to a single, national fee schedule, starting with the NLAs. Under current law, there will be no Medicare outpatient clinical laboratory fee increase or decrease through 2002. If the Congress and HCFA were to maintain this requirement while implementing the new fee schedule (i.e., projected aggregate outpatient clinical laboratory spending under Medicare remains the same), then it is an inescapable conclusion that current NLA levels would have to be slightly reduced across the board to permit the carrier fees currently below the NLAs to rise. A preliminary analysis conducted for the committee suggests that a reduction of the NLAs as little as 1 or 2 percentage points may be sufficient to maintain the current level of aggregate spending (Appendix B). More detailed, accurate analyses of this issue would have to be conducted before the exact amount of the change could be determined. If those studies suggest that a markedly larger reduction in the NLAs would be needed if the Congress were to call for maintaining budget neutrality, the committee suggests that the new fee schedule be phased in over two or more years, to minimize disruptions experienced by beneficiaries and clinical laboratories. 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. HCFA should examine the costs, potential value, strengths, and weaknesses of other approaches and alternative methods for gathering data on costs and developing relative values before refining or replacing the NLA-based fee schedule. Several interdisciplinary groups could, through an interactive process, either review and refine the NLA-based fee schedule or develop a completely new set of relative values. The process could be used for changing selected fees that are noticeably out of line with respect to resource use or could focus attention on

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Medicare Laboratory Payment Policy: Now and in the Future those tests that contribute most to Medicare spending. Alternatively, the process could be used for a comprehensive analysis of every test or groups of similar tests. Such an analytical approach was used to refine physician work values and establish practice expense values for the physician fee schedule. This approach would be built around the participation of laboratorians, as well as other stakeholders. Such a process could use data from many sources in a systematic and rigorous way. A consensus approach could lend legitimacy and credibility to the newly developed values if it is designed in a manner acceptable to stakeholders. Unless care is taken in its design, however, it is vulnerable to criticisms about the process for identifying participants, the method for combining information from different sources, and the possible impropriety of using subjective, qualitative methods to measure what some think should be readily quantifiable. If the focus of the refinement effort is the actual fees rather than their relative values, this method would have to include budget constraints or it could be inflationary. In fact, the parameters for setting the initial conversion factor, which would define the level of payment for the relative value scale, would likely be specified by the Congress. The committee considered a number of approaches for establishing resource-based relative payment rates.2 Each approach has some advantages and disadvantages; specific risks, potential disruptions, and different consequences depending on how it is designed. These approaches are not mutually exclusive and could be combined in various ways to facilitate the refinement of the NLAs or the creation of a new national fee schedule. Elements of different basic approaches could be combined to maximize the advantages and minimize the disadvantages, including costs. For example, some limited, detailed cost studies could provide a basis for rigorous analysis by consensus groups. Four approaches merit further consideration: Micro-costing studies: HCFA would collect objective cost data related to specific services from laboratories, manufacturers, and other appropriate sources. The research could entail detailed cost-accounting studies to identify costs associated with each laboratory service, or it could consist of smaller studies targeted at selected tests. The costs would include that of technicians, pathologists, clinical experts and other labor, equipment, and supplies, transportation, and administrative functions, such as regulatory compliance associated with the production of laboratory tests. Likewise, this approach could range from the use of a random, stratified sample of all laboratories to the use of smaller samples of average or efficient laboratories from which to gather cost data. In any case, high-quality data would require careful study design, clearly defined methods for collecting consistent cost data, and mandatory participation. A well-done study of this type could result in accurate, detailed cost data, but it would be relatively expensive. 2   See Chapter 6.

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Medicare Laboratory Payment Policy: Now and in the Future Competitive bidding demonstration: A competitive bidding demonstration could provide a basis for national relative values. It should be designed primarily to elicit accurate information about market pricing rather than to purchase services. Submitted bids should reveal the cost of production and, therefore, could be used as the basis for establishing relative values. However, the use of bids made under the assumption that the laboratory would receive increased volume from Medicare could be misleading if they were taken as indicative of resource-based prices when setting fees that would apply to all laboratories. HCFA is developing experience with competitive bidding in other service areas and is planning a regional demonstration for outpatient clinical laboratory fees. If this takes place, the data derived from it would be useful to the consensus process. Data obtained from regional demonstrations would have to be adjusted for national application since the committee does not support bidding on a national level. 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 relative values. Again, data would be regional rather than national. Some Medicare carriers have institutional experience with negotiating for their private plans, but it is unclear how much of this expertise could be shared with their Medicare staff. Similarly, some laboratories have experience negotiating with payers, but it is unclear how common this is, particularly among smaller laboratories. Charges: The charges employed by laboratories on each Medicare claim could contribute to the development of relative values. This option is simple since it is based on available data. It is not clear, however, how closely current charges reflect costs since the committee has found no published studies of laboratory costs and charges. If an alternative approach were used to collect cost data or determine relative resource use, it would be helpful to compare these data to charges from claims, because, if charges were shown to be consistently related, claims could prove an easy and inexpensive data source for future revisions. The committee recommends that HCFA examine the costs, potential value, strengths, and weaknesses of these approaches and other methods for developing resource-based relative values before refining or replacing the NLA-based fee schedule. Researchers, industry leaders, policy experts, and others should be included in the agency’s efforts to compare these alternatives and assess their appropriateness for contributing useful data that could be used in the development of relative values for clinical laboratory services. 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.

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Medicare Laboratory Payment Policy: Now and in the Future Some costs, primarily labor and specimen transportation costs, may vary widely across the nation and between urban and rural areas. Current differences in the 56 carrier fee schedules may reflect, at least to some degree, such variation, although they are not for the most part passed along through Medicare payments because of the widespread use of NLAs.3 It would be appropriate to have some systematic geographic adjuster for these costs. HCFA has had extensive experience with this issue since geographic adjusters have been incorporated into virtually all of Medicare’s prospective payment systems, including its capitation payments. Generally, the committee does not support adjustments based on broad categories of laboratories, such as physician office, hospital-based, or independent laboratories, unless there is evidence of significant cost differences and problems affecting beneficiary access. The committee has discussed a number of provider, test, and beneficiary characteristics that may be associated with cost differences and should be reflected in Medicare payments. It is most concerned with situations in which lack of adjustment to national fees is likely to affect beneficiaries’ ability to obtain needed services. The committee recommends that HCFA also study cost differences associated with the following: Qualified laboratories in sole community hospitals:4 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. It should determine whether these hospital-based laboratories generally are likely to benefit from a national fee schedule or whether some additional percentage payment during transition or over a longer term is needed to maintain access for the beneficiaries traditionally served by these providers. STAT tests: The committee recognizes that tests that must be conducted immediately for urgent or emergency care may present additional costs that may have to be recognized by Medicare payments. The committee was unable to find any data to document whether these tests are, in fact, markedly more costly, so it recommends that HCFA study this issue further. If there is a need to recognize STAT tests in Medicare payments, care should be taken with the way in which STAT circumstances are defined and monitored in order to minimize inappropriate use of the STAT designation. 3   Fees that are below the NLAs are an artifact of charge data from the early 1980s and may, in fact, be lower because costs were lower in those regions. Regions that have unusually high costs are not accommodated in the current payment system because the NLAs put an upper limit on the payment rate. 4   A sole community hospital is located 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. A qualified laboratory in a sole community hospital is one that provides some clinical diagnostic tests 24 hours a day, seven days a week, in order to serve the hospital’s emergency room, which is available around the clock.

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Medicare Laboratory Payment Policy: Now and in the Future 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 national fee schedule must respond to economic and scientific changes that affect the cost of providing services. A new national fee schedule for laboratory services would require periodic review and refinement, regardless of the method used initially to establish resource-based relative values. Explicit processes that include opportunities for public input, review, and challenge should be established. Procedures may vary for different elements or building blocks of the fee schedule. For example, an annual process should be established for updating the conversion factor so that it is appropriate relative to inflation, changes in the size and composition of the beneficiary population, changes in laboratory technology, or other appropriate factors. Similarly, an approach should also be articulated for reviewing and updating any adjustments, such as geographic differences in input prices, on a regular basis. Finally, a clear process should be developed for the review of relative values every few years. This periodic review would provide an opportunity to recalibrate the fee schedule to reflect important changes in laboratory operations and technology and to refine values of new technologies. The processes for incorporating new test methodologies and technologies are discussed in Recommendation 6. • 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. Initially, a conversion factor would have to be established to translate the laboratory relative values into dollar amounts. After the first year, the conversion factor should be updated annually. 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. Since laboratory service volume growth is already included in the sustainable growth rate (SGR) process used to calculate updates to physician payment rates, reflecting the role physicians play in ordering the tests performed by laboratories, it should not play a role in updating laboratory payments.5 • Payment adjustments: Review and revision of geographic and other payment adjustments should include analyses of their effect on beneficiary access to laboratory services. To the extent that adjusters for local price variation or STAT services may be important for maintaining access to services, under- 5   See Chapter 5.

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Medicare Laboratory Payment Policy: Now and in the Future standing their effectiveness requires some information about access. For any adjusters ultimately included, a process for reviewing and revising them as necessary should be developed. • Relative values: Periodic review of the relative values, however they were originally established, is essential for maintaining the integrity of the recommended payment approach. The relative costs of existing services change over time as new methods and equipment become available and other workplace and scientific innovations affect the way in which services are performed. As a result, periodic review of all services, not just new ones, is necessary to correct values where such changes have occurred. The review process for relative values should be defined to make explicit potential trade-offs within constrained resources. In fact, the changes in relative values for particular tests should be made under an assumption of budget neutrality since the update factor would be applied annually to all tests equally. These various processes are essential to the continued appropriateness of the Medicare laboratory payment system over time. Without them, the key elements of the payment methodology may become inconsistent with the original design intent. 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 has concluded that a consistent, public process for developing interim values for new laboratory services is essential for an effective payment system. Such a process could improve current methods used to establish payment rates for new services and address many of the concerns stakeholders have about current policy. Data to support this process could be gathered from various sources including the HCFA contractors, private payers, laboratories, and manufacturers. Central to this process, HCFA should create a committee of laboratorians, pathologists, other physicians and scientific experts, health services policymakers, and economists to advise on the setting of interim relative values or national fees for new technologies. There should be an open process for determining which technologies are truly innovative and sufficiently different from existing ones to merit a detailed cost analysis and new fee, and which new tests and methods are incremental improvements and could be paid at the same rate as an existing test. The manufacturer and others should be allowed to present data to the committee showing quantifiable improvements in treatment outcomes and other advantages of the new test that might justify a higher payment rate than that of existing, similar tests. After establishing interim values or fees for new services, Medicare should allow a certain time for diffusion of the new technol-

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Medicare Laboratory Payment Policy: Now and in the Future ogy and stabilization of costs. Before the end of the interim period, the interim fees for these new services should be reviewed and revised as necessary. Once they are “official,” these services would be included in the normal periodic review process of relative values for the full fee schedule. Beyond this, policies should be developed that allow for more timely assignment of codes in the HCFA Common Procedural Coding System (HCPCS). The use of local, temporary, price-appropriate codes set by carriers during the period before a national interim fee could possibly facilitate the introduction of new tests. HCFA should establish clear guidance for its carriers on how to establish payments prior to setting interim prices nationally. The process for incorporating new technology should include public input. 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 Current Procedural Terminology (CPT) coding process6 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 committee is concerned that this problem will be exacerbated in the future, as new technologies for laboratory tests grow at an increasing rate and as the “useful life” of a new technology is shortened by the rapid introduction of newer and improved technologies. HCFA should examine how to reduce coding delays within the current system and examine alternative coding systems distinct from CPT. 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. Originally there was a copayment for Medicare laboratory services, as there was for most other Medicare services. It was eliminated in 1984, with the under- 6   The physicians’ coding system, called the Current Procedural Terminology, Fourth Edition (CPT-4), is maintained by the American Medical Association.

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Medicare Laboratory Payment Policy: Now and in the Future standing that the fees established would represent payment in full. The laboratory industry accepted that fees would be somewhat reduced in exchange for not having the administrative costs of billing the beneficiary for generally small copayments. The committee recognizes the importance of deductibles and copayments in the Medicare program as tools for reducing program expenditures and encouraging the selection of necessary and cost-effective services. Conceptually, cost sharing is expected to reduce overuse of health services by making patients more aware of service costs. For laboratory services, however, the patient does not initiate this use, 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. The medical literature is replete with examples of overuse of laboratory tests in the inpatient hospital setting (Axt-Adam et al., 1993; Hindmarsh and Lyon, 1996; van Walraven and Naylor, 1998). Similar studies on outpatient testing were not found. However, because laboratory tests are requested by a physician (or other health care provider) to aid with the diagnosis or monitoring of a beneficiary’s medical condition, the volume of laboratory tests appears to be more sensitive to the number of physician-patient contacts than to the number of tests used per patient contact (Danzon et al., 1984). This is because the physician orders laboratory tests. There is little empirical evidence about the effect of cost sharing in cases where demand is not initiated by the patient, and theory suggests that its effect on demand would be quite modest. In addition, nearly 90 percent of Medicare beneficiaries have some form of supplemental insurance that covers costs not covered by Medicare. As a result, beneficiaries do not actually pay their cost-sharing requirements directly, so they may not become more price sensitive when a new cost is instituted. The modest savings expected to accrue from behavioral changes from the copayment provision in the administration’s FY 2001 budget suggest that HCFA actuaries also assume little effect on service use. The committee is concerned not only that cost sharing will not help reduce any overuse of services, but also that it could create barriers to appropriate use for some beneficiaries. Previous studies suggest that cost sharing may decrease access to appropriate services and disproportionately burden the poor and chronically ill (Lurie et al., 1989; Shapiro et al., 1986; Solanki and Schauffler, 1999; Solanki et al., 2000; Stuart and Zacker, 1999). It is difficult to know how these findings generalize to the Medicare beneficiary population; nonetheless, the committee is concerned that the 10 percent without supplemental insurance could be in a financially vulnerable situation that might lead them to forgo needed tests. An additional concern is that cost sharing is unlikely to lead to significant reductions in fraud and abuse. It seems unlikely that beneficiaries will become an important check on the system, since they typically are unaware of the exact type of test ordered or of the laboratory to which their specimen was sent. As a result, they may not be in a position to interpret their Explanation of Medicare Benefits with enough understanding to detect fraud. Historically, inside “whis-

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Medicare Laboratory Payment Policy: Now and in the Future tle-blowers” have been the main sources for detecting fraud and abuse in laboratory services, not Medicare contractors and beneficiaries. The committee’s practical concern has to do with administering a set of deductibles or copayments. Given the relatively low per-service payment amount for common laboratory procedures, a 20 percent copayment would typically be less than about $2.30. In many cases, the cost to the laboratory of billing and collecting the copayment and the associated bad debt would exceed the expected payment amount, particularly since the laboratory otherwise has no direct contact with the beneficiary. Although it may be a reasonable business decision to forgo the copayment in many cases, laboratories would risk charges of billing fraud if they failed to make an effort to collect these payments.7 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, there has been less financial incentive for physicians to order unnecessary tests.8 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.9 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), potentially are a considerable improvement over the many conflict- 7   See Chapter 6 for further discussion. 8   The Ethics in Patient Referral Act, enacted in 1989, is named after the legislation’s sponsor, Representative F.Pete Stark, and restricts physicians from referring their patients to laboratories in which they or their family members have a financial interest. 9   The ICD-9 code 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 ing local medical review policies 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 denied claims and medically unnecessary testing from its claims processing data. 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: 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). The committee recognizes that this recommendation will make it difficult to know when a patient Advanced Beneficiary Notice (ABN) is necessary. HCFA will have to consider alternative ways of determining whether the patient should be responsible for the bill. 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 to many current processes and inadequate communication of policy decisions. Some of the previous recommendations made by the committee address selected aspects of current policymaking that need improvement. For example, the recommendation to develop processes for incorporating new technologies into the fee schedule is due in part to concerns about the current practices of cross-

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Medicare Laboratory Payment Policy: Now and in the Future walking and gap-filling values for new tests, both methods currently used for establishing a payment amount for new technology.10 There are other areas, however, in which the committee is making no specific recommendation, but where current policies are not clearly explained in easily obtainable written format. For example, clear statements of local medical review policies (LMRPs) of carriers are not always widely available to stakeholders. Recent efforts to move these policies to the Web represent an improvement, but it is sometimes difficult to find policies relevant to a particular service in a particular carrier’s service area. Similarly, it is unclear to providers whether and under what conditions laboratories are allowed to bill referring physicians for services provided to Medicare beneficiaries that have been denied Medicare payment. In the course of its fact-finding activities, the committee uncovered potentially useful information that was not widely known by affected stakeholders. For example, representatives of the laboratory industry and many physicians are unaware of the fact that laboratory service volumes are included in the SGR system used to update physician payments under the Medicare physician fee schedule. If laboratory service volume grows more than expected, then physician payment rates will grow more slowly. The fact that key stakeholders were unaware of the inclusion of laboratory services in this SGR system suggests that the potential incentives of the system have been muted. These examples suggest the need for HCFA and its contractors to communicate more effectively with stakeholders about both national and local policies. The committee recommends that HCFA develop a method for accomplishing this to ensure that laboratories, referring physicians, and beneficiaries have easier access to information about the laws, policies, and procedures that affect their ability to provide and receive clinical laboratory services and receive payment for them. 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 standardization of program operations is an important aspect of the goal of administrative simplicity and efficiency. Thus, it supports the 1997 Balanced Budget Act section that mandates consolidation of the processing of clinical laboratory claims into four or five regional carriers and 10   See Chapters 4 and 5.

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Medicare Laboratory Payment Policy: Now and in the Future designation of one of the carriers to serve as the central statistical resource, and it encourages HCFA to implement this. The consolidation should create a more efficient and fair administrative process for Medicare laboratory payments. The committee found that HCFA’s current administrative process of working through 56 carrier regions, with approximately 23 distinct carriers and 30 fiscal intermediaries (FIs), 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. These inconsistencies can cause particular problems for laboratories that perform tests on specimens drawn from beneficiaries in many different states since the laboratories may have to deal with differing policies and procedures for each claim. The large number of carriers and FIs contributes to a reduced ability to detect broad patterns of fraud, waste, and abuse that extend beyond state boundaries. In addition, with the recommended move to a national fee schedule, the rationale for maintaining a carrier role for the development of local gap-fill fees is eliminated. Because the rate of diffusion of new tests and technologies varies by locale, the regional laboratory carriers (RLCs) would carry on the role of deciding coverage and pricing for new technologies until diffusion is sufficient nationally to support HCFA headquarters making national coverage determinations and prices for them. The committee recognizes that many design questions must be resolved in planning for this consolidation of laboratory claims-processing functions and considers that it would not be worth the substantial expense of consolidation unless all outpatient laboratory claims were processed through RLCs. To avoid inconvenience to POLs and to hospitals billing for their outpatient laboratories, however, it is important to design a mechanism by which they can continue to submit bills to their carriers and FIs, respectively, which could then forward the laboratory portion of the claim to the RLCs. Recognizing that this route for providers of following familiar administrative procedures would likely add time to the payment process, HCFA could also offer POLs and hospital-based laboratories the alternative of submitting laboratory claims directly to the RLCs. Compensating data analysis efforts might also be necessary to permit the examination of all claims associated with an episode of care. Given the scope of this mandated change and the number of design issues yet to be decided, the committee cautions HCFA to monitor 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. The committee found no data that indicated directly whether or not current payment policy has resulted in beneficiary access problems. Whenever payment policy is changed,

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Medicare Laboratory Payment Policy: Now and in the Future however, policymakers have to monitor for intended and unintended consequences. For example, if Medicare moves to resource-based payments, some segments of the laboratory industry or geographic areas could be more strongly affected than others. Over time, this could change the availability of laboratory services for Medicare beneficiaries. To learn more about these potential access problems and to evaluate the impact of future payment policy changes, the committee recommends that HCFA use existing data sources, such as Clinical Laboratory Improvement Amendments (CLIA) certification, claims data, and the Current Beneficiary Survey, in addition to developing supplemental survey sources to gather direct information concerning harm to patients due to lack of access. 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 they 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 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 of basic processes within contractors to assess their relative efficiency. 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

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Medicare Laboratory Payment Policy: Now and in the Future threaten beneficiary access to care and the use of enhanced testing methods 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 would likely improve the efficiency of the system and ensure that Medicare beneficiaries continue to have access to high-quality laboratory services. 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. Danzon, P.M., W.G.Manning, Jr., and M.S.Marquis. 1984. Factors affecting laboratory test use and prices. Health Care Financ Rev 5, No. 4:23–32. 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. Lurie, N., C.J.Kamberg, R.H.Brook, E.B.Keeler, and J.P.Newhouse. 1989. How free care improved vision in the health insurance experiment [published erratum appears in Am J Public Health 1989; 79, No. 12:1677]. Am J Public Health 79, No. 5:640– 642. Shapiro, M.F., J.E.Ware, Jr., and C.D.Sherbourne. 1986. Effects of cost sharing on seeking care for serious and minor symptoms: Results of a randomized controlled trial. Ann Intern Med 104, No. 2:246–251. Solanki, G., and H.H.Schauffler. 1999. Cost-sharing and the utilization of clinical preventive services. Am J Prev Med 17, No. 2:127–133. Solanki, G., H.H.Schauffler, and L.S.Miller. 2000. The direct and indirect effects of cost-sharing on the use of preventive services. Health Serv Res 34, No. 6:1331– 1350. Stuart, B., and C.Zacker. 1999. Who bears the burden of Medicaid drug copayment policies? Health Aff (Millwood) 18, No. 2:201–212. 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, (6):565–566.

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