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Medicare Laboratory Payment Policy: Now and in the Future 1 Introduction ORIGINS OF THIS STUDY Clinical laboratory services represent a small proportion of total expenditures for medical services. In Medicare, payments for outpatient clinical laboratory tests account for only 1.6 percent of program spending (Gustafson, 2000). At the same time, clinical laboratory tests are an essential component of modern health care and drive other costly diagnostic and therapeutic decisions. As a result of continuing scientific advances, laboratory tests are likely to play an even greater role in the detection, treatment, and monitoring of disease in the twenty-first century. The incentive of manufacturers to develop new laboratory technologies,1 and the ability of Medicare beneficiaries to have access to them, are affected by Medicare’s payment policy. Medicare’s current system of payment for laboratory services in outpatient settings was designed in the early 1980s. Although specific payment rates have changed over the past 20 years, the basic payment methodology has remained unchanged since the early 1980s. The introduction of new technologies and changes in regulations and the laboratory marketplace have had a significant impact on the structure of the laboratory industry during the past 20 years.2 In the face of these changes, current Medicare payment policy for outpatient clinical laboratory services seems not only outdated, but also irrational. Unless it is changed, the current payment system could eventually inhibit 1 New technology may mean completely new testing techniques; however, it also refers to incremental improvements in testing equipment and reagents. 2 For the purpose of this report, the clinical laboratory industry refers to laboratories that process and produce laboratory results. When manufacturers of laboratory tests, equipment, and chemicals are included, this will be specified.
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Medicare Laboratory Payment Policy: Now and in the Future innovation and reduce beneficiary access to care (Lewin Group, 2000). Inadequate payment rates could slow the industry’s ability to develop and disseminate new technology and laboratories’ willingness to adopt valuable but more expensive technologies. The committee did not find a lack of interest in or adoption of innovation, however. Medicare payment policy influences the laboratory industry’s financial health. Medicare payments for outpatient clinical laboratory services represent about 10 percent of the business of clinical laboratories.3 In part because of repeated cuts in Medicare’s payment rates for laboratory tests, the actual amount in real dollars that Medicare spends on outpatient clinical laboratory services has declined.4 In addition, limited evidence5 suggests that Medicare payment policy for outpatient clinical laboratory services influences payment policy for some private payers, and Medicare limits are a cap on state Medicaid laboratory payment rates. Recognizing that Medicare’s payment system for clinical laboratory services may have to be modernized, Congress mandated that the Secretary of the Department of Health and Human Services (DHHS) arrange for the Institute of Medicine (IOM) of the National Academies to review the current Medicare payment methodology for outpatient clinical laboratory services and make recommendations to improve the system (Balanced Budget Act of 1997 [BBA], Public Law 105–33). The IOM was selected because it has a unique advisory process in which independent, volunteer experts analyze issues and make policy recommendations. STATEMENT OF TASK The Health Care Financing Administration (HCFA), the division of DHHS that administers the Medicare program, interpreted the mandate of Congress and contracted with the IOM to conduct a study to undertake the following: Describe the clinical laboratory industry and, where applicable, document significant differences between the situation of this industry today and in the early 1980s, when the current design of Medicare’s clinical laboratory payment 3 According to Health Care Financing Administration testimony before the committee and the Office of the Actuary, $3.6 billion was spent on Medicare outpatient clinical laboratory services in 1998. Estimates are that clinical laboratory services are a $35 billion a year industry. See Chapter 2 for more details. 4 These payment cuts are described in Chapter 4 and were initiated, in part, in response to General Accounting Office (GAO) and Office of the Inspector General (OIG) reports that Medicare was paying too much for laboratory services. See GAO, 1987, 1991. See also OIG reports that found laboratories were inappropriately unbundling test panels and billing Medicare more than physician clients (OIG, 1990, 1996). 5 CHPS Consulting’s (Center for Health Policy Studies) survey of private payers found that six out of nine private health plans base their laboratory payment rates on the Medicare laboratory fee schedule.
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Medicare Laboratory Payment Policy: Now and in the Future methodology was introduced. Factors such as the following should be addressed: the nature and volume of tests performed, sites of testing, the role of automated equipment, reimbursement by public and private payers, access by beneficiaries to services, and quality of testing. Document recent trends in laboratory technology and discuss expectations for future trends. Discuss the realized and possible future impacts of these trends on costs, access, and quality of clinical laboratory tests and services. Assess the strengths and weaknesses of the current Medicare payment methodology for outpatient laboratory tests. This assessment should include consideration of the role and effectiveness of this methodology in helping to ensure beneficiary access to needed services of high quality, containing costs, and responding to technological changes (both in facilitating access to improved services and in securing the advantages of cost-saving changes in methods of testing). Investigate and, if possible, secure and analyze information about costs of performing laboratory tests and about payments made by payers other than Medicare. If possible, present information to help evaluate the effects of laboratory size, specialty, site of service, and geographic location. Tests of particular interest include Pap smears, prostate cancer assays, HIV viral load testing, cancer markers, complete blood counts, and molecular diagnostic testing. Describe and assess alternative Medicare payment methodologies. For each option, (1) describe and provide an example of the method; (2) describe in general terms the legislative changes and administrative steps that would be necessary to implement the method; (3) consider the paperwork and financial costs of introducing and using the method for Medicare, the laboratory industry, and physicians and others prescribing tests; and (4) analyze the advantages and disadvantages of the method in comparison to others. THE IOM STUDY PROCESS To meet this charge, the IOM put together a 12-member panel of experts composed of laboratorians, physicians, economists, and health care policy and management experts. The committee met five times between January and August 2000 to gather information, deliberate its findings, and formulate recommendations. Background information on the laboratory industry and payment policy was gathered through the use of contractors, literature reviews, testimony, and interviews with key stakeholders and government officials. The committee found limited data upon which to base its recommendations. For instance, there was limited information on the financial status of different segments of the clinical laboratory industry. Analyses of market share by site of service for Medicare Part B services reported in different publications all cited HCFA data, but reported conflicting findings (Klipp, 2000; Steiner and Root, 1999). There was also very limited information on the cost of performing spe-
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Medicare Laboratory Payment Policy: Now and in the Future cific tests and how current Medicare payment amounts compare to test costs and to payments by other purchasers. To fill this gap, the IOM contracted with CHPS Consulting (Center for Health Policy Studies) of Columbia, Maryland, to conduct a survey of selected health plans to determine their payment rates for 21 laboratory tests plus venipuncture (Appendix C).6 CHPS Consulting also conducted a limited number of site visits to a variety of laboratory providers to determine their costs of providing a subset of these same laboratory tests. The committee had hoped to get a “snapshot” of costs and payments for these laboratory services from selected sites; however, CHPS Consulting was unable to collect cost data.7 The committee also tried to obtain information and input from all relevant stakeholders. All of the information-gathering meetings, as well as presentations made by contractors, were open to the public; attendees were given the opportunity to address the committee at the conclusion of each public meeting; and the committee sought written testimony. Deliberations about recommendations and the report itself were conducted in private, as required by the National Academies’ procedures. The closed deliberation process enables committee members to discuss issues independently, without external pressures. IOM senior staff and a panel of external expert reviewers evaluated the report to ensure that the committee met its charge and based its findings and recommendations on sufficient evidence. During the committee’s fact finding, stakeholders identified many different problems related to laboratory coverage, coding, and payment policy that they wanted the committee to address. As the remainder of this report shows, policies in these areas are complex and interrelated. At the same time, however, the committee’s charge was narrowly defined. Neither the scope nor the time frame of the contract permitted the committee to go into problems of coverage and coding in depth, but these matters were examined where they touch on payment concerns. The committee believes that many of the problems and issues raised in public testimony transcend the current payment methodology. GOALS FOR A PAYMENT SYSTEM During its deliberations, the committee recognized that any payment system ought to be directed toward the achievement of certain goals. The committee agreed on the following five goals for a Medicare payment system for laboratory tests. The way these goals are balanced while crafting policy elements should 6 These tests were selected because they were suggested by the statement of task or because they are at the top of the list in terms of Medicare expenditures for laboratory services and are representative of different types of laboratory tests, such as chemistry, microbiology, and pathology. 7 The scope of the study was limited by the committee’s time frame and budget and by the federal Paperwork Reduction Act, which requires Office of Management and Budget review of federally sponsored surveys of 10 or more respondents.
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Medicare Laboratory Payment Policy: Now and in the Future lead to a payment system that includes incentives for providers and beneficiaries to act as intended—whether to control costs or to utilize needed care. The five goals represent the ideal. Tensions between different goals, however, may make it impossible for all of the goals to be achieved through payment policy alone.8 The five goals provide a framework for assessing the strengths and weaknesses of both current and alternative Medicare payment methodologies for clinical laboratory services. In Chapter 6, the options for payment policy are measured against these goals. Beneficiary access: Medicare beneficiaries should have access to appropriate services on a timely basis. In the context of clinical laboratory services, three aspects of access are pertinent: medically necessary laboratory tests9 should be available to all Medicare beneficiaries;10 overly burdensome financial barriers should not limit beneficiary access to appropriate services; and finally, turnaround time, or the length of time it takes for the physician to get laboratory test results, should not jeopardize quality of care. Flexibility: The payment methodology should have formal mechanisms to promptly recognize and determine a fair payment for new technology and to adjust fees that, over time, become unreasonable as a result of both scientific and economic changes. The health care environment is changing rapidly. Changes in medical practice, technology, the cost of providing services, and the Medicare budget all affect the provision of health care services. The payment methodology must be flexible enough to incorporate innovation by efficiently recognizing and paying for cost-effective new technology. In practice, this requires the coding system to respond to new technologies efficiently. There must also be practical data-driven mechanisms to change fees that are inappropriate and to update payment amounts in a timely fashion. To incorporate innovation and ensure that beneficiaries have access to appropriate care, payment amounts for new technology should be set quickly and then reviewed periodically to ensure that they are reasonable. Neither the payment amount nor the payment policies should adversely affect the appropriate use of new tests, testing methods, or equipment. Because significantly inappropriate fees can create perverse incentives to misuse health care resources along with barriers to beneficiary access, the payment methodology should have a 8 As an example of other goals for payment policy, see the Physician Payment Review Commission (PPRC, 1987). 9 By law, Medicare only covers services that are “medically necessary.” Medical necessity is determined by national and local Medicare coverage policy. These coverage determinations are made based on available outcomes data, local practice patterns, and the consensus of expert panels. References to medical necessity relate to this Medicare definition. Stating that a test is medically necessary does not imply there are substantial outcomes data to support its use, only that Medicare has agreed to cover the test. 10 Beneficiaries needing laboratory tests often must travel to their physician, the laboratory, or specimen collection site to have the specimen drawn. Payment policy should not exacerbate this burden on beneficiaries.
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Medicare Laboratory Payment Policy: Now and in the Future process, which is open to stakeholder participation, to challenge and change these fees. A payment system will quickly become outdated unless it incorporates a mechanism to update payment amounts periodically in response to changes in the health care environment. These updates should consider inflation, shifts in the composition of the Medicare population, changes in laboratory technology, and the Medicare budget. Transparency: The process for setting payment amounts and payment policies should be understandable and open to input from the public and providers. Increased visibility can diminish the potential for government regulatory agencies over time to become “captured” by the industries they regulate.11 Generally, if all stakeholders understand the rules of the payment system, understand the rationale behind the rules, and feel they have had an opportunity to influence rule development, they will be more likely to comply with them. It is essential that payment policy be communicated clearly to stakeholders during its formation and following its establishment. Value: The payment methodology should promote the purchase of the best-value health care services for beneficiaries. “Best value” is not necessarily “lowest price”; rather, it reflects efficient and appropriate use of laboratory services with the ultimate goal of producing a positive health outcome for the beneficiary using high-quality, appropriate, health care services. Economic incentives should not drive clinical decisionmaking, and prices should be related to the costs of providing services. Therefore, the payment methodology should encourage clinically appropriate care through the absence of financial incentives to provide a particular type of test or financial barriers that inhibit providing other tests. In addition to establishing value on a test-by-test basis, the payment methodology should promote value in aggregate spending. Thus, the system should promote quality health care generally and should minimize opportunities for waste, fraud, and abuse. Administrative simplicity and efficiency: The payment system should strive for simplicity and efficiency in its administrative operations for the provider, payer, and patient. The system should not be unduly burdensome to beneficiaries, physicians, or laboratories. It is important to eliminate any nonessential paperwork and to avoid a design that attempts to accommodate every exceptional case. To provide context for the remainder of this report, the next two sections of this chapter describe the types of clinical laboratory services covered by the Medicare Part B outpatient fee schedule and outline the basic structure of the Medicare payment system. 11 Some political and economic analysts point out the risk of a government agency, instead of representing the interests of the general public, to unduly take the interests of the firms it regulates into account. This can result in higher costs and may inhibit innovation.
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Medicare Laboratory Payment Policy: Now and in the Future CLINICAL LABORATORY SERVICES COVERED BY MEDICARE Unless otherwise stated, for the purpose of this report, clinical laboratory services refer to in vitro tests on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, and treatment of disease or impairment or the assessment of health (see Box 1.1). Clinical laboratory services include not only the technical production of tests, but also clinical and analytical advice to the ordering physician from clinical pathologists, chemists, and microbiologists, as needed. Although there are many types of clinical laboratory services, many are not covered by health insurance. Other uses of clinical laboratory services that are not covered by Medicare include screening for drugs BOX 1.1 Clinical Laboratory Services Diagnosis Clinical laboratory tests are often used to help make a diagnosis. Diagnostic tests may look for the presence of an infectious organism, such as a virus or parasite; may find pathology such as cancerous cells; or may help distinguish between different possible causes of a symptom. Examples of diagnostic tests include tests to identify streptococcus bacteria and blood tests that can identify anemia through a low red blood cell count. Screening Tests are used for screening purposes when they are performed in the absence of signs, symptoms, complaints, or personal history of disease or injury. Screening tests may provide the opportunity for early intervention that can prevent the onset or spread of disease. Screening tests can also be used as a reference point, establishing a baseline measure that can be helpful in diagnosis in the future. Tests for HIV, Pap smears, prostate-specific antigen, cholesterol level, and specific DNA markers such as BRCA1, which may indicate that the patient has an increased risk for breast cancer, can be used for either screening or diagnosis. Patient Monitoring Monitoring tests are used to track disease progression or improvement, identify side effects and complications, monitor drug levels, and assess prognosis. Examples of monitoring tests include blood glucose monitoring for diabetics, tests that measure the levels of seizure medication to ensure that the patient is not being under- or overdosed, and blood T-cell counts that give an indication of the status of HIV infection.
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Medicare Laboratory Payment Policy: Now and in the Future of abuse, conducting forensic investigation, evaluating a person’s health for life insurance, and testing as a part of clinical research and drug development. Because they are not covered by the Medicare program, these additional uses of laboratory services are not discussed in detail in this report. THE MEDICARE PROGRAM The committee was asked to analyze payment policy for a very specific portion of the Medicare program—clinical laboratory services paid for under the Part B outpatient Medicare benefit. It is important, therefore, to understand the structure of the Medicare program in order to focus on the portion of Medicare payment policy that the committee was asked to evaluate. Title XVIII of the Social Security Act (SSA) created Medicare, an entitlement program that currently provides health care coverage to 38.8 million elderly, or permanently disabled individuals and to people with end-stage renal disease (HCFA, 1999). The Medicare program was designed to make health care accessible to covered beneficiaries and to protect beneficiaries from the financial impact of catastrophic disease and injury. Medicare covers health services that are medically necessary to diagnose and treat disease and injury. Unless specifically authorized by statute, Medicare does not pay for screening tests or preventive care. Coverage for exceptions, such as Pap smears and screening for prostate-specific antigen (PSA), is limited to only one test during a prescribed period of time. The scope of this study does not include laboratory services ordered for Medicare beneficiaries who have chosen to enroll in a managed care plan or beneficiaries covered by traditional fee-for-service Medicare who are inpatients in hospitals, hospice, or skilled nursing facilities. The managed care and inpatient fee-for-service market segments are reviewed briefly below to distinguish them from the outpatient, fee-for-service market segment. Although the majority of Medicare beneficiaries rely on traditional Medicare fee-for-service benefits,12 approximately 16 percent of Medicare beneficiaries currently participate in a Medicare+Choice option, which is typically a managed care plan. Managed care plans are paid a capitated amount for each beneficiary and manage the way they pay providers differently than traditional fee-for-service Medicare. Laboratory services paid through managed care plans are not affected by Medicare Part B payment policy (MCOL, 2000). While the managed care segment of the Medicare market grew during the 1990s, many health plans have recently chosen to discontinue their Medicare managed care plans (Morgan, 2000). Laboratory tests provided to beneficiaries in traditional fee-for-service Medicare during the course of an inpatient stay, or in the hospital outpatient setting within 72 hours surrounding an inpatient stay, also are excluded from the 12 Fee-for-service means that the provider is paid for every service or bundle of services that is provided.
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Medicare Laboratory Payment Policy: Now and in the Future scope of this study. Medicare pays hospitals a lump sum for an inpatient stay based on the patient’s diagnosis. All laboratory services provided as part of an inpatient stay are included in that bundled payment. This report focuses on the clinical laboratory services ordered by a physician that are covered by Medicare Part B benefits. Participation in Part B coverage, which pays for physician office visits and other outpatient care, is voluntary for Medicare beneficiaries. Because the Part B premium is subsidized through general revenues and is affordable by most beneficiaries, approximately 95 percent of Medicare beneficiaries have Part B coverage.13 Approximately 23 insurance carriers and 30 fiscal intermediaries (FIs) process laboratory claims paid under Medicare Part B. The carriers and FIs are contractors to HCFA who provide services in 56 geographic areas across the country.14 To make claims submission easier for hospital and other facility laboratories, the same FIs that process inpatient claims process all laboratory claims from hospital outpatient departments and other facility laboratories. Carriers process claims from physician offices and independent laboratories. The methods used to pay for health care services provided under Part B vary. Physicians and laboratories are currently paid based on fee schedules. The list of payment amounts for all clinical laboratory tests in each of the 56 Medicare carrier jurisdictions is called the laboratory fee schedule. The fee schedule has prices for approximately 1,100 separate tests, which pays for the technical component of the test.15 The current payment methodology was established in 1984 and revised in 1986, but current fees are based on what laboratories were charging for tests in their local area in 1983, adjusted over time. A national cap, called the National Limitation Amount (NLA), limits the amount paid per test.16 It is this payment methodology for Part B clinical laboratory services, which includes 56 fee schedules limited by the NLA, that the IOM committee was asked to evaluate. What Types of Laboratory Services Are Included in the Medicare Laboratory Fee Schedule? Not all tests are included in the Medicare laboratory fee schedule. Medicare requires providers to use numeric codes from the HCFA Common Procedural Coding System (HCPCS) to bill for laboratory services. These codes are used to 13 Out of 38.8 million Medicare beneficiaries, 36.7 million (or 95 percent) participated in Part B in 1998 (HCFA, 1999). 14 Each carrier region or jurisdiction is roughly equivalent to a state, with some larger states divided into smaller regions. 15 The PPRC (1995) defines “technical component” as the part of a relative value or fee for a diagnostic test or therapeutic procedure that represents the cost of performing the service excluding the physician’s work. 16 This national cap for each test is currently set at 74 percent of the median of each fee.
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Medicare Laboratory Payment Policy: Now and in the Future describe the laboratory test or test methodology. The HCPCS coding system includes Current Procedural Terminology (CPT) codes assigned and published by the American Medical Association (AMA), plus temporary codes assigned by HCFA or its contractors.17 The laboratory fee schedule includes CPT codes for medical services in the range of 80000 to 89999 and some additional HCPCS codes. Some of these temporary HCPCS codes have become permanent, such as those for venipuncture and specimen collection. Some laboratory professional services, such as surgical pathology and diagnostic radiology have CPT codes in the 80000–89999 range, but they are paid for under the Medicare fee schedule for physician services18 and are not part of the clinical laboratory fee schedule. In addition to these physician services, the following laboratory services are also excluded from the fee schedule: laboratory services included in the end stage renal disease (ESRD) program package ofservices; laboratory services provided to patients in a skilled nursing facility; tests related to blood banking or blood products; physiological testing, imaging, and electrocardiograms (EKGs); and dental laboratory services. ORGANIZATION OF THE REPORT Both the legislative mandate and the charge from HCFA to the IOM for preparation of this report reflect the importance of putting Medicare payment policy in the broader context of payment for services provided by the laboratory industry as a whole, reviewing and analyzing trends in the health care environment, and anticipating developments in laboratory technology. This report is organized along the lines of specific elements of the charge to the IOM. The next three chapters provide background information on clinical laboratories and Medicare payment policy. Chapter 2 reviews the clinical laboratory industry as a whole; its Medicare outpatient market segment; and the way environmental trends in regulation, government efforts to reduce waste and abuse, and payment levels have affected the industry. It concludes with a discussion of how the industry has responded to these trends. Chapter 3 discusses anticipated trends in automation, information technology, and laboratory testing technology, as well as expected shifts in site of service and laboratory staffing needs. Chapter 4 describes the current Medicare payment system and how it has evolved. The vari- 17 For instance, HCFA assigned HCPCS codes for Pap smears conducted for screening purposes to facilitate billing for this newly approved use of the test. HCPCS temporary codes often can be assigned more quickly than CPT codes which facilitates the billing of new technology. 18 The “professional component” is defined as the part of a relative value or fee that represents the cost of a physician’s interpretation of a diagnostic test or treatment planning for a therapeutic procedure (PPRC, 1995).
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Medicare Laboratory Payment Policy: Now and in the Future ous elements of a payment methodology are described and form the framework for analyzing the current outpatient clinical laboratory payment system. The last three chapters present the committee’s conclusions about the current payment system and possible alternatives. Chapter 5 assesses the current system in light of the payment policy goals that the committee has articulated in this chapter. Chapter 6 examines alternative payment methods that could be used by Medicare. Chapter 7 presents the committee’s recommendations, based on its assessment of the current system and the benefits and feasibility of several modifications to it. REFERENCES Gustafson, T. January 20, 2000. Testimony before the IOM Committee on Medicare Payment Methodology for Clinical Laboratory Services. Washington, DC. General Accounting Office (GAO). December 1987. Medicare: Lab Fee Schedules Produce Large Beneficiary Savings but No Program Savings. HRD-88–32. Washington, DC: GAO. GAO. June 1991. Medicare Payments for Clinical Laboratory Test Services are too High. HRD-91–59. Washington, DC: GAO. Health Care Financing Administration (HCFA). 1999. “Medicare Enrollment Trends, 1966–1998.” Web page, [accessed 6 July 2000]. Available at www.hcfa.gov/stats/enrltrnd.htm. Klipp, J. 2000. Lab Industry Strategic Outlook 2000: Market Trends & Analysis. Washington, DC: Washington G-2 Reports. Lewin Group. 2000. Outlook for Medical Technology Innovation: Will Patients Get the Care They Need? Report 1: The State of the Industry. Washington, DC: The Health Industry Manufacturers Association. Managed Care On-Line (MCOL). 2000. Medicare+Choice Enrollment Penetration by State. Webpage: accessed July 6, 2000. Available at http://www.medicarehmo.com/mrepenrp.thm. Morgan, D. June 30, 2000. More health plans quit Medicare. Washington Post, section A, p. 8. Office of the Inspector General (OIG). January 1990. Changes are Needed in the Way Medicare Pays for Clinical Laboratory Tests. A-09–89–00031. Washington, DC: OIG. OIG. January 1996. Follow-up Report to “Changes are Needed in the Way Medicare Pays for Clinical Laboratory Tests.” A-09–93–00056. Washington, DC: OIG. Physician Payment Review Commission (PPRC). 1987. Annual Report to Congress, 1987. Washington, DC: PPRC. PPRC. 1995. Annual Report to Congress, 1995. Washington, DC: PPRC. Steiner, J.W., and J.M.Root. June 1999. The battle between hospital and commercial labs: Who’s winning? Clinical Laboratory News, p. 4.
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