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.


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


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.


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).


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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