portant chemical and biological information about the body.1 Laboratory tests represent a small share of health spending, but play a complementary and an integral role in good medical care. They help physicians to diagnose and treat patients. Technological changes in laboratory testing, both those currently in the pipeline and those anticipated in the near future, offer the prospect of new opportunities for diagnostic improvements. These changes, however, are often associated with expensive new laboratory tests and testing methodologies and will place an increasing burden on the payment system for timely, fair, and appropriate determinations of payment levels and medical necessity.

Medicare, the federal program providing coverage of health care services for the elderly and disabled, is the largest payer of clinical laboratory services. It pays 29 percent of the nation’s laboratory bill for inpatient and outpatient services (Klipp, 2000). The Medicare Part B fee schedule for outpatient laboratory services accounts for approximately one-third of what Medicare spent for laboratory services, or 1.6 percent of its total annual budget, in 1998 (Gustafson, 2000).

Although outpatient clinical laboratory tests are only a small portion of the Medicare budget, Medicare payment policy for laboratory services is significant because it influences state Medicaid and private payers’ policies and payment rates. Laboratory tests also influence health care expenditures far beyond their proportion of actual costs because decisions about the provision of other medical services often hinge on the results of laboratory tests.

Designed in the early 1980s, Medicare payment policy for outpatient laboratory services is now outdated. Payments are not consistently related to costs, and while payment rates have been modestly adjusted for inflation, neither the rates nor the basic payment methodology has evolved to take into account technology, market, and regulatory changes. Laboratory interest groups testified that the outdated payment system has created serious administrative and financial burdens for laboratories, although systematic evidence of major problems for patients, physicians, Medicare, or private insurers is lacking. Theoretically, when prices do not reflect costs, they have the potential to inappropriately influence clinical decision making, inhibit innovation, waste taxpayer dollars, and limit beneficiary access to care. In the case of clinical laboratory tests, the financial incentives of the physician ordering the test are not directly related to the financial incentives of the laboratory conducting the test and receiving payment for it; however, the physician’s incentives could be subject to influence by the laboratories. Again, evidence of such effects is lacking.

Clinical laboratory testing is in the midst of major technological innovations, and regulatory and payment policies must be able to accommodate positive changes. The mapping of the human genome and other scientific advances


Medicare covers clinical laboratory tests used to diagnose disease, screen patients to identify abnormalities, or monitor a patient’s condition. It does not cover other laboratory services such as screening for drugs of abuse, conducting forensic investigation, evaluating a person’s health for life insurance, and testing as a part of clinical research and drug development.

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