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GAO urges further cuts in lab fee schedule.

Results froma study of clinical laboratory pricing policies are finally in, but independent facilities probably would have waited a lot longer for the news. The General Accounting Office (GAO) concludes that Medicare is subsidizing other payers, and therefore legislation mandating additional cuts in program fees is in order.

Specifically, the GAO recommends that Medicare fee caps be lowered from 88% to 76% of the national median rates. The Inspector General's Office of the Health and Human Services Department (HHS) welcomed the findings and supported at least some cutbacks. Officials admit to having concerns, however, about the additional administrative costs labs will face from the Clinical Laboratory Improvement Amendments of 1988, and the overall effects on access to lab services.

In the 1987 budget act, Congress directed GAO to review the appropriateness of Medicare's fee schedule payments, considering both laboratory costs and revenues. To do that, the agency compared labs' profit rates on Medicare with their overall profit rates.

Researchers said that roughly equivalent returns would have shown that Medicare was "carrying its own weight," neither subsizing other payers nor receiving subsidies. "We found, however, that profits from Medicare business substantially exceeded laboratories' overall profit rates, and we conclude that Medicare's fee schedules are too high," said the report presented to Congress.

The findings are based, in part, on the operations of the nation's five largest lab chains: Smith-Kline Beecham Clinical Laboratories, National Health Laboratories, Roche Biomedical Laboratories, MetPath, and Damon Clinical Laboratories. Together, the firms have nearly $2 billion in annual revenues and account for more than 40% of all Medicare testing performed in independent facilities.

GAO also looked at data from 11 smaller lab companies with total revenues of about $62 million. Five had been recommended for review by the American Association of Bioanalysts; the others were chosen according to size and geographic criteria. Researchers examined three major lines of laboratory business: discount customers (primarily hospitals and physicians), Medicare, and all other retail payers.

Among the largest labs, GAO determined that Medicare fee schedule payments in 1988 to 1989 produced average profits of 32% of sales, compared with average overall profits of 15%.

The agency did note that if payment reductions from 1990 and 1991 were taken into account, the profit difference would be cut to 11%. But even at that level, GAO concludes, "Medicare's clinical laboratory service fee schedule is subsidizing other payers at the larger laboratories."

Four of the five large providers actually lost money on their discount customers, but all five had substantial returns on Medicare and other business.

GAO did not identify companies by their profit rates, but the losses from discount customers ranged from 3% to 20%. Profits from Medicare business ranged from 18% to 46%; from other retail customers, 11% to 44%.

Using another yardstick, the report analyzed the labs' costs of servicing each customer group.

Because discount customers are generally billed on the less expensive "statement" basis, they were used as the baseline for comparison. Under that approach, GAO found it costs labs 19% more to serve Medicare than discount customers for the same units of work; costs for other retail customers were 55% higher.

Claiming additional evidence that Medicare fees are too generous, GAO further showed that per-unit lab revenues from the program were 72% higher than from discount customers. Other retail accounts paid 121% more.

The report summarized: "Although the large laboratories incurred more costs in performing work for Medicare beneficiaries than for comparable work performed for discount customers, Medicare fee schedule revenues more than offset the cost differences, making Medicare one of the laboratories' more profitable customers."

Officials said similar patterns emerged among the study's 11 smaller labs, which the agency further divided into two groups.

The first six, serving discount and retail customers including Medicare, collectively record a 23% profit on Medicare, a 27% profit on other retail customers, and a 4% loss on discount business. The remaining five companies served primarily retail customers. Those labs together made a 7% profit on Medicare business and 29% on other retail clients.

The report concludes that capping lab fees at 76% of the national median would insure that Medicare's contribution to a laboratory's profits does not exceed the overall rate.

Analysts applied the 76% limit to the 40 common tests that accounted for 46% of Medicare-allowed charges in 1988. At that level, they found that Medicare would still be paying more than discount customers for 28 of the 40 tests but less for the other 12. GAO recommends legislation giving HHS authority to adjust caps individually for tests where "relative rate inequities are apparent."

The lab industry's ability to absorb such cuts will clearly be under discussion as GAO's results are considered in Congress. And just as clearly, not all laboratories would be able to shoulder the burden equally.

The report notes that if fees were capped as suggested, "some smaller laboratories would face losses. They would have to take action to improve their level of efficiency by reducing costs or leave the business."

The prospect of labs closing their doors seems to be a concern to Inspector General Richard Kusserow, who gave the GAO recommendations qualified backing.

In written comments, Kusserow's office said that the study "confirms our general suspicion that labs have been overcharging Medicare." And the letter noted, "We strongly agree with GAO that there is still opportunity for further reductions in the national limit for the lab fee schedule."

Kusserow stopped short of endorsing the full cut suggested by GAO--at least, not all at once. He said the impact on access to lab services was unclear and noted that CLIA '88 will impose extra costs and operating burdens on labs.

Kusserow also seems to have some philosophical problems with pegging fee caps to profit margins. "We are not in the business of guaranteeing any particular profit margin to entities providing services to Medicare beneficiaries, nor of determining what is an appropriate level of profit on either all or a portion of a private provider's business," the IG said. "Such a policy could also have the effect of eliminating incentives for entities to be efficient."

But overall, the Inspector General would "support reducing partially the national limit to the level recommended by GAO. Subsequent to the implementation of CLIA, the appropriateness of this level could be reevaluated."

Three Congressional committees were given th GAO study, boding more scrutiny of lab payment reforms in coming months.

Some other system reforms being discussed: a direct billing requirement prohibiting labs from billing doctors for non-Medicare work (thus eliminating physician markups) and a lab roll-in payment to physicians to cover testing services during office visits.

The numbers aren't carved in stone, but pathologists may be facing some substantial income cuts under latest plans to implement the resource-based relative value scale (RBRVS).

Under a proposed fee schedule that was published June 5 of this year, the Health Care Financing Administration (HCFA) projects reductions for pathologists of 6% per service in 1992 and 30% by 1996, the year in which the RBRVS system will be fully implemented. But as a practical matter, HCFA says that actual revenue cuts will probably range from 2% to 15%, due mainly to volume and service intensity responses of physicians.

It is still possible for changes in the plan to be made, in part because questions exist over whether the RBRVS will be budget-neutral as required by law. Some physician groups believe that the new system would trim $3 billion in payments rather than simply redistributing income among medical specialties, as Congress intended.

Also under question is the proposed technical component allowed for furnishing pathology services through an independent laboratory. HCFA established the rate at 15% of the 1991 adjusted historical charge, a level Congress used last year to limit reductions in prevailing charges for global pathology services that were furnished by an independent laboratory.

Of the approximately 1,100 services listed in the pathology series of the latest version of the Current Procedural Terminology (CPT), only 57 were judged to qualify as physician services. The remaining 1,043 are considered clinical laboratory services and are therefore excluded from the physician fee schedule.
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Title Annotation:includes information on pathologists' reimbursement; General Accounting Office; clinical laboratories
Publication:Medical Laboratory Observer
Date:Aug 1, 1991
Previous Article:The winds of change are blowing in the lab.
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