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Where Medicare's test work is going; office lab payments will skyrocket and hospital outpatient lab payments will also grow, but independent labs will receive less income for Medicare Part B services.

Where Medicare's test work is going

Even before the Deficit Reduction Act of 1984 encouraged expansion of physicians' office testing, the Health Care Financing Administration reported that manufacturers, independent laboratory owners, and corporate officials widely recognized physicians' office laboratories as "the most rapidly growing segment of the market supplying lab tests.'1

The act increased financial incentives for physicians to perform lab work in their offices, by letting them continue to accept assignment on a case-by-case basis. Instead of settling for Medicare's new 60 per cent of local prevailing test charges, physicians' offices can recover full payment from Medicare beneficiaries, at whatever price the doctor establishes (lab fees are not subject to the physician fee freeze). That's an option independent and hospital labs no longer have--they must accept Medicare assignment.

Predictably, sales of lab instruments and equipment to physicians' offices rose sharply. The CDC recently cited an estimate that 50 per cent of all lab diagnostic tests in the U.S. are now performed in physicians' offices.2

According to the 1984 HCFA Laboratory Task Force report, about half the $1.6 billion spent by Medicare in fiscal 1984 for noninpatient diagnostic lab services under Part B regulations was paid to independent labs and physicians.3 The remaining half, or $800 million, was paid to hospitals.

Medicare payments for physicians' office testing should climb nearly 200 per cent from 1984 to 1986, while payments for hospital outpatient testing will increase 31 per cent and payments for independent lab testing will decline about 9 per cent. I'll explain how I arrived at these estimates.

Projections of future Medicare payments to the different laboratory settings may be misleading unless one takes into account another change introduced by the Deficit Reduction Act: Physicians can no longer bill Medicare patients for work referred to independent or hospital labs.4 Because of this "direct bill' provision of the act, the money Medicare pays directly to independent laboratories has increased. In reality, that increase represents revenue the independents already were earning, but which physicians' offices had billed for in the past.

In order to project the true changes in Medicare Part B expenditures for laboratory diagnostic testing, it is necessary to convert figures reported by HCFA before July 1, 1984 (effective date of the Deficit Reduction Act provisions), to a form that can easily be compared with later data. To do that, one must calculate how many dollars Medicare allocated for services actually performed in the different lab settings.

HCFA's Laboratory Task Force reported that before July 1, 1984, approximately 80 per cent of lab tests for office patients were billed by physicians; the test were billed by independent labs. But a May 1983 HCFA Region V study revealed that only one-fourth of lab tests billed by private practitioners were performed on-premises. The rest were processed at independent labs.5 In other words, only 20 per cent of the total non-inpatient diagnostic lab testing (one-fourth of the 80 per cent billed by physicians) was actually performed in physicians' offices. Independent labs performed the other 80 per cent.

That last finding is consistent with estimates based on data from Rhode Island, a state that has prohibited physicians from billing patients for tests sent out. There, 65 per cent of non-hospital lab tests were billed, and presumably performed, by independent laboratories. Physicians billed the remaining 35 per cent.4

Assuming that the number of tests ordered is proportional to Medicare payments for them, Medicare paid $640 million to independent labs, physicians' offices, and patients in 1984 for work actually performed by independent labs. That leaves Medicare Part B payments totaling $160 million (20 per cent of $800 million) for work actually performed in physicians' offices.

The $800 million paid by Medicare did not represent the total income for such testing in independent and physicians' labs. Before the Deficit Reduction Act, Medicare paid 80 per cent of the prevailing charge for a test, and providers could collect a 20 per cent coinsurance payment from patients.

This entitled independent and physicians' office labs to at least $200 million more for lab services to Medicare patients in 1984. They and hospital labs may have collected additional income because assignment was not mandatory, and payments on unassigned claims could have been higher than prevailing Medicare charges.

HCFA's Office of Financial and Actuarial Analysis projects total Medicare Part B lab outlays of $1.8 billion in 1985 and $2.1 billion in 1986. Of that, independent labs will receive $500 million in 1985 and $583 million in 1986, the HCFA office projects.6

If we subtract the estimated independent laboratory payments from total Part B expenditures, and if we assume hospital lab testing will continue to account for about half the total expenditures, we can project how much physicians' offices will receive for lab work they actually perform-- $400 million in 1985 and $467 million in 1986 (Figure I).

As the Deficit Reduction Act takes firmer hold, and the trend toward more physicians' office testing accelerates, independent laboratories may perform fewer tests than these figures indicate. Therefore, the projections in Figure I may understimate payments for physicians' office lab services and overestimate payments to independent labs for their work.

Nevertheless, the projections are worth a closer look. For example, total payments for services provided by independent labs decrease in 1985 by about 22 per cent. Payments for services provided by physicians' office labs, on the other hand, increase by 150 per cent-- from $160 million in 1984 to $400 million in 1985.

Over the longer 1984-86 period, we have already noted the extent of projected change: -9 per cent for independent labs, 192 per cent for physicians' office labs, and 31 per cent for hospital labs (assuming they continue to receive half of all Medicare Part B payments for lab services).

The picture for physicians' office labs is even brighter than Figure I suggests. Income received by independent and hospital labs for Medicare non-inpatient procedures equals what Medicare pays out because assignment is mandatory. But physicians' lab income is greater than Part B payments because physicians can still accept assignment case by case.

One more factor is fueling the projected increase in payments to physicians' office laboratories-- that is, physicians can generate as much income as they want by simply ordering more tests.

If the Medicare program wishes to control expenditures for lab testing, it must address its efforts toward the sector that is projected to be responsible for the most significant increases in program out-lays. From the HCFA data, it appears that Medicare should target its cost containment efforts at physicians' office laboratories.

1. "Report of Laboratory Task Force,' p. 4. Washington, HCFA, February 1984.

2. Federal Register 50: 23518, June 4, 1985.

3. "Report of Laboratory Task Force,' p. 5. Washington, HCFA, February 1984.

4. U.S. House of Representatives. "Deficit Reduction Act of 1984.' Washington, U.S. Government Printing Office, Report 98-861, p. 599, June 23, 1984.

5. "Diagnostic Clinical Laboratory Services in Region V,' No. 2-05-2004-11, p. 4. Chicago, HCFA, May 1984.

6. National Intelligence Report 6(10): 1, March 12, 1985.

Table: Figurel Projected Medicare payments for non-inpatient lab services

Fiscal 1985 and 1986 projections are based in part on data from the February 1984 HCFA "Report of Laboratory Task Force' and on projections from HCFA's Office of Financial and Actuarial Analysis.
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Author:Birenbaum, Mark S.
Publication:Medical Laboratory Observer
Date:Dec 1, 1985
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