A battle with many fronts

Oct. 18, 2013

Independent clinical laboratories across the country are facing immense economic pressures from several directions simultaneously. Among the challenges labs face are numerous annual cuts imposed by Congress on Medicare Part B laboratory reimbursement rates to pay for other healthcare-related costs; a fiscal year 2014 White House budget proposal recommending cuts that could cut an average lab test by 29% by 2023; a 2013 report by the Office of Inspector General stating that substantial Medicare savings can result from cutting lab rates; a proposal by the Centers for Medicare and Medicaid Services (CMS) to completely reassess payment rates under the Clinical Laboratory Fee Schedule; a refusal by CMS and Medicare contractors to pay for new molecular and diagnostic tests; and questioning by the Food and Drug Administration (FDA) and CMS about the safety and efficacy of lab developed tests (LDTs). The laboratory community has many battles to fight simultaneously.

For independent, regional, and community-based clinical laboratories—those serving the bulk of the Medicare population—the outcome of these battles may determine whether they will continue to exist to serve their communities. A survey commissioned by the National Independent Laboratory Association (NILA) in 2012 showed that the majority of the community and regional labs surveyed have profit margins that do not exceed 3% annually. The 5% Medicare cut implemented in 2013 (a combination of health reform cuts and sequestration) is already having immense consequences for smaller labs with these kinds of margins. With the additional threats of payment reduction looming, NILA and other stakeholders are working to ensure that the community-based independent lab remains a vital part of the healthcare landscape.  

As political leaders debate how to pay for health system changes and address such issues as entitlement reform, every sector of healthcare is a target, and labs are no exception. As part of this debate, Congress and the Administration are questioning what government programs are paying for when they pay for laboratory services. This is happening despite the fact that clinical laboratory testing represents only about 1.6% ($8.2 billion) of all Medicare spending. The perception is that labs are paid too much and that automation and technological advances have reduced lab-related expenditures and created efficiencies, therefore reducing a laboratory’s cost of doing business. Of course, there is much more to the story. 

What the laboratory industry must remind Congress and the Administration is that labs are not commodities but services. The cost of providing quality, accurate lab tests that ultimately ensure a physician makes the right diagnosis and can provide appropriate patient care involves far more than machinery. This service-driven industry sends professionals to skilled nursing facilities to provide quick turnaround testing to help the most vulnerable Medicare beneficiaries. This industry conducts the research and development that creates tests to provide more precise diagnostic capabilities that ensure patients get cost-effective treatment tailored to meeting their healthcare needs. The lab industry employs a skilled workforce that has the technical capabilities needed to interpret test results for Medicare beneficiaries with complex healthcare needs. 

At the same time, the lab industry faces the challenge of implementing new information technology and other electronic health systems to ensure that test results can be expedited and made available to health providers in an ever-changing healthcare delivery system. All of this, coupled with many regulatory requirements implemented over the years from CMS, OSHA, FDA, and others, certainly shows that the cost of providing laboratory services is complex, and automation and technology is only one small part of the equation. 

This fall, Congress is considering legislative proposals to permanently change the Medicare formula for establishing physician payment rates. The legislative effort is focused on how to move away from a fee-for-service system and pay instead for quality healthcare services that provide a measured value. To pass such legislation, Congress will have to come up with a way to pay for the change in structure, which carries a scored price tag of around $138 billion. If Congress cannot find consensus, it will have to come up with other funding recommendations to offset the current mechanism used to update physician pay fix. An example would be a 2% cut to the Clinical Lab Fee Schedule as part of a way to pay for avoiding the doctor cuts. In either scenario, laboratories and other health providers and services face the threat of additional Medicare cuts to pay for these changes.

An important question that is missing from the debate is this: going forward, what would additional cuts to clinical labs mean in terms of access to laboratory services? The reality is that additional cuts will leave an immense void in the healthcare delivery system, as community clinical laboratories are forced to shut their doors or restrict their participation in Medicare. The consequences of this would be immense. Medicare beneficiaries and their physicians would be forced to wait longer to receive test results from labs outside their state, complicating care delivery. Nursing home residents would be transported by ambulance to hospitals to receive tests in the absence of community labs to provide phlebotomists onsite. Critical access hospitals would need to provide lab services in rural communities at a much higher cost, given how the government pays for these services. At a time when the government is looking to move toward ensuring accurate, quality, efficient healthcare services at lesser cost, the lab cuts and other payment reforms under consideration are a step in the opposite direction. 

Clinical laboratories must convince Congress and the Administration that they are a key partner in the effort to improve patient health outcomes and reduce healthcare expenditures. Labs provide the data that drives 70% of medical decision making. Taking an axe to the Medicare Clinical Laboratory Fee Schedule, particularly since passage of the Affordable Care Act, or suggesting laboratory fee schedule reforms that look at only one aspect of the cost of providing laboratory services, does nothing to modernize the laboratory fee schedule. 

What we need is a new approach, a transparent, fair approach that allows the complex laboratory community to work in collaboration with policymakers to understand and appropriately pay for laboratory tests—both new diagnostic tests and the older tests that are relied upon by physicians and other health providers every day. NILA and other interested parties will be working hard to ensure that this is understood by Congress and the Administration as the laboratory community engages in the multitude of debates this fall.

Julie Scott Allen is a government relations director in the Government and Regulatory Affairs Practice Group of the national law firm Drinker Biddle & Reath. Ms. Allen is based in Washington, D.C. Follow her on twitter @allenjva and at the blog where she and her colleagues post on these types of  issues–capitolhealthrecord.com.