Cost management tips to offset reimbursement cuts

May 24, 2018

The Centers for Medicare and Medicaid Services (CMS) released its final rates for the Clinical Laboratory Fee Schedule (CLFS) that phased-in a significant cut in the rates of those common tests physicians use every day to diagnose and treat patients.

The first cut, up to 10 percent, was effective January 1, 2018, with additional possible 10 percent cuts to come each year through 2020, and up to 15 percent each year for 3 years after that. The CLFS is based on information reported under the 2014 Protecting Access to Medicare Act (PAMA). PAMA revised the Medicare reimbursement methodology for clinical diagnostic laboratory tests. According to one industry estimate, the significant impact on laboratory margins is only now becoming clear. According to one estimate, a 10 percent cut in the CLFS will result in a 3-4 percent drop in laboratory profit margins.

Two laboratory-focused group purchasing organization executives weighed in on cost management to offset reimbursement cuts.1

Labs need to verify they are efficient
Donna Showers, Senior Director, Lab/DI Specialists, Intalere, offered these tips:

  • Provide contract review, product standardization for one or multiple laboratories (within an IDN or laboratory alliance) and/or distributor optimization and consolidation. Depending on their level of sophistication, labs can save significant costs by aggregating spend through a regional laboratory alliance group or understanding and using their distributor relationships properly. Your distribution partner should be able to help you understand the cost and efficiency advantage of utilizing their distribution model as the best source of procuring product whether it is through pricing advantage, elimination of added transportation charges, improving overall tier slotting on the distribution contract, and reduction in the number of purchase orders generated and managed.
  • Examine overall laboratory profitability of both in-house and outsourced testing. This includes an in-depth make-versus-buy assessment to help your lab understand both the costs of performing tests (to include both supply and labor costs) as well as the profitability of those tests by determining payer mix and payer rates. The same assessment should be performed on those tests that are outsourced to a commercial reference lab. Based on staffing levels, equipment available, and most importantly, how testing and turnaround times affect patient care, the lab can determine which tests should be done in-house versus outsourced. For example, in one of the labs we examined, we determined that the lab could generate an additional $200,000 in revenues as a result of the findings of our make-versus-buy assessment. One final process to the make-versus-buy assessment would be to conduct an RFP for the remaining reference lab testing; try to consolidate the number of reference labs that are used for the purposes of streamlining send out operations as well as realizing better pricing through economies of scale.
  • It’s not all about product necessarily. Workflow and laboratory design evaluation can make huge differences in improved efficiency and productivity.
  • Many lab professionals are challenged with a lack of ability to verify pricing accuracy on their purchases. Using software to identify and resolve pricing variances as quickly as possible can help reduce costs, eliminate future errors and improve overall price accuracy.
  • Introduce Revenue Cycle Management. Laboratory managers should be corresponding with their billing departments. Laboratory outreach is often an overlooked revenue center in hospitals. Hospital information systems may not have the capability of measuring lab fiscal performance. The lab needs to have more control over their RCM process due to the payer-related nuances that are unique to lab. With appropriate software, coding expertise, collection strategies and denials management, the lab has the ability to improve their revenues by up to 20 percent to 30 percent.

Look for help from your supply chain experts
Akiva Faerber, Senior Principal, Vizient Inc., offered his suggestions for collaboration:

  • Partner with the supply chain team and consistently introduce competitive new supplies, services options/levels that are less expensive but meet the needs of the lab or that have the potential to improve performance.
  • Work with manufacturers to enable the lab to conduct side-by-side evaluations of testing equipment to determine best platform. These side-by-side evaluations provide valuable insight in terms of floor space, technical ease of operation, test capabilities in terms of test mix and volume capacity, reliability, ease of customer capable maintenance and logistics. This also gives the lab staff the ability to have a “hands-on” assessment of the quality of the service staff in the event of platform failures.
  • Negotiate and facilitate onsite training and train-the-trainer learning opportunities. Include these as part of the contract to eliminate add-on expenses should initial
    training found to be not adequate.
  • Facilitate the frequency and ease of QA/QC, sequestration of reagents, information system interfacing.
  • Entertain, educate and encourage vendors/providers to bring new lab-related products and services to lab for evaluation.
  • Explore the option for support subject matter experts in lab to assist with efficiency, reducing costs, increasing revenue, performing coding billing and compliance opportunities, validation of LIS, Lean projects and improve TAT root cause analysis beyond lab. Ideally, there would be one SME from the vendor to assist with those tasks and one or two consultants to provide operational support.
  • Assist lab department leadership in leveraging the benefits of point-of-care testing and cost versus traditional laboratory platform testing.
  • Provide just-in-time agency staffing and interim management as necessary. Provide assessments as request for options related to outsourcing of laboratory management or sale of lab to commercial provider as well as review and negotiate pathology LLC contracts.


  1. Healthcare Purchasing News, May 2018, “Tips, tools, tricks for managing laboratory supply chain operations.”