20% Medicare Co-Pay A Blow to Regional Labs

Threat exists that Medicare’s 20% co-pay might be copied by private health insurers

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CEO SUMMARY: Informed speculation indicates that private health insurers are likely to adopt some form of laboratory test co-payment if the proposed Medicare 20% lab test co-pay legislation becomes law. For hospital laboratory outreach programs, the resulting reduction of reimbursement and associated higher costs of billing small amounts to patients would prove to be financially devastating.

IMPOSITION OF A 20% CO-PAYMENT for Medicare Part B laboratory testing will have the greatest negative impact on regional laboratories, particularly hospital laboratory outreach programs.

But there is a double-indemnity aspect to the proposed 20% co-pay legislation now pending in Congress. If Medicare were to impose a lab test co-pay, there is credible evidence that some of the nation’s biggest health insurers would move to institute similar lab test co-payments by their beneficiaries.

This would wreak financial havoc among regional laboratories across the United States. There are several reasons for this. First, except for the two blood brothers, the remaining independent commercial lab companies providing laboratory tests for office-based physicians generally run on razor-thin profit margins.

Many of these small labs will move into the red. The combination of reduced reimbursement because of a laboratory test co-pay implemented by Medicare and private payers, along with the higher costs of billing and collecting small amounts of money from patients, will spell the difference between survival and sale or bankrupt- cy for numerous small labs.

Lack Economies Of Scale

Second, a large number of surviving regional laboratories are owned and operated by not-for-profit hospitals and health systems. These lab operations lack the buying power and economies of scale of their commercial lab competitors. They also have a specific mission of furthering healthcare to their local communities.

For these types of laboratories, a switch to a laboratory test co-pay by both Medicare and private payers would prove a financial disaster. Most such laboratories operate at financial break-even, passing along the economic benefits of the outreach testing to their parent hospital in the form of lower average cost-per-tests for inpatient testing.

Many hospital-based laboratories operating lab outreach programs are attempting to gauge the financial impact of the proposed Medicare co-pay. In the Northeast, Stan Schofield, President of NorDx Laboratories in Scarborough, Maine is studying the problem. “This summer, we’ve run all sorts of financial models on the impact of the Medicare 20% lab test co-payment,” he said. “The projections are uniformly discouraging.

Prediction About Impact

“In the first year of the co-payment, we estimate 20% of our Medicare patients will go to bad debt,” Schofield revealed. “With patient education, that may level off at about 10% in year two and beyond. I should add that this is a best-case scenario for us, and we are very good at billing and collections. Our days sales outstanding (DSO) is consistently at 39. Not many hospital outreach programs do billing as well as us, so the impact on them would be greater.”

NorDx studied the secondary insurance held by Medicare patients in its outpatient lab testing operations. “In this community, a consistent 65% to 75% have Medi-gap or similar type of insurance,” noted Schofield. “Our financial models assume that Medi-gap would pay first dollars for the lab test co-payment. But one response to the 20% lab test co-pay may be for Medi-gap types of insurance plans to exclude it from their coverage in subsequent years.”

Private Insurer Lab Co-Pays

Schofield is also one of those who believe private health insurers will follow Medicare’s lead and institute their own lab test co-payments. “In Maine, the three big insurers are Anthem Blue Cross, Aetna, and Cigna. I’ve spoken to executives at all three companies. They acknowledge they are aware of Medicare’s proposed lab test co-pay, and without saying so directly, their comments indicate a likelihood that they would study that situation and institute their own types of lab test co-pays or deductibles.

“The Medicare 20% lab test co- pay, if enacted, will be a hammer blow for smaller regional labs,” observed Schofield. “Those of us who operate as a break-even laboratory, in support of a not-for-profit hospital system, already struggle with the Medicare’s low reimbursement for Part B laboratory testing. Were private payers to follow with their own laboratory test co-pays and deductibles, the cumulative effects would be a financial knock-out blow to many of these community-based laboratories.”

Schofield’s observations carry credibility. He is a past president of the
Clinical Laboratory Management Association (CLMA). He continues to be actively involved, at the national level, in a variety of laboratory industry leadership initiatives.

Erosion of Reimbursement

Since 1988, the Medicare program has not been kind to the clinical laboratory industry. Adjusted for inflation, reimbursement for Part B laboratory testing is flat when compared to the mid- 1980s. The 20% co-pay, if imposed by Congress, maintains an established pattern whereby Medicare Part B lab test reimbursement is continually pruned back, leaving labs with inadequate money to cover the basic cost of providing lab testing.

Further, this co-pay, if enacted, will have a disproportional financial impact on the nation’s regional laboratories. At best, their year-to-year financial survival is precarious. And if imposition of a Part B laboratory test co-pay is followed by similar laboratory test co-pay requirements by private health insurers, the level of financial stress will be substantial.

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