Analyzing Lab Bid Demo To Predict Its Outcome

San Diego-Carlsbad-San Marcos MSA is about to become a Medicare guinea pig

CEO SUMMARY: After two decades of study and preparation, the Centers for Medicare & Medicaid Services (CMS) is pushing the laboratory profession toward the first pilot site in the Congressionally-mandated Medicare Clinical Laboratory Services Competitive Demonstration Project. Designed to drive down the price Medicare pays for laboratory tests, the plan CMS described at the December 5 bidders’ conference is likely to disappoint everyone—from patients and doctors to Medicare itself.

WHICH LABORATORIES WILL BE INVITED TO DANCE when federal healthcare officials select the labs they want to participate in the Medicare Clinical Laboratory Services Competitive Demonstration Project, scheduled to commence in San Diego in 2008?

THE DARK REPORT uses the term “select to participate” intentionally, because the bidding process the federal Centers for Medicare & Medicaid Services (CMS) and its contractor, RTI International (RTI), unveiled is not what most Americans would consider open, objective, transparent, and fair.

Complex, Obtuse, Subjective

 To the contrary, CMS/RTI designed a bidding process that is complex, obtuse, and subjective—one that will lead to a predictable outcome about which specific
laboratory organizations CMS selects as participants. That is the opinion of most
informed experts who understand laboratory medicine and have studied the bidders’ package released to the public and discussed at the December 5 bidders’ conference in San Diego.

In the weeks since that conference, THE DARK REPORT has spoken to a cross section of pathologists, laboratory directors, and industry experts. These individuals have studied the bid documents, attended the bidders’ conference, and in many cases, are actively working to craft a bid for their laboratory organization.

In situations like this, THE DARK REPORT would typically provide a simple, concise overview of the laboratory competitive bidding demonstration project. That would orient readers to the basics of this issue and give them context for the comments to follow. However, because CMS/RTI birthed such a labyrinthine concoction of qualifications, bidding requirements, and bid evaluation factors, there is inadequate space to communicate this information properly and succinctly.

In the spirit of brevity and to allow maximum attention to key issues, THE DARK REPORT suggests readers access the CMS Web site to read the full documentation on the Medicare Clinical Laboratory Services Competitive Demonstration Project. ( A number of other laboratory industry Web sites have developed descriptions of the three areas of the demonstration project: 1) requirements for bidding and how bids and the bid application are to be completed; 2) how CMS/RTI will score the bids and evaluate the bid documents to select winning labs; and 3) how the demonstration project will be implemented, beginning on the target date of July 1, 2008. Good starting points for finding commentary about the design of the bid demo are the Web sites of AAB, AACC, ACLA, ASCP, CAP, and CLMA, to name a few.

Observations & Criticisms

With those sites as resources, THE DARK REPORT would like to now present a series of observations and criticisms about the flaws different laboratory professionals have identified from their study of the bidders’ package and their interaction with officials from CMS and RTI. These observations illustrate the lack of simplicity, fairness, transparency, and objectivity that are causing great concern among laboratories currently serving Medicare beneficiaries and their attending physicians in the San Diego MSA.

First are the strategic objectives of the laboratory competitive bidding demonstration project. The cover letter to the bidders’ package CMS distributed at the bidders’ conference on December 5, states that: “Section 302(b) of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) requires the federal Department of Health and Human Services to conduct a demonstration project on the application of competitive bidding for clini- cal laboratory services. The objective of the three-year demonstration is to determine whether competitive bidding can be used to provide Part B clinical laboratory services at fees below the current Medicare payment rates while maintaining beneficiary access to laboratory services and quality of care.” (Italics by THE DARK REPORT.)

This statement of purpose has two strategic objectives. One is to use competitive bidding to lower the price Medicare pays for laboratory testing services below the current Part B fee schedule. Second is to maintain beneficiary access to laboratory services and quality of care.

There is solid consensus among those who have carefully studied the bidding documents and listened to CMS/RTI comments during the bidders’ conference that the existing scheme is not likely to achieve either of its primary objectives. That is a disappointment, because Medicare beneficiaries in the bid demo site, their attending physicians, and the entire range of laboratory medicine professionals involved in delivering laboratory testing services in the San Diego MSA will bear the brunt of any significant failures resulting from this first demonstration site.

A primary failing in the bidding demo is that neither CMS nor RTI has recognized a basic fact: The medical specialty of laboratory medicine encompasses a wide range of diagnostic services. CMS/RTI ignores this important fact because of its single-minded focus for a way to conduct an auction that results in laboratories bidding lower prices than existing Part B reimbursement for an arbitrarily selected panel of 303 clinical lab tests.

Unity of Lab Medicine Ignored

Granted, CMS is correct in saying that these 303 tests represent 99% of what it pays for Part B lab testing services in the San Diego MSA. But, this ignores a basic fact about laboratory medicine: to work up a patient’s case properly requires: 1) a combination of multiple lab test results, often performed in a cascade as the results from each assay are produced; 2) evaluation of these results in the context of that patient’s health history by pathologists, chemistry Ph.D.s, and other laboratory specialists; and, 3) providing, as appropriate, direct clinical consultations about the patient with the referring physician.

This is the opposite philosophy of viewing the result of a single lab test result as a “self contained” unit of service. us, by focusing on 303 specific laboratory tests with an eye to drive down the price it pays, CMS officials have weakened the solid edifice of laboratory medicine that produces impressively consistent, accurate diagnostic and prognostic information for the Medicare patient and his or her physician.

Patient’s Access to All Tests

The point here is that laboratory medicine must be considered like a richly woven, highly detailed tapestry. Any single patient may need several of 2,000 accepted lab assays, performed sequentially in a timely fashion, to guarantee a high quality health outcome. e patient’s laboratory must have the exibility to refer specimens to any number of specialty reference and esoteric laboratories around the country in order to advance the diagnostic progress of the case and the accuracy of the clinical knowledge pro- duced about the patient’s condition.

Further, particularly in di cult or challenging cases, a pathologist, Ph.D., or laboratory scientist often guides the attending physician in ordering the correct tests in the correct sequence, to eventually achieve an accurate diagnosis and identify the most appropriate therapy.

By the way, every time the laboratory medicine profession responds in this way, the Medicare patient gets the right treatment at the right time, wasting no money. Properly used, the 3¢ of every Medicare dollar spent on laboratory services consistently saves the healthcare system substantial money.

Potential To Disrupt Care

Because the Medicare competitive bid demo was not designed to preserve this unity of laboratory medicine services, it is a awed program with the built-in potential to disrupt patient care in multiple ways. However, in another aw, CMS/RTI did not include objective quality measures that would uncover this weakness in the design of its competitive bidding demonstration project.

Next, the design of CMS/RTI’s bid demo fails in another fundamental and important way. In medical school, every physician is taught primum nil nocere. Latin students will recognize this as “First, do no harm.” There are multiple ways that the design and implementation of the competitive bidding demo has the potential to disrupt access and care of elderly Medicare patients living in the San Diego MSA. These issues are identified throughout this issue of THE DARK REPORT. (See pages 9-11.)

Moreover, it should be noted that the laboratory medicine profession has repeatedly identified these troubling aspects of the competitive bidding demonstration to CMS/RTI. But the government agency and its contractor, after acknowledging receipt of this information, failed to act to correct these issues, flaws, and problems.

Testing Without Payment

Another serious failing in the competitive bidding demonstration project is that it goes beyond denying existing laboratories the legal right to provide Part B lab testing services to Medicare fee-for-service (FFS) beneficiaries. Laboratories defined as “non-providers” following the selection of the winning bidders will be forced to provide lab tests to Medicare beneficiaries living in the San Diego MSA
without any hope of reimbursement.

By intent, CMS will expect non-winning labs to perform testing for which the Medicare program will not reimburse! At the bidders’ conference on December 5, CMS officials were asked how “non-participating” laboratories would handle the specimen of a San Diego Medicare patient who showed up in their laboratory.

On December 21, CMS distributed an e-mail titled “Follow-up From Bidder’s Conference” and answered that point as follows:

Question 10: Can a laboratory refuse to provide a laboratory test for a Medicare beneficiary residing in the CBA?

Answer 10: A laboratory that is enrolled as a Medicare supplier cannot legally refuse to provide services to a beneficiary based on payment.

Laboratories are keenly aware that Medicare patients are creatures of habit. Laboratories excluded by the Medicare program from providing testing to Medicare beneficiaries in the San Diego MSA know that elderly patients, having come to their lab’s patient service center for years—even decades—will be unaware of the lab’s changed status as a non-approved provider of Part B laboratory testing services for the demonstration pilot. CMS/RTI are putting a huge burden on labs excluded as providers in the San Diego MSA demonstration pilot. These labs must redirect an often feeble, disoriented Medicare patient to a lab approved to do the testing. If they respond humanely and in the best interest of the patient at that moment, the lab will collect the specimen and perform the tests, with the full knowledge that Medicare will not reimburse it for this act of clinical service and human kindness.

It should be noted that the majority of Medicare patients, made aware of this situation, would consider it un-American, unfair, and a gross violation of the principles upon which this country was founded. After all, government Medicare officials are taking the long-standing “any willing provider” philosophy for Medicare Part B FFS and subverting it into an artifice where it subjectively chooses which labs are “in” and which labs are “out.” It then uses the club of the law to force the “out” labs to perform testing with no hope of reimbursement!

This smacks of involuntary servitude, because the Medicare program will compel that lab to perform a service for free. Maybe involuntary servitude is not the correct legal term in this instance, but most Americans would expect that, if a private health insurer tried this same scheme, courts would overturn it immediately. It would be interesting to see if this competitive bid demo requirement would stand up in court if it were to be litigated.

Serious Flaws In Bid Demo

 These opening observations about the Medicare Laboratory Competitive Bidding Demonstration Project illustrate serious flaws in both the philosophy that guided its creation and the motives of CMS officials in its execution. Intelligence briefings on the following pages will highlight other disturbing issues of the San Diego pilot bidding demonstration. 

To Bid, Laboratories Face An Onerous Requirement

ONE OF THE MORE PUZZLING ELEMENTS of the bidding requirements for the laboratory competitive bidding demonstration project is the need for a single laboratory to provide a bid for each individual test in the mandatory list of 303 tests covered by this demonstration pilot.

Most local laboratories currently serving Medicare beneficiaries in the San Diego-Carlsbad-San Marcos MSA (metropolitan statistical area) perform only a portion of these 303 tests in-house, in their own laboratory facility. Some of these 303 tests will be referred to other laboratories, including the national specialty reference and esoteric testing companies.

This means the bidding auction rules established by CMS/RTI require laboratory bidders to find a third party lab to provide it a “wholesale” price. It can only construct a complete bid by accepting its reference lab’s “wholesale” price and using that figure as a basis to calculate the bid price it will submit to CMS/RTI. For example, Internist Laboratory of Oceanside, California performs about 150 of these tests in its own laboratory. The balance it refers to Laboratory Corporation of America. (See pages 12-15.) Because LabCorp is also expected to bid, this increases the difficulty for Internist Laboratory to get an objective “wholesale” price and creates what could be a “conflict of interest” situation for LabCorp.


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