CEO SUMMARY: A bill that may be the U.S. Senate’s framework for reforming the U.S. healthcare system calls for a tax of $750 million per year to be paid by lab testing companies. The proposed bill also calls for a reduction in Medicare reimbursement for lab testing. One positive element was that reinstatement of the Medicare lab test co-pay was dropped from this version of the health reform bill. THE DARK REPORT provides details of how the Senate bill would determine the amount of tax each lab testing company would pay annually.
WHEN MAX BAUCUS (D-Montana), Chairman of the Senate Finance Committee, released his healthcare reform bill to the press earlier this month, it provided insights into how Senate leaders want to finance health reform.
For the laboratory testing industry, the news was not good. This version, considered to be an important road map to health reform, contains two significant details that could be detrimental to clinical labs. First, the bill calls for a significant new tax to be assessed on clinical lab testing. Second, the bill calls for cuts in Medicare fees that labs currently earn on lab testing services.
Investors understood the implications of these legislative proposals. Kirell Lakhman of genomeweb.com blogged that “Investors in clinical labs are right to be concerned by the government’s plan to tax the fecal-occult blood out of them [the lab companies].” Writing on September 10, Lakhman noted that, since what he called the “Baucus Ruckus” two days earlier, the share prices of Quest Diagnostics Incorporated, Laboratory Corporation of America, and Bio-Reference Laboratories, Inc., had declined by as much as 2.3%, 2.0%, and 1.6%, respectively.
The proposals in the new bill caught the attention of the American Clinical Laboratory Association (ACLA). “Senate Finance Committee Chairman Max Baucus’ plan to impose $750 million in taxes on clinical laboratory testing services—on top of other cuts—translates into a disproportionate cut for laboratories and will damage efforts to enhance prevention and wellness, and raise healthcare costs,” noted Alan Mertz, ACLA President in a written statement.
“The tax unfairly targets the clinical laboratory industry among providers, which includes about 40,000 labs providing a myriad of critical health services to patients across the nation,” Mertz commented. “When the $750 million in new fees are added to other cuts in the proposal, America’s clinical labs could be facing cuts several times that of other providers.”
The second problem for medical laboratories in the Baucus bill are cuts in Medicare spending for lab tests. This continues a 25-year pattern of significant underfunding of laboratory testing services by federal health programs.
“Overall, Medicare payment amounts for clinical laboratory services have been reduced by about 40% in real, inflation-adjusted terms between 1984 and 2004,” Mertz explained. “Congress has acted to completely eliminate the annual payment update for clinical labs in 10 of the last 12 years. Since 2000, labs have received the smallest cumulative update of any provider in Part B of Medicare, only 5.6% compared to 12% for physicians and 34% for hospitals.”
Against the news of a new $750 million tax on lab testing and a reduction in reimbursement for lab services, there was at least one favorable development. Earlier this summer, Baucus’ committee had considered reinstating the lab test co-pay requirement for Medicare patients. The proposed bill did not contain that provision.
Given the rancorous national debate, pathologists and lab executives should expect much more to happen before both houses of Congress vote on their versions of health reform bills.
Understanding How the Senate Bill Would Calculate the Tax to Be Paid By Laboratory Companies
AS DEFINED IN THE PROPOSED LEGISLATION released by the Senate Finance Committee, a fee would be imposed on any “covered entity” offering clinical laboratory services in the United States.
“The aggregate fee on the clinical laboratory sector would be $750 million annually, beginning in 2010,” states the bill, which further explains that the aggregate fee would be apportioned among labs based on each lab’s relative market share of covered domestic laboratory service revenue in the previous year and would be need to be paid annually.
“A covered entity would be defined as any company that provides services for the biological, microbiological, serological, chemical, immuno-hematological, hematological, biophysical, cytological, pathological, or other examination of materials derived from the human body for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of the health of, human beings,” the bill said. The term “covered entity” would include a parent company, its affiliates, and other related parties, the bill said.
The “covered domestic laboratory service revenue” would include revenue from providing laboratory services in the United States. Notably, laboratory services performed by a hospital for inpatients of the hospital would be excluded from this tax.
The bill would ask the Secretary of the Treasury to require any covered entity to file an annual report of its covered domestic laboratory service revenue for the prior calendar year. The secretary would establish individual assessments based on each company’s relative market share. “A covered entity‘s relative market share would be the entity‘s covered domestic laboratory service revenue as a percentage of the total reported covered domestic laboratory service revenue for all covered entities,” the bill said.
Small labs that generate revenue of less than $500,000 would be exempt. “In determining each covered entity’s relative market share, covered domestic laboratory service revenue will be taken into account as follows: 0% of revenue up to $500,000 and 100% of revenue over $500,000,” the bill said. The Baucus bill also would allow the fees paid by labs under this provision to be deductible for U.S. income tax purposes.