A Pricing Strategy Soon to Boomerang?

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HAVE NATIONAL LAB COMPANIES CREATED A REIMBURSEMENT BOOMERANG that will erode financial stability for the entire laboratory industry in the United States? I ask that question because the Medicare Competitive Bidding Demonstration Project for Laboratory Services has selected San Diego to be its first site. It was ready to conduct a bidder’s conference until last week’s wildfires in Southern California forced a change in plans. In taking these steps, CMS is likely to open a Pandora’s box of unintended consequences.

Most of us are familiar with how national lab companies, beginning about 15 years ago, decided on a strategy of bidding for managed care work using marginal cost pricing. The underpinnings of this strategy was a belief that gaining exclusive contract access to a private health plan’s beneficiaries would make it easier to access the discretionary, fee-for-service work referred by physicians. This was the “pull through” concept, and Medicare Part B fee-for-service reimbursement, representing 30% to 40% or more of a large laboratory’s payer mix, was a necessary component to provide the reimbursement dollars needed to offset the losses from private payer contracts bid by the lab at marginal cost. The national contracts based on marginal cost lab test pricing that UnitedHealth, WellPoint, Aetna, and other large health insurance companies currently enjoy are widely believed to be falling below 50% of Medicare Part B reimbursement levels.

So imagine this scenario. In the San Diego-Carlsbad-San Marcos SMA (statistical metropolitan area), the competitive bid demonstration successfully meets three goals: 1) the lowest bids Medicare accepts for the test mix in the SMA save considerable amounts of money for what Medicare would pay for Part B lab tests when extrapolated across the entire United States, 2) patient access is not affected in negative ways, and 3) at least a few small labs in the demonstration site could provide some testing at the lower prices. Based on these outcomes, Medicare administrators then encourage Congress to enact fee-for-service reimbursement levels comparable to what national laboratory companies currently offer as contract pricing to the nation’s largest private health insurers.

That would be a pricing boomerang with devastating financial consequences across the lab industry. As the Medicare program finally insists on paying the same amount that national lab companies have voluntarily bid to private insurers, it would be an economic shock that many labs may not withstand.

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