CEO SUMMARY: As Congress crafted its reform of the nation’s healthcare system last year, it asked healthcare providers to contribute substantially to the cost of the Patient Protection and Affordable Care Act. The lab industry will see a 1.75% cut in reimbursement for Medicare Part B patients in each of the next five years—a cut expected to save $5 billion in federal spending. However, for labs that serve a heavy population of Medicare Part B patients, this cut is overly burdensome. Lab groups are approaching Congress to develop a more equitable formula.
ENACTMENT OF THE MASSIVE HEALTH REFORM LEGISLATION last March means that the clinical laboratory testing profession is set to see a 1.75% reduction in the Medicare Part B laboratory testing fees in each of the five years from 2011 through 2015.
“Lawmakers estimated this cut in Medicare Part B lab test fees would save $5 billion in federal spending,” observed Mark S. Birenbaum, Ph.D., Administrator of the American Association of Bioanalysts (AAB) and the National Independent Laboratory Association (NILA) in St. Louis, Missouri. “But for labs that have a heavy population of Medicare Part B patients, this cut is overly burdensome.”
As the law stands now, those smaller independent clinical laboratory companies—which often have a mix of Medicare patients that can be 40% to 70% of their total patient mix—will bear an unfair share of this de facto tax. Thus, the five-year reduction in Medicare Part B lab test fees has a disproportionate negative financial impact on these independent labs.
By comparison, larger laboratories often have a patient mix where Medicare patients represent about 15% or less of total revenue. For these labs, the five-year cuts in Medicare funding represent a much smaller financial impact.
In recognition of the unfair aspects of the current health reform law, several lab industry groups initiated new discussions with congressional lawmakers. “To avoid the severe impact this Medicare Part B fee cut will have on all laboratories—especially those laboratories that have high Medicare volume and serve the most vulnerable beneficiaries—AAB, NILA, and the American Clinical Laboratory Association (ACLA) are working with Congress this summer,” stated ACLA President Alan Mertz.
Protect Patient Access
“Our goal is to convince Congress to scale back these cuts for all laboratories,” noted Mertz, “so that they are at a level that is more proportionate to the size of the laboratory sector and will not endanger Medicare beneficiary access to critically important laboratory services.”
“NILA believes that the bill’s cuts of 1.75% in Part B lab fees—scheduled for each of the next five years—are not proportional within the laboratory industry and are clearly not equitable,” explained Birenbaum. “The problem is that each 1.75% cut will apply only to Medicare Part B laboratory testing, which comprises less than 14% of the total clinical laboratory market.
“It means these Medicare Part B fee cuts fall most heavily on laboratories with a higher-than-average percentage of Medicare Part B revenue,” he said. “By contrast, those laboratories with below- average percentages of Medicare Part B revenues—which includes the large, national corporate laboratories—bear the lightest burden.
Medicare Part B Billing
“In fact, one large reference laboratory does virtually no Medicare Part B billing and therefore contributes almost nothing to healthcare reform,” added Birenbaum. “Yet that large laboratory stands to benefit substantially from the additional laboratory testing generated by the 31 million individuals who were previously uninsured and will now have insurance cover- age under healthcare reform.
“By taking the 1.75% cuts only from Part B Medicare, Congress is getting funds for healthcare reform from a very small segment of the industry that represents only 13% to 14% of the total amount the nation spends on lab testing,” he explained. “When you do that, clinical laboratories that have a larger percentage of their business from Part B—sometimes as high as 70%—obviously are going to bear a much bigger burden under this bill as it stands. Meanwhile, labs that have very little Medicare Part B business do not pay their fair share.
“Given this inequity, we are now seeking a way to equal out everyone’s contribution among those labs that do more Part B testing and those labs that do less Part B testing,” Birenbaum said. “We are certainly willing to do our share; we just want to make sure it’s fair.
Agree On One Proposal
“Capitol Hill has responded with the mes- sage that the lab testing industry needs to get together and agree on one proposal instead of a number of different proposals,” noted Birenbaum. “Lab industry groups are working on that right now. We want to develop one proposal that we can advance as an industry. If the proposal needs to be modified, AAB and NILA will work with the other industry lab groups to modify it and keep working on it.”
Mertz said it may be possible to reopen negotiations with Congress in an effort to find a way to reduce the burden of the lab cuts by scaling it back and stretching it out. “It’s important to remember that the $5 billion cut over 10 years in the bill was offered as the only alternative to two far worse proposals,” he explained.
“The first such funding idea was institution of a Medicare co-pay of 20%,” recalled Mertz. “The second funding idea was to collect $7.5 billion over 10 years through a new annual federal tax on all laboratory testing revenue. Under this proposal, the Treasury Department would calculate each laboratory’s share of the $750 million annual tax and send it the tax bill.
“The proposal to require a 20% co-payment would have meant an immediate 20% reduction in Medicare lab test reimbursement for all labs in the nation,” Mertz noted. “That would be the equivalent of $20 billion over 10 years. This proposal would also have caused a significant increase in the administrative costs a lab incurs when it bills and tries to collect the Medicare 20% co-payment.
“During the summer of 2009, discus- sions with Congress were ongoing,” he continued. “At that time, the lab community worked quite well together to successfully get the 20% Medicare co-pay taken out of the Senate Finance Committee bill.
$750 Million Lab Tax Idea
“However, as soon as the 20% co-pay proposal was removed from the bill, the Senate Finance Committee added a new proposal for a permanent tax on all laboratory testing revenue,” said Mertz. “This new, all-encompassing laboratory testing tax was designed to produce $750 million per year. Estimates were that this permanent new tax on laboratory testing would probably be 2% to 3% of every laboratory’s total revenue from lab testing services.
“As proposed, every source of lab testing revenue would be included in the proposed annual laboratory tax,” emphasized Mertz. “The tax base would cover clinical lab work, pathology, Medicare, non-Medicare, and all government and private contracts. Worse yet, this permanent tax on total laboratory revenue would have started this year and lasted forever!
“Lawmakers were designing this annual lab tax so it would generate $7.5 billion over 10 years—and the tax rate was to be increased by whatever percentage was required to collect that $7.5 billion,” he observed. “However, projections showed that the net revenue overall to the government as a result of this lab tax would only total about $5 billion.
“This disparity between the $7.5 billion in taxes collected versus $5 billion in net revenue is because government budgeters estimated that so many labs would have to lay off workers, shut down, or file bankruptcy as a result of this devastating new tax, that the government would simultaneously lose about $2.5 billion in other taxes on incomes and profits that they would otherwise collect without the new lab tax,” noted Mertz.
New Medical Device Tax
“This is not pure conjecture, as a similar new tax on medical devices did make it in the final bill,” he added. “That industry is now bracing itself for a permanent new 2.3% federal tax on all sales of medical devices.” (See TDR, March 29, 2010.)
Birenbaum admits that there are many hurdles to overcome before any interested lab industry groups could succeed in gaining repeal of the five consecutive 1.75% Medicare Part B lab test fee cuts—scheduled for 2011 through 2015—and replace them with a more satisfactory funding proposal. “It’s definitely worth doing,” he stated. “However, it will be an uphill battle for any healthcare group that attempts to renegotiate funding cuts as they now stand in the law.
“Generally you have to offer an alternative way to pay for it,” Birenbaum concluded. “That is what we are working on now. If the Senate Finance Committee is receptive, we hope to do something and action could take place, possibly in the next few months.”
Senator Brown’s Election Helped Derail Hopes To Revise 1.75% Cut in Medicare Lab Test Fees
JUST AS CONGRESS WAS PREPARING to vote on the Patient Protection and Affordable Care Act, voters in Massachusetts foiled the Democrats’ plan by electing a Republican. In a special election on January 19, Senator Scott Brown was elected to fill the seat vacated when Democrat Edward Kennedy died on August 25, 2009.
Mark S. Birenbaum, Ph.D., Administrator of the American Association of Bioanalysts (AAB) and the National Independent Laboratory Association (NILA) in St. Louis, Missouri, explained that Brown’s election forced the Democrats to revise their plans for passing the healthcare reform act.
“In the fall of 2009, we had a commitment from legislators on the hill that they would work with us to come up with a formula that would more equitably produce the funding from labs to finance healthcare reform,” Birenbaum recalled. “We understood that the lab testing industry didn’t want the [$750 million annual] tax that was being discussed.
“Our goal was to develop a funding for- mula that didn’t rely exclusively on cuts to lab test reimbursement for those labs that do a lot of Medicare Part B work,” he explained. “For labs that do a large percentage of Part B work, multi-year cuts of 1.75% in Medicare fees threatens their financial viability.
“At the time, we got agreement from eight of the 10 lab groups in the clinical laboratory coalition that something needed to be done about these five 1.75% cuts,” said Birenbaum. “Those eight groups signed the letters we wrote on this subject. These letters were then sent to the Senate and to the House in December and January.
“The lab organizations described the inequity of the funding proposal,” he stated. “Members of Congress recognized that this tax created an imbalance that would unfairly put a larger burden on one group of clinical labs—those labs that perform a higher proportion of testing for Medicare patients.
“We planned to work with the House–Senate conference committee to come up with something that would be more equitable,” noted Birenbaum. “But that all changed when Scott Brown was elected as a Republican Senator for Massachusetts.
“His election altered the voting balance in the Senate and caused Congressional leaders to use a totally different process to pass the health reform bill,” he continued. “That is why the bill never did go to a House-Senate conference committee where key differences between the House and Senate versions would be resolved.
“Instead, the legislation as passed by the Senate was locked in place,” commented Birenbaum. “Like other industries, the laboratory testing industry was essentially frozen out of the ability to go to a conference committee, where typically many important issues can be discussed and worked out. It is then that a final, revised version of the bill is presented to the Senate and House for a final vote.
Looking For Better Solution
“Thus, after the bill was passed and signed into law, our coalition of clinical laboratory organizations was left with only one option—to continue negotiations and develop a more equitable proposal that would treat all laboratories fairly while raising the funds Congress expects from the laboratory testing industry,” declared Birenbaum.
“That is what we are doing now,” he concluded. “We are working to come up with some way to mitigate the burden that the pending five years of 1.75% cuts will have on those clinical labs that have a large percentage of Medicare Part B lab testing.”
Health Reform Bill Initiates Cuts in 2011
WITH ABOUT 2,700 PAGES, the Patient Protection and Affordable Care Act of 2010 is a comprehensive piece of legislation. Further, the bill has many different provisions that will be not be instituted until future years.
To understand what is in the bill, it is often simpler to consult the summaries of the legislation produced by various committees in Congress. What follows is a description of the Medicare Part B laboratory test fee reduction of 1.75% per year. This description was developed by the House Energy and Commerce Committee Republican staff:
(H.R. 3590 as Revised by H.R. 4872)
Medicare: Start date for the Secretary to reduce the annual inflation update to Medicare payments for providers paid through the clinical laboratory test fee schedule by 1.75 percentage points for 2011 through 2015. (Sec. 3401)
The link to this document can be found at https://republicans.energycommerce.hous e.gov/Media/file/News/042110_Health_L aw_Timeline.pdf.
Evidence that even the lawmakers recognize the complicated language in the bill comes from this statement that precedes the summary of the bill’s provisions:
DISCLAIMER: This document represents the best efforts of the Energy and Commerce Committee Republican staff to describe the substantive provisions and effective dates of the legislation. Because of the lack of clarity, internal inconsistencies, and ambiguity in the text, many provisions will inevitably be subject to dispute or alternative interpretations.
Moody’s Predicts that Not-for-Profit Hospitals Will Suffer from Medicare Funding Cuts
HAVING AGREED TO $155 BILLION in reduced Medicare funding during the coming years, the hospital industry is likely to find itself financially strapped. That’s the opinion of financial analysts at Moody’s Investor Services.
Just a few weeks ago, Moody’s released a report on the financial outlook for the nation’s not-for-profit hospitals. The findings were not optimistic. Moody’s started with the announced federal fiscal year 2011 Medicare budget, which includes a 0.4% net reduction in inpatient hospital rates.
The Moody’s analysts wrote that the planned cuts are “an unambiguous credit negative for not-for-profit hospitals and a key driver to our maintaining a negative outlook for the industry. Starting October 1, hospitals will see an overall $440 million less in payments and it was noted that a reduction in federal funding is “an extremely rare event.”
Moody’s believes it will be a tough environment for the hospital industry. On one side are the reductions in Medicare fees, Medicaid reimbursement that is typically less than the cost of providing care, and the slow economy, which has reduced the volume of patients.
On the other side, Moody’s noted that, in recent years, many hospitals have successfully ratcheted down costs in supplies, deferred capital spending, and improved laboratory productivity. However, it is not likely that hospital administrators can continue cutting enough costs to offset lower reimbursement from Medicare.
One consequence of this financial squeeze is that hospital labs will be given even tighter budget restrictions than during the recent recession years. This will hamstring the ability of hospital labs to spend capital to build their clinical capabilities. It also means that it will be tougher for lab industry vendors to enjoy increased sales volume.