Medi-Cal Abandons Lab Contract Scheme

Plan to contract with selected labs collapses from its own complexity

CEO SUMMARY: Another threat to limit all laboratories’ access to Medicaid patients has ended. Just as the Medicaid lab contracting initiative proposed last year in Florida collapsed from its innate complexity, so also has a similar contracting initiative collapsed in California. In both cases, state Medicaid administrators resorted to a reduction in lab fees as the primary way to meet budget objectives.

IT’S THE DEATH OF ANOTHER DUMB BUREAUCRATIC IDEA that involved Medicaid contracting for laboratory testing services. California’s Department of Health Services (DHS) has abandoned plans to enter into contracts with designated labs selected to be Medi-Cal providers.

The decision to cancel this contracting program was communicated in a public letter from DHS dated September 19, 2005. During 2004, DHS had initiated a scheme to negotiate contracts with clinical laboratories that met specific criteria. Laboratories with such contracts would be allowed to provide lab testing services to the Medi-Cal program. Laboratories without such contracts would be excluded as Medi-Cal providers. (See TDRs, May 4, 2004 and November 22, 2004.)

“This Medi-Cal lab contracting initiative collapsed of its own complexity,” stated one lab executive who works in California. “DHS finally figured out that it was going to cost far more to administer the program than any savings that might be realized.”

“This strategy is reintroduced every time the state faces a budget crisis,” observed another source. “It cost labs a lot of money to respond to this application because of the extensive documentation requested. I’ve heard stories that some labs delivered truckloads of paper to DHS when they submitted their application as part of the contract process.”

For laboratories in California, the DHS decision to drop this contract award process is welcome news. On April 5, 2004, the California DHS mailed a cover letter and RFA (Request for Application) to 500 independent laboratories. Its intention was to sign contracts with a specific number of qualifying laboratories.

Without a Medi-Cal contract, a laboratory would be excluded from doing lab tests for Medi-Cal patients. By intent, Medi-Cal program administrators were preparing to use these contracts as a way to include specific laboratories on the Medi-Cal laboratory services provider panel, while excluding all other laboratories from the state’s Medicaid program.

At the same time that Medicaid officials in California were pursuing this scheme, Florida’s Agency for Health Care Administration (AHCA) was embarked on a parallel lab services contracting scheme. However, the Florida plan was even more extreme. AHCA wanted to award a single laboratory a three-year contract to perform all outreach testing services in the state. That effort collapsed earlier this year. (See TDR, January 3, 2005.)

Bellwether States

For the laboratory industry, California and Florida are bellwether states. Any managed care or Medicaid lab contracting initiatives that succeed in these two states tend to be copied in other states. The Medicaid lab test contracting proposals, proposed last year in both Florida and California, represented a significant threat if they were implemented—and were then copied by states looking for remedies to their own Medicaid budget crises.

There was another disturbing element to the Medi-Cal lab contracting scheme. The intention was to sign contracts with a specific number of “qualifying” laboratories (as defined by the Medi-Cal program). Without a Medi-Cal contract, a laboratory would be excluded from doing lab tests for Medi-Cal patients.

If a laboratory holding one of these Medi-Cal contracts was ever deemed to have violated terms of the contract, it would be subject to unilateral revocation by Medi-Cal. The effect was to shift the burden of proof to the lab to show it had not violated the terms of the contract.

Medi-Cal officials believed the contracts would accomplish two primary goals. First, the negotiated contract price would be reduced from existing Medi-Cal fees, saving money for the program. Second, Medi-Cal would only contract with laboratories that it viewed as being fully compliant with all laws and regulations. Because fraudulent billing of the Medi-Cal program is an ongoing problem, Medi-Cal officials believed the contracting process would make it possible to exclude any laboratories it suspected might be capable of fraud.

Of course, such an approach is contrary to the established concepts of “any willing provider” and “due process of law.” Also, such contracting schemes raise another issue: whether the process of selecting a winning laboratory was free of bias and free from manipulation, either by bureaucrats or by laboratories.

Lab Cost Study Ongoing In British Columbia

EVEN AS MEDICAID PROGRAMS in California and Florida were announcing complex laboratory contracting proposals, government health administrators in British Columbia were putting forth their “Lab Reform” plan, which included fee cuts and competitive bidding.

Canada’s Supreme Court ruled the plan was illegal. The British Columbia Medical Association and the government then worked out an interim one-year agreement. Laboratories agreed to accept a 20% reduction in reimbursement while an investigative task force was established to explore ways to reduce the cost of laboratory testing. (See TDR, November 22, 2004.)

“The laboratory fee review panel is reviewing actual cost data to come up with a weighted average, which factors in overhead,” stated Douglas Buchanan, CEO and Managing Director of BC Biomedical Laboratories, Inc., based in Surrey, British Columbia. “A panel on pathology workloads is using global benchmarks on productivity to establish a new model there. There have been no legislative changes and no milestones reached, yet. We expect to see those crystallize over the next six months.”

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