Medi-Cal to Cut Lab Pay on July 1 by 25% to 30%

Latest round of deep lab price cuts follows several years of other lab test fee reductions

CEO SUMMARY: Since 2011, state officials in California have aggressively cut laboratory testing fees for Medi-Cal, the state’s Medicaid program. Now state officials say they will implement a new methodology next month for determining lab testing fees. The new methodology is based on lab pricing data produced as a result of whistleblower lawsuits against labs that were settled in 2011. Should prices fall below the costs of performing these tests, the Medi-Cal program may see legal challenges from the lab industry.

CLINICAL LABS IN CALIFORNIA will face a cut in payment rates of 25% to 30% next week for laboratory tests for any Medi-Cal patient, stated Michael Arnold, Executive Director of the California Clinical Laboratory Association.

“These reduced payment rates in California result from whistleblower suits filed in 2005,” noted Arnold. “One result of the lawsuits was that state officials noticed that clinical labs were taking payment rates from commercial insurers that were lower than what Medi-Cal was paying. Under state law, Medi-Cal should pay the lowest rates.”

In 2011, state officials settled those whistleblower cases when the defendant labs paid millions of dollars to resolve the charges without admitting guilt. “In response to the information surfaced during the investigation, state officials have acted to reduce what Medi-Cal pays to the state’s 1,400 clinical laboratories,” Arnold said. “Of those 1,400 labs, we know that about 400 to 500 are freestanding independent labs, and the rest are labs based in physician offices and in hospitals.”

Arnold explained this change and others affecting clinical laboratories in California as a speaker on a panel at THE DARK REPORT’S 20th anniversary Executive War College last month.

In the whistleblower cases, state officials charged Quest Diagnostics Incorporated, Laboratory Corporation of America, and five other lab companies with failing to comply with California’s regulations so that the Medi-Cal program overpaid the defendant labs for medical lab testing services.

Settlements in Qui Tam Suits

The suit resulted in settlements between the clinical labs and state Attorney General Kamala D. Harris. In May 2011, Quest Diagnostics agreed to pay $241 million to settle the charges. In August 2011, Harris announced a $49.5 million settlement with LabCorp to settle charges that Medi-Cal overpaid for lab testing services under a similar scheme. (See TDRs June 13 and September 26, 2011.)

In these whistleblower cases, the lab companies were accused of providing millions of dollars in low-cost or below-cost testing to health insurers. In return, the insurers would require their network physicians–who also served Medi-Cal patients–to send lab tests to the defendant labs in the lawsuit. The labs then billed Medi-Cal much greater amounts for identical tests in a scheme called pullthrough billing. LabCorp offered some tests to private insurers for as low as $1, CBS News reported.

The payment rates violated rules for the state’s Medi-Cal program because private insurance companies were getting the lowest lab test rates when state law requires that all providers offer Medi-Cal the lowest rate for healthcare services.

After the settlements, California officials wanted to change the state’s payment regulations to ensure compliance with California Medi-Cal statutes. “State officials noticed that Medi-Cal was not getting the lowest rates,” explained Arnold. “And those officials wanted to rectify that situation.”

Legislature Gets Involved

Acting on recommendations from the state Department of Finance and the Department of Health Care Services, the legislature agreed to cut the rates Medi-Cal pays to clinical labs.

“Here’s how it happened,” noted Arnold. “In 2011, the legislature faced budget problems and passed Assembly Bill 97, making a price cut retroactive to June 1, 2011. “That meant that Medi-Cal payment amounts for lab services on or after that date were reduced by 10%. It was as if the state assembly was saying, ‘We will reduce your payments by 10%.’ Much of the reason for this reduction was the qui tam lawsuits that were settled in 2011.

“Then, in 2012, the state faced more budget problems and the legislature passed AB 1494, which imposed an additional 10% payment reduction on top of the payment reduction that labs got under AB 97,” he continued. “And, again, the legislature made those changes retroactive, this time to July 1, 2012. In addition, AB 1494 included a second provision that required state officials to develop a new methodology for reimbursement rates that Medi-Cal would pay to clinical laboratories.

“As part of the new rate methodology, the assembly told the state Department of Health Care Services to collect data on the lowest rates that labs would accept from commercial payers,” stated Arnold. “This request required labs to do a significant amount of work to collect all the payment data. CCLA complained that state officials were asking for too much information and had a series of meetings with state officials. Ultimately, Medi-Cal officials agreed to reduce the number of CPT codes for which labs would have to report all prices they accepted from different payers.

“But then, not all labs reported what commercial insurers paid them,” he added. “In fact, only about 60 or 70 labs out of about 1,400 reported their data to state officials. That’s a big problem because it is believed that many labs that are likely to be getting more for reimbursement probably didn’t report because they were smaller laboratories and found the reporting to be very difficult. But the expense of collecting this pricing data was prohibitive for these smaller labs.

New York DOH Changing Proficiency Test Process

IN NEW YORK, the state Department of Health does not recognize any proficiency testing program other than its own. That situation is about to change, however.

“In the past, New York felt it did proficiency testing better than anyone else and that is why it made all labs abide by its own proficiency testing (PT) standards,” observed Thomas Rafalsky, President and General Counsel of the New York State Clinical Laboratory Association. “But now that process will change.”

Starting next year, the New York State Department of Health will allow other PT providers recognized by the federal Centers for Medicare & Medicaid Services to run PT programs that will be recognized by New York State. NYSDOH will compete against other PT providers.

“Many labs use PT services from a variety of PT providers,” said Rafalsky. “In such situations, they must still use the New York State proficiency testing service. This results in unnecessary duplication and additional expenses. For large labs, this duplication easily could cost hundreds of thousands of dollars for multiple PT programs.

“Many labs feel the staff time needed for the different PT programs is more onerous than the additional cost,” he added. “In response to complaints from our members, over the past two years, we’ve negotiated this matter with the state DOH. State officials finally relented, agreeing to recognize the PT results of other CMS-approved entities.

“All labs operating in New York State will get a letter from NYSDOH in September or October outlining this new process,” he said. “By approximately December 1, labs will need to choose a PT entity for calendar year 2016. NYSDOH will continue to run a PT program, but on a smaller scale. The redundancies will be eliminated, which is a major accomplishment.”

Few Labs Reported Prices

“The fact that so few labs reported the price data is important for another reason,” continued Arnold. “Under the Protect Access to Medicare Act (PAMA) which the U.S. Congress passed last year, the federal Centers for Medicare & Medicaid Services will be collecting price data from clinical labs. If all labs don’t report their price data, it is likely to skew the results. And if the results are developed from incomplete data, CMS could set new rates based on flawed data. But that’s a different topic.

“After the 60 to 70 California labs submitted their price data, the state analyzed this information and decided to toss out all the prices that were above 80% of Medicare because state law says Medi-Cal can’t pay more than 80% of Medicare,” observed Arnold. “Of course, CCLA complained that tossing out those numbers pushed the average for each CPT code much lower, but state officials ignored that objection.

Weighted Average of Prices

“Medi-Cal officials said they would determine the weighted average of test prices and then apply the 10% cuts enacted under AB 97,” he said. “But the price cuts under AB 1494 were eliminated because rates were being adjusted under the new reimbursement methodology.

“The end result of these changes is that clinical labs will get a 25% to 30% cut when all these cuts go into effect on July 1,” commented Arnold. “Now, having said all that, we still don’t know exactly if this new methodology will be implemented or how it will be implemented.

“We believe it will be put in place because that’s what state officials said,” he said. “We have tried to reach state officials to ask them for specific details, but so far we have had no response. We just know they said the new methodology would go into effect on July 1.

“Therefore, labs will have to adjust to new Medi-Cal rates starting next month, but there are additional problems clinical labs face in California,” added Arnold. “Labs involved in personalized medicine in California-and we have many of them-are extremely upset about CMS practices with respect to local coverage determinations (LCDs) that affect what Medicare and Medi-Cal will pay for certain genetic and molecular tests.”

CCLA filed a lawsuit against HHS last year over this matter, but that lawsuit was recently dismissed.

Contact Michael Arnold at 916-446-2646 or; Thomas Rafalsky at or 718-636-8000 x314.


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