Price Discount Practices May Prove Troublesome

One lab industry executive is surprised at how deeply test prices are discounted to payers

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CEO SUMMARY: Some laboratories continue to offer deeply-discounted prices to the nation’s largest managed care plans as a way to maintain provider status and keep market share. In one case, these deep discounts surprised a long-time lab executive, who decided to share the information, along with his comments. Among his concerns is how such situations argue in favor of Medicare’s desire to initiate competitive bidding.

DURING THE PAST DECADE, there’s been plenty of debate and discussion about Medicare reimbursement for laboratory testing and whether existing fee schedules adequately reimburse laboratories for the cost of such testing.

This debate took an added dimension last fall when the Office of the Investigator General (OIG) published rules that would amend regulations related to Medicare/Medicaid’s prohibition against discriminatory billing practices. The proposed rules would establish a more specific formula for laboratories to use when calculating “usual charges.”

Medicare Pays More

Timing of the OIG’s action indicates it believes providers are failing to extend to Medicare the lower, discounted prices they customarily charge other healthcare consumers. That is a reasonable assumption, because it is common knowledge that hospitals, physicians, and laboratories, for most of the past decade, have accepted capitated and highly-discounted fee-for-service arrangements with many private payers and IPAs. Reimbursement rates for these arrangements, when compared to Medicare reimbursement levels, frequently are much less.

“This is an important situation for the laboratory industry,” stated Joseph Plandowski, President of the Lakewood Consulting Group, located in Lake Forest, Illinois. “Many laboratories operate on razor-thin profit margins. This is particularly true of hospital outreach testing programs. So any substantial reduction to existing Medicare lab test reimbursement schedules represents a potentially devastating financial blow.

“The scale of this potential hit was made obvious to me recently,” he noted. “As part of my periodic medical check-up, routine clinical chemistry tests were performed. The specimens were drawn at a local patient service center operated by Quest Diagnostics Incorporated and the tests were done at their regional laboratory. My physician also did a few tests in his office. (See table below.)

“UnitedHealthcare is my health insurer. Both Quest Diagnostics and my physician are providers and both accepted UnitedHealthcare’s payments as full reimbursement,” explained Plandowski. “Moreover, as a patient, I was not required to pay anything. Although that may be good for me financially, the amount reimbursed for laboratory testing and services was appallingly low!

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United Gets 90% Discount

“As billed by either Quest Diagnostics or my physician, the total charge for phlebotomy and all testing was $239.90. United Healthcare paid a total of $24.73. That’s a 90% discount,” exclaimed Plandowski.

“As a point of comparison, based on Medicare fees for Illinois, Medicare would have reimbursed $51.77 for these same laboratory tests and services,” he added. “That’s more than double the amount the national laboratory and my doctor accept from United Healthcare for reimbursement.

“These discounts are huge,” said Plandowski. “However, it is the payment amounts which deserve the most attention. The absolute dollars accepted by Quest Diagnostics and my doctor are staggeringly low.

“This highlights two concerns. First, can any small laboratory or hospital lab outreach program compete at these fees and survive?” questioned Plandowski. “This certainly explains why Quest Diagnostics and Laboratory Corporation of America constantly tell Wall Street their future lies in such higher-margin testing as genetics, infectious disease, prognostic cancer markers, and the like. To the nation’s largest health insurers, these national lab companies have priced routine, high-volume testing so low that it now generates inadequate margins, even at the low cost-per-test generated by their economies of scale.

“Second, Medicare is still a big elephant in the room. Assume that insurance companies like Aetna, UnitedHealthGroup, Oxford Health, Cigna, and Humana get prices like the example provided here, and collectively this represents laboratory testing for upwards of 50 million American. Isn’t it reasonable to expect that Medicare would want these same price levels for the laboratory tests provided to Medicare and Medicaid beneficiaries by the two blood brothers?” asked Plandowski.

“No one should be surprised if the Medicare program takes more aggressive steps to address this pricing inequity,” he added. “One way to do that is to be more detailed in defining ‘usual and customary charges,’ which is reflected in the proposed language the OIG published last September.

Competitive Bidding

“The second way is to institute a demonstration project for competitive bidding in laboratory testing services,” observed Plandowski. “With examples like the pricing offered to UnitedHealthcare by Quest Diagnostics and my doctor, Medicare can certainly go to Congress and defend the need for this step.

“Further, does the uninsured or self-pay patient deserve to pay an artificial ‘patient test price’ that is disconnected from the actual prices negotiated between large laboratory companies and large payers?” he continued. “Probably not. Hospitals are already under pressure by policy makers, consumer groups, and attorneys to cease charging uninsured patients prices which are double and triple the amount they accept from major payers.

“It is not a stretch to see consumer groups attack the laboratory industry for ‘overcharging’ uninsured patients,” said Plandowski. “They can use the same arguments now being made against hospital billing and collection practices.”

Potential For Change

Plandowski raises several interesting questions that strike at the heart of the lab industry’s status quo with the Medicare and Medicaid programs. Would government healthcare administrators make different reimbursement decisions for laboratory tests if they understood the full scale of price discounting that seems to exist between the nation’s big insurance companies and the largest regional and national laboratory companies?

Plandowski believes situations like this will prove problematic for the laboratory industry. “For pathologists, hospital administrators, uninsured patients, and the federal government, this raises a host of interesting questions,” he said. “Not the least is the question of inequity in access to lab testing services. Should uninsured patients and those of government-funded programs like Medicare and Medicaid pay more than a patient covered by a private insurance plan–one that uses the sound business practice of competitive bidding to achieve the lowest price offered in the market?”

At a minimum, the pricing dichotomy for lab testing services that developed in the 1990s between private and public payers may be a ticking time bomb. When it explodes, there will probably be more losers than winners in the laboratory industry.


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