Study Reveals Medicare Already Pays Low Rates

Most of the time, Medicare is paying less than private health plans, with some exceptions

CEO SUMMARY: Researchers studied a database containing laboratory test prices paid in 2012 on behalf of 56 million Americans covered by private health plans and determined that, for most tests, and in most regions, Medicare already pays less than private health insurers for clinical laboratory tests. There are exceptions, but the findings provide a credible critique of the conclusions in the clinical laboratory test price report issued by the Office of Inspector General earlier this year.

MEDICARE ALMOST ALWAYS GETS the lowest rates for clinical laboratory tests nationwide, except for some tests in certain regional markets. These are the findings of a new study recently performed by Avalere Health, a healthcare advisory company in Washington, D.C.

For the clinical lab testing industry, this research may be the most comprehensive investigation ever done of laboratory test prices paid by public and private payers in all 50 states. Its findings are expected to inform the debate over what price levels are appropriate for the Medicare Part B Clinical Laboratory Fee Schedule (CLFS).

Avalere analyzed claims data from the MarketScan databases developed by Truven Health Analytics, a healthcare data aggregator in Ann Arbor, Michigan. Truven Health said its MarketScan databases are built on information collected since 1995 from more than 180 million patients.

“The data for this study included 2012 prices paid on behalf of 56 million Americans by non-government health plans (predominantly those contracting with self-insured employers) in more than 398 metropolitan statistical areas (MSAs),” stated Eric Hammelman, Vice President at Avalere. “The data represented the entire clinical lab testing market. It included data from both hospital-based labs and non-hospital-based labs (independent commercial labs).”

The American Clinical Laboratory Association (ACLA) commissioned Avalere Health to do this study. Hammelman and other Avalere researchers gathered and analyzed the data.

More Complete Picture

“This analysis was done so that policymakers would have a fuller picture of laboratory test pricing,” stated Alan Mertz, President of ACLA. “In particular, it provides a more detailed analysis than that of the federal Office of Inspector General (OIG), which issued a report in June of this year.”

When reporting on the OIG report, Bloomberg News said that for 20 of the highest-volume lab tests, if Medicare paid the lowest price of what any of the 50 state Medicaid programs and three health plans paid, the federal Centers for Medicare & Medicaid Services (CMS) could have saved $910 million in 2011. (See TDR, June 17, 2013.)

The Avalere study raises doubts about the OIG report. While confirming that some commercial health plans pay less than CMS pays, the Avalere study also shows that CMS almost always pays below average rates in markets nationwide.

The data included the numbers from Quest Diagnostics Incorporated and Laboratory Corporation of America, said Hammelman. These numbers are aggregated along with data from all commercial labs and so are not broken out separately.

Hammelman pulled data from the MarketScan databases for 27 lab test CPT codes representing 15 routine low-dollar tests and 12 more high-dollar tests, including the top four Medicare codes when ranked by cost. Collectively, these 27 codes represent about 49% of Medicare spending on the CLFS in 2012, Hammelman said.

A Representative Sample

“The prices were taken from the claims of about 50 million patients,” he said. “Almost 150 million people have employer-sponsored health insurance, which means the MarketScan data represents one third of that total. The data set is large enough that we were looking at almost everything.”

On every routine code reviewed, Medicare paid lower rates than the weighted commercial mean price paid, stated ACLA in its press release. “For example, commercial payers paid an average of $20.26 for a complete blood count (CBC)… Medicare’s price is almost half at $11.02,” wrote ACLA. “For column chromatography for drug screening, commercial payers paid $69.48 and Medicare paid $25.57.

“Commercial rates grew even more expensive than Medicare when services were provided in rural areas,” noted ACLA. “For example, the study found that rates could more than double in low volume areas such as Boise, Idaho, compared to high volume areas such as New York City.”

ACLA said the OIG failed to consider more than half of the private market. The OIG also incorrectly claimed that private payers receive a better deal on clinical lab tests than Medicare does, stated ACLA.

Commenting on the OIG study, Mertz said, “All too often, judgments are made from anecdotal reports or incomplete, thumbnail sketches that cherry pick some commercial rates. Avalere’s analysis shows unequivocally that Medicare pays lower than average commercial rates. The argument that labs may be overpaid by Medicare is simply unfounded.”

Hammelman explained that the OIG report involved a smaller number of lab test codes than Avalere studied. Also, OIG collected data on what Medicaid and health plans paid when contracting with the Federal Employees Health Benefits Program (FEHBP) whereas Avalere focused on the broader commercial market, he said.

“OIG went to the lowest or second lowest price—then published a paper that said Medicare is paying more than commercial payers and that if Medicare lowered what it pays to either what FEHBP pays or what Medicaid pays, then Medicare could save millions,” Hammelman said. “The OIG report reinforced the idea that has been prevalent about the lab test market for years. That idea is that Medicare pays more than commercial payers and this idea has been widespread since UnitedHealthcare signed an exclusive contract with LabCorp in 2006.” (See TDR, October 16, 2006.)

Demonstrate Lab Test Value

When ACLA announced the results of the Avalere research, Mertz explained that all labs understand the pressure on Medicare to cut costs. “ACLA recognizes that Medicare faces significant, long-term fiscal challenges,” he said, “but we cannot let anecdotes and incomplete data guide long-term cuts that will ultimately harm Medicare beneficiary access to life-saving clinical laboratory diagnostics. ACLA is committed to working with Congress and the administration to demonstrate the value of labs and ensure adequate access for current and future Medicare beneficiaries.”

Researcher Suggests More Questions To Ask On Pricing of Medicare Part B Clinical Lab Fees

TWO SIGNIFICANT FINDINGS EMERGED from a study of clinical laboratory test prices, said researcher Eric Hammelman, Vice President of Avalere Health.

“First, commercial insurers tend to pay hospitals a bit more than they pay non-hospital or free-standing commercial labs,” Hammelman explained. “Second, big markets tend to have lower prices than smaller markets. But both of those statements are not always true.

“The question we should ask is this: If Medicare wants to get the best price, how does it define ‘best price’ and where does it look to find the lowest price in its search to define best price?” he asked. “At this time, Medicare does not differentiate among lab test providers. It pays the same price no matter where the test is done.

Diverse Test Prices

“However, when you look geographically, you find a diverse range of prices with private payers,” he continued. “There are hospital-versus-nonhospital settings and urban-versus-rural differences.”

Here is where Hammelman frames a question that has dogged Medicare policy- makers since inception of the program back in 1966. Medicare treats all lab providers equally—but the private health insurance market does not, because it recognizes how volume can drive the prices for lab tests higher or lower.

“Medicare argues that it’s the biggest payer and therefore it should get the best price,” observed Hammelman. “But what the data reveals is that private health insurers and labs view pricing from a dynamic and a competitive viewpoint.

“Let me explain,” he said. “The data on lab test pricing show that, where a private health insurer can guarantee volume to a lab, that lab will offer a better price. That’s because there is a lower marginal cost-per- test when the lab is receiving larger volumes of specimens.

Medicare Test Volume

“But Medicare obviously is not guaranteeing any lab high volume,” said Hammelman. “Therefore, can it be argued that Medicare should get the lowest price? Or should policy-makers acknowledge that a lab provider has marginal costs that Medicare is not covering because it does not send sufficient volume so the laboratory can realize economies of scale?

“Further, Medicare has more compliance rules that make the cost of testing that much higher,” he added.

The long-term care (LTC) segment of the lab testing marketplace supports this point. Medicare pays the same for a test done on a patient in a LTC facility as it does for a well patient in a doctor’s office—despite the higher costs the lab incurs to provide lab testing services to LTC facilities.

This is why publicly-traded lab companies abandoned the long-term care market more than 20 years ago. Medicare benefici- aries in LTC facilities are served by small, independent lab companies that operate on profit margins of 4% or less.

If those smaller lab companies cannot cover their costs from Medicare’s continually-declining Part B lab test fees, they will go out of business. That will leave Medicare beneficiaries in LTC facilities without access to lab testing.



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