Who Wins and Who Loses With 51501 Enforcement

Over many years, California’s health system has benefited from the nation’s lowest lab prices

CEO SUMMARY: Assume that California’s Department of Health Care Services (DHCS) wins all challenges to enforcement of its interpretation of 51501(a). DHCS will get a one-time cash infusion as it collects money from labs which violated the state statute. But going forward, federally qualified health centers, independent practice associations, private payers, and patients will pay more—and the bill will likely exceed an additional $100 million per year in higher lab test fees.

IT HAS YET TO OCCUR to many pathologists and laboratory executives in California that their state’s free-wheeling, competitive market for laboratory testing services is about to be transformed in fundamental ways.

By all appearances, officials at California’s Department of Health Care Services (DHCS) are prepared to strictly enforce their interpretation of California Code of Regulations (CCR), Title 22, section 51501(a). That’s the part of the state code which says that the best price a provider gives to another provider must also be given to Medi-Cal.

Assume, for the moment, that DHCS prevails in all legal challenges to its interpretation of 51501. Lab executives believe that, moving forward, strict adherence to 51501(a) will result in the Medi-Cal lab test fee schedule turning into the de facto “lowest price” that clinical laboratories will offer to providers.

This will generate interesting consequences. For most of the past two decades, lab test prices in California have been consistently lowest in the nation. The direct beneficiaries of this have been patients, physicians, and private payers, as well as the Medi-Cal program itself. Because of the intense competition for market share among the state’s laboratory companies, many lab clients pay much less for lab testing than the existing Medi-Cal fee schedule.

Thus, if DHCS does enforce 51501(a) in a strict, consistent manner, laboratories will probably decide to raise all their lab test prices up to the “floor level” of the Medi-Cal fee schedule. This means a significant lab test price increase is in the immediate future for providers in California.

This will create new winners and losers within the California healthcare system. It is instructive to speculate on who will be a winner and who will be a loser in this new competitive market environment. Here are some informed guesses at how things may play out in California.

California Medi-Cal Program:

If 51501(a) is enforced, many laboratory executives tell THE DARK REPORT that their laboratory will raise any discounted prices to be equal to the Medi-Cal fee schedule. That would indicate, at least in the near term, that Medi-Cal will see little ongoing benefit from its enforcement of 51501(a), since it would continue to pay most lab test claims at its current fee schedule.

Because of its audit program, Medi-Cal will definitely be a winner because of all the restitution money and penalties it may collect from laboratories for past violations of 51501(a). But that is a one-time cash infusion into the financially-strapped program.

Will California labs have an incentive to discount below the Medi-Care fee schedule, then charge Medi-Cal the same lower fees to stay in compliance with 51501(a)? Few lab executives predict this will happen on any significant scale. But they don’t rule out that possibility.

Federally Qualified Health Centers (FQHC):

Currently these medical clinics and care centers—organized to serve uninsured patients—benefit from the nation’s lowest lab test prices. This group is predicted to be losers, since California laboratories must raise their deeply-discounted lab test prices up to the level of the Medi-Cal fee schedule.

FQHCs already recognize this threat and are feeling the financial pinch of higher laboratory test prices. This summer, some of those labs audited by DHCS did raise test prices to all clients, including a few FQHCs, to comply with DHCS’ interpretation of 51501(a).

There are 478 FQHC clinic sites in California. These clinics serve 2.9 million patients, so this is a significant segment of the California healthcare system.

This first round of lab test price increases was painful for the affected FQHCs. In a letter circulated to some California laboratories, the California Primary Care Association (CPCA), which represents FQHCs, writes that “if discounting of laboratory services below Medi-Cal rates is eliminated, CPCA esti mates that the financial impact on FQHCs will be between $40-$55 million annually.”

Independent Physician Associations (IPA):

California’s IPAs play a major role in care delivery. IPAs often contract globally for laboratory testing services. As a competitive sales strategy, lab companies have freely discounted the IPA contract work as a way to access the more lucrative fee-for-service specimens.

There are 142 IPAs in the state and they serve 4.6 million patients. Assume that half of these patients are covered by a global lab testing contract at a deep discount. Assume the same cost increase factor as used by CPCA. That projects that IPAs would pay between $55 million and $64 million more annually should their lab test fees be raised to the level of the Medi-Cal fee schedule. This negative financial consequence puts IPAs in the category of loser.

Clinical Laboratory Companies:

California’s laboratory companies go into the winner’s column. Once the state’s labs have made restitution to DHCS for past discount pricing sins and paid any penal- ties, they will see increased cash flow as they raise all discounted lab test prices up to the same level as Medi-Cal fees.

As the higher lab test fee estimates for FQHCs and IPAs indicate, California laboratory companies will see an estimated revenue increase of between $95 million and $119 million annually just from these two sources! And those higher fees will flow into the state’s laboratories for years into the future.

Private Practice Physicians, Patients, and Private Payers:

California laboratories regularly extend low lab test prices to these entities, who are likely to be in the loser category because laboratory companies will raise fees to the level of the Medi-Cal lab test fee schedule to comply with 51501(a).


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