Competitive Bidding: Once Again, It’s Back!

Medicare publishes new study that resurrects idea and looks at feasibility of national bid project

CEO SUMMARY: For the clinical lab industry, the concept of competitive bidding for Medicare Part B Clinical Lab Testing may be like the movie “Groundhog Day.” The hero, Bill Murray, kept reliving the same day over and over. So it seems to be with competitive bidding. In the latest replay, RTI Technologies just published a study that looks at the feasibility of conducting a national competitive bidding program. The authors’ conclusions will not be welcome, particularly for the nation’s largest lab companies.

AS AN IDEA, competitive bidding for Medicare Part B Clinical Laboratory Testing is back! The evidence is contained in a study recently published in the Medicare & Medicaid Research Review (MMRR, 2012: Volume 2, Number 2).

The study is titled “The National Market for Medicare Clinical Laboratory Testing: Implications for Payment Reform.” It is posted on the Medicare program’s website at http://tinyurl.com/d88fp7d.

MMRR is an on-line, peer-reviewed journal published by the Center for Strategic Planning (CSP) at the Centers for Medicare & Medicaid Services (CMS). MMRR was recently introduced as a replacement for the Health Care Financing Review (HCFR) and it is often used to introduce new ideas.

In the study’s introduction, authors of the report described the current Medicare payment policy for clinical laboratory testing as “outdated,” because, in part, it was designed in the 1980s. The authors wrote:

In this study, we conduct an empirical analysis of the national Medicare Part B FFS [fee for service] clinical laboratory market, which could inform future efforts to implement Medicare clinical laboratory competitive bidding or other payment reforms. (Underline by THE DARK REPORT.)

Bad News For Lab Industry?

For the entire clinical lab testing industry, there are serious implications to the fact that officials at CMS wanted a fresh study of competitive bidding. After all, this was an idea that was believed to be dead after the events of 2008, among which was passage of a federal law that repealed an earlier Congressional mandate to conduct several regional competitive bidding demonstrations for laboratory testing services.

However, if the idea of competitive bidding for Medicare Part B Clinical Laboratory Testing is troubling for the majority of clinical laboratory organizations in the United States, then this new study will be particularly unwelcome to the two blood brothers.

It is unwelcome for Laboratory Corporation of America and Quest Diagnostics Incorporated because the two lab companies are singled out by the study’s authors. After an analysis of the market for Medicare laboratory testing, the authors wrote:

Quest and LabCorp each have a significant market share of Medicare laboratory testing, and we have shown that they each serve large numbers of Medicare beneficiaries in all parts of the country. This suggests that CMS could consider holding a bidding competition among Quest, LabCorp, and any other organizations that could qualify as “national laboratories” (specific criteria would have to be developed).

The winner(s) of this bidding competition would be designated as “national Medicare laboratories” that are qualified to provide services nationally. The national Medicare business could be periodically re-competed. The primary advantage of bidding on a national basis is that the national firms would have an incentive to bid aggressively, because their entire national Medicare business would be at stake. Also, a single nationwide competition could achieve substantial economies in the bidding and contracting process.

Study Based on 2006 Data

Essentially, the study’s authors suggest that a national competitive bidding program for Medicare Part B Clinical Laboratory Testing Services would be feasible. This conclusion is based on the authors’ analysis of a data sample made up of 5% of all Medicare laboratory test claims for the year 2006.

The study was conducted by RTI International Inc. (RTI), of Research Triangle Park, North Carolina. RTI is a non-profit organization that provides technical services and research to government agencies and private companies.

It is notable that CMS officials selected RTI International as the subcontractor for this study. During the years 1997 to 2008, RTI worked closely with the Medicare program to develop the parameters, then implement the competitive bidding demonstration program for Medicare Part B Clinical Laboratory Testing. (See TDR, December 31, 2007.)

Stopped By Judge’s Ruling

It was in early 2008 that a ruling by a U.S. District Court judge stopped the first demonstration project in the San Diego MSA (metropolitan statistical area) from proceeding. Later that year, Congress passed a law that repealed the competitive bidding mandate. (See TDRs, April 14, 2008 and June 16, 2008.)

However, the San Diego MSA demonstration project had moved far enough forward in 2008 that CMS had collected bidding documents from a number of laboratory organizations, including LabCorp and Quest Diagnostics. At the time, it was recognized by lab industry consultants that these documents would give CMS and RTI an unprecedented look at the range of discounts that individual laboratory organizations were willing to offer for different types of lab tests.

It could be argued that the information contained in these bidding documents provided the motivation for Medicare officials to keep the idea of competitive bidding alive. Certainly, it is reasonable to read that conclusion into the findings presented in the 21-page study that RTI prepared under contract to the Medicare program.

To arrive at these findings, the study authors took a random sample of 5% of the national Medicare claims and enrollment data for the calendar year 2006. Using the Medicare Denominator files, the study identified four categories of patients: 1) Aged; 2) End Stage Renal Disease (ESRD); 3) Disabled; and, 4) Dual-Eligible (Medicare/Medicaid).

The focus of the RTI analysis is “Aged.” These are “beneficiaries who qualify for Medicare due to age and do not meet any of the previous conditions” that define the other three patient categories. Of Medicare’s 32.5 million beneficiaries, “Aged” patients number 21 million, or 64.5% of the total.

Using the 2006 data, the study authors determined that national Medicare Part B payments for Clinical Laboratory Test Codes totaled $6.7 billion that year. Of this total, $2.5 billion, or 38.1%, was paid to “independent laboratories.”

In looking at the category defined as the top 10 national independent laboratories, the list was topped by Quest Diagnostics and LabCorp. What may be a surprise is which labs ranked number three and number four on this list.

Top Ten In Medicare Payment

In 2006, RTI noted that Quest Diagnostics received $749 million (or 29.5% of the independent lab sector share) in Medicare payments. LabCorp’s total was $479 million (18.8% share). Numbers three and four on the list were Spectra Laboratories—$124 million and 4.9% share, and DaVita Laboratory Services— $96.5 million and 3.8% share, respectively. Sonic Healthcare was number five on the 2006 independent lab ranking, with payments of $45 million (1.8% share).

Together, Quest Diagnostics and LabCorp received 48.5% of all Medicare Part B Clinical Laboratory Testing payments made to independent lab companies during 2006. “Quest and LabCorp clearly dominate the independent laboratory market, as they are responsible for almost 50% of Medicare payments for lab- oratory tests performed by independent laboratories, and the next largest independent laboratory receives just 5% of payments,” noted the study authors.

Look at hospital Labs

Hospital non-patient payments only totaled $565 million nationally and hospital outpatient payments were $1.8 billion nationally. Together, these represented 36.5% of total Medicare Part B payments for 2006. But no single hospital entity represented more than $17 million in payments for the non-patient category during that year.

The study next looked at market share by urban and rural regions. It determined that Quest Diagnostics and LabCorp had some market share in almost every market. Notably, the study determined that, with 3,141 counties in the United States, Quest Diagnostics provided Medicare Part B testing services to patients in 3,114 counties during 2006. LabCorp provided Part B testing services to patients in 3,014 counties.

In their assessment of the types of labo- ratory tests that were performed, the study authors identified that just 10 HCPCS codes represented 50.8% of the total payments during 2006. Further, the top 100 HCPCS codes represent about 90% of total Medicare Part B lab test expenditures.

Simplify The Bidding Process

This is important because it could simplify a national competitive bidding program. “The concentration of the lab market in a small fraction of the tests on CLFS [clinical lab fee schedule] suggests that it may not be necessary or efficient to include the full set of 1,000 plus laboratory test codes in the test menu for competitive bidding,” noted the authors in their study.

In commenting on the “implications of laboratory market structure” as it would affect the design of a national competitive bidding program, the RTI researchers noted that the significant market share of Quest Diagnostics and LabCorp, their capability to serve patients throughout the nation, and the concentration of test volume into a handful of HCPCS codes would make such a program manageable.

“The winner(s) of this bidding competition would be designated as ‘national Medicare laboratories’ that are qualified to provide services nationally,” stated the study researchers. “The national Medicare business could be periodically recompeted.

“The primary advantage of bidding on a national basis is that the national firms would have an incentive to bid aggressively, because their entire national Medicare business would be at stake,” added the authors. “Also, a single nationwide competition could achieve substantial economies in the bidding and contracting process.”

Prices at Marginal Cost Level

An important issue in the study is the reference to the possibility of seeing bids driven down to the level of a lab’s marginal cost to perform the test. “…competitive bidding could reduce prices paid by Medicare for laboratory tests to the marginal costs of large national laboratories that can take advantage of economies of scale and perform some tests at lower costs than smaller establishments,” predicted the authors.

What would happen to local laboratories under such a scenario? The answer is blunt. The study researchers assume they would send tests to the least-cost lab provider. “In this case, smaller laboratories such as physician office laboratories may minimize losses by outsourcing their laboratory testing to an independent or hospital laboratory instead of providing those tests themselves.”

This information is a first alert to lab executives and pathologists that competitive bidding is once again being explored by Medicare officials. It is a concept that continues to be resurrected. At a minimum, it is a sign that one or more powerful individuals within the Department of Health and Human Services and CMS are determined to see the concept of competitive bidding for laboratory testing become a reality.

Simplify The Bidding Process

Further, the money that was spent to pay RTI International to conduct this study should be seen as strong evidence that the idea of competitive bidding remains both alive and credible within the federal government. It is still to be seen how the lab industry responds to this latest effort to lay groundwork for another effort to implement a competitive bidding project for Medicare Part B Clinical Lab Testing.

Competitive Bidding an Idea With a Three-Decade History

IT WAS BACK IN THE EARLY 1980S when the first studies of competitive bidding for Medicare Part B Clinical Laboratory Testing were conducted by Medicare program officials. So this is an idea with deep roots.

However, not until the second half of the 1990s did a sequence of events begin that culminated in 2003 with a legislative mandate that directed the Centers for Medicare & Medicaid Services (CMS) to conduct two competitive bidding demonstration projects for Part B Clinical Laboratory Testing in different regions of the United States.

Following a series of public meetings between 2003 and 2007, CMS and its con- tractor, RTI International, announced that the first demonstration project would take place in the San Diego MSA (metropolitan statistical area). A bidder’s meeting was conducted in San Diego in December 2007.

Bid documents were due in February 2008.  Under the CMS timetable, winning labs were to be announced in April and the two-year demonstration project would commence on July 1, 2008.

However, several laboratory organizations in the San Diego MSA sued the Secretary of the Department of Health and Human Services (HHS) in federal district court in that city in January 2008. Just months later, in April, the judge ruled in favor of the plaintiff labs and issued a preliminary injunction that effectively stopped the competitive bidding demonstration project from moving forward.

Congress then took up the matter. In the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), passed in June, 2008, it repealed the legislative man- date that the Medicare program conduct competitive bidding demonstration projects for Medicare Part B Clinical Laboratory Testing. That is where the story ended—until June 2012, when RTI’s study of the feasibility of a national competitive bidding program was published in the Medicare journal.

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