OIG Tells CMS It Could Save $910 Million on Lab Test Costs

Report was made public last week and a sign that CMS officials want more power to set prices

IT IS ONE MORE POWERFUL SIGN of the changing times. Last week, the Office of the Inspector (OIG) publicly released a study it had done of the prices paid for lab testing and how the Medicare program could use this information to reduce the cost of Part B clinical laboratory testing.

It was The Wall Street Journal that first published a story on June 11 about this new OIG report. It noted that OIG estimated that the Medicare program could save $910 million per year in lab testing costs. This was based on the OIG’s newly released study.

To put this in context for pathologists and clinical laboratory executives, the OIG says that Medicare paid $8.2 billion for Part B clinical laboratory tests in 2010. Thus, savings of $910 million would be a reduction of 11.1% in payments to the nation’s clinical laboratories during that year.

 Lab Test Fees under Attack

The OIG’s report is a sign of the times because, on all fronts, clinical laboratory test fees are being attacked and reduced. The fact that someone in the federal Department of Health and Human Services (DHHS) chartered the OIG to perform this study indicates that a strategy is in play.

It appears that the goal of that strategy is to give Medicare program officials the statutory and regulatory powers they desire to bring the fees for Part B clinical laboratory testing down to the levels paid by Medicaid programs and private health insurers.

This is a high-risk strategy for both the Medicare program and the clinical laboratory industry. That’s because it is widely acknowledged that many state Medicaid programs currently pay fees that hardly allow a lab to recover the marginal cost of performing the tests.

OIG Studies Lab Prices

The OIG’s report is titled “Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings.” Its release date is June 2013 and it is publication number OEI-07-11-00010.

In this report, the OIG studied just 20 types of lab tests that represent the highest volume of claims submitted to Medicare. It collected payment data from 50 state Medicaid programs and three of the Federal Employee Health Benefits (FEHB) plans. It looked at three factors, which are themselves a window into thinking at DHHS.

The three factors were: 1) how each entity formulated its lab test fee schedule or payment rates; 2) whether the patient was charged a co-payment; and, 3) if that program counted the lab test charges toward a member’s deductible.

Among the four objectives laid out in the report, the OIG wanted to determine “the amount Medicare could have saved if it had paid a rate equal to the lowest insurer’s payment rate for the 20 selected lab tests.”

Using that as a standard, the OIG wrote that “Our approach provides a conservative estimate of potential savings to the Medicare program because using Medicaid claim payment amounts or an FEHB plan’s lowest rate could produce greater differences in comparison to Medicare-allowed amounts.”

Cutting to the chase, the OIG wrote that “Medicare could have saved $910 million in 2011 if it had paid the lowest insurer’s payment rate for 20 lab tests.”

Potential Deep Price Cuts

The examples provided in the report demonstrate the radical change in pricing that would result if the Medicare program were to drop Part B clinical lab test fees to the levels discussed in the OIG report. For the commonly performed thyroid panel (HCPCS Code 84443), Medicare reimbursed $348 million for 14.8 million tests during 2011. Had Medicare “paid providers for these tests at the lowest established rate among the insurers we surveyed, it could have saved approximately $140 million, or 40%,” noted the report authors.

In a memo to Daniel R. Levinson, dated April 26, 2013 and signed by Marilyn Tavenner, Acting Adminstrator of the Centers for Medicare & Medicare Services (CMS), she noted that the OIG had written “The OIG recommends that CMS seek legislation that would allow CMS to establish lower payment rates for lab tests.”

In response, Tavenner wrote, “The CMS appreciates OIG’s recommendations and the valuable work reflected in this report. CMS is currently exploring whether it has the authority under the current statute to revise payments for clinical diagnostic laboratory services consistent with the OIG’s recommendation.”

This is a forewarning to the lab testing industry that CMS is accumulating data it can use with Congress to support legislation that would give it more direct control to set prices under the Medicare Part B Clinical Laboratory Test Fee Schedule.

Further, the OIG report notes that a number of Medicaid programs require patient co-pays for clinical laboratory testing. This may be a sign that CMS would like to argue to Congress that it should reinstate a 20% patient co-pay for clinical lab tests.

Two Big Concerns for Labs

Given the collective reimbursement cuts enacted in recent years, to subtract an additional $910 billion from the annual revenue of clinical labs throughout the nation would guarantee a tidal wave of lab bankruptcies, not to mention depriving millions of patients—both Medicare and non-Medicare—access to a first-rank medical laboratory in their community. That’s because it will be the smaller, local laboratories that will be first to close their doors.

2011’s Top Four Part B Tests Account for $1 Billion in Cost

DATA FROM THE REPORT on Medicare Part B clinical lab testing spending in 2011 reveal that just four tests accounted for $1 billion of that spending.

In its report, the Office of the Inspector General concluded that the Medicare program could save as much as $910 million per year if it changed how it prices Part B clinical laboratory testing.

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