CA, FL, BC Move Forward With Lab Test Contracts

Government health programs push plans to issue restrictive lab testing contracts

CEO SUMMARY: Medicaid agencies in the bellwether states of California and Florida continue to push ahead with plans to revise laboratory test contract policies. In British Columbia, private laboratory companies face an uncertain future as the provincial health administration maneuvers to upset the laboratory contracting status quo. It’s a trend with the potential to be emulated by other state Medicaid programs.

GOVERNMENT HEALTH PROGRAMS in three regions continue to push changes that alter long-standing policies governing which laboratories can provide testing services to government-insured beneficiaries.

In California, the Medi-Cal program wants laboratories to apply for a contract that grants them access to provide testing services to Medi-Cal beneficiaries. Laboratories which do not hold such a contract will be unable to submit reimbursement claims for Medi-Cal patients. (See TDR, May 17, 2004.)

Statewide Contract In FL

In Florida, despite much controversy, the Agency for Health Care Administration (AHCA) continues with its plans to conduct an RFP process and award one laboratory with a three-year contract to provide outpatient laboratory testing for all Medicaid patients in the entire state. (See TDR, April 26, 2004.)

Across the border in the Canadian province of British Columbia (BC), the provincial health administration still holds trump cards in its stated goal to competitively bid outpatient laboratory testing. In reaction to the original proposal, the British Columbia Medical Association (BCMA) raised significant objections. The resulting com- promise seems unsatisfactory to all parties and the competitive bidding initiative might still occur. (See TDR, April 26, 2004.)

The significance of these three radical contracting initiatives is simple. Historically, government health plans have been open to all laboratory providers holding proper licenses and operating in a responsible manner. Now, in parallel, government health program authorities in California, Florida, and British Columbia are taking aggressive steps to effectively limit the number of laboratories allowed to serve government-insured beneficiaries. Any success they have in reducing the cost of laboratory testing services will encourage other state Medicaid programs to initiate similarly restrictive laboratory contracting schemes.

In California, the deadline for laboratories to submit their response to the Medi-Cal RFA (Request for Application) is November 29,” stated Michael Arnold, Legislative Advocate for the California Clinical Laboratory Association (CCLA). “Approximately 400 free-standing laboratories in the state received the RFA. Once Medi-Cal evaluates these applications and selects its contract laboratories, any laboratory that does not hold a contract will be excluded from doing lab tests for Medi-Cal patients.

Evaluating Applications

“The contract process was drafted in such a way that it appears a laboratory which meets minimum criteria will be accepted,” he explained. “But because this is the first contract cycle, no one can really predict how Medi-Cal will score these responses and award contracts.”

Arnold believes that the Medi-Cal laboratory test contracting initiative will radically change another facet of the laboratory marketplace in California. “Each laboratory which applies must document its compliance programs. In signing its Medi-Cal contract, it is agreeing to fully comply with all terms of the contract. If the Medi-Cal agency decides the laboratory is in breach, it can void the contract and exclude the laboratory as a Medi-Cal provider,” he said.

Shifts Burden Of Proof

“This reverses the current situation, where the burden of proof is on Medi-Cal whenever it wants to exclude a laboratory provider for cause,” added Arnold. “These new contracts place the burden of proof on the laboratory to demonstrate that it is in compliance with all contract terms—after Medi-Cal has declared it in violation of the contract and then excluded it as a contract provider of laboratory tests to the Medi-Cal program.”

In Florida, the situation is less clear. Earlier this year, AHCA, which administers the state’s Medicaid program, launched an RFP process that would select a single laboratory to provide all outpatient laboratory testing for the state’s Medicaid patients for a three-year period. The estimated total value of this contract is $100 million. AHCA declared that the contract process was needed to fulfill a legislative mandate passed the previous year.

“Medi-Cal’s RFA proposal is already changing the competitive market for lab services in California.” —Michael Arnold

This restrictive contract triggered howls of protest, not just from labs, but also from influential employer groups like the Florida Healthcare Coalition. There were obvious flaws in the design and timing of AHCA’s RFP process. Faced with intense criticism, AHCA withdrew the original RFP, but announced its intention to meet the legislative mandate for competitive bidding by issuing an Invitation to Bid (ITN). As of press time, AHCA has not provided a firm date for issuing the ITN nor a revised timeline for the contract award process.

In discussions with several individuals knowledgeable about different aspects of the Florida situation, THE DARK REPORT has uncovered an interesting fact. The state law to which AHCA is responding with the sole-source Medicaid lab services contract has another provision covering Medicaid laboratory testing.

This law specifies that, if AHCA has not implemented an initiative which generates a targeted reduction in the cost of laboratory testing by April 2005, two changes are to be implemented. The first change is an arbitrary reduction of 10% in laboratory testing fees paid by the Florida Medicaid program. The second is a requirement that labs providing testing services to Medicaid must transmit test results electronically to an Internet-based pharmacy-ordering system.

Individuals in Florida tell THE DARK REPORT that, within AHCA, the scheme to grant a single laboratory an exclusive, statewide contract for three years has become a “monster.” No bureaucrat apparently wants to be associated with this project.

“Do Nothing” Strategy

Informed sources believe that AHCA’s inactivity on this issue is significant. They speculate that, with April 2005 less than five months away, AHCA’s strategy may just be to let the proposed RFP lay dormant. After that date, it is a less complicated process to institute the 10% reduction in laboratory test reimbursement and establish a time-line for laboratories to comply with the electronic reporting requirement.

One reason why this scenario may play out is that the Florida Medicaid program would like to find a way to exclude smaller labs it considers most likely to be of lesser quality and most susceptible to fraudulent billing practices. The cost of implementing an electronic reporting capability will be a prohibitive expense for many of those smaller laboratories.

Better Than The Alternative

A default result in April 2005 would probably be welcomed by most laboratories in Florida. When compared to losing access to Medicaid patients because of an exclusive contract given to one laboratory, this would be a more palatable outcome.

For private laboratory companies in British Columbia, much uncertainty remains about the eventual outcome in their opposition to the Ministry of Health’s stated plan to institute competitive bidding. The mischief was started when a “Lab Reform” initiative was developed in early 2003.

This began with a law that specified cuts of 8% and 12% to laboratory test fees were to be enacted by September 1, 2003 and April 1, 2004, respectively. The other major damaging element of the regulation was the introduction of a competitive bidding program for laboratory testing services in British Columbia.

Competitive Bidding In Medicare Program

COMPETITIVE BIDDING for lab testing service is a concept that holds allure for government health program officials. That’s because it has the potential to generate a significant reduction in the cost of that care—albeit at the expense of laboratories which perform those tests.

Similar to competitive bidding efforts in Florida and British Columbia, the Medicare program has announced the details of a competitive bidding demonstration involving laboratory testing services. Congressional legislation passed last year mandates this demonstration project and calls for an initial report back to Congress on the results of the demonstration “not later than December 31, 2005.”

This latest interest in competitive bidding was stimulated by the results of a competitive bidding demonstration project involving durable medical equipment (DME). Conducted in Polk County, Florida and San Antonio, Texas, this project generated savings to Medicare of 17% and 22%, respectively. In response, Congress has directed Medicare to expand competitive bidding for DME.

To enable the demonstration project involving laboratory testing services, the Centers for Medicare and Medicaid Services (CMS) awarded a contract to RTI International and its subcontractor, Palmetto GBA, LLC. The contract award was announced on September 30, 2004.

RTI, based in Research Triangle Park, North Carolina, is a not-for-profit corporation that specializes in scientific research and technology development. As one example of its activities, RTI International will compile the information used by U.S. News & World Report to report its annual “America’s Best Hospitals” rankings for 2005.

Physicians Were Alarmed

“There was considerable concern that this ‘Lab Reform’ regulation was an attempt to push private laboratory providers out of the BC health system,” stated Douglas Buchanan, CEO and Managing Director of BC Bio-medical Laboratories, Inc., based in Surrey, British Columbia. “These proposals alarmed many physicians in the province. They registered their opposition in several ways, including a court challenge.”

That earned a notable victory in a hearing at the Supreme Court of British Columbia. The court ruled that the executive branch of government had overstepped its authority in issuing the “Lab Reform” regulations. The court declared them illegal. Following this ruling, the government and BCMA finally sat down to work out an interim one-year working agreement.

Agreed To Fee Cuts of 20%

“Under the agreement, laboratories accepted a 20% reduction in reimbursement, effective April 1, 2004,” explained Buchanan. “To identify alternative ways to reduce the cost of laboratory services, a number of investigative task forces were formed.

“Each task force is made up of representatives from the government, physicians, laboratories, and other stakeholders,” he continued. “They are reviewing lab fees procedure by procedure, looking at lab test utilization, exploring the benefits of information integration, and other ideas.

“These task forces must report their findings in coming months. Until then, the government cannot implement competitive bidding for lab testing services. However, there is no certainty that the government will agree to implement the task forces’ cost-saving recommendations in lieu of proceeding with competitive bidding. It remains an unsettling situation,” observed Buchanan.

THE DARK REPORT considers events in these three regions as warning signs of a growing threat to the laboratory industry. Government health plans, faced with a funding crisis, will take ever more extreme steps to save money.

Govt. Contracting Strategy

It is no coincidence that government health program authorities in California, Florida, and British Columbia have initiated radical measures in how they contract for laboratory services. Each of these regions is known as progressive and innovative in the evolution of their government health programs.

Another factor may further encourage state Medicaid agencies to use these types of laboratory contracting schemes to reduce what they pay for laboratory tests. That is Medicare’s impending competitive bidding demonstration program for laboratory test services. (See sidebar above.) Should this Medicare demonstration project result in significantly lower costs for laboratory tests, expect more state Medicaid programs to follow the same path.


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