California Medicaid Prepares To Issue Lab Contracts

Agency will use contracts to restrict labs which can legally bill for Medicaid testing

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CEO SUMMARY: California Medi-Cal officials may be creating more problems than they solve with their latest scheme to have independent laboratories sign contracts with their Medicaid program—while excluding hospital laboratory outreach programs and labs operated from physicians’ clinics and offices. Nominally, the goal is to reduce fraudulent lab test claims submitted to the California Medicaid program.

CALIFORNIA’S LABORATORIES SEEM to be in the crosshairs of its state Medicaid program.

“First came a cut in reimbursement last fall,” stated Richard Nicholson, President and CEO of Westcliff Medical Laboratories in Newport Beach, California. “Medi-Cal, our state’s Medicaid program, instituted a fee schedule for laboratory testing that was 80% of Medicare fees or less for individual laboratory tests.

“Then, on April 5, 2004, the California Department of Health Services (DHS) mailed a cover letter and a Request for Application (RFA) to 500 independent laboratories in the state,” continued Nicholson. “Medi- Cal intends to sign contracts with a specific number of laboratories that best meet its criteria. If a laboratory doesn’t have a Medi-Cal contract, it will not be reimbursed by Medi-Cal for Medicaid testing.”

Medicaid laboratory testing initiatives in California represent an unsettling counterpoint to efforts by Florida’s Medicaid agency to award a single laboratory the right to perform all Medicaid lab testing in Florida for three years. (See TDR, April 5, 2004 and April 26, 2004.)

Current efforts to control laboratory testing costs by Medicaid agencies in California and Florida should be closely tracked by laboratory administrators and pathologists across the country. As Medicare agencies in other states face a growing funding deficit, it can be expected that they will implement similar initiatives to constrain and control the cost of laboratory testing in their state.

“In general, the laboratory industry in California is opposed to this Medi-Cal contracting scheme,” stated Michael J. Arnold, Legislative Advocate for the California Clinical Laboratory Association (CCLA), based in Sacramento, California. “Over time, it will create many more problems than any it attempts to solve.

Excludes Many Labs

“First, Medi-Cal is asking 500 independent laboratory companies to apply for a contract. This ignores hospital laboratories with laboratory outreach programs, physician office labs (POLs), and labs in clinics and physician group practices, all of which will continue to provide testing to Medicare beneficiaries,” explained Arnold.

“Second, the application is a complex, onerous process, full of ambiguities,” he continued. “Among other things, Medi-Cal has sent this RFA out to labs holding a CLIA license for moderate or complex testing. Each laboratory company must submit a separate and complete application for every CLIA-licensed site it operates.

“Third, Medi-Cal’s RFA says it will award contracts only to the 75% of the laboratories which score highest on their point system,” added Arnold. “Medi-Cal officials have since stated that this will be changed. Last week they suspended the RFA process to revamp aspects of the RFA. They will also allow any laboratory which achieves a certain score on the RFA scoring system to be a Medi-Cal provider.

“Fourth, Medi-Cal has frequently declared that fraudulent laboratory testing claims are a significant problem,” he said. “Medi-Cal hopes that these laboratory contracts will cut down such fraud. However, the source of much fraudulent lab billing is not an independent laboratory company with proper licenses, it is from physicians and laboratories operated in physicians’ offices. Medi-Cal’s laboratory RFA leaves this source of fraud completely unaddressed.”

After mailing the RFAs on April 5, Medi-Cal conducted public meetings in Southern and Northern California. It had originally set May 17 as the application due date. “That was extended to June 22, 2004, before the RFA process was suspended.” noted Nicholson. “Medi-Cal says it will announce the names of laboratories granted a contract by October 1, 2004.”

Should Medi-Cal implement laboratory contracts as it plans, THE DARK REPORT can identify a number of serious ramifications to California’s competitive laboratory testing marketplace. Moreover, California has a reputation as a bellwether state in healthcare. Any initial successes that result from Medi-Cal’s lab contracting pro- gram will motivate Medicaid programs in other states to copy Medi-Cal’s laboratory contracting program. So the long-term impact may reach beyond the borders of California.

Freezing Lab Competition

First, Medi-Cal has already frozen the competitive status quo. The newly-announced plan to contract with a limited number of laboratories will intensify that competitive freeze. “About two years ago, Medi-Cal instituted a moratorium on issuing Medicaid licenses to new laboratories,” stated Nicholson.

“This moratorium denies any new laboratory access to Medicare patients. With Medi-Cal now preparing to sign contracts with a finite number of laboratories, new laboratories will find it more difficult to enter the market, to expand into other regions of the state, and to include Medicaid patients in their test mix,” explained Nicholson.

Medi-Cal’s Lab Strategy a Replay Following Earlier Budget Crunches

FOR SOME PEOPLE WITH LONG MEMORIES, Medi-Cal’s attempts at laboratory contracts is déjà vu. A variant of this scheme was tried before, during an earlier budget crises in 1992.

“Desperate times create desperate actions,” noted Michael J. Arnold, Legislative Advocate for the California Clinical Laboratory Association (CCLA) in Sacramento, California. “When California undergoes a serious budget crisis, the Medi-Cal program often takes radical actions to control costs.

“The last time Medi-Cal tried to put the state’s clinical laboratories under contract was 1992,” he recalled. “There was a budget crisis that year and lab contracting was one strategy to slash Medicaid costs. CCLA opposed that initiative and succeeded in having laboratory contracting proposals withdrawn at that time.

“However, laboratory managers and pathologists today should not be surprised at Medi-Cal’s contracting strategy. Medi-Cal has a long history of using contracts to control prices and access to health services. Medi-Cal originally put hospitals onto contracts during an even earlier budget crisis,” explained Arnold. “That was in 1982.

“Prior to the first Medi-Cal hospital con- tracts in that year, patients were free to choose from any hospital in the state,” he continued. “In 1982, Medi-Cal negotiated favorable pricing and terms with selected hospitals in different regions of the state. After it boldly limited patient choice of hospitals that year, private health insurers jumped on the same bandwagon and began to contract with hospitals and physicians to create provider networks that limited a patient’s choice.”

“Medi-Cal’s contracts with laboratories will also change the way it handles allegations of Medicaid fraud and abuse,” explained Arnold. “Under these new contracts, the burden of proof shifts. Currently, Medicaid must prove allegations of fraud before it can pull the Medicaid license of an offending laboratory.

“Once these contracts are executed between a laboratory and Medi-Cal, it will have the legal right to pull the lab’s Medicaid license if any clause of the contract is violated,” he said. “From the perspective of regulators, they now have a more efficient tool to punish suspected violators.”

Second, Medi-Cal’s lab contracting scheme creates an uneven playing field. It appears that hospital laboratories with outreach programs will not be required to apply for a Medicaid contract, so long as they use their hospital’s provider number when billing for lab tests. Competitively speaking, that gives them a free hand over independent lab companies to build their market share of Medicaid testing.

From the perspective of Medi-Cal bureaucrats, excluding hospital labs from the contract program is reason- able. One goal of Medi-Cal’s lab contracting program is to attack sources of fraudulent lab testing claims. Hospitals do not fit Medi-Cal’s profile of providers likely to submit fraudulent lab test claims.

Third, it shifts the burden of proof in cases of Medicaid fraud and abuse. Prior to the implementation of laboratory contracts, it was up to federal and state investigators to gather the evidence necessary to successfully prose- cute a case of suspected fraud. Language in these contracts will require laboratories, and their managers, to waive constitutional rights and be bound to regulatory procedures that govern violations of state and federal Medicaid statutes and regulations.

Fourth, these contracts will distort the existing market supply of laboratory tests for Medicaid patients. It replaces the existing policy, generally one of “any willing provider,” with a scheme that puts government officials in the position of deciding which laboratory providers will be given favored status.

“CCLA has opposed this concept from its inception,” declared Arnold. “CCLA continues to be opposed. However, it also understands how California’s current budget crisis stimulates these types of proposals.”

Effectively, this allows Medi-Cal officials to decide which laboratories will be winners and losers when it comes to Medicare laboratory testing services. This consequence can already be seen in the first round of this new lab contracting program. Only independent labs holding a CLIA license for moderate or complex testing must apply for a contract. Hospital laboratory outreach programs and physicians’ office laboratories are exempted.

Lab Industry Response

How independent laboratories in California respond to this Medi-Cal contracting initiative has yet to be seen. “Initially, independent laboratories viewed these contracts as a better option than competitive bidding,” observed Nicholson. “Now that labs have seen the first details of this contracting program, there is sure to be determined opposition on several key points. Undoubtedly a number of labs have their lawyers reviewing Medi-Cal’s RFA and that may lead to individual labs filing legal challenges to this RFA process. But nothing yet has happened on that front.”

“CCLA opposed this concept from its inception,” declared Arnold. “CCLA continues to be opposed. However, it also understands how California’s current budget crisis stimulates these types of proposals. On behalf of the state’s lab- oratories, CCLA is already working to clarify ambiguities and eliminate the onerous parts of this Medicaid contracting program.”

The implications of Medi-Cal’s new laboratory testing initiative should be viewed in conjunction with lab testing reforms underway within two other government health pro- grams. One is Florida Medicaid’s effort to bid all Medicaid testing statewide to one laboratory under a three-year contract. The other is in British Columbia, where health authorities are attempting to reduce laboratory fees by 20% while instituting competitive bidding for laboratory testing services in the province. (See TDR, April 26, 2004.)

Radical Changes Predicted

Collectively, these three examples illustrate how rapidly the status quo between government health programs and laboratories in both the United States and Canada will undergo radical shifts. Financial desperation will drive much of this “reform” because government health authorities don’t have adequate money to fund services at existing levels.

Laboratory administrators and pathologists should take these developments as an early warning. In coming years, any lab which relies on revenues from Medicare and Medicaid testing is likely to find itself getting paid less or being excluded from such testing.


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