CEO SUMMARY: Start with a flawed idea: Medicaid lab testing costs in Florida can be cut by awarding an exclusive statewide contract to one laboratory company. Compound that bad idea by designing a contract awards process that guarantees the state will pay twice for a number of tests while at the same time reducing patient access—thereby increasing patient and physician costs while lowering the quality of service.
IT’S NOT ONLY A BAD IDEA IN CONCEPT, but it’s proving to be an even worse idea in execution. Florida’s effort to conduct a bidding contest to award a three-year statewide Medicaid laboratory testing contract to one laboratory gives much evidence that a disaster is in the making.
The concept of the “bad idea that gets worse with time” was reinforced by events in Florida during the past three weeks. Florida’s Agency for Health Care Administration (AHCA) issued a second, revised set of contract award documents on December 13, 2004.
Not only have major problems in the first draft of the contract awards process not been corrected, but the revised contract design makes it likely that AHCA’s downstream costs associated with non-hospital laboratory testing will go up, not down. In the face of three speedily-submitted formal protests, AHCA has already suspended this second attempt to move toward a contract award.
This “bad idea” started as a response to a law passed by the Florida legislature calling for AHCA to slash Medicaid costs. That was why, earlier this year, ACHA announced that it would conduct a bidding process and award a single laboratory the three-year exclusive right to perform all non-hospital laboratory testing in the state. (See TDRs, April 26, and November 22, 2004.)
ACHA estimates value of this contract is $100 million. It declares this figure to be a savings of about 10% over Medicaid’s projected cost of lab testing during the coming three years.
Potential Service Declines
Never mind that every laboratory which has expressed an interest in bidding admits that it lacks the network of patient service centers, rapid response laboratories, and courier logistics to provide adequate services. Or that this contract award, by definition, reduces patient access to services and places physicians at a disadvantage when laboratory tests are needed for Medicaid patients. (And isn’t the core mission of both the Medicaid and Medicare programs to guarantee easy access and high-quality medical services?)
When ACHA issued the first bidding documents last March, it was, at a minimum, guilty of poor communication. At a maximum, the design of both the bidding process and the timeline to award the contract gave critics plenty of ammunition to claim that AHCA already had in mind which laboratory company it preferred to be the winner.
Any lab manager or pathologist with experience at negotiating contracts with managed care companies and government health agencies recognizes when contract specifications are written to favor specific laboratories. ACHA’s March 7, 2004 document contained ample evidence to support this argument.
In the face of heated criticisms and valid objections, the agency quickly withdrew the RFP (Request for Proposal) in April. Not much happened through the balance of the year. That changed on December 13, 2004, when AHCA released a second set of contract documents.
“Invitation To Negotiate”
Now the bad idea has morphed into an “ITN” (Invitation to Negotiate). ACHA’s new bid process calls for laboratories to submit 198 individual capitated price calculations, comprised of 11 regions, six age categories, and three classes of eligibility. Under the revised timeline (now suspended), AHCA would receive proposals by February 7, 2005 and open them publicly on this date.
Next would come a period when ACHA would evaluate the proposals and enter into negotiations. Using the data from all labs’ bids, it would negotiate a single contract with a single laboratory. That decision would be made public on March 18, 2005 and the statewide lab testing contract would become effective on April 4, 2005.
Of course, this timetable is likely to be revised. ACHA suspended this process in response to multiple formal protests on both bid issues and rules issues. Protests were sent by the American Clinical Laboratory Association (ACLA), Laboratory Corporation of America, and Quest Diagnostics Incorporated. Strangely, although the employment of pathologists at up to 97 laboratory companies in the state is at risk, no pathology professional association has weighed in on behalf of its membership.
Now let’s get to the meat of this “bad idea that gets worse in the execution.” ACHA’s stated goal is to reduce the cost of non-inpatient lab testing to Medicaid. In its ITN documents, ACHA provides utilization data and pencils in capitated rates that are set at a minimum/maximum bid range at 50% to 90% equivalent of existing Florida Medicaid fee-for-service rates.
Why plug in a minimum cap rate that’s 50% of existing utilization and fee-for-service rates? That’s because ACHA says it expects the winning laboratory will enjoy significant economies of scale. Based on pricing this additional testing at marginal costs, the winning laboratory can “afford” to provide Medicaid testing services at this price.
What ACHA cannot answer is how the winning laboratory will fund the necessary expansion in service infrastructure (additional blood draw sites, rapid response labs, more courier cars, more couriers, and the like) on a cap rate that may be half of existing Medicaid fee-for-service reimbursement. Which, by the way, is already set at 65% to 70% of Medicare for comparable CPT codes.
Furthermore, every lab still considering a bid tells ACHA that it will incur substantial capital costs to establish the minimum service infrastructure needed to fulfill the contract. That explodes the theory that labs can price this bid based on marginal costs. Oh, and we haven’t yet discussed information technology costs. That comes in a moment.
Let’s get to the topic of capitated rates as a way to lower ACHA’s non-inpatient lab testing costs. We’ve just covered the objection that ACHA’s assumption about using prices based on marginal test costs is fallacious. But it gets worse! (In keeping with the concept of “every bad idea gets worse in execution.”) ACHA’s incompetence in designing the ITN is revealed in the next major criticism of its plan.
Only Five Labs Attend ACHA’s Vendor Meeting
WHEN FLORIDA’S MEDICAID AGENCY convened its Vendor’s Conference on December 21, 2004, just five laboratory companies were present to learn about the contract awards process and ask questions.
In attendance were Laboratory Corporation of America, Quest Diagnostics Incorporated, Nationwide Laboratory Services (formerly ESRD Laboratories, a division of Royco) in Fort Lauderdale, Florida, Doctors Laboratory of Valdosta, Georgia, Cognoscenti Health Institute of Orlando, Florida, and DaVita Laboratories of Deland, Florida.
Nationwide and DaVita are primarily ESRD (end-stage renal disease) laboratories. That fact has significance as explained in the sidebar on page 16.
Hospital Outreach Excluded
ACHA is excluding hospital laboratory testing outreach programs from this three-year exclusive statewide contract. Hospital lab outreach programs will continue to be paid on a fee-for-service basis anytime they provide lab testing services to non-inpatient Medicaid beneficiaries.
However, that arrangement means ACHA will pay twice for lab testing services provided to patients served by hospital lab outreach programs. That’s because ACHA will pay a global cap rate to the sole-source lab contract winner. Whenever a patient, already covered by the cap rate, is served by a hospital laboratory outreach program, ACHA will reimburse that hospital lab on a fee-for-service basis.
It’s the same type of “leakage” problem that plagues private payers. ACHA was clueless to this huge flaw until December 21, 2004. At its Vendor Conference in Tallahassee, laboratory representatives asked the agency if it knew about this flaw in its contract documents. It is reported that the analyst responsible for the documents took a while to grasp the consequences of this situation—but ACHA’s agency head recognized it immediately.
More Downstream Problems
Let’s refocus on the subject of information technology expenses. This is another legitimate criticism of why the ACHA ITN is poorly-designed and is likely to trigger downstream problems if it is implemented as it stands.
The ITN requires the laboratory to create electronic interfaces with at least three major data users, as well as referring physicians. One system is a prescription-ordering and dispensing system. Another is the Medicaid fiscal agent (for future patient electronic medical records and disease management pro- grams). The third interface is a Medicaid Encounter Data System (MEDS). All three of these are either under development or “to be identified in the future.”
Lab managers and pathologists know that interfaces between a laboratory information system (LIS) and other computer systems are probably the single most complex management challenge in lab operations. Interface projects, like upgrades, are expensive, consume huge amounts of staff and management time, and never work to the expectations of all parties.
Yet, in ACHA’s ITN process, no allowance has been made for the winning laboratory’s cost to comply with this requirement. Moreover, ACHA is asking labs to demonstrate capabilities of interfacing to systems which ACHA has yet to define for its own purposes.
Some other criticisms of the ITN include: 1) obvious inaccuracies in the utilization data, which shows “Pregnant Women” in the age groups of 1-5 years and 55+ years; 2) addition of a COLA accreditation option to the requirement that laboratories be accredited by CAP/JCAHO (this benefits only one of the five labs at the Vendors’ Conference); 3) it will be an impossible task for both the winning lab and AHCA to track and pay the correct capitation rates for 198 categories of regions, age-groups, and edibility classes each month; and, 4) lack of specific language in the ITN which defines service and quality measures.
These examples indicate the individuals who crafted this ITN, as well as the original RPF released last March, lack effective knowledge about the organization of laboratory services. The documents fail to incorporate the types of requirements that insure that Medicaid’s primary goals of quality, universal access, and accountability are realized upon execution of the proposed contract.
In fact, this last failing was pointed out during AHCA’s Vendor Conference. Lab representatives in attendance pointed out significant discrepancies in the utilization of lab testing between the 11 Medicaid regions in Florida. It was then noted that the ITN fails to address inappropriate utilization as a way to control costs, with the additional benefit of improving patient outcomes. The cost-saving emphasis of the ITN was instead devoted to forcing down reimbursement paid to the contract-winning laboratory.
As a further point, better utilization of lab testing would not be encouraged by the mechanism which pays a monthly capitation rate to the contract lab while simultaneously reimbursing non-inpatient Medicaid testing done by hospital lab outreach programs with fee-for-service payments.
ESRD Carve-Outs: A Sign of Contract Bias?
FROM THE MOMENT LABORATORIES IN FLORIDA first read the RFP documents issued last March by the Agency for Health Care Administration (AHCA), there were questions about specifications that were interpreted to give certain labs an advantage in the bidding for the exclusive, statewide three-year Medicaid lab testing contract.
Evidence that such bias exists was reinforced with the release of ACHA’s revised bidding documents on December 13, 2004. The ITN (Invitation To Negotiate) contained an interesting clause, titled “End State Renal Disease (ESRD) Specialty Laboratories May Request An Exemption from This ITN).”
It allows labs which only provide ESRD testing to be carved-out of the exclusive statewide Medicare testing contract, upon their request and a review by AHCA. ACHA’s bid schedule includes a date, April 7, 2005, when ACHA is to issue its decision on requests for ESRD exemptions.
Within Florida, competing laboratories note that one particular laboratory company stands to benefit from this provision. The newly-renamed Nationwide Laboratory Services occupies a brand-new, but under- utilized 100,000 square foot lab facility. Nationwide is a division of Royco, which owns dialysis centers in the state. Royco also owns ESRD Laboratories, a business division that operates within Nationwide’s laboratory building.
The ESRD exemption allows Royco to have it both ways. Its Nationwide Lab unit is a declared bidder for the statewide Medicaid contract. But if it loses, Royco’s ESRD Lab division can apply for an exemption and retain access to lab tests done for Medicaid dialysis patients. It is believed the link in this relationship is Scott Hopes, PHD. He is currently a vice president at Nationwide. In recent years, Hopes served on one of AHCA’s advisory boards. This link, along with Royco’s ample political donations in recent years, is believed to be why ACHA’s bid documents include “odd” terms favorable only to Royco’s business interests.
As For A $1 Co-Pay!
As a final insult to common sense, the ITN proposes that Medicaid patients pay a $1.00 co-pay each time laboratory tests are ordered. It deducts this amount from existing laboratory reimbursement when calculating savings to be realized from this contracting initiative.
One Florida laboratory executive observed to THE DARK REPORT that this is a splendid example of flawed bureaucratic thinking. This requirement overlooks the fact that, by definition, Medicaid patients don’t have much money. It also ignores the fact that, because of Medicare and Medicaid compliance requirements, laboratories must spend significant amounts of money in attempts to bill and collect from all patients, regardless of how small the co-pay or deductible might be.
Not The End Of The Story
Are these enough examples? Currently 98 independent laboratory companies serve Florida’s Medicaid beneficiaries. This number does not include hospital laboratory outreach programs.
Yet, on the basis of a contract awards program that is poorly-conceived and badly-designed, 97 of these laboratories may lose access to Florida Medicaid patients for at least three years. At the same time, there is considerable risk to Florida’s Medicaid program that implementation of a sole- source lab services contract may prove highly disruptive to both patients and clinicians. Who is measuring those costs to Medicaid as they occur?
The purpose of this intelligence briefing is to reveal details that usually remain unknown to laboratory leaders outside Florida. If competitive bidding is a concept that will spread within Medicare and the state Medicaid pro- grams, then it is incumbent on government health officials and the laboratory industry to get it right the first time.
Florida Medicaid’s ‘bad idea” is to shoehorn the entire state’s Medicaid testing needs onto a single laboratory. That “bad idea” gets worse because of the design of this contract program magnifies the flaws in the original concept.
Serving The People?
If government is to serve the people, how can ACHA ignore a unified message by the state’s most respected laboratory companies? Whether from $5 billion Quest Diagnostics or $5 million Cognoscenti, the message to ACHA is consistent: no single lab can handle this work effectively. Nor can a single lab company build the sub-contract network required, at the price and terms specified in the ITN.
Is this a political issue? Sure. Medicaid is an entitlement program with exploding costs. Florida’s legislature passed a law that mandated action by ACHA as a way to demonstrate that it was responding to the funding crisis.
So the buck was passed to ACHA. In its defense, this is not something it asked to do. But it must respond to the politics of the situation. That is how one state’s bad idea grows worse in implementation.
Two lessons are to be learned from this situation. First, lab managers and pathologists need to be alert to similar “bad ideas” in their state’s Medicaid program and head them off before they take root. Second, whenever bureaucrats design something, it seems like everybody loses—even the very people they earnestly want to help!