An Economic Perspective On Discounted PC Deals

Financial analysis of providing path services to specialist physicians shows some benefits

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CEO SUMMARY: By opening their own in-office pathology laboratories, specialist physicians are undermining a long-established referral relationship with the pathology profession. Pathologists are debating the merits of this market-based trend and its effect on their profession. However this debate often fails to include an objective assessment of how contracting for professional services can provide financial benefits to pathologists.

ONE SURE WAY TO STIR UP a spirited debate among pathologists is to mention doing pathology professional services at a discounted rate for specialist physicians who have built an in-office histology laboratory.

Some pathologists will say that providing the professional component (PC) in someone else’s office at a deeply discounted rate sets a bad precedent for the pathology profession. Other pathologists will argue that doing such work at a discounted rate is acceptable for two reasons.

Two Advantages

First, in doing the contract work at the specialist physicians’ office, pathologists incur no overhead or other costs. Thus, a discount rate can actually provide acceptable income. Second, doing this work allows a pathologist to maintain the relationship he or she has long had with specialty physicians—preserving access to the most difficult cases and other special staining work, which the specialist physicians are likely to refer to an outside lab.

In fact, the pathology profession’s debate about discounted service arrangements for professional component services to office-based specialist physicians tends to center around a primary argument: does the pathology profession want to establish the precedent that it will perform work, on a discounted basis, in a manner that allows office-based physicians the opportunity to mark up that service and make money from the pathologists’ professional service?

This intelligence briefing explores another dimension to this debate. Setting aside the issue of precedent, are there circumstances where the economics of such arrangements are financially acceptable to a pathologist? After all, the American healthcare system is money-driven.

Debate on this topic needs to include the financial pros and cons—as well as recognition that local pathology groups have competition. Many national and regional pathology laboratories are eager to bid, at discounted rates, for the specialist cases in almost every community across the country.

Consultants who work with specialty physicians suggest that pathologists can benefit by accepting work from urologists and gastroenterologists (GIs) who offer the professional component even at discounted rates. These consultants will point out that, while the rates are low, the costs to the
pathologist of providing the professional service are also correspondingly low. That’s because the specialist group must provide the working space, microscope, computer equipment and software, liability and other insurance, staff support, and bear both the expense and risk from coding, billing, and collection. Thus, any fees paid to the pathologist are offset by overhead costs not borne by the pathologist. Further, the pathologist gets paid even if the group practice is denied reimbursement.

Falling Reimbursement

One consultant with decades of experience in clinical laboratory and anatomic pathology services observes that specialist physician interest in pathology is driven by the falling reimbursement experienced by all physicians, including pathologists. Another factor is that practice consolidation in many communities has created large specialist groups that now have enough patient volume to support in-office pathology labs.

“Specialty docs are no different than pathologists in that they are all under reimbursement pressure,” said Joe Plandowski, President of Lakewood Consulting Group in Lake Forest, Illinois. “Specialty physicians are looking for ways to maintain and increase their income. Realizing those tissues have value, specialty physicians ask themselves, ‘Why don’t we do the testing in-house?’

“What’s more, many gastroenterology and urology groups have gotten quite large over the years,” he added. “The nation’s largest GI group has 65 physicians. There are many groups of urologists and GIs that have 15 or more physicians. They all realize that consolidation creates more clout for them when negotiating with managed care plans for how their clinical services will be reimbursed.

“Even five or six urologists or GIs in a group will generate plenty of volume to sustain their own lab,” explained Plandowski. “The pathology work from the referrals of five or six specialists can easily generate $1 million in collections per year. Profit on that will be 40% to 50% after paying all expenses, including the pathologist. So, a specialty group that generates $1 million in pathology revenue can expect $450,000 in pretax take-home pay. These numbers become even more attractive in groups with 30 or more specialists, because, at these case volumes, income from pathology services becomes significant.

“It should be noted that in-house pathology laboratories are ‘revenue neutral’ situations for Medicare,” observed Plandowski. “The specialty group is paid no more for the pathology work than Medicare would pay any pathologist.”

Bernie Ness, President of B.J. Ness Consulting Group, LLC, in Toledo, Ohio, advised some GI groups in the Kettering, Ohio, area as they developed their in-house pathology labs. “These GI groups wanted to continue working with the pathologists in Kettering,” observed Ness. “It is why they first turned to their local pathologists and offered them the professional component.

RFP For Pathology Services

“It was made clear to each of the two local pathology groups providing services to the GI practice that it was an ‘all or nothing’ deal,” he recalled. “Only one of the two pathology groups was going to win the business at each GI practice.

“The GI groups explained their intention to operate the histology lab and globally bill for the cases,” explained Ness. “Both local pathology groups were offered the opportunity to continue providing professional services and the GIs were prepared to pay competitive market rates.

“In response to the request for proposals (RFPs), one group wanted to charge 50% more than Medicare would reimburse the GIs for that work,” Ness said. “A practice will not take that rate because they would lose money on each specimen. That is simple economics for any practice with 40% Medicare patients.

“Given the opportunity to bid for the professional service, the GI group was disappointed that the local pathology group had offered a money-losing rate,” he noted. “Further, the GIs had shopped the national laboratories and were aware of the aggressive prices some of these labs were prepared to bid to win this business. My point here is that there are competitive rates for contract pathology professional services in the marketplace and specialist physicians are aware of these options.”

Physicians See The Benefits

Specialist physicians view pathology as an ancillary service that benefits their practice by enhancing patient care, supporting better, faster clinical treatment, and doing it in a patient-friendly way. Many pathologists tend to overlook these additional advantages to an in-house laboratory for a larger group practice.

“This trend is not going away,” predicted Plandowski. “As a matter of fact, we see more and more of it every day. Without question, regulations are tough on these ventures, but it is possible for
specialist physicians to start these in-house operations and be successful financially. While this trend does take work out of reference labs, it also creates an opportunity for pathologists to make some money without having to spend money.

“From the local pathologists’ perspective, having specialty physicians open in- house labs represents an opportunity because the specialty practitioners cannot read those specimens!” Plandowski said. “They must have pathologists read them.

“However, most pathologists are not interested in pursuing that work because they think these specialty physicians are competing against them,” he said. “But specialist physicians cannot compete against pathologists because they can’t read the cases. Only a pathologist can read them.

“The sticking point is that pathologists usually believe they will get healthy professional fees for the work in a specialist physician’s office,” he added. “Forget that because Medicare dictates the use of market rates.

“In almost every case, the specialist group developing an in-office lab goes first to its local pathology group to get quotes for the work,” continued Plandowski. “That’s because they want to preserve their local relationship. Also, the work is put out to bid so that the physicians can establish that the price paid for pathology professional services was established at a market rate in case the OIG were to investigate the operation.

No Bills To Send Out

“Remember, pathologists don’t have to bill payers or patients for this work, nor take any disallowances or discounts,” he explained. “That is because they are paid a negotiated fee directly by the specialty practice. The pathologist doesn’t even have to bill the specialty practice, because the practice knows how many cases the pathologist does each month and how much should be paid.

“This is a very clean working relationship. At the end of each month, the pathology group is paid all its money,” he stated. “That’s a positive aspect. There is no investment and no overhead. The pathology group simply needs to contract at an agreed rate and show up to perform the service.

Do The Math

“The pathologist will make money on every case,” Plandowski added, using a common CPT code as an example. “Let’s say the specialty group is large enough to generate 5,000 tissues and uses only CPT code 88305. For any pathology group, that is access to a substantial volume of specimens. It would be a lot for a community hospital in a year. It only takes five or six specialty physicians to produce about 5,000 specimens per year because each physician generates about 1,000 billable 88305s per year.

“Pathologists hope to charge some percentage over the Medicare professional fee, but that would be a mistake,” he added. “They should ask themselves, ‘If I much time will it take a pathologist to read 5,000 billable 88305s? Assume it will take a quarter of a full-time pathologist. If a pathologist were to get $400,000 per year, then one quarter would be $100,000. Use a number in that range when bidding on this type of work because that’s what it will take to win the business.

“Pathologists don’t want to do this work for specialists physicians at a fee that is less than Medicare,” Plandowski added. “But it’s important to remember that Medicare’s reimbursement levels for pathology professional services were established to include components for work expense, malpractice expense and practice expense. Since there are no practice expenses in this scenario (microscope, rent, utilities, dictation, software, billing, collections, write-offs, etc.), pathologists must subtract that component to make a fair comparison of what is being paid for pathology services.”

Looking At The Right Number

Collectively, these insights can be summarized into a simple piece of advice: don’t compare the discounted fee offered by specialist physicians to a benchmark number such as the Medicare fee schedule. To properly evaluate the economic benefit, pathologists must look at the net profit they will earn for their time per case. That is the same math that competing pathologists are doing when they willingly accept this work at discounted pricing.

“Keep in mind that, if your group doesn’t do this work, other pathologists will!” observed Plandowski. “The American healthcare system still has lots of competition and it’s an important point that pathologists need to learn. It’s a tough message because pathologists don’t feel they should be ‘working’ for specialty practitioners such as urologists or GIs.”

Specialist Physicians Need Pathologists to Provide Professional Component Services

PATHOLOGISTS CAN VIEW WORKING for in-house specialty physicians as a profitable venture, says Joe Plandowski, President of the Lakewood Consulting Group in Lake Forest, Illinois.

“You would be working for another physician and it would be only for the professional component,” Plandowski said. “That would be the downside. But you could view the arrangement as a money maker because such an arrangement would have several benefits that shouldn’t be overlooked.

“First, the work can be done for a level of reimbursement that’s worthwhile to the pathologist—even if seems to be too low at first,” he added. “It would be worthwhile because the pathologist providing the professional services incurs no costs. The specialty group must assume all costs. Second, the pathologist would maintain the relationship he or she has with the specialists and so would retain access to the more challenging cases and associated special staining that would allow the pathologist to do both the technical and the professional component.

“Third, the pathologist would want to determine exactly what his or her costs would be and then bid a reasonable rate based on the time involved in doing this work,” he continued. “Once you agree on a rate, you will have the contract with no competition and a steady stream of income.

“What is different is that the pathologist is now working at that medical group’s in-office lab,” Plandowski concluded. “That’s not much different than rotating among several hospitals. Most importantly, a pathologist has the income and continues to enjoy an ongoing professional relationship with the specialty groups in the community.”

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