San Diego MSA Selected For Medicare Lab Demo

Site selection has interesting advantages to success of Lab Competitive Bid Demo Project

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CEO SUMMARY: Earlier this month, CMS revealed its selection of the first of two sites for the Medicare Competitive Bidding Demonstration Project for Laboratory Testing Services. It will be the San Diego-Carlsbad-San Marcos MSA (metropolitan statistical area). An assessment of this MSA reveals a number of reasons why it is likely that CMS believes it can move expeditiously to implement the competitive bidding demo in the San Diego MSA.

LABORATORIES IN SOUTHERN California will soon learn more details about the Medicare Competitive Bidding Demonstration Project for Laboratory Testing Services. Before wildfires spread across the area last week, the Centers for Medicare and Medicaid Services (CMS) was planning to hold a bidder’s conference this week in San Diego specifically to brief laboratories about the bidding process.

CMS is expected to announce a new date soon for the demonstration project in the San Diego-Carlsbad-San Marcos MSA (metropolitan statistical area) which is to be the first site for the Medicare Competitive Bidding Demonstration Project.

Before wild fires forced the postponement, CMS had expected the bidding process to be concluded and the winning laboratories to be determined by year end. It would then implement the demonstration project in the San Diego MSA by mid-year 2008.

The selection of San Diego-Carlsbad-San Marcos MSA may turn out to be a shrewd move by CMS and its contractors, for a number of reasons.

First, neither the congressional representatives from this area nor the two California senators sit on any of the committees in the House and Senate that have direct responsibility for oversight of the Medicare program and implementation of the Medicare Competitive Bidding Demonstration Project for Laboratory Testing Services. One can speculate that Medicare bureaucrats would be aware of the political ramifications of selecting a demonstration site that had members from Congress sitting on such committees. Thus, the choice of the San Diego MSA ensures that CMS officials in charge of competitive bidding won’t have to deal with Congressional delegates who are in a position to wield power over the relevant committees.

San Diego Is A Duopoly

Second, it is not likely that independent laboratories serving the San Diego-Carlsbad- San Marcos MSA will be able to exert much opposition or influence in the bidding demo implementation. That’s because San Diego County is dominated by the two national laboratories. Together, Quest Diagnostics Incorporated and Laboratory Corporation of America hold the lion’s share of the lab testing market in this region.

Outside of the two blood brothers, there are no independent lab companies of size in the MSA. In fact, only a handful of other independent lab companies have clients in San Diego County.

Third, the San Diego-Carlsbad-San Marcos MSA has little hospital laboratory outreach activity. Two of the largest health systems, Scripps Health and Sharp Healthcare, do some outreach testing. But their activities are oriented primarily to serving physicians owned or associated with the respective health systems. Thus, CMS will not have to deal with hospitals or health systems that have sizeable lab testing outreach programs and a willingness to challenge any unfair aspects of the demonstration project.

No Change in PSC Numbers

Fourth, in terms of patient access and how the demonstration project could cause a deterioration, San Diego MSA offers CMS an interesting benefit. As noted above, other than Quest Diagnostics and LabCorp, there is not much existing laboratory infrastructure in this region in terms of rapid response labs and patient service centers (PSCs). Thus, were the bidding process to lead to such low prices that other labs are discouraged from providing services to Medicare beneficiaries in the San Diego MSA, the result would not be the closure of many existing PSCs. For this reason, CMS has little exposure to criticism or patient complaints about reduced access.

Fifth, independent physician associations (IPAs) are a significant factor in the San Diego-Carlsbad-San Marcos MSA. Since the mid-1990s, IPAs throughout California have had a major role in directly contracting for laboratory testing services. IPAs have often negotiated lab testing contracts at rock bottom capitated rates and deeply discounted fee-for-service prices. The ability of IPAs to consistently negotiate deeply-discounted pricing is a significant reason why overall lab prices in California are lower then they are in many other states.

CMS May Have Head Start

Certainly CMS recognized that lab prices in California are often lower than prices in many other regional markets across the country. That fact would argue in favor of selecting the San Diego MSA as the first demonstration site. It gives CMS a head start on delivering an array of bids that would be measurably below the existing Medicare Part B fee schedule for laboratory tests.

Sixth, the specific menu of tests involved in the competitive bid demo project likely will make it easier to implement. CMS has identified 303 specific tests that represent 99% of the lab tests reimbursed under Medicare Part B. Because these are relatively high volume assays, it can be expected that the two blood brothers have good information on their costs to perform these 303 assays. Further, the two national labs probably have a substantial average cost-per-test advantage relative to that of other labs.

Both points would be useful to CMS administrators in implementing this competitive bidding demo for three reasons. First, because the two blood brothers already hold major market share in the San Diego MSA, CMS knows it reduces the number of other labs in a position to complain, to challenge, and to file legal action that could delay or derail the competitive bidding demo at this site.

Medicare Savings Potential

Second, the two national labs can be expected to have a significantly low average cost per test relative to other laboratory providers, thus increasing the odds that the competitive bids will deliver savings when compared with existing Medicare Part B fees. Third, over the three-year course of the San Diego site demonstration, CMS will have to deal only with the two blood brothers and a small number of lab companies and hospital lab outreach programs, since the prices accepted as part of the bid process are likely to make it uneconomical for smaller laboratories to continue serving Medicare beneficiaries.

This assessment of reasons why CMS found it desirable to select the San Diego-Carlsbad-San Marcos MSA assumes that CMS and its contractors actually recognized and based their decision on these factors. Many times, decisions are made based on unpredictable human elements.

Might Demo Succeed?

What becomes clear, however, is that multiple factors exist and could play a role in helping the San Diego MSA demonstration site succeed. That conclusion is certainly not what most laboratory administrators and pathologists want to acknowledge.

On the other side of the ledger, the Medicare program still remains a “command and control” bureaucracy, with all of the attendant hurdles, obstacles, and political influences that are part of this world. The need to comply with a host of statutes, regulations, and due process of law often leads to a complicated and convoluted solution that collapses of its own complexity.

If the project does collapse as a result of its own complexity, it would answer the prayers of many lab executives and pathologists. However, as noted earlier, multiple factors exist in San Diego that improve the potential for this demonstration site to succeed.

Basic Features of Medicare Demonstration Project

LABORATORY TESTS PERFORMED for Medicare patients enrolled in fee-for-service Medicare plans and living within the San Diego-Carlsbad-San Marcos MSA (metropolitan statistical area) will be covered by the Medicare Competitive Bidding Demonstration Project for Laboratory Testing Services. Some relevant facts about the demonstration project are:

•It includes 303 tests representing 99% of all Medicare Part B payments.
•It excludes Pap smear and colorectal cancer screening tests.
•It excludes tests provided by entities that have a “face to face” encounter with patients (such as physicians with office-based laboratories).
•Multiple winning laboratories will be selected, using criteria that includes bid price, quality, capacity, and geographic coverage.
•The demonstration project sets out rules that define which laboratories must bid, how the winning bids will be used to establish reimbursement levels during the three-year course of the demonstration, and which laboratories will be excluded from providers once the winning bids have been announced.

Lab directors and pathologists can track the progress of the demonstration project on this CMS Web page: https://www/ (click on “Demonstration”).


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