Speculating On How Labs Might Respond to Demo

Consequences of the bidding demonstration may swiftly alter national Medicare Part B prices

CEO SUMMARY: Statements and actions by CMS officials responsible for the laboratory competitive bidding demonstration project reveal the likelihood that they are using it as a Trojan Horse. While talking about implementation of a three-year demonstration project in the San Diego MSA, CMS dropped hints that it will use the bids submitted on February 15 as a prototype for a new national Medicare Part B schedule for implementation as early as next fall, at the start of fiscal year 2009.

FEBRUARY 15, 2008, IS SHAPING UP to be a seminal day in the long-term clinical and financial fortunes of the laboratory medicine profession.

On that date, a handful of labs, probably not more than 10 or 12, are expected to
submit bids and applications to be Medicare Part B laboratory test providers
for the three-year term of the Medicare Laboratory Competitive Bidding Demonstration pilot site in the San Diego-Carlsbad-San Marcos MSA (metropolitan statistical area).

Setting Events In Motion

Once those bids are submitted, I predict a series of events will be set in motion that will have ongoing consequences for the laboratory profession—not only those serving Medicare beneficiaries in the San Diego MSA, but for labs all across the United States. That’s because officials at the Centers for Medicare & Medicaid Services (CMS) will use the bids submitted by these laboratories on February 15 as a “prototype” (one CMS official’s characterization) for a national Medicare Part B laboratory price schedule. This price schedule could be used to influence Congressional funding as early as fiscal year 2009.

Thus, what is in play on February 15 is not only access to some 209,000 Medicare fee-for-service (FFS) beneficiaries, of which as many as 80% are already served by Laboratory Corporation of America and Quest Diagnostics Incorporated. Rather, the other objective on February 15 is Medicare’s wish to have laboratories provide it with a range of bids that indicate the rock-bottom prices labs will accept as payment for Part B lab tests (in the San Diego MSA). Medicare will then turn around and use this information as a prototype to allow it to establish a new national Part B fee schedule it can implement as early as next October!

Many would argue that it is irresponsible for CMS to proceed in this manner. What a handful of labs submit as bids (in a poorly-designed and highly-flawed auction) to serve patients in San Diego is not a relevant pricing sample upon which to base a new national Part B fee schedule. Yet, there are plenty of indications that CMS intends to use the San Diego bids for exactly that purpose. Such arbitrary slashing of fee-for-service reimbursement for Medicare Part B laboratory testing would be a short-sighted action with major long term consequences.

Short-Term Focus

However, it must be recognized that politicians and bureaucrats are not good at long-term planning. Their focus is on the short term and the next budget/election cycle. Case in point is the huge Social Security funding gap in coming years. Congress spends the money today that baby boomers will need in downstream retirement years. Yet neither political party has the will to cease spending incoming Social Security payments on current government programs.

Short-term thinking is one reason why CMS officials have turned the competitive bidding demonstration into a Trojan Horse. Nominally, CMS tells the public that this is the first of two three-year pilot sites. In reality, CMS is ready to harvest the San Diego MSA bids and use them as the prototype for a new national Part B laboratory fee schedule, as early as next October.

Local Bid Used Nationally

Thus, there a number of reasons one could use to argue that an important component for the future health and vitality of the laboratory medicine profession in the United States rests on a small handful of labs eligible to bid on February 15. Their decisions to participate, and their strategies for bidding, have consequences far out of proportion to the immediate challenge of preserving their right to serve some 209,000 Medicare elderly in San Diego.

That makes it interesting to speculate on the range of bidding strategies that individual labs might consider as February 15 approaches. First, assume that, in fact, CMS officials are highly interested to get access to these bids—more for use in a national Part B lab price schedule rewrite, than for the San Diego pilot—then one response is to not give them bids.

This could drive a strategy by the laboratory profession at large to delay the February 15 bid submission until the widely-recognized flaws in the design of the lab competitive bidding demonstration plan are fixed. With delay in the February 15 bid submission date as the goal, labs currently serving San Diego would need assistance from state and national laboratory associations and organizations.
These respected and credible laboratory groups would need to issue public statements in support of a delay. There should be reasons why a delay is justified and a list of identified problems that need to be fixed before the demonstration proceeds to the bidding submission stage. The White Paper/position paper concept I discussed on pages 25-27 would help in this effort.

Seeking A Court Injunction

Another approach is for a party to the laboratory demonstration project to go to court and file for an injunction to delay the February 15 bid submission date until the issues that concern labs in San Diego can be adjudicated and resolved. It is wistful thinking, but an ideal candidate to seek relief through the courts would be one of the hospitals or health systems in San Diego that operates a laboratory outreach program.

After all, a hospital laboratory outreach program is the perfect example of integrated patient care. The same laboratory provides inpatient, outpatient, and outreach testing services and the patient’s physicians have full access to this complete record of laboratory testing. Because the competitive bidding demonstration threatens to prevent the hospital lab from providing Part B lab tests to the same patient it is testing under Part A, the San Diego press is likely to pick up on this negative aspect of the bidding demo’s design. Plus, media coverage would also alert Medicary beneficiaries about how they are being made guinea pigs in an effort to shave a few pennies from the cost of Medicare Part B lab testing.

Funding for a legal strategy can come from some type of war chest effort organized by national laboratory leaders. There are enough lawyers who specialize in laboratory and diagnostic testing law to help create a lawful funding entity to provide for the legal costs of going to court and seeking an injunction. Lab industry vendors can also step up and help generate funds needed
to mount and sustain a legal challenge to the laboratory competitive bidding demonstration in its current form. This is doable. Further, if a San Diego-based laboratory or hospital knew that it would have help with the legal expenses and the support of the national laboratory profession, that increases the odds that a willing plaintiff for such a legal action could be found.

The “No Bid” Strategy

Independent of a legal challenge, would any laboratory serving San Diego adopt a strategy of not bidding? That is an interesting question. For Internist Laboratory in Oceanside, and for the lab outreach programs of Sharp Health Care, Scripps Health, and Alvarado Hospital, among others, that is not likely to be a welcome option. Internist Labs needs access to Medicare patients (65% of its patient mix). For the hospital labs, their mission is to serve their
parent hospital and treat the patient as he/she moves from hospital to clinic and
doctor’s office. Being excluded from serving Medicare patients would be very disruptive to such an integrated health delivery model.

Similarly, for the two blood brothers, not bidding is not a rational strategy. Together, they hold an estimated 80% of the Medicare Part B lab market in the San Diego MSA, The business represents about $17 million of the $21 million Medicare says it paid out in 2006 in San Diego. In revenue dollars, it’s not much for either lab company. But both labs have a marketing strategy based on being a contract provider for as many health plans as possible. Thus, if one lab company were to lose the ability to serve Medicare Part B beneficiaries, its competitor would use that as a wedge to win new clients.

Viewed from these perspectives, no lab currently serving the San Diego MSA is
likely to adopt a “no bid” strategy. Therefore, if it was in the best interest of the
laboratory profession to avoid submitting bids on February 15 and/or until recognized flaws and problems with the competitive bidding demonstration are resolved, then the legal strategy of pursuing an
injunction seems to be most feasible.

May Be Wide Range Of Bids

Assuming, then, that all qualified lab players serving San Diego plan to submit bids, are there any price/discount strategies that can be anticipated? Probably not, because of several economic factors. Each laboratory has a cost structure influenced by volume, internal test menu, and instrumentation/ automation. Add direct costs such as patient service centers, courier/logistics, IT connections to client offices, and each lab’s cost per test will vary widely. Further, San
Diego’s aggressive managed care market may mean that all labs serving that community are already working on thin margins and don’t have much ground to give in bidding for the demonstration project.

Is Court A Viable Strategy?

The speculation presented on these pages shows that it is unlikely that the laboratory profession, either locally in Southern California or with its national leadership, is likely to derail the scheduled progression of events, short of going to court and seeking an injunction to delay implementation.

Opting for legal action seems a justifiable approach, particularly because CMS and RTI have kept the laboratory profession at arm’s length during the three-year design phase of this competitive bidding demonstration project. However, it would require that the entire laboratory profession come together in an unprecedented way and take action in the few weeks remaining before February 15. 




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