Statement of the American Clinical Laboratory Association

The American Clinical Laboratory Association (“ACLA”) is pleased to have this opportunity to present its views to the Subcommittee on Health of the House Ways and Means Committee in connection with the Subcommittee’s hearings on H.R. 2768, the Medicare Regulatory and Contracting Reform Act of 2001.

ACLA is an association of federally regulated, independent clinical laboratories and represents national, regional, and local laboratories throughout the United States.  All ACLA members furnish services reimbursed by the Medicare program and interact regularly with CMS and its Medicare contractors.  As a result, ACLA has had the opportunity to observe CMS’s performance and that of its carriers.

ACLA is pleased that in recent years, in particular, the industry’s relationship with CMS has improved significantly.  The agency has developed greater expertise in laboratory issues and has attempted to respond to issues that the industry has raised.  Nonetheless, like all health care providers, laboratories face a complex web of confusing--and often inconsistent--rules and regulations, many of which result from the way the laboratory payment system is currently structured.

In our testimony, ACLA would like to focus particularly on ways that the administration of the Medicare Program could be improved, through greater uniformity and simplification.  Laboratories face payment and coverage policies that differ from carrier to carrier.  As a result, ACLA believes that it is imperative to develop more uniform policies that apply consistently, regardless of carrier jurisdiction.  Congress began that task in the Balanced Budget Act of 1997 (“BBA ‘97”), when, as discussed below, it required CMS to reduce the number of carriers processing lab claims to no more than five and to convene a negotiated rulemaking to develop uniform national policies.  That work is still uncompleted.  A recent study by the Institute of Medicine (“IOM”), which was mandated by Congress, also recommended greater uniformity in payment for laboratory services.  ACLA believes that the implementation of the IOM study and the completion of the BBA ’97 mandates should be a top priority for CMS and Congress. 

In our statement today, ACLA would like to present an overview of the testing process.  We would then like to review particular areas where the lack of uniformity and increasing complexity create payment and coverage issues for laboratory services.  Finally, we discuss some specific ways that the system could be improved.  In addition, we are attaching a summary of legislative issues affecting laboratories that we hope this Congress will address.

I. Overview of Reference Laboratory Testing

Clinical laboratory testing is an important, cost-effective and life saving health care tool, which provides physicians objective information about a patient’s medical condition.  It permits the early detection, treatment and monitoring of a variety of diseases and conditions. Appropriate testing ultimately enhances health, saves lives and reduces health care costs.  Independent clinical laboratories are an important participant in that process.

For independent laboratories, the testing process usually begins in the physician’s office or at a hospital, when a physician examines a patient and determines what laboratory testing is necessary.  The specimens for this testing may be obtained by the physician or by a nurse in the physician’s office, or the patient may sometimes take the test requisition to a “Patient Service Center” operated by the laboratory, where a laboratory employee obtains the specimen.  In the vast majority of cases, however, the blood for testing is drawn in the physician’s office.  Thus, laboratory testing is unique among medical procedures, in that the entity furnishing the service often does not see, or have any direct contact with, the actual patient.

Most clinical laboratories have extensive courier networks that are designed to quickly and efficiently transport the specimen from the physician’s office to the laboratory.  The laboratory courier will usually go the physician’s office in the late afternoon or early evening to pick up the specimens that the physician has left for testing.  The courier may take the specimens directly back to the laboratory, or he may transport them to a central processing facility, where they are packaged for further shipment, by air or ground, to the laboratory.  The laboratory may be hundreds or thousands of miles away from the physician and the patient, and often is located in a different state.

Test specimens usually arrive at the laboratory late at night or early in the morning, at which time they are entered into the laboratory’s computer system and the testing begins.  It is not unusual for an independent laboratory to receive 10,000 specimens a night, on which 30,000 to 40,000 tests may be run during the night and early evening.  For most routine specimens, the laboratory completes the testing overnight and reports the results back to the physician by the next morning.  Often, some tests are performed at the facility that initially received the specimens, but then the specimen is sent to another facility for additional testing.  Thus, laboratory testing takes place in a national marketplace, but the payment and coverage system is still linked to the specific location where the testing occurs.  As a result, differences in payment and coverage decisions arise, a situation that creates inefficiencies, duplication, and increased costs.

II. Issues Arising Under the Clinical Lab Fee Schedule

Laboratory services are reimbursed based on the lesser of the laboratory’s actual charge, the fee schedule amount applicable to the location of the testing laboratory, or the national limitation amount (“NLA”).  CMS has established fee schedules on a carrier by carrier basis; therefore, in most instances, each state has its own fee schedule for clinical laboratory testing.  Some states have more than one carrier and in those areas there may also be more than one fee schedule for the state. The NLA, which is set at 74% of the fee schedule medians for each test, acts as a ceiling on reimbursement and limits the amount that each carrier can pay under its fee schedule.

Thus, there are actually 56 different laboratory fee schedules--one for each carrier jurisdiction.  However, because of consistent reductions in the NLA, today it is the NLA, rather than the carrier fee schedule, that usually governs payment.  This has created a de facto national fee schedule, although there continue to be some outliers in particular jurisdictions, where the test is paid at slightly less than the NLA amount.  However, in those cases, the difference is usually very small, and is often no more than a few cents.  Thus, although we almost have a national fee schedule, Medicare continues to operate as if it has 56 different fee schedules, a circumstance that creates unnecessary complexity and leads to operational difficulties.

For example, laboratories routinely refer testing from one laboratory to another, usually because the initial laboratory does not perform a particular test.  Under the Medicare statute, the referring laboratory is permitted to bill its carrier for all of the testing furnished, even what it referred to another laboratory for analysis; however, the carrier processing the claim is to pay for the testing based on the fee schedule applicable to the testing laboratory.  This means that for claims involving lab-to-lab referrals, two different fee schedules may apply to different tests on the same claim.  Because the carrier processing the claim may not maintain the other carrier’s information in its computer files, the laboratory may actually be required to resubmit the claim to the second carrier, the one with jurisdiction over the laboratory that performed the referred tests.

This solution requires laboratories to “split” their claims and to bill tests that were all part of the same patient encounter to multiple carriers.  This is confusing to the laboratories and to carriers because the same laboratory may be required to enroll with several different carriers, a situation that the carriers themselves often object to because it creates additional paperwork for them.  Even if the laboratory is able to enroll with, and forward claims to, the different carriers, the Program incurs the cost of processing multiple claims, and the beneficiary may receive Explanation of Medicare Benefit (“EOMB”) forms from multiple carriers for the same specimen, which can be very confusing.  The wastefulness of this process is especially apparent because under current payment rules, there may be little or no difference between the actual amounts paid by each carrier.

The recently completed study of the laboratory industry by the Institute of Medicine (“IOM”), Medicare Laboratory Payment Policy:  Now and in the Future--a study mandated by Congress in BBA ‘97--concluded that the Medicare laboratory payment system, incorporating 56 different fee schedules, is unnecessarily complex and inefficient.  The IOM found that for a sample of 20 high-volume Medicare services, payment was set at the NLA in at least 80% of carriers; for three other services, all payments were at the NLA.

As a result, the IOM urged Congress to adopt a single, national, rational fee schedule for clinical laboratory services based, at least initially, on the NLAs.  H.R. 1798, the “Medicare Patient Access to Prevention and Diagnostic Tests Act,” includes a provision implementing the IOM recommendation.  ACLA supports this proposal and believes that the development of a single national fee schedule for laboratory services should be a top priority that will greatly streamline the payment of laboratory claims. 

III. Issues Related to Medical Documentation Rules

In 1994, many carriers began to implement new medical necessity requirements applicable to clinical laboratory testing.  These requirements took the form of Local Medical Review Policies (“LMRP”), which often specified particular ICD-9 diagnosis codes that the carrier believed would demonstrate the medical necessity of a particular test.  If the laboratory did not submit a diagnosis code that the carrier deemed acceptable, then the laboratory would not be paid for the testing.  In some instances, the policy would also limit how frequently the carrier would pay for the testing for an individual beneficiary.

The growth in these carrier policies for laboratory testing had a direct impact on the cost of laboratory testing.  Because the ICD-9 code had to be supplied by the physician--it is a violation of fraud and abuse laws for the laboratory to supply the code itself--laboratories had to put more resources into educating physicians about the need to supply diagnosis coding information and into obtaining the information from physicians when they failed to supply it.  As a result, laboratories were forced to invest large amounts in billing system refinements and added personnel, just so they could bill and be paid for the testing that they performed.  However, in many instances, laboratories still do not obtain the necessary information from the physicians ordering the tests, and thus are forced to write off the costs of testing that they have performed.

The growth of these policies also led to confusion concerning payment policies.  Each carrier developed its own LMRPs for the laboratories within its jurisdiction.  However, carriers did not usually agree on the particular tests that were subject to LMRPs.  Thus, the list of tests for which a laboratory had to submit diagnosis codes would differ depending on where the laboratory was located.  In instances where two carriers had LMRPs for the same test, they often did not agree on the particular diagnosis codes that they found acceptable as demonstrating the medical necessity of the testing.  This led to confusion, because physicians could not easily determine which tests required diagnosis coding information or which diagnosis codes were considered acceptable. 

These differences in policy also led to differences in coverage.  For example, if a physician used a laboratory in one state, he might know that the laboratory’s carrier had certain LMRPs, which required him to submit ICD-9 codes for specified tests.  If he complied with those requirements, and sent in acceptable diagnosis codes, the patient’s testing would usually be paid for.  If the patient went to a physician across the hall, who used a laboratory in another state, the physician could order the same tests and submit all the same information to the laboratory.  However, the patient could find that the testing was not paid for, because the carrier with jurisdiction over the second laboratory did not accept the same diagnosis codes as the other carrier.  These differences have real implications for patients because, if it is clear that the testing is going to be denied as not medically necessary, the patient might be asked to sign an Advance Beneficiary Notice, which permits the laboratory to bill the patient for denied testing.  Thus, Medicare might pay for one patient’s testing, while the other patient would have to pay for it himself.  The result is that Medicare beneficiaries inadvertently have different coverage for laboratory testing services. 

As a result of concerns about these issues, Congress directed CMS, in BBA ’97,  to convene a negotiated rulemaking committee whose purpose was to develop uniform payment policies for clinical laboratory testing.  The negotiated rulemaking, in which ACLA participated, began meeting in July 1998 and completed its deliberations in August 1999.  The Committee developed over 23 uniform documentation policies and recommended additional payment policies.  A proposed rule was issued in March 2000, 65 Fed. Reg. 13082 (Mar. 10, 2000); however, a final rule is not expected to be issued until the fall of this year, at the earliest.

To further reduce differences among carriers, as part of BBA ‘97, Congress also directed CMS to designate a maximum of five regional carriers that would be responsible for paying for clinical laboratory testing.  In its recent study, the IOM also concluded that regional carriers should be established to process clinical laboratory claims in order to reduce inefficiency and waste.  However, up to now, CMS has taken no action to implement the regional carrier system, which was to be in place by July 1, 1999.

ACLA strongly urges the adoption and implementation of the negotiated rulemaking policies, which were mandated by BBA ’97, and which, by statute, were to be in place by January 1, 1999.  In addition, we urge the implementation of the regional carrier requirements that were also mandated by BBA’97.  Both the regional carrier and negotiated rulemaking provisions of the BBA were designed to achieve greater uniformity in the process of clinical laboratory testing--a goal that would ultimately be to the benefit of laboratories, physicians and most of all, beneficiaries.  Such a result would reduce the costs of claims processing, increase predictability concerning what tests would be paid for, and eliminate unnecessary regulatory burdens.[1]

IV. Issues Created by New Laboratory Testing

Because the laboratory fee schedule was originally developed almost 20 years ago, based on 1983 pricing data, it does not address the tremendous technological advances that have taken place since that time.  The law establishing the payment methodology did not specify a process for dealing with new technologies so CMS has had to create one. 

For new tests that are not already covered by the fee schedule, CMS uses two different methodologies to arrive at a price.  For some tests, CMS directs carriers to develop their own prices, based on “gap filling.”  Presumably, carriers are to determine the price that is applicable in their individual area, but CMS has provided little guidance to carriers concerning what information they are to review to develop the new gap-filled prices.  As a result, “gap filling” often results in widely divergent pricing levels for the same test.

In other instances, CMS “cross-walks” a new CPT code to an existing code, and prices the new code at the same level as the old code.  However, there may be little relationship between the test represented by the new CPT code and the test represented by the old one; therefore the decision to price them at the same level may result in a payment level that is inappropriate.

Further, when CMS issues a proposal concerning how it will pay for other types of services, the agency usually issues a notice in the Federal Register for comment, and subsequently responds to these comments when issuing a final rule.  Thus, interested parties have an opportunity to present their views on how particular services will be paid for.  For the laboratory fee schedule, this process is not followed.  CMS makes a unilateral determination concerning how new technologies will be handled; whether they will be gap filled or cross-walked; and what fee will be set--without any opportunity for public comment.  CMS’s determinations are not known until the agency issues a Program Memorandum late in the year, which specifies how the new codes will be treated.

Again, the IOM recognized the difficulty in obtaining coverage for new tests and technology.  ACLA agrees with the IOM’s conclusion that new tests and technologies must be incorporated into the fee schedules in an open, timely and accessible manner that is subject to challenge.  The current coverage process, according to the IOM, is lengthy, costly and not open to meaningful challenge.

ACLA believes that it is vital to address the problem of payment for new technologies.  CMS needs to develop a process, in consultation with the industry,  that sets reimbursement levels for new technologies that reflect their fair market value.  CMS should develop clearer standards concerning how carriers develop payment levels in their jurisdictions, so that carriers have direction in how to set these prices.  Congress solved one, albeit small, part of this problem last year in the Benefits Improvement and Protection Act (“BIPA”) by ensuring that the NLA, for new tests that were gap filled, would be set at 100% of the median price, rather than at 74% as is done for other services.  However, the other problems discussed above, related to disparity in pricing, and the lack of input into the process, remain.  The aforementioned H.R. 1798, the “Medicare Patient Access to Prevention and Diagnostic Tests Act,” addresses this concern by establishing specific procedures for determining payment amounts for new clinical laboratory tests.

[1] ACLA also believes a single, separate carrier for laboratory services furnished to End Stage Renal Disease (“ESRD”) beneficiaries would introduce additional cost savings for the Medicare program and support overall claims processing simplification.  Because ESRD testing is usually a small part of each carrier’s claims, carriers do not usually develop the expertise necessary to apply the very complex set of rules that pertain to ESRD testing.  As a result, laboratories performing this testing often encounter great difficulty with claims processing issues.  Therefore, we also believe it is reasonable to ensure that a single carrier handles all the claims processing for laboratory services dedicated to performing ESRD testing.