New era begins as HCFA implements lab fee schedule Essay

Congress has finally set the Government on course for a national fee
schedule covering diagnostic laboratory services in physicians’
offices, independent laboratories, and hospital outpatient facilities.

The launch came with the Deficit Reduction Act of 1984, whose
Medicare reforms included a directive that the Health Care Financing
Administration begin immediately paying for non-inpatient tests
according to regionally calculated fee schedules. The agency
instructing each carrier and intermediary to establish a fee schedule
tied to area prevailing charges, with the new payment standards to take
effect as soon as possible.

The Deficit Reduction Act was signed July 18. Early in August,
HCFA has assurances that the fee schedules would be in effect in all
carrier areas by the middle of that month. Less certain was the
time-table for the intermediaries, who needed to install a new coding
system (CPT-4) and make the transition from reasonable cost

During the changeover, according to HCFA officials, intermediaries
will pay for hospital-based outpatient laboratory services by
calculating a “relatively high” percentage of hospital-based
outpatient laboratory charges. “The intermediaries know what the
charges have been, more or less,” a HCFA official said. “They
are to continue to pay, for instance, 80 to 90 per cent of that, though
it could be lower or higher, to keep th dollars flowing. Once the fee
schedules are established, the bills will be processed, and any
necessary adjustments made.”

While the Government wants to avoid payment delays, it clearly
desires to reduce overall outlays for diagnostic testing. The interim
percentage-of-charges plan for hospitals, for instance, was installed to
approximate the fee schedule’s anticipated impact. Lawmakers
estimated the fee schedule would save Medicare $960 million over the
next four years.

Many observers believe hospitals will be hardest hit. When
inpatient laboratory services were swept into the prospective payment
program, administrators and laboratorians alike looked to outpatient
services as a counterbalancing revenue source. Although the new rules
don’t place the hospital-based services at a competitive payment
disadvantage with other laboratory facilities, they nevertheless dictate
the fee structure and probably preclude strategies for recapturing
dollars lost to DRGs.

Hospital lobbyists hammered this point home during the legislative
process, and won some small victories that are reflected in the
legislation. Here’s a rundown:

* The schedule applies to tests performed in independent
laboratories, phhysicians’ office labs, and hospital labs. The
payment level for hospital laboratories will be 62 per cent of the
prevailing charge level for services provided to hospital outpatients.
When a hospital-based lab performs tests for non-hospital outpatients,
it will be paid at the lower fee schedule rate Congress set for
independent and physicians’ office labs–60 per cent of the
prevailing charge level.

The legislation calls for HCFA to convert the carrierwide screens
for physicians’ office laboratories and independent laboratories in
effect this year to a national fee schedule beginning July 1, 1987. HCFA
officials probably won’t know for months just how they’ll
accomplish that task. The agency could make gradual adjustments,
narrowing differences among carrier schedules each year before the
deadline. Or they may adjust schedules only once, in July 1986.

Hospital laboratory treatment differs sharply. Rather than
mandating conversion to a national fee schedule, the law says that
hospital-based services will revert to the cost reimbursement system in
July 1987 unless Congress says otherwise.

The Health and Human Services Department is to advise lawmakers on
the feasibility of extending the fee schedule for hospital-based
laboratories serving hospital outpatients.

* Assignment now is mandatory for independent and hospital
laboratories, but remains optional for physicians. Moreover, whenever
assignment is in effect, the deductibles and coinsurance are waived, and
Medicare pays 100 per cent of the schedule fee.

* The new rules further require that carriers and intermediaries
pay only the entity actually performing the tests. (This precludes
physician billing for tests sent to an outside laboratory.) However, an
exception is allowed. An independent laboratory can bill for all tests
performed for a patient, even if some of those tests were referred to
another laboratory better equipped to handle them.

* A provision that is especially pleasing to independent
laboratories directs the Health Care Financing Administration to
simplify billing requirements, so long as the alterations don’t
simplify efforts at fraud and abuse. An agency spokesman said that will
probably mean an end to requiring beneficiaries’ addresses and
diagnoses. “We’re working now on making those changes
administratively,” said Charles Booth, special assistant to
HCFA’s deputy administrator.

Overall, Booth said, “our objective, and that of Congress, was
to insure that the Government pays for what a test is worth, regardless
of who performs it or where. A blood test should be worth x amount of
dollars. If it costs Hospital A x to perform it, and Hospital B x plus
1, the Government shouldn’t have to bear the difference. Hospital
B’s greater cost is not the Government’s problem.”

Booth pointed out that HCFA and legislators zeroed in on the 60 per
cent prevailing charge level because “that seemed the point at
which the Government could, in fact, reach some savings without being

Hospitals won the 2 per cent differential after arguing vigorously
that their laboratories should be excluded altogether due to the
financial uncertainities of switching from cost-based reimbursement.
“Historically, hospital laboratories and other hospital departments
have had overhead built into their costs, so it is difficult to judge
the impact,” Booth said. “But the question was whether to
allow an exclusion and risk giving hospital laboratories an unfair
competitive edge. Ultimately, Congress decided that the hospitals would
have to participate, but they could have a few more dollars.”

Hospitals also secured a victory of sorts by persuading lawmakers
to review their fee schedule experience after three years, rather than
automatically convert to the national system. The institutions thus
will enjoy an opportunity to re-argue their case before Congress even as
HCFA presents its findings concering the schedule’s impact on
hospital-based laboratories.

Currently, HCFA is preparing regulations to implement several
provisions of the act where it has some discretion. Among the matters
the regs will address: the mechanism for moving from carrierwide to
national fee schedules; whether wage differences in various regions of
the country will be a factor in the national schedule; how to handle
collection fees; and how to pay for low-volume, high-cost tests.

The legislation allows a collection fee per encounter to the
laboratory or office that actually draws the specimen.

“The House-Senate conference report addresses the fee for
venipuncture and urnalysis via catheterization, and we are allowing
payments for those right away.” Booth said. “However, we are
going to take the regulatory route, with the opportunity for public
comments, to decide on collection fees for specimens taken other

As for low-volume, high-cost tests, “we recognize that many of
today’s routine tests began as very expensive tests, and we
don’t want to impede advances in technology by discouraging new
developments and not paying a premium for them. When we make a
decision, others give it a hard look. So we know we have an influence
on more than just our portion of the market.”

At this writing, it appeared HCFA would not be proposing the fee
schedule regulations until late fall at best.


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