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entitled 'Medicare: Modifying Payments for Certain Pathology Services 
Is Warranted' which was released on September 30, 2003.

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Report to Congressional Committees:

United States General Accounting Office:

GAO:

September 2003:

Medicare:

Modifying Payments for Certain Pathology Services Is Warranted:

Medicare Payment for Technicl Pathology Services:

GAO-03-1056:

GAO Highlights:

Highlights of GAO-03-1056, a report to congressional committees 

Why GAO Did This Study:

In 1999, the Health Care Financing Administration, now called the 
Centers for Medicare & Medicaid Services (CMS), proposed terminating 
an exception to a payment rule that had permitted laboratories to 
receive direct payment from Medicare when providing technical 
pathology services that had been outsourced by certain hospitals. The 
Congress enacted provisions in the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (BIPA) to delay the 
termination. The BIPA provisions directed GAO to report on the number 
of outsourcing hospitals and their service volumes and the effect of 
the termination of direct laboratory payments on hospitals and 
laboratories, as well as on access to technical pathology services by 
Medicare beneficiaries. GAO analyzed Medicare inpatient and outpatient 
hospital and laboratory claims data from 2001 to develop its 
estimates.

What GAO Found:

In 2001, approximately 95 percent of all Medicare prospective payment 
system (PPS) hospitalshospitals that are paid predetermined fixed 
amounts for servicesand critical access hospitals (CAH), which 
receive reimbursement from Medicare based on their reasonable costs, 
outsourced some technical pathology services to laboratories that 
received direct payment for those services. However, the median number 
of outsourced services per hospital was small81. 

If laboratories had not received direct payments for services for 
hospital patients, GAO estimates that Medicare spending would have 
been $42 million less in 2001, and beneficiary cost sharing 
obligations for inpatient and outpatient services would have been 
reduced by $2 million. Most hospitals are unlikely to experience a 
financial burden from paying laboratories to provide technical 
pathology services. If payment to the laboratory is made at the 
current rate, a PPS hospital outsourcing the median number of 
technical pathology services outsourced by PPS hospitals, 94, would 
incur an additional annual cost of approximately $2,900. There would 
be no financial impact for the 31 percent of rural hospitals that are 
CAHs, as they would receive Medicare reimbursement for their 
additional costs. 

Medicare beneficiaries access to pathology services would likely be 
unaffected if direct laboratory payments are terminated. Hospital 
officials stated they were unlikely to limit surgical services, 
including those requiring pathology services, because limiting these 
services would result in a loss of revenue and could restrict access 
to services for their communities.

What GAO Recommends:

GAO suggests that the Congress may wish to consider not reinstating 
the provision that allows laboratories to receive direct payment from 
Medicare for technical pathology services provided to hospital 
patients. GAO recommends that the Administrator of CMS terminate the 
policy of allowing laboratories to receive direct payment. CMS stated 
it would carefully consider our recommendation.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Few Hospitals Outsource Large Volumes of Technical Pathology Services:

Medicare Expenditures and Beneficiary Copayments Would Be Reduced, 
While Hospital Costs Would Increase Slightly, If Direct Payment to 
Laboratories Is Terminated:

Beneficiaries' Access Likely Would Be Unaffected:

Conclusions:

Matter for Congressional Consideration:

Recommendation for Executive Action:

Agency Comments and Comments from National Associations and Our 
Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Comments from the Centers for Medicare & Medicaid Services:

Tables:

Table 1: Medicare Payments for Outsourced Technical Pathology Services 
at PPS Hospitals and CAHs under Current Payment Policy and If Direct 
Payment to Laboratories Is Terminated:

Table 2: Beneficiary Cost-Sharing Obligation for Outsourced Technical 
Pathology Services at PPS Hospitals and CAHs under Current Payment 
Policy and If Direct Payment to Laboratories Is Terminated:

Table 3: Number and Percentage of All Hospitals, Urban and Rural PPS 
Hospitals, and CAHs Outsourcing Technical Pathology Services by Number 
of Services in 2001:

Table 4: Estimated Payments to Laboratories by Medicare and Medicare 
Beneficiaries for Technical Pathology Services Provided to Hospital 
Inpatients and Outpatients, 2001:

Table 5: Estimated Medicare Payments under Current Policy and Projected 
Annual Savings If Direct Payments to Laboratories Are Terminated, Based 
on 2001 Services:

Table 6: Estimated Beneficiary Copayments under Current Policy and 
Projected Annual Savings If Direct Payments to Laboratories Are 
Terminated, Based on 2001 Services:

Abbreviations:

AHA: American Hospital Association:

APC: ambulatory payment classification:

BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000:

CAH: critical access hospital:

CAP: College of American Pathologists:

CMS: Centers for Medicare & Medicaid Services:

DRG: diagnosis-related group:

HCFA: Health Care Financing Administration:

MPFS: Medicare physician fee schedule:

NRHA: National Rural Health Association:

POS: Provider of Services:

PPS: prospective payment system:

SNF: skilled nursing facility:

United States General Accounting Office:

Washington, DC 20548:

September 30, 2003:

Congressional Committees:

Hospitals receive fixed, predetermined amounts under Medicare's 
hospital inpatient and outpatient prospective payment systems (PPS) for 
providing necessary services to Medicare beneficiaries. By paying 
hospitals fixed amounts under a PPS, Medicare seeks to encourage them 
to operate efficiently, as hospitals retain the difference if their 
payments exceed their costs of providing necessary services. Hospitals 
that outsource services for their patients generally pay suppliers of 
those services directly, and the suppliers do not receive payment from 
Medicare.

In 2000, the Congress enacted provisions in the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)[Footnote 
1] to delay for 2 years application of a rule issued by the Health Care 
Financing Administration (HCFA),[Footnote 2] the agency responsible for 
administering Medicare. The rule terminated an exception to the 
inpatient and outpatient PPS that permitted one type of supplier--
laboratories--to receive payment directly from Medicare when providing 
technical pathology services[Footnote 3] to beneficiaries who are 
hospital patients. The BIPA provisions applied only to "covered 
hospitals," those hospitals that had agreements with laboratories in 
effect as of July 22, 1999, the date HCFA proposed the rule, under 
which the hospitals outsourced technical pathology services to 
laboratories, and the laboratories received payment from Medicare for 
these services. Under these agreements, some hospitals may outsource 
all of their technical pathology services to laboratories, while others 
may outsource only some of their services, such as complex procedures 
that are rarely performed or overflow services at times of full 
capacity.

Numerous issues were raised when HCFA issued its rule in 1999 to 
terminate direct Medicare payment to laboratories for technical 
pathology services. At the time, HCFA stated that Medicare was paying 
twice for those services provided to hospital inpatients, once to the 
hospital through the inpatient PPS payment and once to the laboratory 
through a separate payment.[Footnote 4] In addition, outsourcing 
hospitals had an advantage because they did not pay the cost of 
technical pathology services outsourced to laboratories, while other 
hospitals had to pay for the cost of these services from their 
inpatient PPS payments.[Footnote 5] Furthermore, application of 
Medicare cost-sharing rules resulted in added costs to inpatient 
beneficiaries admitted to outsourcing hospitals, compared to those for 
inpatients at other hospitals. Some hospitals and laboratories and 
their affiliated pathologists voiced concern, however, that termination 
of the laboratories' direct payments would increase hospitals' costs, 
decrease laboratories' revenues, and cause hospitals to stop performing 
surgical services, particularly in rural areas, reducing beneficiaries' 
access to services.

Although the BIPA provisions expired at the end of 2002, the Centers 
for Medicare & Medicaid Services (CMS) made an administrative decision 
to continue directly paying laboratories for technical pathology 
services provided to hospital patients.[Footnote 6] In recent bills, 
both the House of Representatives and the Senate have included language 
to further delay application of the CMS rule.

In BIPA, the Congress directed that we report on how terminating direct 
laboratory payments would affect hospitals, laboratories, and access to 
technical pathology services by Medicare beneficiaries.[Footnote 7] As 
agreed with the committees of jurisdiction, we (1) describe the number 
and type of hospitals outsourcing technical pathology services and 
their service volumes, (2) estimate how termination of direct 
laboratory payments would affect Medicare expenditures, beneficiary 
cost-sharing obligations, and hospital costs, and (3) examine how 
terminating direct laboratory payments would affect beneficiaries' 
access to technical pathology services in hospitals.

We used Medicare claims and provider data to identify Medicare 
beneficiaries receiving technical pathology laboratory services 
concurrently with hospital services. Using 2001 data, the most recently 
available, we estimated the number of urban and rural PPS hospitals and 
critical access hospitals (CAH),[Footnote 8] which are paid their 
reasonable costs rather than PPS payments,[Footnote 9] outsourcing 
technical pathology services. We also estimated the volume of and 
payments for these services. We relied on these data because there is 
no list of covered hospitals and the laboratories to which they 
outsource technical pathology services.

We interviewed officials at CMS, the Department of Health and Human 
Services Office of Inspector General, and the Congressional Budget 
Office, as well as representatives from several Medicare 
carriers.[Footnote 10] In addition, we interviewed representatives from 
national associations representing hospitals and pathologists and 
representatives from 13 laboratories and 17 urban and rural PPS 
hospitals in eight states and an additional 2 laboratories in another 
state. We visited a laboratory and a rural hospital that outsources 
technical pathology services. We also spoke with officials from two 
CAHs. Our methodology is detailed in appendix I. We did our work from 
June 2002 through September 2003 in accordance with generally accepted 
government auditing standards.

Results in Brief:

We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95 
percent of all such facilities, outsourced at least some technical 
pathology services to laboratories that received direct payment from 
Medicare for those services. In 2001, out of approximately 1.4 million 
outsourced technical pathology services, the median number of 
outsourced services per hospital was 81. Urban hospitals outsourced 
almost twice as many services as rural hospitals. In addition, 64 
percent of these services were for outpatient beneficiaries.

If laboratories had not received direct payment for services for 
hospital patients, we estimate that Medicare spending would have been 
$42 million less in 2001, with $18 million and $24 million in savings 
for inpatient and outpatient services, respectively, and overall 
beneficiary cost sharing would have been reduced by $2 million. 
Comparatively, in 2001, payments to laboratories providing technical 
pathology services to beneficiaries who were hospital patients equaled 
over $63 million, including Medicare payments of about $51 million and 
beneficiary cost sharing of almost $13 million. Most hospitals are 
unlikely to experience a large financial burden from paying 
laboratories to provide technical pathology services. However, the 
extent to which an individual hospital's costs and a laboratory's 
revenues would change if direct laboratory payments are terminated 
would depend on the rates negotiated by that hospital and laboratory. 
If payment to the laboratory is made at the current rate, a PPS 
hospital outsourcing the median number of technical pathology services 
outsourced by PPS hospitals, 94, would incur an additional annual cost 
of approximately $2,900. Also, there would be no financial impact from 
terminating direct laboratory payments for the 31 percent of rural 
hospitals that are CAHs because they would be reimbursed for their 
costs of outsourcing technical pathology services.

Medicare beneficiaries' access to pathology services would likely be 
unaffected if direct payment to laboratories is terminated, as hospital 
representatives we spoke with stated that, because of financial and 
community access concerns, their hospitals were unlikely to limit 
surgical services, including those requiring pathology services. In 
addition, almost all hospital representatives we spoke with said their 
hospitals would likely continue to outsource technical pathology 
services as it would generally be less costly than performing the 
services themselves.

We suggest that the Congress may wish to consider not reinstating the 
provisions that allow laboratories to receive direct payment from 
Medicare for providing technical pathology services to hospital 
patients. We recommend that CMS terminate its policy of permitting 
laboratories to receive payment from Medicare for these services. In 
commenting on a draft of this report, CMS stated that it is important 
that payment policy encourage efficiencies in the provision of 
technical pathology services and that it would carefully consider our 
recommendation. National associations that received a draft of the 
report for comment disagreed that direct laboratory payments should be 
terminated, as they believe such a change would have negative effects 
on beneficiaries' access to services and on rural hospitals. However, 
hospital representatives we spoke with said their hospitals would 
likely continue to outsource technical pathology services. In addition, 
we do not believe paying laboratories directly for these services will 
place a significant financial burden on rural hospitals as we estimated 
that the median number of technical pathology services outsourced by 
rural hospitals in 2001 was only 61.

Background:

Medicare payment policies for technical pathology services have changed 
over the years as new payment systems for hospital and physician 
services have been implemented and modified. Beginning with the 
implementation of the hospital inpatient PPS on October 1, 1983, 
through the implementation of the Medicare physician fee schedule 
(MPFS) on January 1, 1992, and the outpatient PPS on August 1, 2000, 
payment for technical pathology services changed as fixed, 
predetermined payment replaced reasonable cost or charge-based 
reimbursement for Medicare services.

Implementation of the Inpatient PPS:

Under the inpatient PPS, each inpatient stay is classifed into a 
diagnosis-related group (DRG) based primarily on the patient's 
condition. Each DRG has a payment weight assigned to it that reflects 
the relative cost of inpatient treatment for a patient in that group 
compared with that for the average Medicare inpatient. Included in the 
costs of each DRG are nonphysician services provided to inpatients by 
the hospital and its outside suppliers. A hospital receives a DRG 
payment from Medicare and a deductible amount from a beneficiary for 
each inpatient benefit period.[Footnote 11] Each year, the DRG weights 
are recalibrated to account for changes in resource use, and the 
payment rate is adjusted by an update factor to account for changes in 
market conditions, practice patterns, and technology. Medicare 
separately pays physicians, including pathologists, and certain other 
professionals for the direct services they provide to inpatients.

When developing the inpatient PPS in the early 1980s, HCFA determined 
that technical pathology services outsourced to laboratories were an 
integral part of the professional services provided by the 
laboratories' pathologists, not separate nonphysician services. Based 
on that determination, the payment for technical pathology services 
provided by laboratories was included in the larger payment to the 
laboratories and not included in the PPS payments.[Footnote 12]

Implementation of the MPFS:

In 1992, HCFA implemented the MPFS, which created distinct payments for 
the professional and technical components of most diagnostic services, 
including pathology services. Although the MPFS included a distinct 
payment to laboratories for technical pathology services, HCFA did not 
revise its policy to prohibit laboratories from continuing to receive 
the separate Medicare payment for outsourced technical pathology 
services provided to inpatients. Under the MPFS, beneficiaries are 
responsible for a copayment equal to 20 percent of the payment for 
physician services, including technical pathology services. Thus, 
inpatient beneficiaries whose technical pathology services were 
outsourced by a hospital to a laboratory that received direct payment 
from Medicare were responsible for a copayment, while other inpatients 
were not.

Termination of MPFS Payments to Laboratories for Technical Pathology 
Services:

On July 22, 1999, HCFA proposed ending Medicare payments under the MPFS 
to laboratories for technical pathology services provided to hospital 
inpatients on or after January 1, 2000.[Footnote 13] Under the 
proposal, laboratories, like suppliers of other nonphysician services, 
would have to seek payment from hospitals for technical pathology 
services provided to hospital inpatients.

HCFA's rationale for its proposed rule was that payment for technical 
pathology services provided to beneficiaries was already included in 
the inpatient PPS. When implementing the inpatient PPS, HCFA 
established separate payment rates for rural and urban hospitals based 
on data from hospitals' cost reports submitted to the agency. Hospitals 
that performed their own technical pathology services included such 
costs in their cost reports, while hospitals outsourcing these services 
did not. According to HCFA, urban hospitals generally performed such 
services, and in part, their higher rates reflected that. Consequently, 
in HCFA's view, when the separate rural rate was eliminated in 1995 and 
rural hospitals began receiving the higher rate paid to most urban 
hospitals, the cost of technical pathology services was included in 
that payment. Thus, HCFA concluded that when a laboratory received 
payment from Medicare for technical pathology services provided to a 
hospital inpatient, Medicare was paying twice for the same service--
once to the hospital as part of the PPS payment and once to the 
laboratory through the MPFS. A second reason HCFA cited to support its 
proposed rule was concern that hospital outsourcing arrangements with 
laboratories to provide technical pathology services would proliferate 
if hospitals realized these arrangements would reduce their costs 
without any reduction in their inpatient PPS payments.

After considering comments from the hospital industry and laboratories, 
which stated, in part, that they would need additional time to 
renegotiate their agreements, in the final rule, HCFA delayed 
implementation of the policy until January 1, 2001.[Footnote 14]

Temporary Continuation of Laboratories Receiving MPFS Payments:

In December 2000, the Congress enacted provisions in BIPA that stated 
that laboratories furnishing technical pathology services to hospital 
patients under agreements with hospitals as of the publication date of 
the HCFA proposed rule could continue to receive payment directly from 
Medicare for these services until January 1, 2003.[Footnote 15] Because 
the outpatient PPS was implemented in August 2000, the provisions 
applied to services provided to outpatients as well as inpatients.

Implementation of the Outpatient PPS:

The outpatient PPS pays hospitals a predetermined amount per service 
similar to a fee schedule. All services paid under the outpatient PPS, 
including technical pathology services, are classified into groups 
called ambulatory payment classifications (APC). Like inpatient DRGs, 
the relative weights of the APCs are adjusted annually by recalibration 
and the payment rates by an update factor to account for changes in 
resource use, technology, practice cost, and service delivery. When the 
outpatient PPS was implemented, beneficiary copayments for a service 
were generally 20 percent of the hospitals' median charges for that 
service in 1996, updated to 1999. Therefore, the beneficiary cost-
sharing obligation as a percentage of APC payment rates varies by 
service. Because the median charges were often higher than the APC 
payment rates implemented with the outpatient PPS, beneficiary 
copayments were frequently as high or higher than 50 percent of the 
total APC payment amount. The Balanced Budget Act of 1997 established a 
mechanism to gradually decrease the cost-sharing percentages for all 
APCs to 20 percent over time.[Footnote 16]

The copayments that beneficiaries are responsible for paying under the 
outpatient PPS for technical pathology services that are furnished 
directly by hospitals are roughly comparable to the copayments that 
beneficiaries are responsible for paying laboratories under the MPFS 
when services are outsourced. The outpatient PPS payment rates for 
technical pathology services are significantly lower than the 
corresponding MPFS payment rates, but outpatient PPS copayments 
represent a higher percentage of the payment for technical pathology 
services than MPFS copayments.[Footnote 17]

Medicare Payment Methodologies If Direct Payments to Laboratories Are 
Terminated:

If the BIPA provisions are not reinstated and CMS terminates direct 
payments to laboratories, hospitals would have to negotiate payment 
amounts with laboratories to pay them directly for services delivered 
to inpatient and outpatient beneficiaries or begin to supply these 
services themselves. While the hospitals would not experience any 
direct adjustments to their inpatient DRG payments, over time, hospital 
costs of paying laboratories for technical pathology services would be 
reflected in the DRG weights, as the annual recalibration accounts for 
changes in the costs of delivering services. For services delivered to 
outpatients, hospitals would bill Medicare under the outpatient PPS for 
technical pathology services and, therefore, would recover additional 
revenue even if they continued to outsource these services to 
laboratories. Inpatient beneficiaries of hospitals that outsource 
technical pathology services would no longer be responsible for 
additional copayments to the laboratories. Outpatient beneficiaries 
would no longer be responsible for copayments to laboratories under the 
MPFS, but instead would be responsible for copayments to the hospitals 
where they received their services under the outpatient PPS.

CAHs, which as of March 2003 constituted 15 percent of all hospitals 
and 31 percent of rural hospitals, would not be affected by the 
termination of direct laboratory payments.[Footnote 18] CAHs are not 
paid under the inpatient and outpatient PPS, but instead are paid based 
on their reasonable costs of providing services. Currently, CAHs 
receive no payment from Medicare for technical pathology services 
outsourced to laboratories that directly bill Medicare because CAHs 
incur no costs in the delivery of those services. If direct laboratory 
payments are terminated, CAHs would be reimbursed by Medicare for their 
costs of paying laboratories to perform technical pathology services, 
and outpatient beneficiaries who currently are responsible for paying 
20 percent of the payment for their technical pathology services to the 
laboratories under the MPFS would instead be responsible for paying 20 
percent of the CAHs' customary charges.[Footnote 19] See table 1 for a 
description of Medicare payments to outsourcing PPS hospitals and CAHs, 
and table 2 for a description of beneficiary cost-sharing obligations 
at outsourcing PPS hospitals and CAHs, under current policy and if 
direct payment to laboratories is terminated.

Table 1: Medicare Payments for Outsourced Technical Pathology Services 
at PPS Hospitals and CAHs under Current Payment Policy and If Direct 
Payment to Laboratories Is Terminated:

Inpatient; Hospital payment; PPS hospital outsources to laboratory: 
Current policy: None; PPS hospital outsources to laboratory: If direct 
payment is terminated: None[A]; CAH outsources to laboratory: 
Current policy: None; CAH outsources to laboratory: If direct payment 
is terminated: Reasonable costs.

Outpatient: Laboratory payment; PPS hospital outsources to laboratory: 
Current policy: Outpatient: MPFS payment; PPS hospital outsources to 
laboratory: If direct payment is terminated: Outpatient: None[B]; 
Outpatient: [Empty]; CAH outsources to laboratory: Current policy: 
Outpatient: MPFS payment; CAH outsources to laboratory: If direct 
payment is terminated: Outpatient: None[B].

Outpatient; Hospital payment; PPS hospital outsources to laboratory: 
Current policy: None; PPS hospital outsources to laboratory: If direct 
payment is terminated: APC payment; CAH outsources to 
laboratory: Current policy: None; CAH outsources to laboratory: If 
direct payment is terminated: Reasonable costs.

Reasonable costs: Laboratory payment; PPS hospital outsources to 
laboratory: Current policy: Current policy: MPFS payment; PPS hospital 
outsources to laboratory: If direct payment is terminated: If direct 
payment is terminated: None[B]; None[B]: [Empty]; CAH outsources to 
laboratory: Current policy: Current policy: MPFS payment; CAH 
outsources to laboratory: If direct payment is terminated: If direct 
payment is terminated: None[B].

Source: CMS.

Note: GAO analysis of Medicare payment rules for 2003.

[A] A hospital receives a DRG payment amount for inpatient services 
related to the patient's condition. There is no additional payment to 
the hospital if direct laboratory payments are terminated.

[B] A laboratory that continues to supply these services for a hospital 
would receive payment directly from the hospital.

[End of table]

Table 2: Beneficiary Cost-Sharing Obligation for Outsourced Technical 
Pathology Services at PPS Hospitals and CAHs under Current Payment 
Policy and If Direct Payment to Laboratories Is Terminated:

Inpatient; PPS hospital outsources to laboratory: Current policy: 20 
percent of MPFS payment to laboratory; PPS hospital outsources to 
laboratory: If direct payment is terminated: None; CAH 
outsources to laboratory: Current policy: 20 percent of MPFS payment to 
laboratory; CAH outsources to laboratory: If direct payment is 
terminated: None.

Outpatient; PPS hospital outsources to laboratory: Current policy: 20 
percent of MPFS payment to laboratory; PPS hospital outsources to 
laboratory: If direct payment is terminated: APC copayment (percentage 
of payment varies by service); CAH outsources to laboratory: 
Current policy: 20 percent of MPFS payment to laboratory; CAH 
outsources to laboratory: If direct payment is terminated: 20 percent 
of CAH's customary charges.

Source: CMS.

Note: GAO analysis of Medicare payment rules for 2003.

[End of table]

Few Hospitals Outsource Large Volumes of Technical Pathology Services:

We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95 
percent of all such facilities, outsourced at least some technical 
pathology services to laboratories that received direct payment from 
Medicare for those services (see table 3).[Footnote 20] However, most 
hospitals outsourced a small number of these services to laboratories. 
In 2001, approximately 1.4 million technical pathology services were 
outsourced, and the median number of outsourced services per hospital 
was 81. Approximately 68 percent of all hospitals outsourced 200 or 
fewer technical pathology services, and only 6 percent outsourced more 
than 1,000 services. Outsourcing hospitals consisted of 2,428 urban PPS 
facilities and 1,651 rural PPS facilities, representing 95 percent and 
97 percent of urban and rural PPS hospitals in 2001, respectively, and 
694 CAHs.

Table 3: Number and Percentage of All Hospitals, Urban and Rural PPS 
Hospitals, and CAHs Outsourcing Technical Pathology Services by Number 
of Services in 2001:

Number of services: 1-20; All hospitals (percentage of total 
hospitals): 1,084 (22); Urban PPS hospitals (percentage of total urban 
PPS hospitals): 384 (15); Rural PPS hospitals (percentage of total 
rural PPS hospitals): 387 (23); CAHs (percentage of total CAHs): 313 
(42).

Number of services: 21-100; All hospitals (percentage of total 
hospitals): 1,558 (31); Urban PPS hospitals (percentage of total urban 
PPS hospitals): 837 (33); Rural PPS hospitals (percentage of total 
rural PPS hospitals): 506 (30); CAHs (percentage of total CAHs): 215 
(29).

Number of services: 101-200; All hospitals (percentage of total 
hospitals): 773 (15); Urban PPS hospitals (percentage of total urban 
PPS hospitals): 464 (18); Rural PPS hospitals (percentage of total 
rural PPS hospitals): 212 (12); CAHs (percentage of total CAHs): 97 
(13).

Number of services: 201-500; All hospitals (percentage of total 
hospitals): 754 (15); Urban PPS hospitals (percentage of total urban 
PPS hospitals): 414 (16); Rural PPS hospitals (percentage of total 
rural PPS hospitals): 277 (16); CAHs (percentage of total CAHs): 63 
(8).

Number of services: 501-1000; All hospitals (percentage of total 
hospitals): 333 (7); Urban PPS hospitals (percentage of total urban PPS 
hospitals): 149 (6); Rural PPS hospitals (percentage of total rural PPS 
hospitals): 178 (10); CAHs (percentage of total CAHs): 6 (1).

Number of services: 1001-2000; All hospitals (percentage of total 
hospitals): 145 (3); Urban PPS hospitals (percentage of total urban PPS 
hospitals): 88 (3); Rural PPS hospitals (percentage of total rural PPS 
hospitals): 57 (3); CAHs (percentage of total CAHs): 0 (0).

Number of services: 2001+; All hospitals (percentage of total 
hospitals): 126 (3); Urban PPS hospitals (percentage of total urban PPS 
hospitals): 92 (4); Rural PPS hospitals (percentage of total rural PPS 
hospitals): 34 (2); CAHs (percentage of total CAHs): 0 (0).

Number of services: Total; All hospitals (percentage of total 
hospitals): 4,773 (95)[A]; Urban PPS hospitals (percentage of total 
urban PPS hospitals): 2,428 (95); Rural PPS hospitals (percentage of 
total rural PPS hospitals): 1,651 (97)[B]; CAHs (percentage of total 
CAHs): 694 (93).

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and provider 
data.

[A] Percentage of total hospitals by number of services does not total 
95 percent due to rounding.

[B] Percentage of total rural PPS hospitals by number of services does 
not total 97 percent due to rounding.

[End of table]

Among hospitals outsourcing technical pathology services, urban 
hospitals, including CAHs, outsourced a median of 97 services and 64 
percent of all services, and rural hospitals, including CAHs, 
outsourced a median of 61 services and 36 percent of all 
services.[Footnote 21] Almost twice as many services were delivered to 
outpatient beneficiaries compared to inpatient beneficiaries, as 
outpatient services accounted for approximately 64 percent of all 
outsourced services.

Medicare Expenditures and Beneficiary Copayments Would Be Reduced, 
While Hospital Costs Would Increase Slightly, If Direct Payment to 
Laboratories Is Terminated:

If laboratories had not received direct payment for services for 
hospital patients, we estimate that Medicare spending would have been 
$42 million less in 2001, with $18 million and $24 million in savings 
for inpatient and outpatient services, respectively, and overall 
beneficiary cost sharing would have been reduced by $2 million. In 
2001, payments to laboratories providing technical pathology services 
to beneficiaries who were hospital patients equaled over $63 million, 
including Medicare payments of about $51 million ($18 million for 
inpatient services and $33 million for outpatient services) and 
beneficiary copayments of almost $13 million ($5 million for inpatient 
services and $8 million for outpatient services). Paying laboratories 
to provide technical pathology services is unlikely to impose a large 
financial burden on most hospitals. However, the extent to which an 
individual hospital's costs and a laboratory's revenues would change if 
direct payment to laboratories is terminated would depend on the rates 
negotiated by that hospital and laboratory. If payment to the 
laboratory is made at the MPFS rate, a PPS hospital outsourcing the 
median number of technical pathology services would incur an additional 
cost of approximately $2,900. Additionally, there would be no financial 
impact on CAHs if direct laboratory payment is terminated because they 
would be reimbursed for their reasonable costs of outsourcing technical 
pathology services.

Total Payments to Laboratories in 2001:

In 2001, estimated payments to laboratories providing technical 
pathology services to hospital patients totaled over $63 million, 
including Medicare payments of about $51 million and beneficiary 
copayments of almost $13 million (see table 4). For services provided 
to inpatients, total laboratory payments equaled approximately $23 
million, with $18 million from Medicare and $5 million from 
beneficiaries. For services provided to outpatients, total laboratory 
payments equaled approximately $41 million, including $33 million from 
Medicare and $8 million from beneficiaries.

Table 4: Estimated Payments to Laboratories by Medicare and Medicare 
Beneficiaries for Technical Pathology Services Provided to Hospital 
Inpatients and Outpatients, 2001:

Dollars in Millions: 

Estimated Medicare payments; Services provided to 
inpatients: $18; Services provided to outpatients: 
$33; Total: $51.

Estimated beneficiary copayments; Services 
provided to inpatients: 5; Services provided to 
outpatients: 8; Total: $13.

Total; Services provided to inpatients: $23; 
Services provided to outpatients: $41; Total: $63[A].

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and 2001 
MPFS payment and copayment rates.

[A] Total does not add due to rounding.

[End of table]

Lower Medicare Payments If Direct Payment to Laboratories Is 
Terminated:

If laboratories had not received direct payment for services for 
hospital patients, we estimate that Medicare spending would have been 
$42 million less in 2001 (see table 5). The $18 million in inpatient 
savings would have resulted from Medicare discontinuing payments for 
technical pathology services to laboratories under the MPFS, while 
making no additional payments to PPS hospitals for inpatient services. 
For outpatient services, Medicare would not have paid laboratories 
directly, but would have paid PPS hospitals under the outpatient PPS. 
If direct payment to laboratories had been terminated, Medicare would 
have paid PPS hospitals an estimated $9 million under the outpatient 
PPS in 2001 for technical pathology services, thus saving $24 million.

Table 5: Estimated Medicare Payments under Current Policy and Projected 
Annual Savings If Direct Payments to Laboratories Are Terminated, Based 
on 2001 Services:

Inpatients; Estimated payments to laboratories 
under current policy: $18; Estimated payments to 
PPS hospitals if direct payment is terminated[A]: $0; 
Projected savings after termination: $18.

Outpatients; Estimated payments to laboratories 
under current policy: 33; Estimated payments to 
PPS hospitals if direct payment is terminated[A]: 9; Projected savings 
after termination: $24.

Total; Estimated payments to laboratories under 
current policy: $51; Estimated payments to PPS 
hospitals if direct payment is terminated[A]: $9; 
Projected savings after termination: $42.

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and MPFS and 
outpatient PPS payment rates.

[A] Calculations for payments if direct laboratory payment is 
terminated were performed for PPS hospitals only. We were unable to 
estimate Medicare payments to CAHs because payments depend on CAHs' 
reasonable costs, which vary across facilities. Total Medicare payments 
are likely to be higher. However, as CAHs provided less than 4 percent 
of all pathology services outsourced to laboratories in our analysis, 
we do not expect these payments to greatly increase our estimates.

[End of table]

Reduced Overall Beneficiary Cost Sharing:

If laboratories had not received direct payment for services for 
hospital patients, Medicare beneficiaries would have been relieved of 
approximately $2 million in cost-sharing obligations (see table 6). In 
2001, inpatients at hospitals that outsourced services were responsible 
for paying laboratories approximately $5 million in copayments under 
the MPFS. If direct payment to laboratories is terminated, inpatients 
would make no copayments to laboratories for technical pathology 
services. We estimate that the cost-sharing obligation of outpatients 
at PPS hospitals would have increased by $3 million to approximately 
$11 million under the outpatient PPS if laboratories had not received 
direct payment, compared to an estimated cost sharing of $8 million 
under the MPFS. However, outpatients' cost-sharing obligations for 
technical pathology services under the outpatient PPS gradually will 
decline, as mandated by the law. As the percentage declines, 
beneficiary copayments for technical pathology services under the 
outpatient PPS should become lower than under the MPFS, as long as 
payments for these services generally remain lower under the outpatient 
PPS than the MPFS.

Table 6: Estimated Beneficiary Copayments under Current Policy and 
Projected Annual Savings If Direct Payments to Laboratories Are 
Terminated, Based on 2001 Services:

Inpatients; Estimated copayments to laboratories 
under current policy: $5; Estimated copayments to 
PPS hospitals if direct payment is terminated[A]: $0; 
Projected savings after termination: $5.

Outpatients; Estimated copayments to laboratories 
under current policy: 8; Estimated copayments to 
PPS hospitals if direct payment is terminated[A]: 11; 
Projected savings after termination: ($3).

Total; Estimated copayments to laboratories under 
current policy: $13; Estimated copayments to PPS 
hospitals if direct payment is terminated[A]: $11; 
Projected savings after termination: $2.

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and MPFS and 
outpatient PPS beneficiary copayment amounts.

[A] Calculations for beneficiary copayments if direct laboratory 
payment is terminated were performed for PPS hospitals only. We were 
unable to estimate the change in the cost-sharing obligations of 
outpatients receiving services from CAHs if direct payment to 
laboratories is terminated because their cost-sharing amounts depend on 
the CAHs' customary charges, which vary across facilities. Total 
beneficiary copayments are likely to be higher. However, as CAHs 
provided less than 4 percent of all pathology services outsourced to 
laboratories in our analysis, we do not expect these copayments to 
greatly increase our estimates.

[End of table]

Small Financial Effects Dependent on Negotiations:

If outsourcing hospitals agree to pay laboratories the rates the 
laboratories currently receive under the MPFS for technical pathology 
services, these amounts are unlikely to impose a large financial burden 
on most hospitals. In 2001, a PPS hospital outsourcing the median 
number of services outsourced by PPS hospitals, 94, would have incurred 
additional costs of approximately $2,900 in paying a laboratory for 
technical pathology services,[Footnote 22] representing a small 
fraction of hospitals' annual Medicare revenues.[Footnote 23] A PPS 
hospital outsourcing 1,283 services annually--the 95th percentile of 
outsourced technical pathology service volume in our analysis--would 
have incurred an additional annual cost of just under $40,000. There 
would be no financial impact from terminating direct laboratory 
payments for rural hospitals that are or become CAHs, as CAHs would 
recover from Medicare their reasonable costs of outsourcing technical 
pathology services.

The extent to which a hospital's costs and a laboratory's revenues 
would change if direct laboratory payments are terminated would depend 
on the rates negotiated between the two parties. Hospitals' costs would 
increase because they would begin paying the laboratories for technical 
pathology services; laboratories' revenues would decline if hospitals 
pay lower rates for the technical pathology services than Medicare 
currently pays laboratories under the MPFS. Because larger hospitals 
and those located in urban areas have more purchasing power and may 
have multiple laboratories from which to choose, these hospitals are 
likely to fare better than smaller hospitals and those in rural areas.

Laboratory officials we spoke with voiced concern that some hospitals 
would insist that laboratories furnish technical pathology services at 
no charge or at extremely low rates in exchange for hospitals referring 
other business to the laboratories and their pathologists. However, 
these officials also indicated that their laboratories would not 
perform technical pathology services at no charge or for very low 
rates. Furthermore, hospitals might be deterred from requesting low 
rates because of concerns that such arrangements might violate 
applicable fraud and abuse laws.[Footnote 24]

Although hospitals and laboratories would face new billing costs--both 
one-time and ongoing--if direct payments to laboratories are 
terminated, such changes generally would impose a modest additional 
cost. We spoke with officials from hospitals and laboratories that 
already have billing arrangements for these services, and they did not 
report to us that these costs were burdensome.

Beneficiaries' Access Likely Would Be Unaffected:

Medicare beneficiaries' access to pathology services is unlikely to be 
disrupted if direct payments to laboratories are terminated because 
hospitals are unlikely to limit surgical services, including those 
requiring pathology services. In addition, hospitals would likely 
continue to outsource technical pathology services to laboratories 
because this would generally be less costly than performing these 
services themselves.

Limiting Surgeries Unlikely:

Representatives of outsourcing hospitals with whom we spoke indicated 
that their hospitals would not eliminate or restrict surgical 
procedures if direct payment to laboratories is terminated.[Footnote 
25] Because a large percentage of hospital-based surgeries require 
pathology services, hospitals would lose an important source of revenue 
if they restricted surgeries to those not requiring such 
services.[Footnote 26] Outsourcing hospitals stated that they could not 
afford this revenue loss. Rural hospitals, which are often the sole 
hospitals in their geographic areas, expressed the added concern that 
eliminating surgical procedures would reduce their communities' access 
to medical services.

Continuation of Outsourcing Arrangements with Laboratories:

If direct payment to laboratories is terminated, representatives from 
hospitals that do not maintain pathology laboratories and outsource 
technical pathology services to laboratories said they would continue 
to outsource technical pathology services. Few such hospitals have a 
sufficiently large volume of technical pathology services to make it 
cost effective to perform such services themselves. For most hospitals, 
the equipment and personnel expenses associated with maintaining their 
own pathology laboratories would likely exceed the cost of outsourcing 
the technical pathology services to laboratories. Hospital officials 
also stated that they have had difficulty recruiting histotechnicians, 
and it therefore would be difficult to staff new, or expand existing, 
pathology laboratories.

Conclusions:

Termination of direct laboratory payments generally would reduce 
Medicare expenditures and beneficiary cost-sharing obligations for 
technical pathology services while having little effect on 
beneficiaries' access to these services. While termination of direct 
laboratory payments would impose a small financial burden on 
outsourcing PPS hospitals, this change would have no impact on CAHs. As 
the relative payment weights of services provided under the inpatient 
and outpatient PPS are adjusted annually, any increased costs hospitals 
incur to pay laboratories for technical pathology services will, over 
time, be reflected in the inpatient and outpatient PPS payments. 
Termination of direct laboratory payments also would eliminate the 
inequity between beneficiary cost-sharing obligations at different 
hospitals.

In addition, continuing direct laboratory payments is an inappropriate 
means for providing financial assistance to hospitals. Hospitals, in 
receiving fixed payment amounts under a PPS and paying suppliers of 
nonphysician services provided to a Medicare patient from such fixed 
amounts, have an incentive to provide health care services efficiently. 
Permitting hospitals to outsource technical pathology services and have 
laboratories seek payment from Medicare eliminates the incentive for 
the efficient provision of these services and leads to potential 
Medicare double payments.

Matter for Congressional Consideration:

We suggest that the Congress may wish to consider not reinstating the 
provisions that allow laboratories to receive direct payment from 
Medicare for providing technical pathology services to hospital 
patients.

Recommendation for Executive Action:

We recommend that the Administrator of CMS terminate the policy of 
permitting laboratories to receive payment from Medicare for technical 
pathology services provided to hospital patients.

Agency Comments and Comments from National Associations and Our 
Evaluation:

In commenting on a draft of this report, CMS stated that it is 
important that payment policy encourage efficiencies in the provision 
of technical pathology services. CMS stated that it would carefully 
consider our recommendation and noted that the Congress is currently 
considering this issue. CMS further stated that it would want to ensure 
that implementation of the recommendation does not adversely affect 
rural hospitals.

As we noted in the draft report, permitting laboratories to receive 
payment directly from Medicare for technical pathology services is not 
an appropriate or efficient mechanism for providing financial 
assistance to hospitals, as it is contradictory to the objectives of a 
PPS. In addition, because the median number of technical pathology 
services annually outsourced by rural hospitals was low, we do not 
believe that paying laboratories directly for these services will place 
a significant financial burden on these hospitals.

CMS's written comments are reprinted in appendix II. The agency also 
provided technical comments, which we incorporated where appropriate.

We received oral comments on a draft of this report from the American 
Hospital Association (AHA), the College of American Pathologists (CAP), 
and the National Rural Health Association (NRHA). These organizations 
disagreed with our conclusions, matter for congressional consideration, 
and recommendation and suggested that direct laboratory payments should 
continue. Generally, all three organizations expressed concerns about 
rural hospitals. AHA and NRHA expressed the concern that termination of 
direct laboratory payments would place a financial burden on rural 
hospitals, and CAP expressed concern that hospitals, including CAHs, 
and laboratories would experience an increased administrative burden in 
changing their current billing practices. CAP also raised a question 
about whether hospitals and laboratories would be able to successfully 
negotiate new payment arrangements for outsourced technical pathology 
services; if not, in its view, beneficiaries' access to services could 
be jeopardized.

As we noted in the draft report, hospital officials we spoke with, 
including those from rural hospitals, stated they would continue to 
offer technical pathology services as a part of their surgical services 
if they had to pay laboratories directly for technical pathology 
services. These officials stated that they would not consider 
eliminating surgeries if they had to enter new, or modify existing, 
arrangements with laboratories to provide technical pathology services. 
We acknowledge that modifying their billing practices will impose costs 
on hospitals and laboratories; however, officials from hospitals and 
laboratories that already have billing arrangements for technical 
pathology services did not report to us that these costs were 
burdensome.

We are sending a copy of this report to the Administrator of CMS and 
appropriate congressional committees. The report is available at no 
charge on GAO's Web site at http://www.gao.gov. We will also make 
copies available to others on request.

If you or your staffs have any questions, please call me at (202) 512-
7119 or Nancy A. Edwards at (202) 512-3340. Other major contributors to 
this report include Beth Cameron Feldpush, Jessica Lind, and Paul M. 
Thomas.

A. Bruce Steinwald 
Director, Health Care--Economic and Payment Issues:

Signed by A. Bruce Steinwald: 

List of Committees:

The Honorable Charles E. Grassley 
Chairman 
The Honorable Max Baucus 
Ranking Minority Member 
Committee on Finance 
United States Senate:

The Honorable W.J. "Billy" Tauzin 
Chairman 
The Honorable John D. Dingell 
Ranking Minority Member 
Committee on Energy and Commerce 
House of Representatives:

The Honorable William M. Thomas 
Chairman 
The Honorable Charles B. Rangel 
Ranking Minority Member 
Committee on Ways and Means 
House of Representatives:

[End of section]

Appendix I: Scope and Methodology:

In conducting this study, we analyzed Medicare claims and provider data 
obtained from the Centers for Medicare & Medicaid Services (CMS). We 
interviewed officials at CMS, the Congressional Budget Office, and the 
Department of Health and Human Services Office of Inspector General. We 
also interviewed industry representatives from the American Hospital 
Association, College of American Pathologists, and National Rural 
Health Association, as well as representatives of individual hospitals 
and laboratories and a pathology practice management consulting 
company. Finally, we conducted a site visit of a laboratory and one of 
the rural hospitals to which it provides pathology services.

As there is no list of covered hospitals and the laboratories to which 
they outsource technical pathology services, we used 2001 Medicare 
claims data, the most recent year for which data are available, for our 
analysis. We received the data files directly from CMS. These data 
reflect the set of claims submitted to and paid by CMS for services 
performed in 2001. We performed our own initial analyses to check the 
reliability of the data.

We estimated the number of hospitals outsourcing technical pathology 
services to laboratories that directly billed Medicare and the volume 
of and payments for these services. To do so, we matched Medicare 
laboratory claims with claims submitted by prospective payment system 
(PPS) hospitals and critical access hospitals (CAH). We assumed that a 
laboratory's service was related to a hospital inpatient admission or 
outpatient encounter if the date of service on the laboratory's claim 
was (1) during an inpatient's stay at a hospital, within 3 days prior 
to the inpatient's admission,[Footnote 27] or after the inpatient's 
discharge or (2) on the day of or within 3 days after an outpatient 
surgical procedure at a hospital.[Footnote 28] We included in our list 
of total hospitals only those hospitals listed in the CMS Provider of 
Services (POS) file and characterized outsourcing hospitals as urban or 
rural according to their designation in the POS file. To identify 
hospitals outsourcing technical pathology services that have converted 
to CAHs, we matched each hospital's Medicare provider number to the 
list of CAHs maintained by the North Carolina Rural Health Research and 
Policy Analysis Center at the University of North Carolina as of March 
2003.

To estimate Medicare payments and beneficiary copayments to 
laboratories for technical pathology services in 2001, we first 
calculated the claims frequency for each type of technical pathology 
service in our file of matched laboratory and hospital claims. We 
estimated the Medicare payment amount for each type of technical 
pathology service as 80 percent of the Medicare physician fee schedule 
(MPFS) national standard payment rate for that service and beneficiary 
cost sharing as the remaining 20 percent, and then we multiplied the 
claims frequency by the estimated Medicare and beneficiary cost-sharing 
amounts to calculate total laboratory payments.[Footnote 29] We 
performed similar calculations to find payments for inpatient and 
outpatient claims exclusively. To estimate 2001 Medicare outpatient PPS 
payments and beneficiary cost sharing to PPS hospitals if laboratories 
had not received direct payments, we multiplied the 2001 outpatient PPS 
Medicare payment rate and beneficiary copayment amount for each type of 
technical pathology service by the frequency of each type of technical 
pathology service in the outpatient claims.

To estimate the cost difference to PPS hospitals of paying laboratories 
to perform technical pathology services, we first calculated a weighted 
average payment rate for technical pathology services for 2001 by 
multiplying the 2001 national standard MPFS payment rate by the 
frequency percentage of each type of technical pathology service among 
PPS hospitals and summing the payments for all services. We multiplied 
the median and 95th percentile volume of services outsourced by PPS 
hospitals by the estimated weighted average laboratory payment. We then 
calculated a weighted outpatient PPS payment rate, including 
beneficiary copayments, for technical pathology services in 2001 as 
described above for calculating the weighted average MPFS payment rate. 
Because approximately 63 percent of technical pathology services 
provided to patients of PPS hospitals were provided to outpatients, we 
estimated the number of outpatient services by multiplying the median 
and 95th percentile volumes by 63 percent. We then multiplied the 
estimated number of outpatient services by the estimated weighted 
average outpatient PPS payment rate, and subtracted this amount from 
the weighted average laboratory payment.

We interviewed representatives of four Medicare carriers and four state 
hospitals associations. In addition, we spoke with representatives from 
19 hospitals and 13 laboratories from a sample of eight geographically 
diverse states--Colorado, Florida, Iowa, North Dakota, Pennsylvania, 
Tennessee, South Dakota, and Washington--and an additional 2 
laboratories in Oklahoma. We selected several states in the South, 
Southeast, and Midwest where, according to CMS officials, outsourcing 
arrangements for technical pathology services were believed to be 
fairly common. We interviewed officials from urban and rural hospitals 
and hospitals and laboratories with different types of outsourcing 
arrangements, including a hospital that outsources only complex and 
infrequently performed services and a hospital that currently pays its 
laboratory for technical pathology services.

[End of section]

Appendix II: Comments from the Centers for Medicare & Medicaid Services:

DEPARTMENT OF HEALTH & HUMAN SERVICES	Centers for Medicare & Medicaid 
Service:

Administrator Washington, DC 20201:

DATE:

SEP 11 2003:

TO: A. Bruce Steinwald:

Director, Health Care-Economic and Payment Issues:

FROM: Thomas A. Scully 
Administrator:

SUBJECT: General Accounting Office (GAO) Draft Report: "Medicare: 
Modifying Payments for Certain Pathology Services is Warranted" '(GAO-
03-1056):

Thank you for the opportunity to review the GAO draft report entitled 
"Medicare: Modifying Payments for Certain Pathology Services is 
Warranted" (GAO-03-1056), in which you recommend that the Centers for 
Medicare & Medicaid Services (CMS) implement its 1999 proposal to 
change how hospitals and independent pathology laboratories bill 
Medicare for services to inpatients, and to apply that rule to 
outpatient services as well.

Under current regulations, most services, other than physician 
services, to hospital inpatient and outpatients are paid under 
prospective payment systems (PPS). Under the PPS, if services are 
provided to the hospital patient by a third party, the hospital is 
responsible for billing Medicare for those services, and for 
reimbursing the third party.

Historically, pathology services that are contracted out to an 
independent laboratory have been an exception to this rule. The 
independent laboratory usually bills for both the technical component 
(TC) and the professional component furnished by the pathologist, who 
is usually the owner or an employee of the laboratory.

Over the years, CMS became concerned that it was paying twice for the 
TC of pathology services - once to the hospital under the inpatient 
PPS, and once to the independent pathology laboratory. We were 
concerned that consulting entities were advising hospitals to outsource 
the TC of physician pathology services. In this way, the hospital's 
revenue increased because its costs were reduced. More recently CMS has 
become concerned that allowing independent laboratories to bill 
directly for the TC could leave Medicare vulnerable to billing schemes. 
For example, CMS has received inquiries from hospitals about the 
legality of leasing the hospital laboratory to a physician and whether 
the leased laboratory would be considered an independent pathology 
laboratory, capable of billing Medicare separately from the PPS for 
services to hospital patients.

Therefore, in a 1999 final physician fee schedule rule, CMS proposed to 
require that the TC of pathology services to inpatients (the outpatient 
PPS had not yet been implemented) be billed by the hospital. With the 
implementation of the outpatient PPS in August 2000, this requirement 
was extended to services to hospital outpatients. However, the 
effective date was postponed to allow hospitals and independent 
laboratories to modify their contractual arrangements to comply with 
the new rules. Ultimately, the rule never went into effect, in part 
because of a moratorium imposed by Congress, pending the results of 
this study.

The GAO recommends that the CMS implement its final regulation 
published in the Federal Register in 1999. This final regulation would 
require the hospital to provide directly, or arrange for the provision 
of, the TC of physician pathology services. Thus, independent 
laboratories would no longer be able to bill the TC of physician 
pathology services for hospital patients.

The GAO recommendation may prove to be moot as there are currently 
legislative proposals to extend the exception created by section 542 of 
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (BIPA). If legislation is not enacted, we would carefully 
consider the GAO recommendation. However, we want to ensure the 
implementation of the recommendation would not adversely affect those 
rural hospitals whose contracted services account for a significant 
volume of laboratory services. It is also important that payment policy 
encourage efficiencies in the provision of the TC of physician 
pathology services.

We look forward to working with GAO on this and other issues.

FOOTNOTES

[1] BIPA, Pub. L. No. 106-554, app. F,  542, 114 Stat. 2763, 2763A-
550. 

[2] In July 2001, the agency's name was changed from HCFA to the 
Centers for Medicare & Medicaid Services. In this report, we refer to 
the agency as HCFA when discussing actions it took under that name.

[3] Technical pathology services involve the preparation of tissue 
samples removed during surgery for examination by a pathologist. Such 
services are performed by a laboratory technician, known as a 
histotechnician, and involve cutting, mounting, and staining the 
specimen on a microscope slide. Under Medicare, these services are 
referred to as the "technical component" of a pathologist's service. 
Medicare covers as a separate service the pathologist's examination of 
a specimen, which is called the "professional component."

[4] HCFA's 1999 rule pertained to services delivered only to hospital 
inpatients because the outpatient PPS was not yet implemented. The 
outpatient PPS was implemented in August 2000; therefore, when the BIPA 
provisions were enacted in December of that year, they applied to both 
inpatient and outpatient services.

[5] Other hospitals either perform technical pathology services 
themselves or outsource and directly pay laboratories for such 
services.

[6] CMS Program Memorandum, Transmittal B-03-001 (Jan. 17, 2003).

[7] BIPA  542(d), 114 Stat. 2763A-551.

[8] CAHs were created as part of a program developed to maintain access 
to hospital services in rural areas. In general, to be designated as a 
CAH, a hospital must (1) be in a rural area more than a 35-mile drive 
from another hospital (or certified as a necessary provider in the 
area), (2) make available 24-hour emergency care services, (3) have no 
more than 25 beds (of which no more than 15 may at any time be used for 
acute care to provide average acute care stays of no more than 96 hours 
per patient), (4) meet most Medicare requirements generally applicable 
to hospitals, and (5) have a quality assessment and performance 
improvement program, as well as procedures for utilization review. 42 
U.S.C.  1395i-4(c)(2) (2000). 

[9] Reasonable cost reimbursement is based on the actual cost of 
providing services, including direct and indirect costs of providers, 
and excludes any costs that are unnecessary in the efficient delivery 
of services.

[10] Medicare carriers are the contractors responsible for processing 
claims and paying laboratories, physicians, and certain other 
providers.

[11] A benefit period starts with an inpatient hospital or skilled 
nursing facility (SNF) admission and ends after 60 consecutive days of 
no inpatient care. 42 C.F.R.  409.60(a) and (b) (2002). For 2003, the 
deductible for each hospital inpatient benefit period is $840.

[12] In this report, we use the term "laboratory" to include both the 
pathology laboratory and its affiliated pathologists, as many 
laboratories bill Medicare for both the pathologists' professional 
services and the technical services. 

[13] 64 Fed. Reg. 39,608, 39,624 (July 22, 1999).

[14] 64 Fed. Reg. 59,380, 59,409 (Nov. 2, 1999).

[15] Although the provisions expired at the end of 2002 (BIPA  542(c), 
114 Stat. 2763A-551), CMS notified carriers that they should continue 
to pay laboratories separately for technical pathology services.

[16] Pub. L. No 105-33,  4523(a), 111 Stat. 251, 445.

[17] For example, in 2001, the average payment rate under the 
outpatient PPS for the most commonly performed technical pathology 
service (representing approximately 56 percent of all technical 
pathology services outsourced by hospitals in 2001) was approximately 
$22, which is less than half the payment rate of approximately $51 for 
the same service under the MPFS. However, the copayment for that 
service under the outpatient PPS is approximately $12, or 54 percent, 
compared to approximately $10, or 20 percent, under the MPFS.

[18] As of March 25, 2003, there were 749 CAHs in 44 states. The North 
Carolina Rural Health Research and Policy Analysis Center at the 
University of North Carolina estimates that as of April 15, 2003, there 
were an additional 69 CAH applications pending and an additional 311 
rural hospitals actively considering conversion to CAH status. 

[19] Medicare defines a "customary charge" as the amount that a 
provider charges for a specific service the majority of the time. 42 
C.F.R.  405.503(a) (2002).

[20] We were unable to identify the number of laboratories receiving 
Medicare payment for technical pathology services provided to hospital 
patients because a single laboratory may submit claims under multiple 
provider numbers, and CMS does not track different provider numbers to 
a single laboratory. 

[21] Among hospitals outsourcing technical pathology services in 2001, 
urban hospitals outsourced approximately 892,000 services, and rural 
hospitals outsourced approximately 496,000 services.

[22] This amount represents estimated payments to the laboratory by the 
hospital minus payments to the hospital for outpatient services under 
the outpatient PPS.

[23] According to the American Hospital Association (AHA), in 2001, the 
median net Medicare revenue, which is the amount actually collected by 
the hospital, was $30.4 million for urban hospitals and $5.6 million 
for rural hospitals. AHA based its estimate on an annual survey 
completed by community hospitals, which includes all nonfederal, short-
term general and specialty hospitals whose facilities and services are 
available to the public.

[24] The federal anti-kickback statute, 42 U.S.C.  1320a-7b(b) (2000), 
generally prohibits knowingly and willfully providing remuneration to a 
referral source for the purpose of inducing referrals. 

[25] One Medicare carrier we spoke with shared this opinion, noting 
that Medicare requires SNFs to pay nonphysician providers for services 
and items furnished to their patients, and this requirement has not 
reduced beneficiary access to SNF care.

[26] A hospital risks termination from Medicare if it places 
restrictions on whom it will treat without exempting Medicare 
beneficiaries or applying the same restrictions to everyone. 42 C.F.R. 
 489.53(a)(2) (2002).

[27] If a beneficiary receives diagnostic preadmission services, 
including pathology services, in the hospital or in an entity owned or 
operated by the hospital within 3 days preceding the beneficiary's 
admission as an inpatient, the preadmission services are included in 
the hospital's inpatient PPS payment. 42 C.F.R.  412.2(c)(5) (2002). 
We therefore assumed that if a laboratory provided technical pathology 
services to a beneficiary within 3 days of the beneficiary's inpatient 
admission, the services were provided in connection with the 
beneficiary's inpatient stay. 

[28] It is unlikely that a patient would receive a technical pathology 
service within the time period we specified that would be unrelated to 
the surgical services the patient received at the hospital. 
Nevertheless, our approach may have resulted in the inclusion of some 
claims for technical pathology services that were unrelated to a 
hospital inpatient admission or outpatient encounter, as well as the 
exclusion of other claims that were related. In addition, errors in the 
claims data, such as an incorrect discharge or encounter date, 
similarly could result in mistakes.

[29] We were unable to use the Medicare payments from the matched 
claims to calculate this amount because the laboratories' claims were 
often for both the technical and professional services, and the amounts 
for each could not be separated.

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