" ' . \ 
, .
; f

Department of Health and 
Human Servces 
OFFICE OF 
i 

I -
INSPECTOR GENERAL 
f 

IMPACT OF A LABORATORY ROLL IN 
MEDICARE EXPENDITURES 
A Management Advisory Report 
VIC. 
Richard P. Kusserow 
INSPECfOR GENERA 
'0 
" OEI-
05-89-89151 
.ta  .................................................. 
. . . ..  ..  ..  ...   ...   ...  .  ...   ...   ...   ...  .  ...   ...   ....    ....    ... ..    ....    ....    ....    ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ...   ..  ..  .. .  ..  ..  ..  ..  ..  ..  ..  ..  . .. 
TABLE OF CONTENTS

PAGE-
Int:aducton 
Purpose 
. . . . . . . . . . . . . . . 1 
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
. . . . . . . . . . . . . . 1 
Methodology 
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Findigs 
A laboratory roll in could save Medicare 
over $1 bilion in the fist year and

more than $12 bilion over
 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .sraey 5
The LRI wi provide suffcient funds for

physicians to cover costs they incur in

securing laboratory work. 

. . . 3

Recommendation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 
Appendices 
Appendix A: Methodology.................................. A-
Appendix B: Enhancing LRI Success  . . . . . . . . . . . . . . . . . . . . . . . . . . B-
Appendix C: Draft Report Comments and OIG Response  . . . . . . . . . . . C - , "
INTRODUCTION

PUROSE

To examie the potential fiancial impact of including payment for laboratory servces

in Medicare s recognized chaige for physician office visits.

BACKGROUN 
Recently, the Offce of Inspector General (OIG) issued a monograph which examined 
the forces that affect use of laboratory servces. That monograph concluded that 
Medicare s efforts to contain escalating laboratory costs have not succeeded in 
controllng growth in expenditures because they did not address use of servces. 
Our recent study entitled  Ensuring Appropriate Use of Laboratory Servces: A 
Monograph" proposed that Medicare roll reimbursement for laboratory servces into the 
recognized charge for physician office visits. This bundling approach, called a laboratory 
roll in (LRI), appears to be a promising option which would contain rising laboratory 
costs. The report also suggests that a LRI, like Diagnosis Related Groups, can produce 
significant savigs without compromising the quality of patient care. 
MEODOLOGY

To ilustrate the effects of a LRI, we used 1988 Part B Medicare Annual Data (BMA)

and:

calculated a LRI by distributing allowed laboratory "amounts across allowed 
physician office visits; 
distributed servces and allowed amounts biled by pathologists, osteopathic 
(DO) pathologists and independent cliical laboratories to all other 
physician specialties based on the proportion of servces each specialty 
ordered from these outside sources; 
compared average payment for laboratory servces per office visit under 
fee-for-servce (FFS) with the amount that would have been paid under a 
LRI; 
calculated coinsurance and administrative savings; and 
conducted an analysis of individual laboratory use within physician 
specialties. 
A detailed discussiori' of our methodology and analysis which has led to the information 
contained in this report can be found in Appendix A.  FINDINGS

Rnding #1: A LRI could save Medicae over $1 billon in the firs year and more 
than $12 billon over 5 year. 
Implementation of the LRI in 1992 would produce first year savigs of at least 
$1.1 bilon. At least $980 millon of the savigs would be realied from patient 
coinsurance. Admstrative savigs would tealize an additional $143 milion. Table 1 
from coinsurance, lower administrative costs and controlled growth in 
ilustrates savings 
expenditures. The table shows that over 5 years cumulative savings could exceed 
$12 bilion. 
With a LRI, the policies controllng physician offce visits will also constrain the 
growth of laboratory expenditures. Future updates to the LRI would be a part of 
the fee schedule amounts for  visits. As an 
physician offce  indistinguishable part of 
the offce visit, future price increases for laboratory servces would be held to the 
growth rate for physician servces which is lower than the projected growth rate for
laboratory servces.  .,- _.
Table 1, on the previous page, shows projected expenditures under the current FFS 
system using current average growth of 19 percent annually. Estimates of anticipated
laboratory expenditures after the LRI reflect an annual growth rate of 
10 percent. 
The 10 percent growth rate is based on projected annual growth in 
physician 
payments under the new resource based relative value scale. The actual rates put 
forth by the Secretary in future years may differ from our estimates. 
Physician payment reforms require the updating of relative values for physician 
servces at least every 5 years. New technologies and other factors that might 
increase or decrease the cost of securing laboratory work would be considered at 
that time.

Findig #2: The LR wi provde suffcient fuds for physician to coer costs they 
secug 
incu in  laboratory work. 
This proposal would require physicians to pay for the clinical laboratory work they 
order for their patients. Medicare would no longer pay each individual entity 
performing tests ordered by a physician. The money Medicare spends under the 
FFS system would be distributed to physicians as an indistinguishable part of the 
recognized charge for physician office visits. The physician, rather than Medicare 
would be responsible for paying any outside provider of laboratory servces. 
Analysis of the 1988 BMA shows that the LRI would provide adequate funds to 
cover expenses physicians incur in securing laboratory work. On average, 77 percent 
of the physicians biling Medicare are likely to have more than suffcient funds to 
cover the costs they incur in securing laboratory work. Only 
atyical users of 
laboratory servces are likely to experience difficulty in covering their costs. 
detailed description of our methodology and the results of our analysis of the LRI's 
impact can be found in Appendix A  RECOMMENDA TIONS

reiurem 
HCF A shoul research and deelop th LR  mechani for 
Th 
laboratory sc.7Ves, and propoe lelatin to  years. 
implem it wihi 
In developing the LRI, HCF A will need to address a number of issues. Our analysis 
suggests that the LRI can only be effective in reducing costs if calculated using all 
Part B outpatient data, including hospital outpatient laboratory payment data and 
hospital outpatient visit data. We also believe the calculation should exclude 
laboratory procedures listed in the Federal Register as 
physician servces. All other 
clinical laboratory servces should be included in the LRI. We believe no entities 
providing outpatient laboratory servces should be allowed to bil for servces outside 
the LRI.  result in manipulation of the 
Failure to include these safeguards could 
system and failure to achieve savings. Appendix B discusses enhancements which we 
feel would ensure the LRI success.  Comments on the Draf Report 
Both the Assistant Secretary for Planning and Evaluation (ASPE) and HCFA 
commented on our draft management advisory report. The ASPE concurred with 
our recommendation but believes studies should be und rtaken to ensure that patient 
case mi does not adversely affect physician specialists. The HCF A cited several 
reasons for not concurrng with our recommendation. 
We regret that HCFA is not inclined to research and develop the LRI. We believe 
it is a viable concept, one that will control escalating laboratory expenditures. We 
believe additional study is needed before considering implementation and therefore 
continue to urge HCF A to study and explore its possibilties. 
The complete text of ASPE's and HCF A's comments and our specific responses are 
contained in Appendix C. 
 .;-.-
.(  .

f : 
1 . 
1 
APPENDIX A

I . 
f -. 
MEODOWGY  GENRA INORMTION

To determine the effects that a LRI might have, we analyzed HCF A's 1988 BMA 
fie. We did not analyze "local laboratory codes" in the BMA file. These codes 
are unique to individual Medicare carrers. Their volume and dollar value are low. 
We also used a subsample of the 1 percent BMA file to evaluate the effects of a 
LRI on physicians' income and to make comparisons with the current FFS system. 
The following procedure codes in BMA were used to calculate a hypothetical LRI 
for 1988.

80000 - 89999 Laboratory procedures 
90000 - 90099 Office visits

90100 - 90199 Home visits

90600 - 90699 Consultations 
The following is a table of BMA procedure codes which were not used in our LRI 
calculations. Our rational for not using them in our LRI calculations is also 
provided. 
A 
 ,.'   .. .,.
Volume and dollar values for hospital outpatient laboratory procedures and 
outpatient clinic visits are not contained in the BMA fie, and therefore, were not 
included in our analysis. Past studies, conducted by the OIG, indicate that hospital 
outpatient laboratories provide approximately 25 percent of all Medicare laboratory 
servces. 7ls is a significant share of total outpatient laboratory servces provided to 
patients. For this reason, and other reasons mentioned in our monograph, they 
should not be excluded from the LRI. 
L , 
A 
 , 
LR CALTIONS

A LRI is computed by dividing total Part B outpatient expenditures for laboratory 
tests by the total number of paid physician outpatient offce visits in a 
given year.
results in the same level of aggegate payments as would' be made under the FFS 
system in that year. 
To ilustrate how a LRI might be calculated, we used the 1988 BMA fie and 
redistributed the $1.84 bilion Medicare allowed for labvoratoirys serivctes sacr)oss. p aid 
visits. Ths calculation resulted in a base LRI 
physician offce  of $13.50 per offce 
visit ($1.84 bilion Medicare  offce 
allowed/1.37 milion 
To determine the potential impact on physician specialties, we compared the $13. 
LRI with each specialty s average reimbursement for laboratory servces under the 
FFS system. To do this, we created a subs ample from the BMA consisting patients 
who were seen by a single physician in 1988. This enabled us to obtain a complete 
picture of all laboratory servces a patient received, no matter who biled. Using the 
subsample we calculated the number of physician offce laboratory servces provided 
in-house by each specialty to each patient. We also calculated the number of 
servces each specialty ordered from an outside source. Allowed amounts and 
servce volume for clinical laboratory servces biled by pathologists, osteopathic (DO) 
pathologists and nonphysician specialties such as independent clinical laboratories 
were distributed to all physician specialties based on the proportion of servces each 
physician specialty ordered from an outside source. The same method was used to 
redistribute the allowed dollar value of tests. 
We calculated the weighted average for offce visits in the 1 percent BMA sample 
and in our subsample of patients who were seen by a single physician. We did this 
to determine whether the subs ample, on which the distribution was based, differed 
from significantly from the 1 percent BMA from which it was drawn. The 
weighted average for offce visits in the 1 percent BMA was 3.33 versus 3.51 in the 
subsample. The slight difference between the two numbers shows that the subs ample 
on which our distribution was based is reflective of the whole sample. 
The financial impact that a $13.50 base LRI would have on physicians is shown in 
Table 1 on the following page. The last column in each table indicates whether, on 
average, the  likely to be paid more or less than they 
physicians in each specialty are 
were under the FFS system. 
A 
 -----------
----------
:!,-.    .-.
Table 1

I ; 
Effect of $13.50 base LRI on Physician Specialties 
I 

FF 
Data 
Total  Avg. OV  Total!  Averag  Total!  Average 
Offce  Per Bene  Lab  Lab Svcs.  Paid  Lab Paid/V  +/- 2 
Speialties  Visits  Servce  Per VISit  For Lab  Under 
01 General Practice  164397  171047  1.04  $1,99,179  $1213

02 General Surgery  59213  225  44058  $ 68192  $11.

03 Alergy  4873  1993  0.41  603  $ 5.

04 ENT  30316  1.75  9109  0.3  156 879  $ 5.

05 Anesthesiology  1720  204  148  17,574  $10.

06 Cardiovasular Disse  68718  282  61454  $ 770 907  $11.

07 Dermatology  3109  205  19163  $ 476 851  $15.

08 Family Practice  2033692  2498  1.22  969 973  $14.58

09 Gyneclogy (DO Only)  158  1.93  121  $10.

10 Gastroenterology  19166  204  2024  $ 279 981  $14.

11 Internal Medicine  414798  581949  1.40  $6,  411  $16.

12 Manipulative Therapy (DO)  2719  2775  1.02  32,614  $11.

13 Neurology  20595  10206  $ 143,30  $ 6.

14 Neurological Surger  4734  1.61  1628  0.3  450  $ 4.32

15 Obstetrics  $ 1.44

16 OB-Gyecology  15791  1.9  14780  $ 162 037  $10.

17 EENT (DO only)  776  1.69  829  1.07  011  $1290

18 Ophthalmology  51108  1.87  19544  $ 259 173  $ 5.

19 Oral Surgery  490  1.49  467  965  $18.

20 Orthopedic Surgery  44331  210  1363  198,422  $ 4.

23 Peripheral Vasular (DO)  2.5  145  0.40  162  $ 8.

24 Plastic Surgery  3185  1.64  2035  851  $17.

25 Physical Medicine  4545  211  1212  235  $ 4.

26 Psychiatry  5171  224  5731  1.1  640  $15.

28 Proctology  1195  1.56  696  621  $ 7.

29 Pulmonary Disea  18896  279  14146  $ 194 073  $10.

30 Radiology  5403  1.71  2810  0.52  39,3  $ 7.

31 Radiology (DO)  394  123  12,169  $30.

Radiation Therapy  221  1.44  158  907  $ 8.

33 Thoracic Surgery  6529  1.64  285  0.43  938  $ 6.

638 
34 Urology  42338  1.51  $ 618,795  $14.

36 Nuclear Medicine  157  1.91  147  422  $28.

37 Pediatrics  2820  292  1.04  838  $12.5

38 Geriatrics  429  1.4  832  $13.

39 Nephrology  802  10162  1.26  126,568  $15.

40 Hand Surgery  240  1.95  0.3  1,2  $ 5.

41 Optometry  4085  2242  0.55  757  $ 7.

48 Podiatry  28746  13134  173 675  $ 6.

49 Misc. Physician  1779  296  4568  257  513  $45.

70 Clinic or Group Practice  91362  12352  1.3  706 841  $18.

li"	 88 Unknown  222  1.3  $ 6. 
99 Unknown Physician  259  2.5  1122  15,597  $60. 
Source:  BMA 
One percent sample of the  1988  files 
Includes laboratory services billed by non-physiciin speciilties such as inependent clinical laboratori which were ditruted
L ! 

among the physician speciilties. This was done because only physiciins are reimbursed using LRI 
This column represents whether a physiciin specialty, on average, would be paid more or less under LRI.than under the fee-for
service system.

A 
 ,,

ANALYSIS OF TI LRS FIANCIA IMACf

ON SELCID PHYSICI SPECIATI.

I : 
The graphs on the following pages show the effects of the LRI on selected physician 
specialties. We selected these nine specialties for this report because, as a group, 
each of these specialties appears to be paid less under the LRI than they were under 
the FFS system, and each specialty had at least 50 practitioners in our subsample. 
Detailed analysis shows that although each specialty as a whole appears to be paid 
I . 
l .  less under the LRI, the majority of individual physicians within the specialty will 
actually benefit from the LRI. 
t ..
 Graphs A through I were prepared from our subsample of the 1 percent 1988 
BMA fie. 
The subs ample, as previously mentioned, consisted of beneficiaries who 
saw only one physician in 1988. Using the subsample gave us a complete picture of 
all laboratory servces a patient received, no matter who biled. Because each 
patient was seen by a single physician we were able to group physicians by their 
respective specialties. 
t 
Within each specialty, we categorized physicians by how many laboratory servces 
each ordered, on average, per offce visit. For the physicians in each category, we 
i 

divided the total amount Medicare paid them for laboratory servces by the total 
r  number of office visits they biled, to obtain the average laboratory reimbursement 
for each category.

The graphs, and the tables which accompany them, show the LRI's effect on 
individual physicians within a specialty. They show that the majority of physicians in 
each specialty would have more than adequate funds to cover expenses incurred in 
securig laboratory work. On average Medicare 
, 77 percent of the physicians biling 
are likely to have more than suffcient funds to cover the costs they incur in securing 
laboratory work. Only atyical users of laboratory servces are likely to experience 
difficulty in covering their costs. 
The data for Specialty 11, Internal Medicine, will ilustrate our analysis and how to 
read the graphs on the following pages. As mentioned earlier we calculated a LRI 
of $13.50 for 1988. This means that $13.50 would be added to the Medicare 
recognized charge for every offce visit biled by physicians. The data on Table 1 of 
Appendix A indicated that internists charge on average $14.61 per offce visit for 
laboratory servces. Because the LRI wduld pay only $13.  , it appears that 
Medicine would lose $1.10 on each offce visit 
physicians specializing in Internal 
biled. 
A 
 .'(.-    --,-	 , 

When individual use of laboratory servces under the FFS system is examined more 
closely (Graph D and the accompanying table), it shows that the average Medicare 
payment was less than $13.50 for at least 71 percent of the internists. On average 
36 percent were paid $2.51 and 35 percent were paid $9.63. Under the LRI, 71 
percent of internists are likely to receive more money than they did under FFS 
I :	 system. The graph also shows that less than 1 percent of internists provide, on 
average, 11 or more laboratory servces per office visit at an average cost to 
Medicare of $198. 
f 

i .

f . 
"'h 
A 
 ----------------------- ---------------------------
. -
GRAH A

AVERAGE LABORATORY PAYMENT

SPECIALTY 7:  N = 1104

DERMTOLOGY 
(PARTIAL GRAPH)

OF PRACTITION	 AVG PAID PER OFFICE VISIT

60X	 5250 
5225 
AT LEAST 57% ARE PAID tlORE UNDER THE LRI
SOX 
$200 
$175 
40X 
$150 
S125 
S100 
20X 
S75 
S50 
lOX 
S25 
11+ 
AVERAGE NUMBER OF LABORATORY SERVICES PER OFFICE VISIT 
OF PRACTITI01!ERS  AVERAGE PAID  AVG PAID 11+ SVCS 
19BB BMAD SUBSAMPLE

TABLE OF DATA 
AVERAGE SERVICES  SUBSAMPLE  % OF
 AVERAGE

PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID

627  56.  $2. 
279  25.  $19. 
$42. 
$51. 76

$71. 90

$81. 27

$75. 
$79. 
$159. 
$87. 
$91. 56

11+
 1.8%  $222. 
A 
 ------------------- ------------- -------------------
-+ 
GRAH B

AVERAGE LABORATORY PAYMENT

SPECIALTY 8: FAMILY PRACTICE, N =  374

(PARTIAL GRAH) 
Of PRACTITIONERS  AVG PAID PER OFFICE VISIT

45"  5200 
AT LEAST 79% ARE PAID tlORE UNDER THE LRI
40" 
5175 
35% 
$150 
30% 
5125 
25% 
$100 
20% 
575 
15" 
'50 
10" 
525 
11+ 
AVERAGE NUnBER OF LABORATORY SERVICES PER OFfICE VISIT 
Of PRACTITIONERS  AVG PAID  AVG PAID 11+ SVCS 
198B BnAD SUBSAnPLE

TABLE OF DATA 
AVERAGE SERVICES  SUBSAMLE  % OF  AVERAGE 
PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID 
4454  42.  $2. 
3761  36.  $8. 
1212  11. 7%  $18. 
455  $30. 
219  $41. 
103  $49. 
$69. 
$73. 
$89. 
$91. 
$91. 
11+  $161.  -" 
---------------------------- -------------------------
GRAH C

AVERAGE LABORATORY PAYMENT

= 692

SPECIALTY 10: GASTROENTEROLOGY 

(PARTIAL GRAPH)

x OF PRACTITIONERS
 AVG PAID PER OFFICE VISIT

4011  $300 
AT LEA5T 64% ARE PAID tiORE UNDER THE LRI  $275 
3511 
$250 
3011  5225 
$200 
2511 
5175 
20X  5150 
5125 
1511 
$100 
1011  375 
$50 
511 
$25 
011 
11+ 
AVERAGE NUtlER OF LABORATORY SERVICES PER OFFICE VISIT 
OF PRACTITIONERS  AVERAGE PAID  '* AVG PAID 11+ SVCS 
1988 BtlAD SUBSAtlPLE

TABLE OF DATA 
AVERAGE SERVICES  SUBSAMPLE  % OF
 AVERAGE 
PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID 
252  36.  $2. 
189  27.  $12. 
13.  $23. 
$44. 
$45. 
$58. 
1.6%  $60. 
1.4%  $80. 
$152. 
$137. 
1.2%  $102. 
11+
 $244. 
A 
 ---------------------- -----------------------------
GRAH D

AVERAGE LABORATORY PAYMENT

SPECIALTY 11: INTERNAL MEDICINE, N =  145

(PARTIAL GR PH) 
x OF PRACTITIONERS  AVG PAID PER OFFICE VISIT

40"  $250 
5225
35" 
$200 
3D" 
$175 
AT LEAST 71% ARE PAID tlORE UNDER THE LRI 
25" 
$150 
20X  5125 
SlOO 
15" 
575 
10" 
550 
525 
11+ 
AVERAGE NUMBER OF LABORATORY SERVICES PER OFFICE VISIT

% PRACTITIONERS  AVERAGE PAID  '* AVG PAID 11+ SVCS

1988 BMAD SUBSAMPLE

TABLE OF DATA 
AVERAGE  SERVICES  SUBSAMPLE  AVERAGE

PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID

5814  36.  $2.

5627  34.  $9.

2372  $19.

14. 7 % 
1039  $30.

556  $42.

273  1. 7%  $55.

156  $61.

1. 0% 
$78.

$85.

$97.

$106.

11+  $198.

A  -" 
---------------------------------------------------
-+ 
!.  --
GRAH E 
AVERAGE  LABORATORY PAYMENT

SPECIALTY 24:  PLASTIC SURGERY, N = 171

(PARTIAL GRAPH)

x OF PRACTITIONERS  AVG PAID PER OFFICE VISIT

45X  $350 
40X 
AT LEAST 43% ARE PAID tlORE UNDER THE LRI  $300 
35X 
$250 
30% 
$200
25% 
20X 
$150 
15% 
$100 
10% 
$50 
15+ 
AVERAGE NUnBER OF LABORATORY SERVICES PER OFFICE VISIT

OF PRACTITIONERS  AVERAGE PAID  AVG PAID 15+ SVCS 
1968 BtlAD SUBSAtlLE 
TABIE OF DATA 
AVERAGE  SERVICES  SUBSAMLE  AVERAGE

PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID

43.  $2. 
28.  $35. 
12.  $45.

3 % 
$85.

$93.

$59.

1.2%  $116.

1.2%  $80.

$115.

15+  1.8%  $302.

(There  were  observations  between  and  in the subsample. 
A 
 ---------------------------- -------------------------
GRAH F 
AVERAGE LABORATORY PAYMENT

SPECIALTY 26: PSYCHIATRY, N = 277

(PARTIAL GRAPH)

OF PRACTITIONERS  AVG PAID PER OFFICE VrSIT

$200 
60" 
AT LEAST 70% ARE PAID tlORE UNDER THE LRI  $175 
$150 
40%  $125 
5100 
575 
20% 
550 
10" 
525 
11+ 
AVERAGE NU  ER OF LABORATORY SERVICES PER OFFICE VISIT 
" OF PRACTITIONERS  AVERAGE PAID  AVG PAID 11+ SVCS 
19BB BnAD SUBSAnPLE

TABLE OF DATA 
AVERAGE SERVICES  SUBSAMPLE  % OF  AVERAGE

PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID

167  60.  $0. 
10.  $9. 
$32. 
$40. 
1.8%  $54. 
$82. 
$71. 13 
1.4%  $116. 
$66. 
1.1%  $113. 
$lC9. 
11+ 
$191. 78 
A  -- 
------------------------------------------- --------
GRAH G

AVERAGE LABORATORY PAYMENT 
SPECIALTY 34: UROLOGY, N = 1, 346 
(PARTIAL GRAH) 
x OF PRACTITIONERS	 AVG PAID PER OFFICE 
 VISTT 
55X
 $250 
sox

$225 
45X

AT LEAST 70% ARE PAID tiGRE UNDER THE LRI .  $200 
40"

5175 
35"

S1S0 
30"

5125 
25"

5100 
20"

575 
15"

10"
 550 
525 
11+ 
AVERAGE NUnBER OF LABORATORY SERVICES PER OFFICE VISIT 
" OF PRACTITIONERS  AVERAGE PAID  AVG PAID 11+ SVCS 
1988 BnAD SUBSAnPLE

TABLE OF DATA 
AVERAGE SERVICES  SUBSAMPLE  % OF  AVERAGE 
PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID 
243  18.  $2. 
696  51. 7%	 $11. 
220  16.	 $20. 
$32. 
$41.93 
1.2%  $59.

$64.

$76.

$73.

$110.

$106. 
11+ 
$ 2 25. 7 1 
A  ----------"- ------------------------------------------
'..,..
GRAH H

AVERAGE LABORATORY PAYMENT

SPECIALTY 39: NEPHROLOGY, N = 268

(PARTIAL GRA

OF PRACTITIONERS  AVG PAID PER OFFICE VISIT

5500 
5450 
3510 
5400 
30"  AT LEAST 70% ARE PAID tiGRE UNDER THE LRI 
5350 
25" 
5300 
5250 
I. .. 
5200
15" 
I ,  5150 
10" 
5100 
510 
550 
11+ 
I -
AVERAGE NUMBER OF LABORATORY SERVICES PER OFFICE VISIT 
-4 
OF PRACTITIONERS  AVERAGE PAID  "' AVG PAID 11+ SVCS 
1988 BMAD SUBSAMPLE

TABLE OF DATA 
AVERAGE SERVICE  SUBSAMLE  % OF  AVERAGE 
PER OFFICE VISIT  FREQUENCY  SPECIALTY  PAID 
101  37.  $1. 
32.  $9. 
12.  $25. 
3 % 
$27. 
$40. 
1.9%  $57. 
$58. 74

$95.

$100.

$147.

$99.

11+  $475.

1. 6% 
A 
 -------------------- ------;- -
 ------------------------
-- 
GRAH I 
AVERAGE LABORATORY PAYMENT

i j  SPECIALTY  70: CLINIC/GROUP PRACTICE, N = 2 233

(PARTIAL GRAH) 
OF PRACTITIONERS
 AVG PAID PER OFFICE VISIT

$225 
$200 
AT LEAST 82% ARE PAID tlORE UNDER THE LRI 
5175 
$150 
$125 
$100 
$75 
550 
10" 
525 
11+ 
AVERAGE NUnBER OF LABORATORY SERVICES PER OFFICE VISIT

OF PRACTITIONERS  AVERAGE PAID  AVG PAID 11+ SVCS 
19BB BnAD SUBSAnPLE

TABLE OF DATA 
AVERAGE SERVICES  SUBSAMPLE  % OF  AVERAGE 
PER OFFICE VISIT
 FREQUENCY  SPECIALTY  PAID 
941  42.  $3. 
870  39.  $10. 
234  10.  $19. 
$29. 
$35. 
1.0%  $58. 
$71. 
$60. 
$111. 56 
$98. 
$98. 
11+  $216. 
A 
 APPENDIX 
SUCC 
ENHCING LR  "...  .
... '
".. ............. ....."....".   . .,...". ......'.............,.....,p....-..-....-..."............. .., ......,."....'..,......."....".
... ........ .................
ENHCING LR SUCCE 
In researchig our previous study, entitled "Ensuring Appropriate Use of Laboratory -
l :

Servces: A Monograph " we learned the laboratory marketplace is extremely 
adaptable. For nearly 20 years it has demonstrated its abilty to adapt to new laws 
reguations and policies and overcome HCFA' s efiorts to contain costs. We learned 
that a reimbursement mechanism that makes too many 
exceptions wil increase 
utilization. Therefore, we believe that incorporation of the following elements into 
i ,  LRI implementation will safeguard the benefits described in the monograph and this 
management advisory report.
r . 
outti 
i .
 LR shoul be calcted usg BMA and hoitl  data. 
Th 
A LRI is a one-time event. The 
LRI should be calculated from all 
outpatient laboratory data  .... on".....
'',n,..... 
including hospital outpatient data.

Exclusion of any entity providing 
laboratory servces will encourage
r 

a shift of laboratory work to 
excluded persons or businesses. 
dOne la boratory seres
in the Federal 
r ..  Regter as 
physin seres
exlu 
shoul be 
from the 
In 1988 fewer than 1000 different 
laboratory procedure codes were 
used to bil Medicare. Several

thousand codes were not used.

Failure to address all laboratory 
servces would in all likelihood 
result in shifts to codes currently

not in use. Only laboratory

i .
 servces defined in the Federal

Register as physician servces 
should be excluded from the LRI. 
These excluded servces would be 
paid as physician servces under 
Medicare s resource-based relative value scale (RBRVS). Failure to include all other 
laboratory servces would encourage manipulation of the system.  All physicin specilties shoul be inclued  LR paynL 
in the 
In our analysis, we found that only atyical physicians in each specialty would 
likely to receive less money under a LRI. The graphs and tables in appendix A 
show that the majority of physicians in most specialties would receive more money 
under a LRI. Therefore, we do not believe a LRI needs to be adjusted for specialty 
differences nor should a specialty be excluded.  APPENDIX C

DRA REPORT COMMNf AN OIG REPONSE 
C - 1
 "( 	
. .
- -.: - (:-;.;. . -
.,  .- .. j  -:; -.
DEPARTMENT OF HEALTH II HUMAN SERVICES	 Of 
of th 
W8Ihingon, D.
C. 	 201 
991 
I: 	 FE3 I 2 
I .	 TO:  Richard P. Kusserow 
Inspector General  c.)-
; q f. 
Assistant Secretary for
FROM: 
Planning .and Evaluation	
' :/i . 
; ..1

SUBJECT :  OIG Draft Report: 
I .
 "Impact of a Laboratory Roll-In
Medicare Expenditures" (OEI-OS-89-891S1) -- COMMS 
Thank you for the opportunity to review the subj 
ect report. We 
generally support the concept of "bundling" as a way to encourage
efficient use of services. 
We agree that HCFA should research 
i:.	 and develop a reimbursement mechanism for laboratory services 
based on bundling to replace the laboratory fee schedule. 
We believe that two major issues that are not addressed in the 
draft report must be resolved before bundling can be considered 
to be a viable alternative reimbursement mechanism. First, the 
issue of case-mix complexity. Graphs A through I show that, for 
the specialties examined, only a relatively small proportion of 
numer of tests 
physicians order a large  per visit. However, the 
analysis does not examine the differences in case-mix across 
(e.g.,
physicians to evaluate how the severity of patient illness 
s. 
co-morbidities, nonspecific etiologies) affects utilization of
tes 
The second issue is that, while many of the most common 
tests can be obtained at fairly low prices, many special tests 
are unavoidably more expensive. . For example, the report does not 
examine differences in prices by the clinical performance 
characteristics of tests. Under the approach advocated by the 
report, physicians would be financially penalized for adopting 
more diagnostically specific tests, since such tests are often 
more expensive than a standard test, especially when first
introduced. 
In order for a bundling strategy to be effective, it must be

sensitive to the circumstances under which laboratory services

are appropriately required. While we agree with the implicit

premise of the report that a simple approach is more desirable

than an overly complex one, we believe that a flat add-on for all

laboratory services regardless of case-mix and technolog would

be inadequate.

Gerr 
Mart ' H 
C - 2  Health Care 
DEPARTMENT OF HEALTH &. HUMAN SE	 YICF.	
:' Ie
 .. I.  Financing Administration
I....  . ; I . 	 I..  1: 
01''''N  Memorandum
APR I 5 
199/

Date

D. 

Gail R. Wilensky, Ph.
From  Administrator

OIG Draft Report - "
Subject	 Impact of a Laboratory Roll In on Medicare Expenditures:'

OEI-05-89-89151

The Inspector General 
Office of the Secretary

We have reviewed the 
subject draft report, which is a follow-up to OIG' 
previous study entitled "
Ensuring Appropriate Use of Laboratory Services: A 
Monograph," OEI-05-89-89150. Both r  ports outline a method for rolling laboratory
payment into Medicare 
s recognized charge for a physician offce visit. 
The report found that a bundling approach, called a laboratory roll-in (LRI).
could save Medicare over $1 bilion in the 
fIrst year and more than $12 billion over
5 years. It also found 
physicians would be suffciently paid by the additional funds
added onto the payment for offce visits (the LRI) to pay for all 
necessary
laboratory work ordered for their patients. OIG recommends that HCF A should 
research and develop the LRI payment mechanism for laboratory services, and 
propose legislation to implement it within 2 
years. 
While, in general, we strongly support the concept of bundling related 
services 
into payment groups, we do not concur with the plan to roll laboratory payment
into Medicare s recognized charge for a physician offce visit as it is described in the 
report for the reasons described in the attached comments. Our specific comments
on the report s recommendation are also attached for your consideration. 
Thank you for the opportunity to review and comment on this draft report. 
Please advise us whether you agree with our 
position on the report 
recommendations at your earliest convenience. 
HHS/OIG
OFFICE OF EVALUATION 
Attachment	 AND INSPECTION 
- ROV 
APR 2 2 
1991 
C - 3
 , .
Comments of the Health Care 
FinancinlJ Administration 
(HCF A) on the OIG Draft Report - "
Impact of a Laboratorv
Roll In On 
Medicare Exenditures." OEI-05-89-89151 
In general. bundling related services into groups for payment purposes can 
provide
appropriate 
incentives for the effcient delivery of servces while ensuring quality of 
care. Bundling payment for laboratory tests into physician offce visits 
is" an 
interesting idea, but is one that would need extensive research and analysis before it 
could be pursued.  HCFA does not concur with GIG' s recommendation for four 
primary reasons: (1) the concept is in conflct with the thrust of all recently 
enacted Medicare legislation that governs Medicare certification of laboratories and 
payment for laboratory services, most notably the Clinical laboratOry Improvement 
Amendments of 
1988 (CLIA); (2) the Laboratory Roll In (LRI) concept as 
described in this report has serious conceptual and practical problems; (3)
enactment of the legislative proposal to reinstate coinsurance on laboratory services 
contained in the FY 1992 President s budget, combined with the administrative 
complexities of the LRI proposal, would virtually eliminate the $1.1 billion annual 
savings estimated by OIG; and (4) it would be diffcult, if not impossible. for HCFA 
to develop laboratory payment reform while implementing Physician Payment 
Reform. Our specific comments follow. 
1. GIG's suggested methodology for paying laboratory fees would not be in

compliance with CLIA or the Omnibus Budget 
Reconciliation Act of 1989

(OBRA 89). OBRA 89 cross-references the CLIA statute for Medicare

payment. Th  , the Federal laboratory regulations will be uniform between

Medicare and CLIA, and both wil be based on tests performed. A payment 
system based on the physician offce visit would 
not identify individual lahoratOry 
test procedures performed. This would make it impossible for Medicare carriers 
to correlate tests performed by the labora!ory with .the laboratory s certific;ltion 
status. 
2. The LRI plan proposed by OIG advocates the same payment to different kinds 
of physicians. This would result in significant inequities in compensation hecause 
test-orderig 
practices and the costs of tests tyical to a specialty may differ
greatly. Even with an adjustment for different specialties, the LRI plan would 
put individual physicians at risk based on whether their patient mix was sicker 
than average or requift d greater than the average number of clinical lahoratory
tests. Risk cannot be spread with individual physicians, who are small volume 
providers. as it can with hospitals and HMOs. 
3. Under the LRI system, information on utilization of specific laboratory tests 
would no longer be available. To assure the availability of such information 
would require that an alternative data collection system be developed. Also. 
C - 4
 . .
Page 2

would be difficult fo.r HCF A to determine the future costs oflaboratorv services 
without knowing the costs of laboratory servces to physicians. This information 
would most likely have to be provided on the physician s offce visit bill, which 
would adversely affect any administrative savings anticipated. 
4. While lab tests. may represent 25 percent of the carriers' workload. they are 
usually submitted electronically and are inexpensive to process. Adding 
' paper claims will result in a smaller 
laboratory tests to doctors overall claims 
volume, but also in fewer electronic medical claims and a higher administrative 
I .	 cost per claim. Assessing the combined effect of these results on administrative 
costs as a whole would require further analysis. 
5. The report references Blue Cross and Blue Shield Association and the American 
findings that 20 to 60 percent of clinical laboratory testing 
College of Physicians 
may be unnecessary. The calculation in the report, which arrived at $13.50 for 
the amount to be added onto a physician office visit, did not take 
this into 
account. 
6. OIG calculated that the use of the LRI plan would produce first year savings of 
at least $1.1 billon, and that $980 millon of those savings would be realized 
from patient coinsurance. The FY 1992 President s budget includes a legislative 
proposal to reimpose laboratory coinsurance. If this is enacted, the savings from 
the LRI mechanism would be virtually eliminated. 
from patient coinsurance have been subtracted, the balance of 
After the savings 
the savings estimated by OIG, $143 milion, was attributed to reductions in 
administrative costs. It is unclear how much, if any, of the administrative savings 
anticipated by OIG could actually be realized because of other factors not taken 
into account in this study. These factors include: the change from electronically 
submitted laboratory claims to additional line items on paper claims; the need 
for a new laboratory certification system under the LRI payment mechanism; the 
possible inflationary effect of potential kickbacks under LRI; and the cost of

developing and maintaining a new system for collecting laboratory data for 
utilzation and payment purposes. 
In addition, provisions enacted in OBRA 90 have a!=o addressed the concerns 
about rapid inflation in laboratory costs that prompted OIG to recommend an 
LRI payment mechanism. Section 4154(a) of OBRA 90 changes the annual 
update factor for the laboratory fee schedules from the Consumer Price Index 
for All Urban Consumers (which usually runs 4 percent to 5 percent) 
1993. Section 4154(b) of OBRA 90 reduces the national 
2 percent for FY 1991-
C - 5  ,. 

- . . ,
Page 3

limit for each test, now set at 93 percent of the median of the 
carrer fee 
schedule amounts, to 88 percent of the 
median of the carrier fee schedule 
amounts, effective January 1, 1991. These provisions should help to serve to 
control the groWth of laboratory reimbursements. 
7. It would be diffcult, if not 
impossible, for HCF A to develop laboratory 
payment
reform while implementing Physician Payment Reform. 
The problem is further
exacerbated by the demands on HCFA to 
fully implement other new legislative
provisions--notably CLIA and the prohibition on referrals from physicians who
have an ownership interest in laboratory 
entities--which are in conflct with the 
OIG proposal. Given both the administrative 
complexity of our responsibilities
under current law and changes that will be taking place in payments to 
i.  physicians as a result, this would not appear to be an opportune time to develop
or implement a LRI 
policy. 
C - 6
 . , ,. "

OIG Response to ASPE and RCF A 
Comments 
Both the Assistant Secretary for Planning and Evaluation (ASPE) and the Health 
Care Financing Administration (HCFA) commented on our draft Management 
Advisory Report. The ASPE agrees with our recommendations and 
suggeJts that the 
potential differences in patient case-mix among physician practices and the difference 
in prices between "common" and more specialized testing be further explored. 
The HCF A does not concur with our recommendation. 
Primarily, they feel that the 
LRI: 1) is in conflct with implementation of the Clinical Laboratory Improvement 
Amendments of 1988 (CLIA); 2) will put individual physicians at risk based on the 
complexity of their patient mix; 3) will not save money; and, 4) will be diffcult, if not 
impossible, to develop while implementing Physician Payment Reform. 
We do not believe that the LRI conflcts with CLIA's implementation. Based on 
HCFA' s comments, it appears that enforcement of CLIA regulations is going to be 
- dependent, in part on Medicare carrer tracking of laboratory and physician billings 
for laboratory servces. HCF A maintains that, under the LRI system, information on 
utilization and specific laboratory tests would no longer be available
, makiltg their 
enforcement of CLIA diffcult. 
While discrete Medicare claim information on laboratory use will not be 
available 
under the LRI, this information does exist in HCFA' s certification and survey process 
and could also be obtained through scientifc sampling. In addition, it has always 
been our belief that reliance on Medicare carrers to scrutinize millons of laboratory 
claim line items is an arduous and costly task. 
We would also point out that approximately two out of three laboratories that 
HCF A will be regulating under CLIA do not submit itemized bils to carrers. 
Hospital, nursing home and dentist laboratories are but a few that do not submit 
itemized bils for laboratory servces to Medicare. It would appear that an alternate 
system of enforcement will have to be developed for these 
laboratories. This system 
could be adapted for Medicare laboratories, thus removing the need for carrier data 
on laboratory servces. 
The HCF A and ASPE believe that the LRI might put individual physicians at risk 
based on their patient case mix. We considered this issue during the development of 
the LRI and found little evidence to support the patient case mix 
theory. All of the 
literature we located and our research appear to 
indicate that individual physician 
case mix does not account for differences in the use of servces. 
Our work on 
patient case mix was not a rigorous analysis; therefore, we agree with ASPE and 
HCF A that additional study 
needs to be done. 
Our analysis of laboratory use by physician specialty indicated that expensive 
laboratory servces which might 
adversely affect sO\le physician specialties have 
C - 7  ~~~
already been redefined as physician servces by the Physician Payment Reform 
Commission. On page B-1 of this report, we recommend these servces be exempt
from the LRI payment. Because our analysis is preliminary, we agree with both 
HCF A and ASPE that this issue should be studied further. 
Many of HCFA's specific comments regarding the costs of implementing the LRI 
and the subsequent lack of program 
savings are predicated on HCF A' s need to
maintain exhaustive laboratory information to enforce CLIA. 
This need cannot be
realistically met under the LRI. 
As stated previously, we believe there are
alternatives to maintaining discrete laboratory claim information. Should discrete 
laboratory information be necessary to enforce CLIA the costs 
of developing and
maintaining a new system for collecting this data should be offset by the 
CLIA user
fees. 
The HCF A states that a large portion of program savings that would result from the
LRI come from reinstating co-
insurance on laboratory tests. This co-
insurance
proposal is included in the Fiscal Year 
1992 President' s Budget. If legislation is
enacted to reinstate the co-insurance, HCF A believes the savings from the 
LRI will
be virtually eliminated. The HCFA's analysis of potential savings is incomplete and
fails to take into consideration the full scope and sources of 
savings under the LRI.
As shown on page 2 of this report, we calculated no program savings for 1992
because our formula is budget neutral for the year of 
implementation. However, in
the four succeeding years, savings of $5 bilion could be realized. This is in addition
to the administrative and co-
insurance savings. 
Finally, HCFA believes that it would be difficult
, if not impossible, to develop
laboratory payment reform while implementing 
Physician Payment Reform and other
laboratory initiatives, such as CLIA and the prohibition on laboratory referrals from
physician who have ownership interests. 
We appreciate the enormous responsibilties and administrative 
complexities facing 
HCF A at this time. However, we do not believe that researching the LRI would
interfere with .current HCF A initiatives. Once implemented
, the management of the
LRI is compatible with the methodologies HCFA will need to employ to 
update the
relative values required for physician payment under RBRVS. 
Relative values for 
physician servces are to be updated at least every 5 years. Under the LRI
, the cost
of securing laboratory work would be considered practice overhead cost. 
When the
relative values for a physician specialty are adjusted
, these overhead costs would be
taken into consideration and any inequities in the LRI adjusted at that time. 
We believe the LRI is a viable 
concept for controllng laboratory expenditures and 
thus continue to recommend that HCFA research and 
develop it. 
C - 8