Department of Health and Human Services
 
OFFICE OF 

 
INSPECTOR GENERAL 

 
 
 
 
 
 
 
 
VARIA  TION IN THE CLINICAL 

 
L F S  
ABORATORY  EE  CHEDULE 

 
 
 
 
 
 
 
 
Daniel R. Levinson 
  
Inspector General 

 
July 2009 
 
OEI-05-08-00400 
   
Office of Inspector General

http://oig.hhs.gov  
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as  
amended, is  to protect the integrity of the Department of  Health and Human Services  
(HHS)  programs, as well as the health and welfare of beneficiaries  served by those 
programs.  This statutory mission  is  carried  out through  a nationwide network  of  audits, 
investigations, and inspections conducted by the  following operating components:  
Office of Audit Services 
The Office  of  Audit Services  (OAS) provides auditing services  for HHS, either by  conducting  
audits  with its own audit resources or by  overseeing  audit work done by others.  Audits  
examine the performance of HHS programs and/or its grantees and contractors in carrying  
out their respective responsibilities and are intended  to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and  
mismanagement and promote economy and efficiency  throughout  HHS. 
Office of Evaluation and Inspections  
The Office  of  Evaluation and Inspections (OEI)  conducts national evaluations to  provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud,  waste, or abuse  and promoting  
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving  program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations  
of  fraud and misconduct  related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI  utilizes its resources 
by actively  coordinating with the Department  of Justice  and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to  criminal 
convictions, administrative sanctions,  and/or  civil monetary  penalties.  
Office of Counsel to the Inspector General 
The Office of Counsel to the  Inspector  General (OCIG) provides general legal services to 
OIG, rendering  advice and opinions on HHS programs and operations and  providing all  
legal support for OIGs  internal operations.  OCIG represents  OIG in all civil and 
administrative fraud and abuse cases involving HHS programs,  including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In  connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program  guidance, publishes fraud alerts, and provides other  
guidance  to  the health care industry concerning the anti-kickback statute and other  OIG  
enforcement authorities.    
  
   
E X E C U T I V E   S U M M A R Y  
  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY   
OBJECTIVE 
 
To determine the extent to which Medicare Clinical Laboratory Fee 
Schedule rates varied in 2007. 
BACKGROUND 
Medicare Part B covers  most outpatient clinical diagnostic laboratory 
tests (hereinafter referred to as lab tests) and pays 100 percent of their 
costs because there are no beneficiary copayments or deductibles for lab 
tests. In 2007, lab tests accounted for 3 percent of all Medicare Part B 
payments. Each laboratory submits claims to the Medicare carrier 
responsible for the area in which the laboratory is located. Carriers 
process Medicare Part B payments in 56 carrier localities that 
correspond mostly with State borders.   
Medicare Part B payments for lab tests are determined by the Clinical 
Laboratory Fee Schedule.  The Deficit Reduction Act of 1984 mandated 
that fee schedules be established for each lab test on a regional, 
statewide, or carrier basis.  As a result, each carrier established its own 
fee schedule rates (hereinafter referred to as carrier rates), which are 
collectively known as the Clinical Laboratory Fee Schedule.  The 
Consolidated Omnibus Budget Reconciliation Act of 1985 mandated a 
national limit amount (NLA) that capped carrier rates.   The NLA is set 
at 74 percent of the median carrier rate for each lab test (or 100 percent 
of the median for new tests for which an NLA was not established 
before January 1, 2001). Carriers pay laboratories the lower of the 
laboratories charges or the carrier rate as capped by the NLA.    
To determine the extent of variation, we assessed carrier rates as well 
as utilization and payments for Medicare-covered lab tests in 2007.  To 
do this, we used the 2007 Clinical Laboratory Fee Schedule and a 
1-percent random sample of 2007 Medicare Part B claims data for lab 
tests paid under the Clinical Laboratory Fee Schedule.   
FINDINGS 
Carrier rates for nearly  all lab tests varied,  but 83 percent of carrier 
rates were  at the National Limit Amount.   In 2007, 97 percent of lab tests 
had at least one carrier rate that varied from the  NLA.   However,  
83 percent of all carrier  rates were at the NLA and 89 percent of lab test  
claims were  paid at the NLA.       
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E X E C U T I V E   S U M M A R Y   
Variation in carrier  rates did not appear to reflect geographic 
differences in cost.  Variation from the NLA was inconsistent within 
each carrier and thus did not appear to reflect geographic differences in 
costs.  For instance, we  found that each carrier had rates dispersed at 
varying percentages below the NLA.  If a geographic assessment of costs  
had been factored into the establishment of each carriers rates, each  
carrier might have been expected to  have most, if not all, rates at the 
same percentage below the NLA.    
Methods for setting carrier rates created inconsistent variation 
across carriers.  In 2007, all carriers had rates that varied from the 
NLA. Variation was greater for some carriers than others because of  
methods for setting and updating carrier rates.   In establishing rates 
in 1985, carriers used laboratory charge data that may not have 
reflected lab tests costs.  Since then, methods used to update carrier 
rates have incrementally added to the variation in carrier rates. 
Because carriers pay different rates for the same lab test, variation 
affects Medicare payments. Medicare paid over $3.4 billion for lab tests 
in 2007. Medicare payments would have been $3.5 billion if all lab tests 
had been paid at the NLA or $2.4 billion if the NLA had been reduced to 
50 percent of the median carrier rate.  Setting all carrier rates at 
73 percent of the median carrier rate would have eliminated variation 
without a change in overall Medicare payments.  
RECOMMENDATION 
The Centers for Medicare  & Medicaid Services should  seek 
legislation that would allow it to set accurate and reasonable 
payment rates for lab  tests.  The Centers for Medicare & Medicaid 
Services (CMS) should request legislative authority to institute a new  
process for setting accurate and reasonable payment rates.  CMS could  
use several methods to  achieve this  result.  Whatever method CMS 
implements should be determined  after careful consideration of the 
impact on Medicare costs and on the laboratory industry. 
One approach would be for CMS to seek legislation to set a base 
payment rate for each lab test.  If a single base payment rate for each 
lab test is set, CMS should consider adjusting these rates to  reflect any 
geographic differences in cost.    
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   ii   
  
   
E X E C U T I V E   S U M M A R Y
   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
CMS did not concur, at this time, with our recommendation to seek  
legislation that would allow it to set accurate and reasonable payment 
rates for lab tests.  Although it did not concur at this time, CMS stated 
that it will consider our recommendation and that it is committed to 
improving payment policies for lab tests and to refining methodologies  
for establishing new payment rates.  We encourage CMS to pursue 
legislation that would allow it to set accurate and reasonable payment 
rates for lab tests.   
 
 
 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   iii   
  T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
  
 
 
I N T RO DUC T IO N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 
  
 
 
F I N D IN G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8 
  
Carrier rates for nearly all lab tests varied, but 83 percent of     

carrier rates were at the National Limit Amount . . . . . . . . . . . . . .  8 
  
Variation in carrier rates did not appear to reflect geographic 

differences in cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9 
  
Methods for setting carrier rates created inconsistent variation   

across carriers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10 
  
 
R E C O MMEN D A T ION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 
  
Agency Comments and Office of Inspector General Response  . . .  14 

 
 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15 
  
  A:  Rates Below the National Limit Amount by Carrier. . . . . . . .  15 
  
  B: Carrier Rates for the 10 Most Utilized Lab Tests . . . . . . . . . .  17 
  
  C:  Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19 
  
 
 
A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21 
  
   
  
   
   I N T R O D U C T I O N   
OBJECTIVE 
To determine the extent to which Medicare Clinical Laboratory Fee 
Schedule rates varied in 2007. 
BACKGROUND 
Clinical diagnostic laboratory tests (hereinafter  referred to as lab tests) 
are tests performed  on specimens taken from the human body and  
provide information integral to preventing, diagnosing, and  treating 
disease. Most lab tests are conducted in hospital, physician-office, or 
independent laboratories.   
Medicare Part B Coverage and Payment for Lab Tests 
Medicare Part B covers  most outpatient lab tests and pays 100 percent 
of their costs because there are no beneficiary copayments or  
deductibles for lab tests.1  In 2007, lab tests accounted for 3  percent of 
all Medicare Part B payments.2    
Each laboratory submits claims to the Medicare carrier responsible for 
the area in which a laboratory is located.3  Carriers process  Medicare 
Part B payments in 56 carrier localities that correspond mostly to State 
borders. By 2011, the 56 carrier localities are scheduled to be replaced 
by 15 Medicare Administrative Contractor (MAC) jurisdictions.  
However, MACs will not consolidate payment policies. MACs will 
continue to  administer the same payment policies used in each of the 
56 carrier localities.   
The Clinical Laboratory Fee Schedule  
The Deficit Reduction Act of 1984 (DRA of 1984) mandated that fee 
schedules be established for each lab test on a regional, statewide, or  
carrier basis.4  Consistent with the DRA of 1984, each carrier 
established its own fee schedule rates based on the prevailing charges 
 
1 Social Security Act  1866(a)(2)(A)(ii), 42 U.S.C.  1395cc(a)(2)(A)(ii); Social Security Act 
 1833(b)(3), 42 U.S.C.  1395l(b)(3). 
2 Centers for Medicare & Medicaid Services (CMS), Data Compendium:  Table II.3.  
Available online at 
http://www.cms.hhs.gov/DataCompendium/downloads/2008Expenditures.zip.  Accessed on 
February 26, 2009. 
3 Each hospital laboratory submits claims to the fiscal intermediary responsible for the 
area in which the hospital is located.  Fiscal intermediaries use the same payment system  
as carriers. 
4 DRA of 1984, P.L. No. 98-369  2303(d). 
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I N T R O D U C T I O N   
for lab tests in its locality between 1984 and 1985.5  The fee schedule 
rates established by carriers (hereinafter referred to as carrier rates) 
are collectively known as the Clinical Laboratory Fee Schedule.  
Currently, the Clinical Laboratory Fee Schedule covers 1,105 unique lab 
tests. 
In addition to establishing the Clinical Laboratory Fee Schedule, the 
DRA of 1984 mandated two further changes. First, it mandated the 
establishment of a single national fee schedule after July 1, 1987.6   
Congress repealed this mandate in 1989 following an Office of Inspector 
General (OIG) report.7  The OIG report found that setting a national fee 
schedule at rates equal to 100 percent of the median carrier rate for 
each lab test would have been more  costly than the range of carrier  
rates on the Clinical Laboratory Fee Schedule.8  Second, the DRA of 
1984 mandated the use of the Consumer Price Index for All Urban 
Consumers (CPI-U) to annually adjust carrier rates for inflation.9  In 
2003, Congress eliminated the CPI-U adjustments for 2004 through 
2008.10  In 2008, Congress reinstated the CPI-U adjustments but 
lowered the CPI-U by 0.5 percentage points for 2009 through 2013.  11    
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)  
mandated a national limit amount (NLA) that capped carrier rates at 
115 percent of the median carrier rate for each lab test.12  For example, 
if the median carrier rate for a particular lab test was $100, the NLA 
capped carrier rates at $115.  Over time, Congress incrementally 
lowered the percentage of the national median carrier rate used to 
calculate the NLA as part of a process to implement cost constraints.13   
Since 1998, the NLA has been set at 74 percent of the median carrier 
rate for each lab test (or 100 percent of the median for new lab tests for 
 
5 DRA of 1984, P.L. No. 98-369  2303(d). 

6 Ibid. 

7 The Omnibus Budget Reconciliation Act of 1989, P.L. No. 101-239  6111(a). 

8 OIG, Medicare Reimbursement for Outpatient Laboratory Services, OAI-04-88-01080, 

p. 9, March 1989. 
9 DRA of 1984, P.L. No. 98-369  2303(d). 
10 Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), 
P.L. No. 108-173  628. 
11 Medicare Improvements for Patients and Providers Act of 2008, P.L. No. 110-275 
 145(b). 
12 COBRA, P.L. No. 99-272  9303(b). 
13 Social Security Act,  1833(h)(4)(B), 42 U.S.C.  1395l(h)(4)(B). 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   2   
  
   
I N T R O D U C T I O N   
   
which an NLA was not established before January 1, 2001).14   Under 
the Clinical Laboratory Fee Schedule, carriers pay laboratories the 
lower of the laboratories charges or the carrier rate as capped by the 
NLA.15    
In 2003, Congress mandated that CMS implement a demonstration 
project to explore whether competitive bidding could provide rates for 
lab tests below those on the Clinical Laboratory Fee Schedule.16   
However, a lawsuit brought by two laboratories resulted in a 
court-ordered preliminary injunction that stopped implementation of 
the demonstration project in April 2008.17  In July 2008, Congress 
repealed the authority for the demonstration, thereby eliminating the 
demonstration project.18  
Updating the Clinical Laboratory Fee Schedule 
To keep pace with industry changes, CMS annually determines which  
lab tests to cover under  Medicare.  As a result, CMS either adds or 
deletes lab tests from the Clinical Laboratory Fee Schedule.  When CMS 
adds a new lab test to the Clinical Laboratory Fee Schedule, it must 
determine the appropriate carrier rates.  CMS uses one of two methods 
to set the carrier rates for each new lab test:  cross-walking or 
gap-filling.19    
Cross-walking new lab tests.  CMS uses the cross-walking method to 
assign carrier rates when it considers a new lab test to be clinically or 
technologically similar to an existing lab test, multiple existing lab 
tests, or a portion of an existing lab test.  Under  this method, CMS 
assigns an existing lab tests NLA and carrier rates to the new lab 
test.20  According to CMS staff, CMS uses this method to set carrier  
rates for the majority of lab tests.   
 
14 Social Security Act,  1833(h)(4)(B)(viii), 42 U.S.C.  1395l(h)(4)(B)(viii). 

15 Social Security Act,  1833(a)(1)(D)(i), 42 U.S.C.  1395l(a)(1)(D)(i). 

16 MMA, P.L. No. 108-173  302(b). 

17  Sharp Healthcare v. Leavitt, No. 08-CV-0170 W (POR), 2008 U.S. Dist. LEXIS 

28623 (S.D. Cal. Apr. 8, 2008). 
18 Medicare Improvements for Patients and Providers Act of 2008, P.L. No. 110-275 
 145(a). 
19 42 CFR 414.508; see also 73 Fed. Reg. 33825, 33825 (June 13, 2008) (describing the 
two methods). 
20 42 CFR 414.508(a). 
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I N T R O D U C T I O N   
 
Gap-filling new lab tests.  CMS uses the gap-filling method to establish 
carrier rates for a new lab test if no similar lab test exists.21  Under this 
method, CMS assigns each carrier the responsibility for setting the new 
rates in the first year.  Carriers may use several sources of information 
to set rates, such as lab test charges and payment amounts determined 
by other payers. Carriers may also consider other sources  of 
information as appropriate.22  In the second year, CMS uses the  
carrier-specific amounts to establish the NLA.23        
Office of Inspector General and Related Work 
Previous OIG work on laboratories included studies that examined  
payment safeguards,24 Clinical Laboratory Fee Schedule rates 
compared to other payers,25 utilization and alternative payment 
approaches,26 and potential costs for establishing a national fee 
schedule for outpatient lab tests.27    
In 2000, the Institute of Medicine (IOM) of the National Academies 
published Medicare Laboratory Payment Policy:  Now and in the 
Future.28  IOM found that the Clinical Laboratory Fee Schedule and 
methodology for setting rates have not evolved to account for 
technology,  market, and regulatory changes.  Among other 
recommendations, IOM recommended that Medicare payments for lab 
tests be based on a single, rational, national fee schedule that should be  
adjusted for geographic location to  account for differences in costs of 
labor and supplies.29  
 
21 42 CFR 414.508(b). 
22 42 CFR 414.508(b)(1)(iv); CMS, Medicare Claims Processing Manual,                    
Pub. No. 100-4, ch. 23  40.4.  Available online at  
http://www.cms.hhs.gov/manuals/downloads/clm104c23.pdf. Accessed on September 15, 
2008. 
23 42 CFR 414.508(b)(2). 
24 OIG, Common Working File Edits for Unauthorized Laboratory Tests, 
OEI-05-00-00050, January 2002. 
25 OIG, Follow-Up Report to Changes Are Needed in the Way Medicare Pays  for Clinical 
Laboratory Tests, A-09-93-00056, January 1996. 
26 OIG, Ensuring Appropriate Use of Laboratory Services, OEI-05-89-89150,        
October 1990. 
27 OIG, Medicare Reimbursement for Outpatient Laboratory Services, 
OAI-04-88-01080, March 1989. 
28 Dianne Miller Wolman, et al., Institute of Medicine of the National Academies, 
Medicare Laboratory Payment Policy:  Now and in the Future, 2000. 
29 Wolman, et al.., op. cit., pp. 146147. 
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I N T R O D U C T I O N
   
METHODOLOGY 
This study assesses carrier rates and utilization of Medicare-covered lab 
tests in 2007 to describe variation in the 2007 Clinical Laboratory Fee 
Schedule.  This study also assesses the effect of variation on Medicare 
Part B payments for lab tests. 
Data Sources 
To describe variation across lab tests and carriers for the 2007 Clinical 
Laboratory Fee Schedule, we  obtained the corresponding 56 carrier 
rates and NLA for each of the 1,105 unique Medicare-covered lab tests.  
We defined lab tests using the Healthcare Common Procedure Coding 
System.  To  determine whether variation had changed over time, we 
obtained the 56 carrier rates and the NLA for each of the 1,059 unique 
Medicare-covered lab tests on the 2002 Clinical Laboratory Fee 
Schedule to contrast with those on the 2007 Clinical Laboratory Fee 
Schedule. We selected the 2002 Clinical Laboratory Fee Schedule to 
provide a historical perspective over  a 5-year period. 
To determine utilization of and payment for lab tests, we  obtained a 
1-percent random sample of 2007 Medicare Part B claims data for lab 
tests paid under the Clinical Laboratory Fee Schedule.  The Part B 
claims data identify the paying carrier, the type  of lab test performed,  
and the amount the carrier paid for each lab test.  This sample includes 
a record for each lab test that a laboratory billed.  It does not include 
claims from hospital outpatient laboratories.  We chose not to obtain 
hospital outpatient laboratory claims because some hospital 
laboratories are paid with a special adjustment for outpatient lab tests 
or are paid on a reasonable-cost basis.     
Data Analysis   
We analyzed the 2007 Clinical Laboratory Fee Schedule by lab test and 
by carrier to determine the extent of  variation in carrier rates.  To  
determine whether the extent of variation changed over time, we  
compared the number of carrier rates for lab tests below the NLA in 
2002 to the number of carrier rates below the NLA in 2007. 
Determining the extent of carrier rate variation for lab tests. To determine 
the variation in carrier rates for each lab test, we calculated how far 
below the NLA all 56 carrier rates were for each  lab test.  We then 
calculated several measures of carrier rate variation across all lab tests.   
We determined the utilization of lab tests paid at or below the NLA.  
For lab tests paid below the NLA, we determined how much they were 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   5   
  
   
I N T R O D U C T I O N   
paid below the NLA and the corresponding level of utilization.  To do 
this, we identified the allowed lab tests paid below the NLA, determined  
the percentage of the NLA each of these allowed  lab tests was paid, and  
grouped the allowed lab tests by the different percentages of the NLA 
that they were paid.  We  could not match the payment methodology to 
the corresponding claim or claims for less than 1 percent of allowed lab 
tests and therefore did not include them in our analysis. 
Determining the extent of variation in each carriers  rates.   To determine 
the extent of variation in each carriers rates, we assessed the range and 
distribution of all rates for each carrier at different percentages of the 
NLA. 
To provide an example of the variation in each carriers rates, we  
assessed the rates for the carrier with the highest lab test utilization.  
To identify the carrier with the highest lab test utilization, we summed 
the total number of allowed lab tests for each carrier.  We then assessed 
the extent and range of variation in this carriers rates for lab tests. 
Determining the extent of variation across carriers and the effect of 
variation on Medicare payments.   To determine the extent of variation in 
rates across carriers, we  counted the number of rates that each carrier  
had below the NLA. We then calculated several measures of variation 
across all 56 carriers. 
To provide an example of the effects of variation on Medicare payments, 
we chose to use the claims and payments for the 10 most utilized lab 
tests nationally in 2007.  We identified the 10 most utilized lab tests 
nationally by calculating the number of allowed lab tests for each claim  
and ranking each lab test by the number of allowed lab tests.  We then 
assessed variation in their carrier rates.  These 10 lab tests accounted 
for 48 percent of all lab test utilization in 2007.  
To see how variation across carriers affects Medicare payments, we first 
calculated the amount Medicare actually paid for lab tests in 2007.  
Then, we calculated how much Medicare hypothetically would have paid 
if variation had been eliminated.  We calculated three examples:          
(1) a single payment rate based on the current NLA, (2) a single 
payment rate based on a cost-neutral NLA, and (3) a single payment 
rate based on an NLA set at a reduced percentage of the median carrier  
rate.  To do so, we chose to reduce the NLA to 50 percent of the median 
carrier rate.      
 
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I N T R O D U C T I O N   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency (now 
Council of the Inspectors General on Integrity and Efficiency). 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   7   
  
   
F I N D I N G S  
  F I N D I N G S  
Carrier rates for nearly all lab tests varied, but  In 2007, although 97 percent of lab 
83 percent of carrier rates were at the National  tests had at least one carrier rate 
that varied from the NLA, most  
Limit Amount  
carrier rates for lab tests were at 
the NLA.  Overall, 83 percent of carrier rates were set at the NLA.  For 
the 17 percent of carrier  rates below  the NLA, carrier rates ranged from  
less than 1 percent to 93 percent below the NLA.  On average, these  
carrier rates were 25 percent below the NLA.   
Similarly, most lab test utilization was paid at the NLA.  Overall, 
89 percent of lab test utilization was paid at the NLA.  In addition, most  
of the 11 percent of lab test utilization that was paid below the NLA was 
for lab tests that were paid near the NLA.  For example, 47 percent of 
utilization for lab tests paid below the NLA was paid within 10 percent  
of the NLA.    
As illustrated in Chart 1, lab test utilization generally declined as the 
amount paid moved farther below the NLA, with a noticeable drop in 
lab test utilization when the amount  paid was 25 percent or more below 
the NLA. In addition, Chart 1 demonstrates that carrier rates below  
the NLA were most prevalent where the percentage below the NLA was 
the smallest.  The percentage of carrier rates below the NLA generally 
declined as the carrier rates moved farther below the NLA. 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   8  F NDINGS
Chart 1: Percentage of Lab Test Utilization and Carrier Rates at Different Percentages
Below the NLA
30% -----------
c..(
Z
:5 25%
~
Qai
S
inii 20%
"-
el
"E
ni
(J
i:
-i Carrier Rates
c:
ni
c0: 15% -+Lab Test
Utilization
~

$
i- 10%
~
..
O
el
Cl
ni 5%
5i
l.

Q.
0% ~&* ~~ ~~&C&~&~&*~~&&
~ ~ ~?~ ~~ ~ ~ ~d,~~d~d~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ v v v\\ ~ ~ ~ ~
Percenta e Below the NLA
Source: OIG analysis of the 2007 Clinical Laboratory Fee Schedule and Medicare Part B Claims data, 2008.
Variation in carrier rates did not appear to No carrier consistently had all
rates at the same percentage
reflect geographic differences in cost
below the NLA. Instead, each
carrier had rates dispersed at varying percentages below the NLA. For
example, Florida's carrier, the carrier with the highest utiization of lab
tests, ilustrates how carriers' rates were dispersed below the NLA.
Florida's carrier rates were below the NLA.
Overall, 21 percent of 
These rates ranged between less than 1 percent and 92 percent below
the NLA. See Chart 2 for the number of  Florida's carrier rates at
different percentages below the NLA.
OEI. 0 5.0 8.0 0400 VARIATION IN THE CLINICAL LABORATORY FEE SCHEDULE 9  
  
   
F I N D I N G S  

Chart 2:  Floridas Carrier Rates Below the NLA  
50 
45 
40 
35 
s 
e
Rat 30 
er 
Carri 25 
of 
 er 
mb 20 
u
N
15 
10 
5 
0 
%  %  %  %  %  % %  %  %  % % %  %  %  %  % %  %  % 
<1-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 90-95
Percentage Below the NLA 
Source:  OIG analysis of  the 2007 Clinical Laboratory Fee Schedule and Medicare Part B Claims  data, 2008.  
If a geographic assessment of costs  had been consistently factored into 
the establishment of each carriers rates, each carrier might  have 
been expected to have  most, if not all, rates at the same percentage 
below the NLA.  For example, under Medicares  physician fee 
schedule and hospital outpatient prospective payment system, base 
rates from a single national fee schedule are adjusted to reflect 
geographic differences in costs, such as wages.  As a result, rates for 
each physician or hospital outpatient service are adjusted by the same 
percentage from the corresponding fee schedule for each individual 
locality. 
Methods for setting carrier rates created  Variation in carrier rates 
originates from the methods used  
inconsistent variation across carriers  
to establish and update the 
Clinical Laboratory Fee Schedule.  When carriers established the 
Clinical Laboratory Fee Schedule in 1985, they used laboratory 
charge data from their localities to set payment rates.  Although this 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   10   
  
   
F I N D I N G S  
report did not assess the charge data used to establish the Clinical 
Laboratory Fee Schedule, evidence  suggests that laboratory charge 
data may not have reflected the actual costs of performing lab tests.30   
In some cases, laboratory charge data may have reflected laboratories 
decisions on  acceptable profit levels and  market share.  As  a 
consequence, charge data may also not have reflected real differences  
in cost from  carrier to carrier.31    
Since the establishment of the Clinical Laboratory Fee Schedule, the  
cross-walking and gap-filling methods used to update it have 
incrementally added to the variation in carrier rates.  The cross-walking 
method builds upon existing variation because CMS assigns new lab 
tests the carrier rates of existing lab tests.  Thus, if the existing lab test 
has variation, the new lab test has the same variation.  The gap-filling 
method may also add to variation because CMS allows carriers, at their  
discretion, to use different sources of information to assign rates for new  
lab tests. 
If CMS continues to use these two methods for updating the Clinical 
Laboratory Fee Schedule, variation  that does not reflect actual costs 
will remain and possibly increase over time.  For example, between 
2002 and 2007, CMS added 70 new lab tests to the Clinical 
Laboratory Fee Schedule and deleted 24 lab tests.  During this time, 
the variation in the Clinical Laboratory Fee Schedule increased 
slightly, from 16.8 percent of carrier rates below the NLA to  
17.1 percent. IOM found that about 15 percent  of carrier rates were  
below the NLA in 2000.32  
Variation was greater for some carriers than others   
The methods used to establish and update the Clinical Laboratory Fee 
Schedule resulted in the proportion  of rates below the NLA  varying 
across carriers.  At one end, Alaskas carrier had 3 percent  of its rates  
below the NLA.  At the other end, Utahs carrier had 31 percent of its 
rates below  the NLA.  Most carriers (34 of 56) had between 
10 and 24 percent of their rates below the NLA.  See Appendix A for the 
proportion,  average, and range of rates below the NLA for  each carrier.    
 
30 Wolman, et al., op. cit., p. 89. 
31 Wolman, et al., op. cit., p. 95. 
32 Wolman, et al., op. cit., p. 90. 
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  S  
Carriers also differed with respect to the amounts at which their rates 
were below the NLA.  At  the low end  of the range  of variation,  
Kentuckys  carrier had an average rate 16 percent below the NLA. At 
the high end of the range, Wisconsins carrier had an average rate of 
38 percent below the NLA.   
Variation of rates across carriers means that some carriers paid 
different amounts for the same lab test.  For example, the carrier rate 
for one genetic test was $12.82 in California and $95.84 in Wyoming.  
Similarly, the carrier rate for one breath analysis test was $60.66 in 
New Jersey and $94.11 in Kentucky.  Another example concerns the two 
most utilized tests. For the most utilized lab test, the carrier rate for 
Kentucky was at the NLA (the highest possible carrier rate), whereas 
the carrier rate for Kansas was 40 percent below the NLA (the lowest 
carrier rate for this lab test).  However, the reverse was true  for the 
second most utilized lab test.  The carrier rate for Kansas was at the 
NLA, whereas the carrier rate for Kentucky was 21 percent below the 
NLA (the lowest carrier rate for this lab test).  See Appendix B for 
examples of variation in the carrier rates for the 10 most utilized lab 
tests. 
Because carriers pay different rates for the same lab test, variation 
affects Medicare payments. Medicare paid over $3.4 billion using the 
current carrier rates for lab tests in 2007.  If variation had been 
eliminated by setting all carrier rates at the current NLA, Medicare 
payments would have increased by $74 million, bringing the total to 
almost $3.5 billion.  On the other hand, if variation had been eliminated 
using a single rate based on a reduced NLA, Medicare would have paid 
less.  For example, if all lab tests had been paid at 50 percent of the 
median carrier rate, Medicare payments would have been reduced to 
$2.4 billion, a reduction of $1 billion.  Only if carrier rates had been set 
at 73 percent of the median carrier rate would variation have been 
eliminated with no change in overall Medicare payments.  
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   12   
  
   
  R E C O M M E N D A T I O N  
Although variation affected nearly all lab tests, most carrier rates were 
at the NLA and the majority of lab test utilization was for lab tests paid 
at the NLA.  The variation that existed in 2007 did not appear to reflect 
geographic differences in cost.  Instead, the variation originated from 
the methods used to establish and update the Clinical Laboratory Fee 
Schedule.  Variation of rates across carriers means that some carriers  
paid different amounts for the same lab test.   
In light of our findings, we make the following recommendation for 
setting payment rates for lab tests.  
CMS should seek legislation that would allow it to set accurate and 
reasonable payment rates for lab tests  
CMS should request legislative authority to institute a new process for 
setting accurate and reasonable payment rates that would represent 
costs, adjusted for any geographic differences.  Whatever method CMS 
implements to set rates accurately and reasonably should be 
determined after careful consideration of the impact on Medicare costs 
and on laboratories.    
One approach would be for CMS to seek legislation to set a base 
payment rate for each lab test.  IOM also recommended moving to a 
single base payment rate as a first step to a simplified and more 
rational payment system.33  If a single base payment rate for each lab 
test is set, CMS should consider adjusting these rates to reflect any 
actual geographic differences in cost.  In addition, CMS may wish to 
consider adjusting base payment rates to take into account other factors 
affecting the cost of providing lab tests.   
One way to  establish a base payment rate for each lab test would be to 
pay all lab tests at the current NLA or at a reduced NLA.  In an earlier 
report, OIG found that setting a base payment rate using the NLA could 
be costly because doing so would require increasing some  carrier rates.34   
However, cost-neutral base payment rates could be achieved by 
adjusting all carrier rates to a percentage of the NLA.   We estimate that 
in 2007, a single payment rate based on 73 percent of the median 
carrier rate would not have resulted in a change in overall Medicare 
payments.  
 
33 Wolman, et al., op. cit., pp. 146147. 
34 OIG, Medicare Reimbursement for Outpatient Laboratory Services, 
OAI-04-88-01080, March 1989. 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   13   
  
   
R E C O M M E N D A T I O N
  
While using the NLA as a base payment rate would eliminate the 
current variation, payment rates using this approach may not 
accurately reflect cost because the NLA would still be derived from the 
same suspect data used to establish and update the Clinical Laboratory 
Fee Schedule.   
In seeking legislation to set accurate and reasonable payment rates for 
existing lab tests, CMS should include a process to set accurate and  
reasonable payment rates for new lab tests. 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
CMS did not concur, at this time, with our recommendation to seek  
legislation that would allow it to set accurate and reasonable payment 
rates for lab tests.  CMS noted that the Presidents budget for fiscal year 
2010 does not propose amending the payment methodology for lab tests.  
CMS also noted that it does not have the authority to standardize 
payment rates across the Clinical Laboratory Fee Schedule without a 
legislative change.  We have clarified the recommendation language to 
reflect  this.   
Although it did not concur at this time, CMS stated that it will consider 
our recommendation and that it is committed to improving payment 
policies for lab tests and to refining methodologies for establishing new 
payment rates.  CMS suggested that using the gap-filling method for 
establishing payment rates for new lab tests in place of the 
cross-walking methodology has the potential to establish rates more 
closely tied to cost, but it was uncertain of unintended consequences.  
CMS further noted that recently established annual meetings that 
invite public discussion on the payment rates for new lab tests may lead 
to more accurate rates for new lab tests.      
We encourage CMS to pursue legislation that would allow it to set 
accurate and reasonable payment rates for lab tests.   
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Rates Below the National Limit Amount by  Carrier 
 
Table 1: The Percentage, Average, and Range of 
Rates Below the  National Limit Amount* by Carrier 
Percentage   Average  Smallest   Largest 
of Carrier  Percentage   Percentage   Percentage  
Rates Below   Below the   Below the   Below the  
Carrier  the NLA   NLA   NLA   NLA  
AK  3%  25%  0.92%  76% 
NV  4%  24%  0.12%  65% 
HI  4%  30%  1.51%  84% 
CT  6%  27%  2.88%  81% 
MT  6%  26%  0.37%  91% 
OR  6%  22%  0.04%  82% 
MN  7%  18%  0.42%  67% 
OK  8%  27%  0.37%  69% 
CA2  8%  24%  0.77%  87% 
CA1  8%  24%  0.77%  87% 
AZ  9%  21%  0.54%  62% 
NM  9%  26%  0.20%  82% 
PR  10%  18%  0.26%  86% 
ND  10%  25%  0.03%  78% 
NJ  11%  17%  0.39%  73% 
IL  12%  27%  0.05%  81% 
LA  13%  31%  0.62%  73% 
MO2  13%  31%  0.13%  88% 
WI  14%  38%  0.45%  77% 
CO  14%  29%  0.03%  88% 
RI  15%  25%  0.31%  73% 
WV  15%  26%  1.66%  86% 
WA  16%  26%  0.17%  84% 
DC  16%  19%  0.22%  80% 
OH  16%  27%  0.93%  86% 
PA  16%  20%  0.19%  87% 
ID  17%  20%  0.59%  75% 
VA  17%  21%  0.90%  76% 
* National Limit  Amount  = NLA.  
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Table 1:  The Percentage, Average, and Range of  
Rates Below the National Limit Amount by Carrier 
(Continued)  
Percentage of  Average  Smallest   Largest 
Carrier Rates  Percentage   Percentage   Percentage  
Below the   Below the   Below the   Below the  
Carrier  NLA   NLA   NLA   NLA  
AR  17%  28%  0.05%  77% 
DE  18%  19%  0.22%  83% 
GA  18%  30%  0.08%  83% 
IA  18%  30%  0.05%  91% 
TX  18%  31%  0.21%  75% 
KS  18%  30%  0.09%  84% 
SD  19%  27%  0.03%  84% 
MD  20%  25%  0.14%  92% 
KY   21%  16%  0.29%  88% 
FL  21%  26%  0.23%  92% 
MA  22%  23%  0.68%  74% 
ME  22%  23%  0.68%  74% 
MO1  23%  33%  0.41%  85% 
NH  23%  23%  0.68%  82% 
SC  24%  27%  0.12%  85% 
MS  24%  27%  0.37%  85% 
TN  24%  21%  0.37%  87% 
IN  24%  25%  0.50%  87% 
AL  25%  22%  0.24%  87% 
NC  25%  19%  0.15%  88% 
NY3  26%  28%  0.42%  86% 
NY2  27%  31%  0.42%  86% 
NE  27%  32%  0.05%  93% 
WY   28%  29%  0.03%  79% 
NY1  29%  20%  0.04%  92% 
VT  29%  22%  0.29%  77% 
MI  30%  25%  0.09%  90% 
UT  31%  27%  0.03%  92% 
Source:  Office of  Inspector General analysis of  the 2007  Clinical Laboratory Fee 
Schedule, 2008.  
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Carrier Rates for the  10 Most Utilized Lab Tests 
Below is a chart showing the National Limit Amount (NLA) and carrier 
rates for the 10 most utilized lab tests for 2007.  Carrier rates below the 
NLA are bolded and underlined.   
Table 2: Carrier Rates for the 10 Most Utilized Lab Tests for 2007 
Complete  
Blood Count  
Assay  w/ Automated  
Basic  Comp.  Urinalysis  Urinalysis  Thyroid  Differential 
Metabolic   Metabolic   Lipid   Urinalysis   Automated w/   w/out  Glycosylated   Stimulating  White Blood  Prothobin 
Carrier  Panel   Panel   Panel   w/ Scope  Scope   Scope   Hemoglobin  Hormone   Cell Count   Time  
NLA   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
AK   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
AL  $11.83   $14.77   $15.88   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
AR   $11.83   $14.77   $17.77   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
AZ   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $8.97  $5.49 
CA1  $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
CA2  $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
CO   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $9.88  $5.49 
CT   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
DC   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
DE   $11.83   $14.77   $18.72   $4.41   $4.41  $3.57  $13.56  $23.47   $10.86  $5.49 
FL  $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
GA   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
HI   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
IA   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $4.89 
ID   $11.83   $14.77   $15.85   $4.43   $4.43  $3.57  $9.77  $21.98   $10.86  $5.49 
IL  $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
IN  $8.93   $14.55   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
KS   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $6.50  $5.49 
KY   $9.37   $11.74   $15.91   $4.43   $4.43  $3.37  $13.56  $23.47   $10.86  $5.49 
LA   $11.83   $14.77   $16.69   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
MA   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
MD   $11.83   $14.77   $17.05   $4.43   $4.43  $3.57  $13.00  $23.47   $10.86  $5.25 
ME   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
MI  $11.83   $14.55   $17.85   $4.43   $4.43  $3.57  $13.56  $23.47   $10.85  $5.49 
MN   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
MO1  $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
MO2  $11.83   $14.77   $18.72   $4.43   $4.43  $2.92  $13.56  $23.47   $10.86  $5.49 
 
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A P P E N D I X   ~   B  

 
Table 2: Carrier Rates for the 10 Most Utilized Lab Tests for 2007 (Continued)  
Complete  
Blood Count  
Assay  w/ Automated  
Basic  Comp.  Urinalysis  Urinalysis  Thyroid  Differential 
Metabolic   Metabolic   Lipid   Urinalysis   Automated w/   w/out  Glycosylated   Stimulating  White Blood  Prothobin 
Carrier  Panel   Panel   Panel   w/ Scope  Scope   Scope   Hemoglobin  Hormone   Cell Count   Time  
NLA   $11.83   $14.77   $18.72   $4.43   $4.43  $3.57  $13.56  $23.47   $10.86  $5.49 
MS  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $22.73   $10.86  $5.49 
MT  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NC  $11.20   $11.80   $18.72  $4.43  $4.43  $3.57  $13.56  $22.77   $10.86  $5.49 
ND  $11.83  $14.77  $17.05   $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NE  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $6.50  $5.49 
NH  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NJ  $11.83   $13.36   $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NM  $11.83  $14.77  $17.16   $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NV  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NY1   $11.20   $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.79  $5.49 
NY2   $8.93   $13.36   $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
NY3   $8.93   $13.36   $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
OH  $10.25   $14.77  $17.77   $4.43  $4.43  $3.30  $13.56  $23.47   $10.86  $5.49 
OK  $11.83  $14.77  $18.72  $4.43  $4.43  $3.28  $12.08  $23.47  $10.86  $5.49 
OR  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
PA  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
PR  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
RI  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $12.22  $23.47  $10.86  $5.49 
SC  $11.83   $13.36   $13.69   $4.41   $4.41  $3.57  $13.56  $23.47   $10.36  $5.49 
SD  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.00  $23.47  $10.86  $5.49 
TN  $9.64   $12.05   $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
TX  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
UT  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $7.39  $5.49 
VA  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
VT  $11.83  $14.77  $15.34   $4.43  $4.43  $2.49  $13.56  $23.47   $10.86  $5.49 
WA  $8.93   $11.92   $18.72  $4.43  $4.43  $3.57  $13.56  $23.39   $10.86  $5.49 
WI  $11.83  $14.77  $18.72  $4.43  $4.43  $3.57  $13.56  $23.47  $10.86  $5.49 
WV  $11.83  $14.77  $18.72  $4.43  $4.43  $3.29  $13.56  $23.47   $10.86  $5.49 
WY   $10.74   $14.77  $15.56   $3.57   $3.57  $2.87  $10.61  $22.93   $10.86  $4.44 
Source:   Office of Inspector General analysis of  the 2007  Clinical Laboratory Fee Schedule and  Medicare Part  B Claims data, 2008. 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   18  
  
   
  A P P E N D I X ~ C
 
Agency Comments 
 
if-f/'ti'.,.,..HO','4.,
~
{ DEPARTMENTOFHEALTH& HUMANSERVICES Gelllers'0'Medicare&MedicaidServICO'
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200Il1depelldenceAvell".SW
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MAY 212009
DATE:
TO: DanielR. Levinson
InspectorGeneral
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'"
FRO VeflaffeneFnzzera)
ActingAdministrator
S BJECT: OfficeofInspectorGeneral' DraftReport: "Variationin theClinicalLaboratory
FeeSchedule' (OEI-0508-00400)
TheCenters forMedicare& MedicaidServices(CMS)appreciatestheopportunitytoreviewand
providecomments00theOfficeofInspectorGeneral's(OIG)draftreportentitled"Variationin
theClinicalLaboratoryFee chedule." Thereportassessedcarrierratesaswellasutilization
and paymentsfor Medicare-coveredlabtestsin2007andfound variationacrosscarriersthatdid
notappeartoreflectgeographicdifference incos!.
MedicarePartBpaymentsforlaboratorylestsaredetermined bytheClinicalLaboratoryFee
Schedule(CLFS). TheDeficitReduction Actof1984mandatedthatfee chedule be
establishedforeachlaboratorytestonaregional,statewide,orcarrierbasis. Asaresult,each
carrierestablisheditsownfeescheduleratesthatarecollectivelyknownastheCLFS. The
ConsolidatedOmnibusReconciliationActof1985mandatedanational limitationamount
(NLA). TheNLAissetat74percentofthemediancarrierrateforeachlaboratorytest(or 100
percentofthemedianfornewtests forwhichanNLAwasnotestablishedbeforeJanuary I,
2001). Basedonsection 1833(a)(1)(0)and 1833(a)(2)(0)oftheSocial eeurityAct(theAct),
carrierspay thelaboratoriesthe lowerofthelaboratories'charges,the LA,orthecarrierrate.
DIG Recommendation:
CMSshouldrequestlegislativeauthoritytoinstituteanewprocessforsettingaccurateand
reasonablepaymentrates. CMScoulduseseveral methodstoachievethisresull. Whatever
methodCMS implementsshould bedeterminedallercarefulconsiderationoftheimpacton
Medicarecostsandonthe laboratoryindustry.
CMSResponse:
Wenon-concuratthistime. ThePresident'sbudgetfor fiscal year20I0docsnotincludeany
proposalstoamendthepaymcntmethodologyforclinical laboratorytests. However,wewill
takethisrecommendationintoconsiderationaswecontinuetomonitortheeffectsofourcurrent
paymentpolicies.
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   19   
  
   
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Page2- Daniel R. Levinson
TheOIGstate that, intheinterim,CM couldstandardizepaymentratesacrosstheCLF and
suggeststhatthiscouldbedonebypayingforall laboratorytestsatthecurrent LAorata
reducedNLA. Theyfurthernotethatwhilesetlingbasepaymentratesbasedonthe LAwould
eliminatetbecurrentvariation,thosepaymentratesmaystillnotaccuratelyreflectcost.
Therefore theyrecommendthat MSconsideradjustingtheseratestorenectgeographyand
otherfactors thataffectco t.
Currently,CMS'authoritytosetpaymentsatadifferentpercentageoftheNLA islimitedby
statute. Specifically,section I833(a)(1)(D)and I833(a)(2)(D)oftheActprovidethat, for
clinicallaboratorydiagnosticservices,CMSshallpaythelesseroftheCLFSamount,theNLA,
orthcamountofchargesbilledforthetest. Thestatutealsospecifieshowtheamountofthe
LAshallbecalculated. Therefore,wedonothavetheauthorityatthecurrenttimeto
standardizeratesacrosstheCLF bypayingalltestsattbecurrent LAorareducedNLA.
Finally,theOIGrecommendsthatCMSdevelopaprocesstoestablisbaccurateandreasonable
paymentratesfornewlabte tsthatwouldrepresentcosts,adjusted foranygeographic
differences,andwouldnotcreatenewratevariations.
AsdescribedintheOIG'sreport,twomethodsareusedtoestablishpaymentamountsforncw
labtestcodes. Cross-walkingisusedwhenanewtestisdeterminedtobe imilartoanexisting
test,multipleexistingtestcodcs,oraportipnofanexistingtestcode. Thenewtestcodeisthen
assignedtherelatedexistinglocal feescheduleamountandtherelatedexisting LA. Gap 
filling isusedwhennocomparable,existingtestisavailable,andpresentsanopportunityto
establisbratesbasedonmoreupdatedcostdata. Whilethegap-fillingmethodologyhasthe
potentialtoestablishnewratesmorecloselyliedtocostand10morenarrowlylimitvariation
withincarriers,itisfarmorecommonforustousecross-walkingtoestablishtheratesfornew
labtestsbecausenewtestsarefrequentlyverysimilartoexistingones. Ifweweretousegap 
fillingevenwhenitispossibletocross-walk,wemightbeabletoestablishpaymentthatreflects
nationalaveragecostsadjustedforgeographicareadifferencesbutmightcreatenew
inconsistenciesbyhavingdifferentrateswithinasinglegeographicareaforlaboratoryservices
withsimilarcosts.
Wedonote,however,thatinthecalendaryear2007PhysicianFee cbedule,CMSimplemented
section942(b)oftheMedicarePrescriptionDrug,Improvement,and ModernizationActof2003,
whichrequired thatCMSestablishprocedures[orconsultingthepublicon'howtoestablish
paymentfornewclinicallaboratorytestcodestobeincludedintheannual updateoftheCLFS.
Wcnowholdanannualpublicmeetingtoallowforpublicinputon thepricingofnewtestsand
weprovideanadditionalopportunityforthepublictocommentoncetheproposedratesare
posted. Altendeesandthosewho providecommentliareinvitedtosubmitcostdatatoaidCM
inaccuratelypricingnewtests.
TheCMSiscommittedto improvingourCLF paymentpoliciesand torefiningour
methodologiesfore tablishingnewpaymentrates. Therefore, weappreciatetheopportunityto
commentonthisreport.
OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   20   
  
   
A P P E N D I X ~ A  
  A C K N O W L E D G M E N T S
A P P E N D I X ~ A  
 
This report was prepared under the  direction of Ann Maxwell, Regional 
Inspector General for Evaluation and Inspections in the Chicago 
regional office, and Thomas Komaniecki, Deputy Regional Inspector 
General. 
Mark Stiglitz served as the team leader for this study.  Other principal 
Office of Evaluation and Inspections staff from the Chicago regional 
office who contributed include Mara Werner.  Other principal central 
office staff who contributed include Cynthia Thomas, Scott  Manley, and 
Robert Gibbons. 
  
 
  OEI-05-08-00400   VARIATION IN THE CLINICAL  LABORATORY  FEE  SCHEDULE   21