ENSURING APPROPRIATE USE 
OF LABORATORY SERVICES 
A MONOGRAPH 
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OFFICE OF INSPECTOR GENERAL 
OFFICE OF EVALUATION AND INSPEC'f 
OCTOBER 1990  ENSURING APPROPRIATE USE 
OF LABORATORY SERVICES 
A MONOGRAPH 
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OFFICE OF INSPECTOR GENERAL 
INSPEC'f-INS 
OFFICE OF EVALUATION AND 
OCTOBER 1990  ENSURING APPROPRIATE USE 
OF LABORATORY SERVICES 
A MONOGRAPH 
Richard P. Kusserow 
INSPECTOR GENERAL 
OEI-05-89-89150  OCTOBER 1990  EXECUTIVE SUMMARY 
PURPOSE 
This report examines forces that affect the use of diagnostic clinical laboratory services and 
explores alternative payment approaches. 
BACKGROUND 
Until recently, most Medicare legislation involving clinical laboratory services has focused on 
controllng the amount the program pays for services. Passage of the Omnibus Reconcilation 
utization. It is in the context of this change 
Act of 1989 has focused attention on controlling 
labo.tory 
in focus that this inspection examines the forces that encourage utilization of 
services and considers varous solutions to control laboratory test use. 
METHODOLOGY 
joural arcles, 
We compiled information and data regardig clinical laboratory services from 
previous government and private sector studies, Congressional testimony and from HCFA' 
fies. We also obtained information on payment 
Par B Medicare Annual Data (BMAD) 
radomly selected Medicare carers. 
policies and utilization review procedures from 21 
Seven national associations, representing the medical and laboratory communities, also 
from the working files of 
provided their perspectives. Additional information was obtained 
previously published Offce of Inspector General studies of physician offce laboratories 
(POLs) and physician financial arangements. 
FINDINGS 
The Use Of Clinical Laboratory Tests Is Rising. 
Between 1984 and 1988, Medicare Par B payments for laboratory services have more 
than doubled. 
The volume of clinical laboratory services has increased disproportionate to the increase 
in the beneficiar population, from approximately 116 milion services in 1985 to nearly 
148 milion services in 1988. 
carers. 
Testing accounts for nearly 25 percent of the line items paid by  Many Factors Influence Use Of Laboratory Tests.
s condition and other factors
Physician ordering decisions are affected by the patient
such as fear of malpractice.
Medicare s fee-for-service system financially rewards increased use.
Researchers and our respondents confirm that many factors encourage use.
Current 
The Sheer Volume And Small Dollar Value Of Laboratory Services Render The 
Pre And Post Payment Review Systems Ineffective. 
Fragmentation upcoding, test groupings and other biling idiosyncracies hinder accurate

claim review and cause erroneous payments.
The medical necessity of laboratory services is difficult to determne because no

consensus exists on the appropriateness and intensity of laboratory services for a given
medical condition or complaint. 
Current Initiatives Do Not Fully Address Laboratory Use.
services do 
Direct billng initiatives and other restrctions on who can bil for laboratory 
not alter incentives that encourage use. 
Reinstatement of the deductible and coinsurance for laboratory services may reduce
Medicare laboratory payments. However, by itself, its effects on utilization are
uncenain.
Initiatives which would prevent physician ownership of any laboratory may adversely
affect access to services.
Competitive bidding initiatives focus on cost but raise questions on quality of services
and may not control use.
Practice guidelines may improve medical necessity determinations but wil not alter the
other problems inherent in the fee-for-service system.
affect individual 
V olume performance standards may lower costs, but they may not 
treatment decisions.  Rollng Laoratry Reimbursement Into Offce Visit Payments Is A Promising Strategy For 
Curbing Over Use. 
Laboratory roll ins would consolidate Medcare reimburement for individual laboratory 
tests into the recognize charge for physician offce visits. 
Laboratory roll ins would provide physicians with incentives to ensur appropriate use 
of clinical laboratory services and lower Medcar s adnistrative costs. 
CONCLUSION 
The LRI has the potential to alter the forces inherent in the curnt FFS system which 
At the same time, it recognizes 
encourage and reward excessive use of laboratory servces. 
the physician s authority in determning which tests ar medcally necessar, does not unjustly 
penalize patients for deisions out of their contrl and leaves the maketplace and its dynamcs 
unrestrned. 
The major featurs of this mechanism would: 
be relatively easy to implement; 
provide appropriate incentives which allow for predictable, controlled growth of 
Medicar laboratory expenditurs; 
reduce the number of claims line items proessed by carers by 25 percent; 
reuce the paperwork buren for bilers and carers; and, 
use deductibles and coinsurance where they can be most effective in affecting overall 
car. 
utilization of health 
Implementation of the LRI would result in significant savings from increased coinsurance and 
lower adistrative costs. We wil shortly issue a repon which furer explores the financial 
implications of these features of the LRI reimbursement mechanism.  . . ..  ..  ... .  . .. .  . .. .  . .. .  . .... .    . .... .    . .... .    . ..... .     . ...... .      .. ......  .      .. ......  .      .. ......  .      .. ......  .      . ....... .       . ....... .       . ....... .       . ....... .      . . ...... . .      . . ...... . .      . . ...... . .      . . ...... . .       .. ...... . .      . . ...... ..       . . ....... ..        .  ........ ..        .  ........ ..       . .  ......... . .         .  ......... ...         .  ................... .. ...           
. . ..  ..  ...   ....    ....    ....    ....    ......      .......       .......       .......       .......       .......       .......       .......  .     .. .....  .     .... .....    .     .... .....   . .     .... . .....    . .     .... . .....    . .     ......  .....      ..     ......  .....      ..     ......  .....      ..     .......  .....       ..     ...... . .... .     . .    . .....  ... ...     ..   .   .....  ... ...     ..   .   .....  ... ...     ..   .   .....  .. ....     . . .    ..... . . ....     . . .    ..... . . ....     . . .    ..... . . ....     . . .    ..... . . ... .    . . .   . .... . . .. .    . . .  .. ....  . ..  .    .. .  .. ...  . ..  .   .. .  .. ...  . ..  .   .. .  .. ...  . ..  .   ... .  .. ...   ...   .   ...   .... ..   ...    .  ...   ..... .   ...     . ...   ...... .   .. .     . ....  .. .....    . .  .     ....  .... ....    .    .    .... ..... .. .    .     ... . .... ...    . .   .   .....  .... ..     ..    .  ..... . .... .      ..    ... .... .. ..    .   .   . .... ..... . .     . "   .. .... .....  .      .   . ......... . .          . ........... .           . ..........           ...........   . ..  .  ..  . .. . ........      
TABLE OF CONTENTS
EXECUTIVE SUMMARY 
INTRODUCTION. 
PURPOSE. 
BACKGROUND
SCOPE
METHODOLOGY. 
FINDINGS. 
The use of clinical laboratory tests Is rising 
....................... 4
Many factors influence use of laboratory tests. 
Influences on physician ordering decisions
........................................... 5
Market In fluences 
Medicare s fee-for-service system. 
Research, studies and expert 
opinions. 
The sheer volume and small dollar value of laboratory 
services renders the current pre and post payment review 
.............................................. 7
systems ineffective. 
Fragmentation, upcoding, test groupings and other 
billing Idiosyncracies 
Medical necessity
............................................. 9
Carrier revieJ1 
Current Initiatives do not fully address laboratory use. . . 
Direct billing and other restrictions on who can bil  ................ 10 
Deductible and coinsurance 
Preventing physician ownership of 
laboratories. 
Competitive bidding. 
Practice guidelines
Volume Performance Standards
Rollng laboratory reimbursement Into office visit
payments is a promising strategy for curbing over use
Strengths of approach. 
Incentives to control 
use. 
Lower administrative 
costs. 
Issues for further exploration 
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 
NOTES 
EN 
APPENDIX A: Legislative History and Its Effects on laboratories  ' ,,
INTRODUCTION 
PURPOSE 
This report examines forces that affect the use of diagnostic clinical laboratory services and 
explores alternative payment approaches. 
BACKGROUND 
By the end of 1986, Medicare and its beneficiares were paying 45 percent more for Par B 
1 Despite a freeze on physician payments, adoption of 
services than they had 3 years before. 
fee schedules, reductions in payments for certin services and other measures which should 
have controlled the growth of Par B expenditures, Medicare expenditures continue to grow. 
From 1975 to 1987 the rate of increase in Medicare payments per beneficiar for physician 
services was  ... almost twice the compound annual rate of growth in the per capita gross 
national product and almost four times as much as the increase in Federa domestic 
spen mg.... 
A substantial portion of the growth in Medicare Par B expenditures is attrbuted to services 
ordered by physicians. In the period between 1985 and 1989, physician initiated services 
grew at a faster rate than overall Par B expenditures. Increases in volume and intensity of 
services accounted for roughly half of the increase in Medicare payments to. physicians. 
Volume increases reflect both increases in use and the fragmented biling of services that were 
4 Nowhere has 
formerly bundled and biled together. increased use and fragmentation of 
services been more apparent than in the area of clinical laboratory services. Payments for 
laboratory services more than doubled between 1985 and 1989. 
Both indigenous and exogenous influences have exacerbated the growth of clinical laboratory 
advances, spread of 
services. The exogenous factors most often cited include technological 
health insurance, oversupply of physicians, aging of the population, and malpractice liability, 
as well as the implementation of the Prospective Payment System (PPS) for Medicare hospital 
inpatient services. Many aricles have been wrtten about how these exogenous factors have 
influenced the growth of Par B services including laboratory services. This repon wil only 
look at the indigenous causes and market forces unique to the laboratory environment. Only 
these indigenous causes can explain the inordinate growth which has occurred in the use of 
laboratory services. 
Over the years, the Health Care Financing Administration (HCFA) made several attempts to 
control the growth of Medicare Part B expenditures for clinical laboratory services. The 
HCFA' s approach relied primarly on voluntar disclosure of the actual charge incurred in 
securing laboratory work, on carer scrutiny of laboratory claims, and on capping the amount 
paid per laboratory test. With the passage of the Omnibus Budget Reconciliation Act of 1989 
(OBRA 1989), attention has now focused on controllng utilzation. It includes the relative 
value scale (RVS) for physician payment; Medicare volume performance standards;  effectiveness and outcomes research to develop practice guidelines; prohibition of physician 
referrals 
referrals to most laboratories in which they have ownership; and, restrctions on 
among different clinical laboratories. It is in the context of these recent changes that this 
report examines factors that encourage utilzation of laboratory services, and considers varous 
solutions to control utilization. 
SCOPE 
This study looks at varous forces which affect the use of laboratory services. It also examnes 
progr 
the ability of the Medicare  to effectively enforce policies relating to these services 
and the environment in which they ar secured. It does not include Medicare data on services 
provided to registered hospital outpatients, hospita inpatients and enrollees of health 
maintenance organizations. The report involves only non-hospita diagnostic clinical 
laboratory services. 
METHODOLOGY 
aricles, 
We compiled information and data regarding clinical laboratory services from journal 
previous government and private sector studies, Congrssional testiony and from HCFA' 
Par B Medicare Annual Data (BMAD) fies. We also obtained information on payment 
Medicar carers. 
policies and utilization review procedures from 21 randomly selected 
Seven national associations, representing the medical and laboratory communities, also 
provided their perspectives. Additional information was obtaned from the working files of 
previously published Offce of Inspector General studies of physician offce laboratories 
arngements. 
(POLs) and physician financial  "'" 
....... ......  ".............'"..............,............',..
........-.....,.......... ...................................
FINDINGS
Clinical Laboratory Tests Is Rising.
FINDING 1: The Use Of 
Of the 19 bilion diagnostic tests performed each year on Americans, a large ponion are
accounted for $11 bilion in annual
c1inicallaboratory services. In 1982, laboratory testing 
6 By the end of 
medical car costs. 1986, the amount of money spent on laboratory testing had
Current estimates place the yearly laboratory market at
grown to $20 billon. 
$30 bilion.
Medicare annual expenditures for laboratory services parallels the growth in laboratory
expenditures experienced by the nation as a whole. Medicar expenditures for Par B
laboratory services have continued to escalate despite adoption of a fee schedule method of
reimbursement and reductions in test payment amounts. Between 1984 and 1988, Medicare 
Par B payments for laboratory services (excluding hospital outpatient laboratory services) 
have more than doubled. In 1983, payments totaled approximately $800 millon. By 1988,
payments had risen to approximately $1.9 billon and are expected to exceed $2.5 bilion in
1990. This growth in Medicare expenditures for laboratory services is not accounted for by
increased Par B enrollment or by inflation, but is due to an increase in the volume of
laboratory services and biling idiosyncracies inherent in the curnt fee-for-service (FS)
system.
FIGURE 1
Growth In Laboratory Expenditures Despite Reductions In Payment
90 Billon 
What Medicare Actually Paid 
30 Bilion 
.....,......,.........".,'" .1,14,BiHion'."" 
a:  744 Milion
698 Million
, , , , . . . . Wh'  Medicare 'Expecied to 'Pay' . . . . . . . . . . . ' . . . . . . . . . 
(Based on Fee Scedule Reducions)
198  1984  1985  198  1987  198
Figure 1 ilustrates the escalation that has occurrd in Medicare expenditurs for clinical
laboratory services from 1983 through 1988. The bottom line represents projected annual
expenditure levels resulting from adoption of fee schedules and subsequent increases and the growth in the 
reductions in payment levels. The bottom line has been adjusted to reflect 
line, in Figure 1, shows what Medicare has actually paid for 
beneficiar population. The top 
grph clearly 
clinical laboratory services since adoption of the fee schedules in 1984. The 
expenditurs for 
demonstrates that adoption of the fee schedule did not reduce Medicare 
laboratory services or slow the rate of growth. 
In addition to the growth in expenditures, the volume of laboratory services paid by the 
progr  beneficiar 
Medicare  has also increased disproportonate to the increase in the 
population, from approximately 116 millon services to nearly 155 millon services between 
1985 and 1988. This growth in the volume of laboratory services is consistent with the 
effects predicted in a 1982 study conducted for HCFA. That study concluded that reductions 
in payment levels are often offset by increased volume. 
FINDING 2: Many Factors Influence Use Of Laboratory Service 
Physician ordering decisions are affected by the patent' s condition and other factors. 
Once a patient decides to seek medical care, subsequent decisions about medical services are 
almost entirely in the hands of the physician. The kinds and intensity of services that the 
patient receives are usually out of the patient s contro1. 
Medicare and other insurers reinforce the control of the physician in procuring clinical 
laboratory services by paying only for tests which ar ordered by a physician and which the 
l0 Medicar and most other insurers wil 
physician has determined are medically necessar. 
not pay for patient initiated tests, routine testig and tests which are not medically indicated. 
carng for 
There are many reasons which explain why physicians order laboratory tests when 
their patients. Expens, who have studied physician behavior, repon that the most common 
reasons to explain why physicians order laboratory tests are: to reduce uncertainty in their 
l1 to search for as 
mptomatic disease, to monitor 
diagnosis and management of a patient, 
Other reasons include physician 
chronic conditions and to valdate previous test findings. 
need to be complete, lack of experience, poor test inte  retation, routine screening, ordering 
packaged clusters of tests and fear of malpractice suits. 3 
One study suggests that individual physician test-ordering behavior often becomes routinized 
. over time. 14 This individual behavior has hindered the development of a consensus, among
15 This lack 
physicians and professional associations, over acceptable test ordering protocols. 
of consensus in test ordering behavior has been observed by researchers, who compared use of
16, 17

laboratory services in different practice settings and under different fi2nan2cial, incentives. 
Other researchers have focused on the varability of tests ordered for a s  ecific diagnosis and
20,21,
the absence of correlation with improved patient outcome. 18,19,  ...
increased use of tests.
The market impinges on ordering decisions in ways that encourage 
The market for laboratory services can be characterized by intense competition for a finite
tests to succeed
number of patients. Laboratories need a certain minimum volume of 
financially. To achieve this minimum test volume, a laboratory needs a predictable volume of
patient referrals. Because referrs ar a function of tests ordered by physicians, laboratories
ways to ensure that physicians wil refer patients and test specimens to their 
tr to find 
laboratory and not another. 
where to have
This competitive market impinges on two aspects of the test ordering decision: 
the test run, and how much testing to order. Both aspects are afected by those who stand to 
profit from the test ordering decision, which can include the physician ordering the test as well 
as the laboratory that runs the test.
In vying for referrals, laboratories may offer volume discounts and customized packages of 
tests to gain a competitive edge. Discounts are based upon expected volume of referrls and 
other cost and competitive factors presented by each client. They often may have little or no 
relationship to the actual cost incurred in performng a test. "  (A) laboratory may grant a 
discount on one or more tests to a client if it believes that the client wil also order enough
24 Such discounts are
higher margin tests to make an overall account suffciently profitable.
possible because the discount price of a laboratory test is often significantly different from the 
amount paid by Medicar and other third pary insurers. On the average, Medicare 
reimbursement rates ar nearly tWice as much as the discount amount paid by physicians and 
other laboratories for tests. When groups of tests are purchased, Medicar pays even more. 
A laboratory wil also offer customized test packages as a way of attrcting patient referrals by 
giving the test orderer "personalized" service, tailored to the needs of that physician s practice. 
These customized groupings of tests are often sold to wholesale clients (physicians, hospitals 
bil 
and other laboratories) at considerable discount. Many wholesale clients subsequently 
their patients and insurers, such as Medicare, for more money than they actually paid. A 1988 
survey found that the average mark-up on purchased laboratory work was 139 percent. The 
same survey found that sixteen percent of the surveyed physicians charged patients and 
insurers more than three times the price charged to them by the laboratories that actually 
conducted the tests. 
In addition to discounts, business practices which streamline day-to-day operations, facilitate 
rapid turn around time, enable better service and provide convenience to the patient are often 
used to gain a competitive edge. It is not uncommon for physicians and laboratories to share 
offce
telephones, computer hardware and software, laboratOry and other medical equipment, 
27 Like other businesses, the sellers and 
supplies, management services and personnel. 
Under 
purchasers of laboratory services, engage in activities designed to promote goodwill. 
existing Medicare law, these business practices may be considered inducements for patient 
referrals, and therefore constred as ilegal.  furer 
The market competition for test volume and patient referrals is  complicated if the test
orderer stands to profit from where the test is performed. Havin interest in a
28.2f  Ionw nership 
laboratory can signifcantly increase a physician s revenues.  response to this potential 
new source of revenue, many physicians have established laboratories in their offces or 
expanded their existing POL testing capabilities. Others, practicing independently of one 
another, have pooled their resources to establish joint ventur or collaborative laboratories. 
In some aras of the countr, independent and hospita laboratories have entered into joint 
ventures with physicians to retain their market shar. Having physicians as parers not only 
makes joint ventures competitive but also increases their laboratory profitabilty by assuring a 
suffcient patient base.
Having a financial interest in a laboratory which performs tests can afect a physician
decision to order tests. A recent Office of Inspector General report to Congress established 
that at least 25 percent of the nearly 4500 independent clinical laboratories (lCLs) are owned
in whole or in par by referrng physicians. The same report found that Medicare "(p)atients 
of referrng physicians who own or invest in ICLs received 45 percent more clinical
Medicar patients....(And) 34 percent more services from
laboratory services than al 
31 Laboratory owners and
independent clinical laboratories than all Medicar patients.... 
parcipants in laboratory joint business ventures are aware that the financial success of their 
laboratory depends on the number of patients referrd by parers in the laboratory. 
Medicare s FFS reimbursement system financially rewards increased use of laboratory tests.
Under the FFS system, increased use of medical services is rewarded. The FFS
reimbursement system pays for medically necessar services provided to a Medicare
are provided by physicians and others who then submit bils itemizing
beneficiar. Services 
the services they have provided to Medicare s fiscal agents for payment. This means that the
more services are ordered, rendered and biled, the more Medicare pays to the biler. This
reward system intensifies competition for the finite pool of referrs needed to succeed
financially.
For nearly 2 decades, HCFA has sought to reduce Medicare expenditus for clinical 
laboratOry services by bringing Medicare reimbursement more in line with the wholesale 
prices offered to physicians and other laboratories. The original approach to resolve the 
voluntar disclosure of 
discrepancy between payment levels and wholesale prices relied on 
the actual charge incurred in securing laboratory work and on carer scrtiny of laboratory 
claims. When volunta efforts proved ineffective, a series of laws (listed in appendi A) 
were enacted to reduce expenditures by controlling the amount Medicare p  d for laboratory
increases which not only 
services. These attempts to control payment resulted in volume 
offset anticipated savings by also resulted in increased expenditures. 
Furthermore, in the DEFRA 1984 legislation HCFA eliminated the beneficiar deductible and 
coinsurance with regard to laboratory services, softening its attempts to curb laboratory 
This resulted in Medicare 
expenditures by reducing the financial burden on the beneficiares. 
picking up additional costs that were once the responsibility of the beneficiar. Reinstatement  of deductibles and coinsurance for laboratory services is being considered. Funher discussion 
about coinsurance for laboratOry services are included in finding 4.
Researchers and our respondents confinn that many factors influence the increased use of
laboratory tests.
Articles from newspapers and academic/professional journals and government reports have
also examined the overuse of laboratory services. Recently published findings of the Blue
Cross and Blue Shield Association and the American College of Ph"  s2ic ians suggest that
Many researchers who 
20-60 percent (of clinical laboratory testing) may be unnecessar. 
have studied physician use of laboratory services have noted overutilization of laboratory 
services as par of an overall increase in physician services. Others have analyzed the problem 
of excessive test ordering by looking at the incentives inherent in the medical and payment 
34,35,36,37 , 38, 
systems. 33,
In our discussions with carers, 14 of 21 felt that physicians ordered too many tests, although 
they disagreed over the extent of the problem. The laboratory and medical associations we 
contacted acknowledged that the use of laboratory services has increased and that some of this 
increase might be attrbutable to routine screening of patients. They felt that laboratory tests 
are relatively inexpensive compared to other alternatives for diagnosing a patient s medical 
status. They strenuously objected, however, to studies which indicated that much of the 
excessive. 
laboratory work being ordered was medically unnecessar or.
According to the people we interviewed and joural anicles in this area, a varety 
exogenous factors influence the growth in laboratory services, including the aging of the 
population, the oversupply of doctors, the presence of health insurance and other factOrs. A 
more specific factor cited was increasing physician dependence on "objective" measures,
40 Growth in testing also suggests
rather than professional judgment, in making diagnoses.
increased documentation of the diagnostic/treatment process as a par of "defensive 
medicine." Of the objective measures or documentation sought by physicians, low-cost, 
readily avaiable items such as laboratory services contrbute a  health care 
grater share of 
costs than expensive items like magnetic resonance imaging, CAT scans, etc. 
FINDING 3: The Sheer Volume And Small Dollar Value Of Laboratory Services 
Render The Current Pre And Post Payment Review Systems 
Ineffective.
The sheer volume of laboratory services and the diversity of bilers present logistical problems 
for carer monitoring efforts. In 1988 carers paid for nearly 148 millon laboratory services 
at an average payment of $12.46 per service. All 21 carers felt that increasing their efforts to 
police laboratory services would increase their administrative cost disproportionate to any
savings that might be realized. The accuracy of payments made for laboratory services depends to a grat extent on the ability 
of Medicare carers to identify suspect services and intervene in their payment. Carers are 
authorized to pay only for covered services furished to Medicare beneficiares. The services 
furished in the most appropriate setting and 
must be reasonable and medically necessar, 
42 Carers claim 
reflect the services rendered. that their efforts to police 
biled accurately to 
laboratory services do not give them suffcient retur to cover expenses. In 1988, clinical
Medcar Par B expenditurs
laboratory services represented approximately 5 percent of total 
but accounted for nearly 25 percent of the Medicare Par B service volume.
Fragmentation, upcoding, test groupings and other biling idosyncracies hinder accurate 
claim review and cause erroneous payments. 
Carer systems are vulnerable to laboratory claims information which has been manipulated
to maximize reimbursement. Fragmented biling, customized profies and upcodig or 
procedure inflation ar common methods employed to manipulate the FFS system. Although 
HCFA and the carers recognize that these vulnerabilties and others exist and have attempted 
to safeguard their clais processing systems, we found wide varation in carers 
interpretations of the problems and in their abilty to detect and intervene when claims
information has been manipulated.
Fragmentation is a common problem carers encounter when reviewing claims for clinical 
laboratory services. It is common practice for physicians to order the tests they use most often 
in the form of packages which have been customized and talored for their individual needs.
Medicare would like to see these packages biled and paid the way they were purchased - as a
single item. 
bil packages as a single procedure
Bilers of laboratory services argue that they ar unable to  43 Their 
code because no single code exists which accurately describes the package.
assessment is correct. Few Medicare procedure codes exist which accurately describe the
packages being ordered. This situation exists because the packages being ordered have been
customized for individual physician needs. It is unlikely that Medicare could ever develop
customized packages of laboratory 
enough procedure codes to accurately describe al of these 
services.
When the OIG looked at laboratory procedures, 37 percent of the line items biled to Medicare 
Medicar as 
were found to have been ordered by physicians as packaged tests defined by 
44 Yet, HCFA's BMAD 
profies. fies do not list a single profie procedur code (codes 80050 
through 80099) in the top 60 procedures biled to Medicar from 1985 to 1987. In 1987, only 
2 millon laboratory  Using data from 
services biled to Medicare were identified as profies. 
this previous study, we project that more than 55 millon laboratory services should have been 
biled and paid as profies.
Another billng practice which results in erroneous laboratory payments is upcoding or
.45 Upcoding involves biling for a more complex service or procedure
procedure inflation.'
than was actually performed.46 The Medicare progr is vulnerable to laboratory service upcoding because as many respondents told us, multiple procedure codes exist which define 
essentially the same laboratory procedures. As new methods are introduced, more procedure 
codes are added often with higher reimbursement rates than the older methods. The number 
test enables physicians and laboratories to select codes 
of biling codes available to describe a 
which will result in the highest payment. Upcoding is not easily detected by screens and often 
requires in-depth review of records by a trained laboratory technician. 
The medical necessity of laboratory services is difficult to determine. 
The Medicare carers must deny or adjust payment for claims they determne to be medically 
47 Unlike claims for 
unnecessar. primar care, carers have a diffcult time determning the 
medical necessity of laboratory services because no consensus exists concerning the 
appropriateness and intensity of laboratory services for a given medical condition or 
48 Individual physician test ordering behavior has continued for so long that carer 
complaint.
data analysis no longer provides meaningful insight into acceptable test orderig protocols, 
but merely shows the lack of consensus which exists among physicians concerning the 
medical necessity of laboratory tests. 
Determning medical necessity is funher complicated by the complex claim development 
to arve at many medical necessity decisions. It is not 
which carers must undertake 
uncommon for a carer to receive bils for laboratory services from several different 
laboratories for a single patient s episode of ilness. For a single episode of patient car a 
from a POL and from one or more ICLs and/or hospital 
carer could receive a bil for services 
operated laboratories (HOLs). The cost of ensuring that each individual test provided was 
medically necessar and not in excess of the patient s needs is a tremendous burden on the 
carers which, given the volume of services, appears unrealistic. 
When carers question the medical necessity of laboratory services provided to a patient, they 
not only must validate that each laboratory involved performed the work they biled, but also 
that the patient s medical record establishes that the laboratory tests performed were medically 
necessar. If a laboratory service is determined to be unnecessar, the carer must recover the 
payment made. Under the current system, payment is made to the entity (physician or 
laboratory) which performed the actual tests. When the carer determines that a laboratory 
service was not medically indicated or that the services were in excess of the patient s need, 
recovery is made from the biler(s). The ICLs and HOLs argue that they should not be 
penalized for following physician orders. They argue that Medicare s recovery of payments 
often leaves them without any means to collect payment for work they have performed. 
Carrier reviews of laboratory claims are often reversed on appeaL 
All of the carers we spoke to expressed a sense of fUtility concerning the effectiveness of 
much of the work they have done in policing laboratory claims. Even when they deny claims 
49 Carers claim 
for payment, an increasing number are appealed, reprocessed and paid. that 
the reprocessing of claims lost on appeal further increases administrative costs associated with 
laboratory services. Some carers feel that had they paid the original claim, the overall cost  to the Medicar program would have been less than the expenses they incurred in developing 
a service for denial, preparg for the appeal, and reprocessing cases lost on appeal. 
All of the carers with whom we spoke agred that the costs associated with policing 
laboratory claims exceed the money that would be recovered or saved if payment was denied.
At a time when carer budgets are being restraied, it appears unralistic to expect them to
police and correct the problems associated with laboratory services, especially in an
environment where entrepreneurs identify vulnerabilties in carer systems and ogenly market
strategies to tae advantage of those vulnerabilties to maximize reimbursement.  In the case
of laboratory services, the cost of policing the industr and the claims it produces is unralistic
and probably would cost more than the value of the services biled.
Initiatives Do Not Fully Address Laboratory Use. 
FINDING 4: Current 
Curent Medicare initiatives to control use would prohibit physician referrs to most 
laboratories in which they have ownership, restrct referrals among diferent clinical 
laboratories and establish volume performance standards. Other proposals would reinstate
coinsurance for laboratory services, ban physician ownership of laboratories entily, require
that laboratory services be procured through competitive bidding or use practice guidelines to
control use. These approaches may not be adequate because the FFS system which promotes
increased use remains in effect. Even the competitive bid proposals allow some aspect of the
FFS system to remain. 
Direct biling initiatives and other restrctions on who can bil for laboratory services do not
alter incentives that encourage use.
Direct biling initiatives place restrctions on who can bil Medicar for a clinical laboratory 
service. S  ce .1984 and the passage of the Deficit Reduction Act (DEFRA 1984), physicians 
and laboratories can bil only for work they actually perform. The DEFRA 1984 banned 
physicians from biling Medicare for work they purchased from independent and hospital 
laboratories. The DEFRA 1984 did not prohibit laboratories from referrng work to other 
laboratories and billng for the referred work. 
The DEFRA 1984 clearly affected laboratory services. Some physicians responded by 
opening their own laboratories or enterig into joint ventues with established ICLs and 
HOLs. Some of the new laboratories were merely "shells" and performed little or no actual 
physicians circumvented the intent of 
testing. Some arangements between ICLslHOLs and 
the law by simply exchanging regulated Medicare and Medicaid patient testing for 
nonregulated private pay patient testing. Some physicians received reduced prices from 
ICLs/HOLs on their nonregulated private pay patients if they referrd their regulated 
Medicare/Medicaid patients to the ICLIHOL. 
argements established
The exact number of laboratories, joint ventures and other creative 
in response to DEFRA 1984 is unknown. The number of POLs established following the
enactment of DEFRA 1984 is unknown, because POLs ar not subject. to regulation until 1992. The number of physicianlHOL joint ventures is also unknown. The only available data 
shows that by 1988 physicians owned, or were involved in joint ventures with nearly 25 
percent of the 4500 ICLs certified by Medicare. "Patients of referrg physicians who own or 
invest in ICLs received 45 percent more clinical laboratory services than all Medicare 
pauents.... " 51

In 1989, Congress passed OBRA 1989 which placed further restrctions on who can bil for 
laboratory services. The OBRA 1989 legislation bans most physicians from referrng their 
Medicare patients to laboratories that they own, or in which they have a financial interest. 
Laboratories ar no longer permtted to bil for work they have purchased from other 
laboratories unless they perform in-house 70 percent or more of the work they bill. 
Four major diffculties remain with direct billng initiatives. The utilization review problems 
inherent in the FFS system are unchanged. Creative arangements to secure a predictable 
volume of patient referrals wil continue to flourish and may even be encouraged as they were 
by earlier legislation. Policing these argements wil continue to be diffcult and time 
consuming. Finally, basic incentives afecting physician ordering decisions and which result 
in increased use of laboratory services wil stil exist. 
Reinstatement of the deductible and coinsurance for laboratory services may reduce 
Medicare laboratory payments. However, by itself its effects on utilization are uncertain 
As mentioned in finding 2, reinstatement of deductibles and coinsurace for laboratory 
services has been proposed. Such a move may reduce the Medicare outlays by shifting a 
ponion of expenditures back to the beneficiar. If utilization can be controlled, savings in 
Federal outlays could exceed several bilion dollars over a 5-year period. 
Deductibles and coinsurance would also place an increased administrative burden on those 
paperwork and personnel time would be requird for 
billng laboratory services. Additional 
patient billng and collection. The average laboratory charge is relatively inexpensive (less 
than $12.50 based on 1988 Medicare data), yielding an average coinsurance amount of about 
$2.50. The cost of collecting the coinsurance could conceivably equal or exceed this amount, 
but in any case could be considered disproponionately large compared to the amounts to be 
collected. 
Some believe that giving the beneficiar a  stae in laboratory expenditures 
greater financial 
may encourage them to more actively pancipate in test orderig decisions, thus affecting 
utilization. Cost sharng may motivate beneficiares to discuss the potential costs and benefits 
of cenan laboratory tests with their physicians. On the other hand, it is,the physician, not the 
patient or the laboratory, who is most influential on the number and kinds of tests to order. 
The effectiveness of deductibles and coinsurance in controllng utilization is most evident in 
those aras where the patient has more control over the decision, such as whether to visit the 
physician in the first place. We believe there is a strtegy which uses deductibles and  coinsurance where they wil be most effective, in the beneficiar s decision to access the 
health care system. It is described in finding 5. 
Initiatives which would prevent physician ownership of any laboratory may adversely affect
access to laboratory services.
Some laboratorians suggest that Medicar could control escalating laboratory use by banning
physician ownership of any laboratory. These initiatives would either ban physician
laboratory ownership entirly or prevent payments for laboratory work performed by
physicians and businesses with physician ownership interest. To be effective, initiatives
which prohibit physician ownership would need to extend to all laboratory work and not
simply apply to tests performed for Medicare and Medcaid patients. Any initiative which 
argements 
does not apply to all patients would, in al lielihoo, exacerbate  between ICLs, 
HOLs and physicians. The complexities of an almost infinite number of arangements would 
make it diffcult, if not impossible, to determne the legalty of each specific arangement. 
The only viable solution would be to remove the financial incentive from the physician
decision. Removing the financial incentive could only be done by prohibiting physician
ownership and financial interest in any laboratory, including POLs. This initiative could hun
patient access to laboratory services in rual aras where POLs and physician owned ICLs
may be the main or only source of services.
Competitive bidding initiatives focus on cost but raise questions on quality of services and 
may not control use. 
The HCFA has considered using competitive bid to procur laboratory tests for Medicare 
patients. The HCFA competitive bid initiatives stem from the reponed success of competitive 
bidding in the State of Nevada. 
The State of Nevada established a sole source competitive bid project to secure laboratory
testing for Medicaid patients in that State. Two laboratories perform all the testing ordered for 
Medicaid patients. All other laboratories (ICLs, POLs and HOLs) are foreclosed from
providing covered laboratory services for Medicaid patients. According to HCFA, the Nevada
sole source competitive bid project succeeded in reducing the number of laboratory tests
conducted on Medicaid patients by nearly 50 percent.
The HCFA competitive bidding initiatives differ considerably from that used by Nevada. The 
number of laboratories allowed to perform tests on Medicar patients is not restrcted as 
severely as in the Nevada program. Increasing the number of laboratory testing sites greatly 
reduces the economies brought about by increased volume. The Medicare models also allow 
physicians to get paid for tests they perform in-house. This de facto exemption of POLs puts 
roughly half of all Medicar Pan B laboratory services outside the constrnts of the 
competitive bid proposals. Any proposal which does not apply to about half of the relevant 
services is unlikely to achieve substantial savings for Medicare.  Both the laboratory and physician community expressed concern that cqmpetitive bidding 
har 
might compromise laboratory test qualty and  patients. They felt competitive bidding 
might encourge laboratories to cut corners and consequently compromise patient care. 
Practice guidelines may improve medical necessity determinations but wil not alter the 
other problems inherent in the FFS system. 
The medical associations with whom we spoke suggested that Medicar controllabora,tory use 
by using clinical practice guidelines. They suggest that clinical practice guidelines being 
developed be used by Medicare to determne the medical necessity of laboratory services. 
Practice guidelines should be developed because they could improve the quality of treatment 
provided to patients by reducing physician uncertnty. Used as a baseline, the agred upon 
parameters for medical treatment may also help to reduce the risk and costs associated with 
malpractice suits against physicians. 
Unless practice guidelines are combined with additional safeguards, they wil do little 
corrct overuse. We suppon establishing practice guidelines because they wil be useful 
identifying under-treatment. However, most guidelines set a floor but not a ceiling, and 
consequently, have little or no effect on the incentives in the FFS system which lead to 
excessive use of services. 
Volume Performance Standards (VPS) may lower costs, but-hey may not affect individual 
treatment decisions. 
The VPS establish aggregate payment and volume tagets for Medicare Par B physician 
Par 
services and payments including clinical laboratory services. Future growth in Medicare 
B payments to physicians wil be related to past expenditures for physician services and to the 
volume of physician services provided to patients. If physicians, as a whole, exceed the 
targets they would get little or no update in their fees the following year. If physicians meet 
the target, they would get a full fee update. 
Critics of VPS claim that VPS aggrgate targets do not provide incentives which wil alter 
continue to increase the 
individual physician behavior. Service intensive physicians could 
intensity of services they provide, penalizing physicians whose practice of medicine is more 
conservative. 
The VPS represent an innovative approach to control total costs. The challenge remains to 
provide incentives for controllng individual use of services. We believe that a strategy exists 
that wil meet this challenge at the level of individual behavior and is compatible with and 
supponive of VPS.  FINDING 5: Rollng Laboratory Reimbursement Into Office Visit Payments Is 
A Promising Strategy To Ensure Appropriate Use. 
The use of laboratory roll ins (LRIs) appear to be a promising strtegy for curbing the use of 
laboratory services. Under LRIs, reimburement for individual laboratory tests would no 
progr. 
longer be made by the Medicare  Clinical laboratory reimbursement would be rolled 
into Medicare s recognized charge for physician office visits and trated as an 
indistiguishable par of a physician offce visit. Medcar would no longer process any 
800 
claims for diagnostic clinical laboratory services (HCPC proedure codes  though 
89999). Reimburement for laboratory services would be a fixed amount added to the 
recognized charge for physician outpatient offce visits (HCPC procedur codes in the 90000 
series excluding inpatient services). The new recognizd charge (which includes the LRI) for 
physician outpatient offce visits would contiue to be subject to deductible and coinsurance. 
To ilustrte how a LRI might be calculated, we used the 1988 BMA file and redistrbuted 
84 bilion Medicar allowed for laboratory services across paid physician offce visits 
the $1. 
(90000 series procedur codes). This calculation resulted in a base LRI of$13.50 per offce 
visit ($1.84 billion Medicare allowed/1.37 millon offce visits). 
To determe the potential impact on physician specialties, we compard the $13.50 LRI with 
each specialty s average reimbursement for laboratory services under the FFS system. 
Allowed amounts and service volume for clinical laboratory services biled by pathologists, 
osteopathic (DO) pathologists and nonphysician specialties such as ICLs, were distrbuted to 
all physician specialties based on the proporton of services each physician specialty ordered 
from an outside source. To do this we isolated patients who were seen by a single physician in 
1988. This enabled us to obtain a complete picture of al laboratory services a patient 
received, no matter who biled. From this initial step we were able to calculate the number of 
POL services provided by each specialty to each patient in the sample. We were also able to 
calculate the number of services each specialst ordered from an outside source. The same 
method was used to determne the dollar value of tests. 
The financial impact that a $13.50 base LRI would have on physicians is shown in the table 
on the following page. The last two columns of the table compares the average laboratory 
payment for each office visit under the FFS system with a base LRI of $13.50. The last 
column in the table indicates whether the physicians in each specialty are likely to paid more 
or less than they were under the FFS system.  ---------....-------------..-----------------------..----
....-..---------
Table 1

Effect of $13.50 base  LRI  on Physician Specialties

FF 
Data 
Total  Avg. OV  Totall  Averag  Totall  Average 
Office  Per Bene  Lab  Lab Svcs.  Paid  Lab Paid/OV  +/- 2 
Specialties  Visits  Servce  Per Visit  For Lab  Under 
01 General Practice  164397  171047  1.04  $1,994 179  $12.13 
02 General Surgery  59213  2.25  44058  192  $11. 
03 Allergy  4873  1993  603  $ 5. 
04 ENT  30316  1.75  9109  156,879  $ 5. 
05 Anesthesiology  1720  2.04  148  17,574  $10. 
06 Cardiovascular Diseae  68718  2.82  61454  $ 770 907  $11.22 
07 Dermatology  3109  2.05  19163  $ 476,851  $15. 
08 Family Practice  2033692  2498  1.22  $2,969 973  $14. 
09 Gynecology (DO Only)  158  1.93  121  $10. 
10 Gastroenterology  19166  2.04  20824  1.09  $ 279,981  $14. 
11 Internal Medicine  414798  581949  1.40  927 411  $16. 
12 Manipulative Therapy (DO)  2719  2775  1.02  614  $11. 
13 Neurology  20595  1020  143 340  $ 6. 
14 Neurological Surgery  4734  1.61  1628  20,450  $ 432 
15 Obstetrics  $ 1.44 
16 OB-Gynecology  15791  1.59  14780  162,037  $10. 
17 EENT (DO only)  776  1.69  829  1.07  011  $12. 
18 Ophthalmology  51108  19544  0.3  259 173  $ 5. 
19 Oral Surgery  490  1.49  467  965  $1830 
20 Orthopedic Surgery  44331  2.10  1363  031  198,422  $ 4. 
23 Peripheral Vascular (DO)  145  162  $ 8. 
24 Plastic Surgery  3185  2035  851  $17.54 
25 Physical Medicine  4545  1212  235  $ 4. 
26 Psychiatry  5171  5731  79,640  $15.40 
28 Proctology  1195  1.6  696  0.58  621  $ 7. 
29 Pulmonary Disease  18896  14146  194,073  $10. 
39,3 
30 Radiology  5403  1.71  2810  0.52  $ 7. 
31 Radiology (DO)  394  123  12,169  $30. 
32 Radiation Therapy  221  158  907  $ 8. 
33 Thoracic Surgery  6529  1.64  2805  0.43  938  $ 6. 
34 Urology  42338  6380  1.1  $ 618,795  $14. 
36 Nuclear Medicine  157  1.91  147  422  $28. 
37 Pediatrics  2820  2926  34,838  $12. 
38 Geriatrics  429  1.4  832  $1360 
39 Nephrology  8042  10162  126 568  $15. 
40 Hand Surgery  240  1.95  240  $ 5. 
41 Optometry  4085  1.40  2242  28,757  $ 7. 
48 Podiatry  28746  13134  173 675  $ 6. 
49 Misc. Physician  1779  4568  2.57  81,513  $45. 
70 Clinic or Group Practice  91362  12352  1.36  $1,706 841  $18. 
88 Unknown  1.38  $ 6. 
99 Unknown Physician  259  1122  15,597  $60. 
Source:  One percent sample of the  1988  BMA files 
Includes laboratory services biled by non-physician specialties such as independent clinical laboratories which were distrbuted

among the physician specialties.  This was done because only physicians are reimbursed using LRI
This column represents whether a physician specialty, on average, would be paid more or less under LRI than under the 
fee-fo
service system.
 ...
Strengths of this approach. 
There appear to be little disagrement among researchers and expens in health economics 
that "Effective cost control can be achieved only by controlling prices and the number of 
52 
services simultaeously.... ,, Studies have explored the possibility of Medicar controllng 
the cost of some services "  by redefmin  the payment unit from a narow procedure to a 
" 3 
more comprehensive bundle of services.
Rollng laboratory reimbursement into Medicar s reognize charge for an office visit would 
redefine the offce visit payment unit from a narow procedur to a more comprehensive 
package of services. The resulting increase in offce visit charges wil incrase patient cost 
sharng through the effect of deductibles and coinsurance, and may affect their decision to 
55 Funhermore, carers have 
told us that it is easier to evaluate the 
seek health car. 
medical necessity of office visits compard to the time and effort needed to make such 
decision on individual laboratory tests. 
This approach to paying for clinical laboratory services is not without precedent. HMOs and 
the Diagnostic Related Groups to reimburse hospitals for inpatient car ar the most visible 
examples. Other less visible packages include global surgical fees and demonstration pr  ects 
involving high volume procedures such as cataract and coronar arery bypass surgeries. 
LRIs would provide physicians with appropriate incentives to control use 
When the laboratory and medical professional associations were asked why laboratory use has 
increased they mentioned the need to reduce uncertnty, searching for asymptomatic disease, 
need to be complete and many of the other factors documented by researchers. Everyone 
mentioned the rise in malpractice litigation as a primar cause of increased c1inicallaboratory 
use. 
Everyone we spoke to agrees that the use of laboratory procedures is liely to decline 
Medicare s reimbursement for them is combined into a more comprehensive physician offce 
visit package. Many people expressed concern that physicians would severely curail their use 
of clinical laboratory services resulting is poor quality of patient care. While we agree that 
laboratory use wil decline, we find the argument that the decline would jeopardize the qualty 
of patient care to be unlikely. The adoption of LRIs wil not change al the forces that have 
caused the increased use of laboratory services. In fact some, like the threat of malpractice, 
wil work in conjunction with LRIs to prevent the possibilty of under-tratment. It appears 
unlikely that most physicians would risk malpractice litigation for the smal sums of money 
needed to secure laboratory work. 
The possibilty that test use would decline to such low levels as to impai the quality of patient 
care is furter mitigated by the development of practice guidelines or protocols. These 
guidelines would set minimum requirements for tests needed to determine a given diagnosis, 
thus providing definitions and boundares for evaluating possible under-treatment. Even  without national uniform guidelines, Professional Review Organizations (PROs) could use 
local standards of practice to initiate action to sanction physicians who provide inadequate 
care to patients. 
LRIs wil lower administrative costs 
Bundling all laboratory reimbursement into the recognized charge for physician offce visits 
would elimiate over 25 percent of the line items curntly processed by Medicare carers. 
progr 
The elimination of laboratory bils would save the Medicare  at least $100 millon in 
admnistrative costs annually. Existing billng codes, systems and payment procedures need 
not be revised. Only Medicare s recognized charge for an offce visit changes under LRIs. 
Medicare could concentrate its effons to enforce laws and regulations designed to ensure 
quality testing, rather than police the legality of physicianaboratory joint ventus and other 
financial argements. Carer time would be fred to pursue activities which result in 
progr 
savings. Medical necessity reviews would focus on the need for office visits and 
target physicians who increase their offce visits, rather than individual laboratory tests or 
procedures. . 
Further Exploration 
Issues for 
. During the course of this study several issues were raised concerning the impact of LRIs. 
Many of the issues raised were beyond the scope of this study but need to be considered 
before implementation of a LRI. 
The following areas need to be explored: 
How could hospital outpatient services be included in calculating the base LRI? 
Exclusion of hospital outpatient laboratories from a LRI would in all likelihood shift 
services to hospital laboratories and undermine progrm savings. 
Should the base LRI be adjusted to account for geogrphic varations (e.g. rural vs. 
urban)? 
Should the base LRI be adjusted for certain physician specialties, or should cenain 
specialists be excluded from a LRI payment method? 
Should cenain tests be excluded from a LRI payment method? 
Would the quality of patient care suffer if physicians cunail testing? 
Wil quality of testing suffer as physicians become more cost conscious?  Wil the forces (malpractice, need to reduce uncenainty, etc.) that have influenced
physician ordering decisions in the past be adequate to prevent under use of laboratory
services in a LRI system?
Can practice guidelines be used to prevent under use?
impai?
Wil patient access to car be 
Some of these issues wil be examed in greater detail in an additional OIG report, to be
released shonly.
CONCLUSION
The LRI has the potential to alter the forces inherent in the curnt FFS system which
encourage and reward excessive use of laboratory services. At the same time, it recognizes
the physician s authority in determning which tests ar medically necessar, does not unjustly
dynamcs
penalize patients for decisions out of their control and leaves the maketplace and its 
unrestrned.
The major features of this mechanism would:
be relatively easy to implement;
provide appropriate incentives which allow for predictable, controlled growth of
Medicare laboratory expenditures;
red:uce the number of claims line items processed by carers by 25 percent;
reduce the paperwork burden for bilers and carers;
use deductibles and coinsurance where they can be most effective in affecting overall
utilization of health care.
Implementation of the LRI would result in significant savings from increased coinsurance and
furer 
lower admistrative costs. We wil shortly issue a report which  explores the financial
cost implications of these features of the LRI reimbursement mechanism. , "
ENDNOTES
1988, p. 282. 
Social Security Bulletin. Annual Statistical Supplement, 
Wiliam L. Roper, M.D., "Perspectives on Physician-Payment Reform,  New 
September 29, 1988, P. 866. 
England Journal of Medicine, 
Roper, p. 866. 
Roper, p. 866. 
S. Dept. of Health and Human Services, Health Care Financing Admnistrtion, 
Economic Factors in the Use of Laboratory Tests by Offce-
Based Physicians, 
Patrcia Munch Danzon, R-2525- HCFA, (Santa Monica, CA: Rand, August 
1982), p. 60. 
Patrcia Munch Danzon, Willard G. Manning, and M.S. Marquis, "Factors 
Affecting Laboratory Test Use and Prces,  Health Care Financi  g Review 
Summer 1984, p. 23. 
Spencer Vibbert, "Is Utilization Review Paying  Health, 
qffl"  Business 
Februar 1989, p. 24. 
Danzon  Economic Factors in the Use of Laboratory Tests by Offce-Based 
p. 61. 
Physicians, 
Paymentfor Physician Services: Strategies 
Office of Technology Assessment, 
(1986), pp. 48-49, 56. 
for Medicare, 
10.  Thomas Rice, "Physician-induced Demand for Medical Car: New Evidence 
from the Medicar Progrm  Advances in Health Economics and Health Services 
1984, pp. 129-160. 
Research, 
11.  Stan N. Finkelstein , M.  Technological Change and Clinical Laboratory 
Utilzation  October 1980, p. 1055. 
Medical Care, 
12.  L. Overholt, "The Use of the Laboratory: Dollars and Sense,  Wisconsin 
1989, pp. 38-41. 
Medical Journal, 
13.  Judith Thompson Bar, "Design and Analysis of Interventions to Modfy 
Utilization of Therapeutic Drug Monitoring," Diss. Harard 1987, pp. 31-39. 
14.  Finkelstein, pp. 1055-1056.  15.  Lawrnce S. Linn et al., "Differences in the Numbers and Costs of Tests Ordered 
by Internists, Famly Physicians, and Psychiatrsts,  Fal 1984, p. 266. 
Inquiry, 
16.  Linn et al., p. 266. 
17.  S. Dept. of Health and Huma Services, Offce of Inspector General, Office of 
Financial Arrangements Between Physicians and 
Analysis and Inspections, 
OAI-12-88-01410, (Washington 
Health Care Businesses: Report to Congress, 
C.: May 
1989), p. 18.

18.  M. Eisenberg et al., "Computer-Based Audit to Detect and Corrct 
Overutilization of Laboratory Tests,  1977; 15:915-921; 
Medical Care, 
summarzed in Judtih T. Bar, "Improved Laboratory Utilization and Informtion 
Production: The Admnistrator s New Role,  Journal of Medical Technology, 
October 1986, p. 512. 
19.  A. Schroeder et al., "The Failure of Physician Education as a Cost Containment 
Strtegy,  1984;252: 225-230; 
Journal of the American Medical Association, 
summarzed in Bar, "Improved Laboratory Utilzation and Information 
Production " p. 512. 
20.  P. Griner and B. Liptzn, "Use of the Laboratory in a Teaching Hospita,  Annals 
1971; 75:157-163, summazed in Bar, "Improved 
of Internal Medicine, 
Laboratory Utiization and Information Production " p. 513. 
21.  P. Marin et aI., "Inputs into Coronar Care During 30 Years,  Annals of 
1974; 81:289-293, summarzed in Bar, "Improved Laboratory 
Internal Medicine, 
" p. 513. 
1)tilzation and Information Production,
22.  Margaret DiNatae and Judith Bar, "Varations in Clinical Laboratory Utilization: 
Lessons for Relative Ran Feedback Strtegies," unpublished drt, August 27, 
1989. 
23.  Judith Bar, "Clinical Laboratory Utilization: The Role of the Clinical Laboratory 
Scientist,  ed. Brenta G. Davis, Michael L. 
" in  Clinical Laboratory Practice, 
Bishop, and Diana Mass, pp. xxxi-xlv. 
24.  Testimony of the American Clinical Laboratory 
Laboratory Payment Issues, 
Association Before the Subcommittee on Health and the Environment. June 8, 
1989, p. 35. 
25.  S. Dept. of Health and Human Services, Offce of Inspector General, Offce of 
Changes are Needed in the Way Medicare Pays for Clinical Laboratory 
Audit, 
CIN:A-09-89-00031 (Revised) (Washington, D.  ) pp. 5-
Tests,  , "
26.  p. 41. 
Laboratory Payment Issues, 
27.  Financial Arrangements Between Physicians and Health Care Businesses: 
Report to Congress,  pp. 11, 17. 
28.  James R. Woo, "Cooperative Parership, American Clinical Products Review, 
Apri 1988, p. 22. 
29.  David Hemenway, "Physicians Responses to Financial Incentives,  New England 
, Vol. 322:15, April 12, 1990, pp. 1059-1063. 
Journal of Medicine 
30.  J. Stephen Kroger, M.D., "Legislation, Regulations Provide Opportnities, 
Pitfalls,  September 1985, p. 17. 
The Internist, 
31.  Financial Arrangements Between Physicians and Health Care Businesses,  p. 18.
32.  Vibbert, p. 24. 
33.  Finkelstein, p. 1055-1056. 
34.  Vibbert, p. 24. 
35.  Economic Factors in the Use of Laboratory Tests by Offce-Based 
Danzon, 
Physicians,  p. 60. 
36.  Danzon, Manning, Marquis, "Factors Affecting Laboratory Test Use and Prces," 
23. 
37.  pp. 48-49, 56. 
Payment for Physician Services: Strategies for Medicare, 
38.  Kroger, p. 17.
39.  R.A. Hughes et al. "The Ancilar Services Review Prgram in Massachusetts," 
1984;252: 1727-1732, summarzed 
Journal of the American Medical Association, 
in Bar  Improved Laboratory Utilization and Information Production " p. 512. 
40.  Finkelstein, p. 1055-1056. 
41.  Danzon, Manning, Marquis, "Factors Affecting Test Use and Prces," p. 23. 
42.  42 CFR 421 , Subpar C. 
43. 
Laboratory Payment Issues,  p. 35. 44. Changes are Needed in the Way Medicare Paysfor Clinical Laboratory Tests, 
45. Janet B. Mitchell et al., "Packaging Physician Services: Alternative Approaches
Winter 1987, pp. 324-325.
to Medicare Pan B Reimbursement,"  Inquiry, 
46. Rhonda L. Rundle, "How Doctors Boost Bils by Misrepresenting the Work They 
Do,  December 6, 1989, p. 1. 
Wall Street Journal, 
47. 42 CFR 421.200 (a)(2). 
48. Linn et al., p. 266.
49. Testimony of Richard P. Kusserow, Inspector Genera, 
Medicare Contractors, 
Dept. of Health and Human Services Before the Senate Appropriations 
Commttee, Subcommttee on Labor, Health and Human Servces, and Education 
Februar 28, 1989, p. 8. 
50. About Lab-net, Inc.  Physicians' Laboratory Newsletter  , No. 4 (Sprig 1987), 
pp. 2-
51. Financial Arrangements Between Physicians and Health Care Businesses,  p. 18.
52. Mitchell et al., p. 325.
53. Dept. of Health and Human Services, Health Care Financing Admnistration. 
Growth in the Volume and Intensity of Physician Services: Issues and Options, 
(1989), p. ES-
54. Payment for Physician Services,  pp. 48-49, 56. 
55. Danzon, Manning, Marquis, "Factors Affecting Test Use and Prces," pp. 25-27. 
56. Growth in the Volume and Intensity of Physician Services: Issues and Options, 
pp. 4-4 to 4- Laboratories  Effects of Legislation/Regulation  The legislation attempted to eliminate reimbursement for mark-ups on lab services.  Some physicaians responded by opening their own laboratories or expanding their current physician office lab services.  Inpatient lab service became unprofitable.  Hospitals had incentie to eliminate or contan costs of lab services performed on an inpatient basis.  hospital lab testing were encouraged to Pre-admission and post-move from the hospital setting to POLs.  Hospitals cut back on the amount of lab equipment they purchased.  Manufacturers began to market their lab equipment to POls and home markets.  Physicians were further encouraged to open POls.  The number of POLs and volume of testing in POLS increased dramatically. 
 
n
APPENDIX A Legislative History and its Effects o Provisions of Legislation/Regulation  Required physicians to disdose the actual cost of the lab services they purchased form ICLs.  Bundled inpatient lab services into the DRG payments.  Established area/regional fee schedules for ICLs and hospital labs.  Mandated that ICLs and hospitals accept assignment for laboratory claims.  Eliminated beneficiary deductible;; and copayments.  Required establishment of national fee schedule for lab services.  Limited reimbursement for drawing and handling fees.  Discontinued reimbursement for interpretation fees.  Instituted direct billng provision.  Placed a freeze on the customary and prevailing fees for all physicain services 
n 
o
Regulati - 1980  1983  A. 1984

slation/ OBRA  PPS - DEFR
gi
e
L ulation hospitals and ICLs,  evenues lost during , particularly ervices 
Effects 01 Legislation/Reg Brought POLs under the same regulations as  Laboratory use increases 25 percent.  Studies suggest that physicians made up lor rMD lee Ireeze by increasing use 01 ancilary s laboratory services. Too early to determine.  Too early to determine. 
n ue  of 
Provisions 01 Legislation/Regulation Brought POls under the regional lee schedule,  Required POLs to accept assignment.  Placed a ceiling on regional lee schedule, Delayed implementation 01 the national lee schedule.  Lilted MD lee freeze.  Placed a Ireeze on area rates, 90.Stipulated that a national lee schedule be used beginning 1-(not implemented)  Reduced the national limitations amount.  Reduced area ratedson the most common tests.  Eliminated CPI increases.  License required for all sites where laboratory work is performed.  Degree 01 regulation tied to complexity 01 testing.  Bans physicians from relerring patients to most labs that they ow92.have financial interest as 011-theyor in which  based relative valPhysician services to be paid using a resource-scale. Volume Performance Standards established,  HHS to fund outcomes research on quality and appropriateness medical care.  Balance billng limits would apply beginning in 1991. 01 the national Cap on clinical laboratory fees set at 93 percent median fee.
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latlon/Regulat 1985OBRA-1986OBRA-1986 OBRA - 1987 OBRA - CLiA - 1988  1989 OBRA -
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L Gloria Randle Scott
Gloria Randle Scott. was the first black woman National Presidenl 
of the Girl Scouts (1975-1978). and is the eleventh president (second
female) of Bennett College in Greensboro. 
North Carolina (1987 to 
present). 
Dr. Scott has been a leader in higher education and an advocate 
of women s issues for a long time. Her career began in early 1960 as 
a research associate in genetics and embryology at Indiana Univer 
sity Institute for Psychiatric Research. In 1961 . she became the first 
black biology teacher at a predominantly white college in In 
dianapolis. It was during her tenure there that she made a decision 
to work at black colleges. She felt that she and her husband could 
offer their knowledge and experience to black children by team-
teaching. Having been a poor girl herself. she felt there were many 
other poor children who needed help in making it through. Dr. Scott 
has been providing support and direction for years. holding faculty 
and administrative positions at black colleges, including Clark Col 
lege in Atlanta . Grambling State University, North Carolina State A&T 
University, and others. 
Gloria Scott was born on April 14, 1938, in Houston, lexas. She 
knows what hard times and segregation are all about. When she was 
in the second or third grade. she had a paper route, As a little girl. she 
was not allowed to go to the public libraries in Houston because they 
were not opened to blacks. Public libraries there did not become 
desegregated until she was a senior in high school. Nevertheless, it
was the money from a trust established, by a rich white man without 
a family, for black high sct1oo1 students that afforded her the oppor 
tunity to go to college. The money that this rich man had was the result 
of hard labor by black pcol )1(-who worked for him. It was the per-
suasion of his black bookk('cpt'r that he established the scholarship
fund. 
Dr. Scott received the BdChrior of Ans and Master of Ans degrees
in zoology in 1959 and l )()(). respectively, and the Ph. D. degree in
higher education in 1965 from Indiana University. Her honorary 
degrees include: Doctor of I.. 1\\' from Indiana University in 1977; Doc-
tor of Humane Letters from h trlcigh Dickinson University in 1978; and
Doctor of Humane Letters  Westfield State College in 1989. She 
In 111\ 
has extensive leadership ('-,p('ri('nce and has served on numerous 
bords of diredors, including 1111 (,reensboro Chamber of Commerce, 
and Delta Sigma Theta 
Sorority, Inc. 
Gloria Scott believes that one must have a base from which to stan 
and those who have made it must provide the base, direction and 
suppon for those who folio\\.