ENSURING APPROPRIATE USE 

OF LABORATORY SERVICES 

A MONOGRAPH 

-r St"VICES' 

'0 Iy-l1i"d30 

OFFICE OF INSPECTOR GENERAL 

OFFICE OF EVALUATION AND INSPEC'f 

OCTOBER 1990 
ENSURING APPROPRIATE USE 

OF LABORATORY SERVICES 

A MONOGRAPH 

-r t'-V'CES 

'0 Iy-l1t"d30 

OFFICE OF INSPECTOR GENERAL 

OFFICE OF EVALUATION AND INSPEC'f-INS 

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 

Act of 1989 has focused attention on controlling utization. It is in the context of this change 

in focus that this inspection examines the forces that encourage utilization of labo.tory 

services and considers varous solutions to control laboratory test use. 

METHODOLOGY 

We compiled information and data regardig clinical laboratory services from joural arcles, 

previous government and private sector studies, Congressional testimony and from HCFA' 

Par B Medicare Annual Data (BMAD) fies. We also obtained information on payment 

policies and utilization review procedures from 21 radomly selected Medicare carers. 

Seven national associations, representing the medical and laboratory communities, also 

provided their perspectives. Additional information was obtained from the working files of 

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. 

Testing accounts for nearly 25 percent of the line items paid by carers. 
Many Factors Influence Use Of Laboratory Tests.€

Physician ordering decisions are affected by the patient s condition and other factors€

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.€

The Sheer Volume And Small Dollar Value Of Laboratory Services Render The Current 

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.€

Direct billng initiatives and other restrctions on who can bil for laboratory services do 

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.€

V olume performance standards may lower costs, but they may not affect individual 

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 

encourage and reward excessive use of laboratory servces. At the same time, it recognizes 

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 

utilization of health car. 

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 

Many factors influence use of laboratory tests. ....................... 4€

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€
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 

EN NOTES 

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 

services than they had 3 years before. 1 Despite a freeze on physician payments, adoption of 

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 

formerly bundled and biled together.4 Nowhere has 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 

services. The exogenous factors most often cited include technological advances, spread of 

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 to most laboratories in which they have ownership; and, restrctions on referrals 

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 

the ability of the Medicare progr 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 

We compiled information and data regarding clinical laboratory services from journal aricles, 

previous government and private sector studies, Congrssional testiony and from HCFA' 

Par B Medicare Annual Data (BMAD) fies. We also obtained information on payment 

policies and utilization review procedures from 21 randomly selected Medicar carers. 

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 

(POLs) and physician financial arngements. 
....... ...... ........

.....,.......... .......................................................,.........,............

FINDINGS€

FINDING 1: The Use Of Clinical Laboratory Tests Is Rising.€

Of the 19 bilion diagnostic tests performed each year on Americans, a large ponion are€

c1inicallaboratory services. In 1982, laboratory testing accounted for $11 bilion in annual€

medical car costs.6 By the end of 1986, the amount of money spent on laboratory testing had€

grown to $20 billon. Current estimates place the yearly laboratory market at€

$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'."" 

744 Milion€ a: € 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€
reductions in payment levels. The bottom line has been adjusted to reflect the growth in the 

beneficiar population. The top line, in Figure 1, shows what Medicare has actually paid for 

clinical laboratory services since adoption of the fee schedules in 1984. The grph clearly 

demonstrates that adoption of the fee schedule did not reduce Medicare expenditurs for 

laboratory services or slow the rate of growth. 

In addition to the growth in expenditures, the volume of laboratory services paid by the 

Medicare progr has also increased disproportonate to the increase in the beneficiar 

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 

physician has determined are medically necessar. l0 Medicar and most other insurers wil 

not pay for patient initiated tests, routine testig and tests which are not medically indicated. 

There are many reasons which explain why physicians order laboratory tests when carng for 

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 

diagnosis and management of a patient, 

l1 to search for as mptomatic disease, to monitor 

chronic conditions and to valdate previous test findings. Other reasons include physician 

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 financial incentives. 

Other researchers have focused on the varability of tests ordered for a s ecific diagnosis and 20,21,22, the absence of correlation with improved patient outcome. 18,19, 
...

The market impinges on ordering decisions in ways that encourage increased use of tests.€

The market for laboratory services can be characterized by intense competition for a finite€

number of patients. Laboratories need a certain minimum volume of tests to succeed€

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€

tr to find ways to ensure that physicians wil refer patients and test specimens to their 

laboratory and not another. 

This competitive market impinges on two aspects of the test ordering decision: where to have€

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 

and other laboratories) at considerable discount. Many wholesale clients subsequently bil 

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 

telephones, computer hardware and software, laboratOry and other medical equipment, offce€

supplies, management services and personnel. 27 Like other businesses, the sellers and 

purchasers of laboratory services, engage in activities designed to promote goodwill. Under 

existing Medicare law, these business practices may be considered inducements for patient 

referrals, and therefore constred as ilegal. 
The market competition for test volume and patient referrals is furer complicated if the test€

orderer stands to profit from where the test is performed. Havinf ownership 

interest in a€

laboratory can signifcantly increase a physician s revenues. 

28.2 In 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€

laboratory services than al Medicar patients....(And) 34 percent more services from€

independent clinical laboratories than all Medicar patients.... 31 Laboratory owners and€

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€

beneficiar. Services are provided by physicians and others who then submit bils itemizing€

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 

discrepancy between payment levels and wholesale prices relied on voluntar disclosure of 

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€

services. These attempts to control payment resulted in volume increases which not only 

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 

expenditures by reducing the financial burden on the beneficiares. This resulted in Medicare 

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 sicians suggest that€

20-60 percent (of clinical laboratory testing) may be unnecessar. 

" 2 Many researchers who 

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 

systems. 33,34,35,36,37 , 38, 

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 

laboratory work being ordered was medically unnecessar or.excessive. 

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,€

rather than professional judgment, in making diagnoses.40 Growth in testing also suggests€

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 grater share of health care 

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 

must be reasonable and medically necessar, furished in the most appropriate setting and 

biled accurately to reflect the services rendered.42 Carers claim that their efforts to police 

laboratory services do not give them suffcient retur to cover expenses. In 1988, clinical€

laboratory services represented approximately 5 percent of total Medcar Par B expenditurs€

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. 

Bilers of laboratory services argue that they ar unable to bil packages as a single procedure 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€

enough procedure codes to accurately describe al of these customized packages of laboratory 

services.€

When the OIG looked at laboratory procedures, 37 percent of the line items biled to Medicare 

were found to have been ordered by physicians as packaged tests defined by Medicar as 

profies.44 Yet, HCFA's BMAD 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 services biled to Medicare were identified as profies. Using data from 

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€

procedure inflation.' .45 Upcoding involves biling for a more complex service or procedure€

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 

of biling codes available to describe a test enables physicians and laboratories to select codes 

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 

unnecessar.

47 Unlike claims for 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 

complaint.48 Individual physician test ordering behavior has continued for so long that carer 

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 

which carers must undertake to arve at many medical necessity decisions. It is not 

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 

carer could receive a bil for services from a POL and from one or more ICLs and/or hospital 

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 

for payment, an increasing number are appealed, reprocessed and paid.49 Carers claim 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.€

FINDING 4: Current Initiatives Do Not Fully Address Laboratory Use. 

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 

testing. Some arangements between ICLslHOLs and physicians circumvented the intent of 

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. 

The exact number of laboratories, joint ventures and other creative argements established€

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 

" 51
 pauents.... 

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 

billng laboratory services. Additional paperwork and personnel time would be requird for 

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 greater financial stae in laboratory expenditures 

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 

does not apply to all patients would, in al lielihoo, exacerbate argements 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 

might compromise laboratory test qualty and har 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 

services and payments including clinical laboratory services. Future growth in Medicare Par 

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 

individual physician behavior. Service intensive physicians could continue to increase the 

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 

longer be made by the Medicare progr. 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 

claims for diagnostic clinical laboratory services (HCPC proedure codes 800 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 

the $1. 84 bilion Medicar allowed for laboratory services across paid physician offce visits 

(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 

Specialties 

Office Per Bene Lab 

Visits Servce 

Lab Svcs. 

Per Visit 

Paid 

For Lab 

Lab Paid/OV 

Under 

+/- 2 

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 

08 Family Practice 

3109 2.05 19163 

2033692 2498 1.22 

$ 476,851 

$2,969 973 

$15. 

$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 

28 Proctology 

5171 5731 

1195 1.6 696 0.58 

79,640 

621 

$15.40 

$ 7. 

29 Pulmonary Disease 

30 Radiology 

31 Radiology (DO) 

18896 14146 

5403 1.71 2810 

394 123 

0.52 

194,073 

39,3 

12,169 

$10. 

$ 7. 

$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 

services simultaeously.... ,,52 Studies have explored the possibility of Medicar controllng 

the cost of some services " by redefmin the payment unit from a narow procedure to a 

more comprehensive bundle of services." 3 

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 

seek health car. 

55 Funhermore, carers have told us that it is easier to evaluate the 

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. 

The elimination of laboratory bils would save the Medicare progr 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. . 

Issues for Further Exploration 

. 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?€

Wil patient access to car be impai?€

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€

penalize patients for decisions out of their control and leaves the maketplace and its dynamcs€

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€

lower admistrative costs. We wil shortly issue a report which furer explores the financial€

cost implications of these features of the LRI reimbursement mechanism.€
, 

ENDNOTES€

10. 

11. 

12. 

13. 

14. 

Social Security Bulletin. Annual Statistical Supplement, 1988, p. 282. 

Wiliam L. Roper, M.D., "Perspectives on Physician-Payment Reform, New 

England Journal of Medicine, September 29, 1988, P. 866. 

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 qffl" Business Health, 

Februar 1989, p. 24. 

Danzon Economic Factors in the Use of Laboratory Tests by Offce-Based 

Physicians, p. 61. 

Office of Technology Assessment, Paymentfor Physician Services: Strategies 

for Medicare, (1986), pp. 48-49, 56. 

Thomas Rice, "Physician-induced Demand for Medical Car: New Evidence 

from the Medicar Progrm Advances in Health Economics and Health Services 

Research, 1984, pp. 129- 160. 

Stan N. Finkelstein , M. Technological Change and Clinical Laboratory 

Utilzation Medical Care, October 1980, p. 1055. 

L. Overholt, "The Use of the Laboratory: Dollars and Sense, Wisconsin 

Medical Journal, 1989, pp. 38-41. 

Judith Thompson Bar, "Design and Analysis of Interventions to Modfy 

Utilization of Therapeutic Drug Monitoring," Diss. Harard 1987, pp. 31- 39. 

Finkelstein, pp. 1055- 1056. 
15. 

16. 

17. 

18. 

19. 

20. 

21. 

22. 

23. 

24. 

25. 

Lawrnce S. Linn et al., "Differences in the Numbers and Costs of Tests Ordered 

by Internists, Famly Physicians, and Psychiatrsts, Inquiry, Fal 1984, p. 266. 

Linn et al., p. 266. 

S. Dept. of Health and Huma Services, Offce of Inspector General, Office of 

Analysis and Inspections, Financial Arrangements Between Physicians and 

Health Care Businesses: Report to Congress, OAI- 12-88-01410, (Washington 

C.: May 1989), p. 18.


M. Eisenberg et al., "Computer-Based Audit to Detect and Corrct 

Overutilization of Laboratory Tests, Medical Care, 1977; 15:915-921; 

summarzed in Judtih T. Bar, "Improved Laboratory Utilization and Informtion 

Production: The Admnistrator s New Role, Journal of Medical Technology, 

October 1986, p. 512. 

A. Schroeder et al., "The Failure of Physician Education as a Cost Containment 

Strtegy, Journal of the American Medical Association, 1984;252: 225-230; 

summarzed in Bar, "Improved Laboratory Utilzation and Information 

Production " p. 512. 

P. Griner and B. Liptzn, "Use of the Laboratory in a Teaching Hospita, Annals 

of Internal Medicine, 1971; 75:157- 163, summazed in Bar, "Improved 

Laboratory Utiization and Information Production " p. 513. 

P. Marin et aI., "Inputs into Coronar Care During 30 Years, Annals of 

Internal Medicine, 1974; 81:289-293, summarzed in Bar, "Improved Laboratory 

1)tilzation and Information Production," p. 513. 

Margaret DiNatae and Judith Bar, "Varations in Clinical Laboratory Utilization: 

Lessons for Relative Ran Feedback Strtegies," unpublished drt, August 27, 

1989. 

Judith Bar, "Clinical Laboratory Utilization: The Role of the Clinical Laboratory 

Scientist, " in Clinical Laboratory Practice, ed. Brenta G. Davis, Michael L. 

Bishop, and Diana Mass, pp. xxxi-xlv. 

Laboratory Payment Issues, Testimony of the American Clinical Laboratory 

Association Before the Subcommittee on Health and the Environment. June 8, 

1989, p. 35. 

S. Dept. of Health and Human Services, Offce of Inspector General, Offce of 

Audit, Changes are Needed in the Way Medicare Pays for Clinical Laboratory Tests, CIN:A-09-89-00031 (Revised) (Washington, D. ) pp. 5-
, 

26. 

27. 

28. 

29. 

30. 

31. 

32. 

33. 

34. 

35. 

36. 

37. 

38. 

39. 

40. 

41. 

42. 

43. 

Laboratory Payment Issues, p. 41. 

Financial Arrangements Between Physicians and Health Care Businesses: 

Report to Congress, pp. 11, 17. 

James R. Woo, "Cooperative Parership, American Clinical Products Review, 

Apri 1988, p. 22. 

David Hemenway, "Physicians Responses to Financial Incentives, New England 

Journal of Medicine , Vol. 322:15, April 12, 1990, pp. 1059- 1063. 

J. Stephen Kroger, M.D., "Legislation, Regulations Provide Opportnities, 

Pitfalls, The Internist, September 1985, p. 17. 

Financial Arrangements Between Physicians and Health Care Businesses, p. 18.€

Vibbert, p. 24. 

Finkelstein, p. 1055- 1056. 

Vibbert, p. 24. 

Danzon, Economic Factors in the Use of Laboratory Tests by Offce-Based 

Physicians, p. 60. 

Danzon, Manning, Marquis, "Factors Affecting Laboratory Test Use and Prces," 

23. 

Payment for Physician Services: Strategies for Medicare, pp. 48-49, 56. 

Kroger, p. 17.€

R.A. Hughes et al. "The Ancilar Services Review Prgram in Massachusetts," 

Journal of the American Medical Association, 1984;252: 1727- 1732, summarzed 

in Bar Improved Laboratory Utilization and Information Production " p. 512. 

Finkelstein, p. 1055- 1056. 

Danzon, Manning, Marquis, "Factors Affecting Test Use and Prces," p. 23. 

42 CFR 421 , Subpar C. 

Laboratory Payment Issues, € p. 35.€
44.€

45.€

46.€

47.€

48.€

49.€

50.€

51.€

52.€

53.€

54.€

55.€

56.€

Changes are Needed in the Way Medicare Paysfor Clinical Laboratory Tests, 

Janet B. Mitchell et al., "Packaging Physician Services: Alternative Approaches€

to Medicare Pan B Reimbursement," Inquiry, Winter 1987, pp. 324-325.€

Rhonda L. Rundle, "How Doctors Boost Bils by Misrepresenting the Work They 

Do, Wall Street Journal, December 6, 1989, p. 1. 

42 CFR 421.200 (a)(2). 

Linn et al., p. 266.€

Medicare Contractors, Testimony of Richard P. Kusserow, Inspector Genera, 

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. 

About Lab-net, Inc. Physicians' Laboratory Newsletter , No. 4 (Sprig 1987), 

pp. 2-

Financial Arrangements Between Physicians and Health Care Businesses, p. 18.€

Mitchell et al., p. 325.€

Dept. of Health and Human Services, Health Care Financing Admnistration. 

Growth in the Volume and Intensity of Physician Services: Issues and Options, 

(1989), p. ESPayment for Physician Services, pp. 48-49, 56. 

Danzon, Manning, Marquis, "Factors Affecting Test Use and Prces," pp. 25-27. 

Growth in the Volume and Intensity of Physician Services: Issues and Options, 

pp. 4-4 to 4-
Hospitals had incentie to eliminate or contan costs of lab services 

performed on an inpatient basis. 

Pre-admission and post-hospital lab testing were encouraged to 

The legislation attempted to eliminate reimbursement for mark-ups Some physicaians responded by opening their own laboratories or expanding their current physician office lab services. 

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 

Effects of Legislation/Regulation 

Inpatient lab service became unprofitable. 

APPENDIX A€

Legislative History and its Effects on Laboratories 

on lab services. 

dramatically. 

Required physicians to disdose the actual cost of the lab services 

Mandated that ICLs and hospitals accept assignment for laboratory 

claims. 

Eliminated beneficiary deductible;; and copayments. Required establishment of national fee schedule for lab services. 

Discontinued reimbursement for interpretation fees. Instituted direct billng provision. 

Placed a freeze on the customary and prevailing fees for all physicain services 

Provisions of Legislation/Regulation 

Bundled inpatient lab services into the DRG payments. 

Established area/regional fee schedules for ICLs and hospital labs. Limited reimbursement for drawing and handling fees. 

they purchased form ICLs. 

Legislation/Regulation 

OBRA - 1980 

DEFRA. 1984


PPS - 1983 
Studies suggest that physicians made up lor revenues lost during 

MD lee Ireeze by increasing use 01 ancilary services , particularly 

Brought POLs under the same regulations as hospitals and ICLs, 

Effects 01 Legislation/Regulation€

Laboratory use increases 25 percent. 

Too early to determine. 

Too early to determine. 

laboratory services.€

Physician services to be paid using a resource-based relative value scale.€

Volume Performance Standards established, 

HHS to fund outcomes research on quality and appropriateness of 

medical care. 

Balance billng limits would apply beginning in 1991.€Cap on clinical laboratory fees set at 93 percent 01 the national 

Bans physicians from relerring patients to most labs that they own

median fee.€

92.€

90.€ Stipulated that a national lee schedule be used beginning 1-

License required for all sites where laboratory work is performed. 

Provisions 01 Legislation/Regulation€

Delayed implementation 01 the national lee schedule. 

Lilted MD lee freeze. 

Reduced the national limitations amount. 

Reduced area ratedson the most common tests. 

Eliminated CPI increases. 

have financial interest as 011-

Brought POls under the regional lee schedule, 

Degree 01 regulation tied to complexity 01 testing. €

Required POLs to accept assignment. 

Placed a ceiling on regional lee schedule,€

Placed a Ireeze on area rates,€

(not implemented) 

they€ or in which €

Leg Islatlon/Regulatlon€

COBRA- 1985€

COBRA- 1986€

OBRA - 1987 

OBRA -1989 

OBRA - 1986 

CLiA - 1988 
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 University Institute for Psychiatric Research. In 1961 . she became the first 

black biology teacher at a predominantly white college in Indianapolis. 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 teamteaching. 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 College 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 opportunity 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 persuasion 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; Doctor of Humane Letters from h trlcigh Dickinson University in 1978; and

Doctor of Humane Letters In 111\ Westfield State College in 1989. She 

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\\.