, . 

. \ 

; f


Department of Health and Human Servces i ­


I - OFFICE OF f ­
 INSPECTOR GENERAL 

IMPACT OF A LABORATORY ROLL IN 

MEDICARE EXPENDITURES 

A Management Advisory Report 

VIC. 

Richard P. Kusserow 

INSPECfOR GENERA '0 

.ta " OEI-05-89-89151 
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 

TABLE OF CONTENTS


PAGEInt:aducton 

Purpose . . . . . . . . . . . . . . . 1 

Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1


Findigs 

A laboratory roll in could save Medicare 

over $1 bilion in the fist year and


more than $12 bilion over 5 years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 

The LRI wi provide suffcient funds for


physicians to cover costs they incur in


securing laboratory work. 
 . . . 3


Recommendation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

Appendices 

Appendix A: Methodology.................................. AAppendix B: Enhancing LRI Success . . . . . . . . . . . . . . . . . . . . . . . . . . BAppendix C: Draft Report Comments and OIG Response . . . . . . . . . . . C -
, 

INTRODUCTION


PUROSE


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


in Medicare s recognized chaige for physician office visits.


BACKGROUN 

Recently, the Offce of Inspector General (OIG) issued a monograph which examined 

the forces that affect use of laboratory servces. That monograph concluded that 

Medicare s efforts to contain escalating laboratory costs have not succeeded in 

controllng growth in expenditures because they did not address use of servces. 

Our recent study entitled Ensuring Appropriate Use of Laboratory Servces: A 

Monograph" proposed that Medicare roll reimbursement for laboratory servces into the 

recognized charge for physician office visits. This bundling approach, called a laboratory 

roll in (LRI), appears to be a promising option which would contain rising laboratory 

costs. The report also suggests that a LRI, like Diagnosis Related Groups, can produce 

significant savigs without compromising the quality of patient care. 

MEODOLOGY


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


and:


calculated a LRI by distributing allowed laboratory "amounts across allowed 

physician office visits; 

distributed servces and allowed amounts biled by pathologists, osteopathic 

(DO) pathologists and independent cliical laboratories to all other 

physician specialties based on the proportion of servces each specialty 

ordered from these outside sources; 

compared average payment for laboratory servces per office visit under 

fee-for-servce (FFS) with the amount that would have been paid under a 

LRI; 

calculated coinsurance and administrative savings; and 

conducted an analysis of individual laboratory use within physician 

specialties. 

A detailed discussiori' of our methodology and analysis which has led to the information 

contained in this report can be found in Appendix A. 
FINDINGS


Rnding #1: A LRI could save Medicae over $1 billon in the firs year and more 

than $12 billon over 5 year. 

Implementation of the LRI in 1992 would produce first year savigs of at least 

$1.1 bilon. At least $980 millon of the savigs would be realied from patient 

coinsurance. Admstrative savigs would tealize an additional $143 milion. Table 1 

ilustrates savings from coinsurance, lower administrative costs and controlled growth in 

expenditures. The table shows that over 5 years cumulative savings could exceed 

$12 bilion. 

With a LRI, the policies controllng physician offce visits will also constrain the 

growth of laboratory expenditures. Future updates to the LRI would be a part of 

the fee schedule amounts for physician offce visits. As an indistinguishable part of 

the offce visit, future price increases for laboratory servces would be held to the 

growth rate for physician servces which is lower than the projected growth rate for laboratory servces. 
. . ,

_

Table 1, on the previous page, shows projected expenditures under the current FFS 

system using current average growth of 19 percent annually. Estimates of anticipated laboratory expenditures after the LRI reflect an annual growth rate of 10 percent. ­

The 10 percent growth rate is based on projected annual growth in physician 

payments under the new resource based relative value scale. The actual rates put 

forth by the Secretary in future years may differ from our estimates. 

Physician payment reforms require the updating of relative values for physician 

servces at least every 5 years. New technologies and other factors that might 

increase or decrease the cost of securing laboratory work would be considered at 

that time.


Findig #2: The LR wi provde suffcient fuds for physician to coer costs they 

incu in secug laboratory work. 

This proposal would require physicians to pay for the clinical laboratory work they 

order for their patients. Medicare would no longer pay each individual entity 

performing tests ordered by a physician. The money Medicare spends under the 

FFS system would be distributed to physicians as an indistinguishable part of the 

recognized charge for physician office visits. The physician, rather than Medicare 

would be responsible for paying any outside provider of laboratory servces. 

Analysis of the 1988 BMA shows that the LRI would provide adequate funds to 

cover expenses physicians incur in securing laboratory work. On average, 77 percent 

of the physicians biling Medicare are likely to have more than suffcient funds to 

cover the costs they incur in securing laboratory work. Only atyical users of 

laboratory servces are likely to experience difficulty in covering their costs. 

detailed description of our methodology and the results of our analysis of the LRI's 

impact can be found in Appendix A 
RECOMMENDA TIONS


Th HCF A shoul research and deelop th LR reiurem mechani for 

laboratory sc.7Ves, and propoe lelatin to implem it wihi years. 

In developing the LRI, HCF A will need to address a number of issues. Our analysis 

suggests that the LRI can only be effective in reducing costs if calculated using all 

Part B outpatient data, including hospital outpatient laboratory payment data and 

hospital outpatient visit data. We also believe the calculation should exclude 

laboratory procedures listed in the Federal Register as physician servces. All other 

clinical laboratory servces should be included in the LRI. We believe no entities 

providing outpatient laboratory servces should be allowed to bil for servces outside 

the LRI. Failure to include these safeguards could result in manipulation of the 

system and failure to achieve savings. Appendix B discusses enhancements which we 

feel would ensure the LRI success. 
Comments on the Draf Report 

Both the Assistant Secretary for Planning and Evaluation (ASPE) and HCFA 

commented on our draft management advisory report. The ASPE concurred with 

our recommendation but believes studies should be und rtaken to ensure that patient 

case mi does not adversely affect physician specialists. The HCF A cited several 

reasons for not concurrng with our recommendation. 

We regret that HCFA is not inclined to research and develop the LRI. We believe 

it is a viable concept, one that will control escalating laboratory expenditures. We 

believe additional study is needed before considering implementation and therefore 

continue to urge HCF A to study and explore its possibilties. 

The complete text of ASPE's and HCF A's comments and our specific responses are 

contained in Appendix C. 

. . .

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APPENDIX A


I . 

f -. 

MEODOWGY 
GENRA INORMTION


To determine the effects that a LRI might have, we analyzed HCF A's 1988 BMA 

fie. We did not analyze "local laboratory codes" in the BMA file. These codes 

are unique to individual Medicare carrers. Their volume and dollar value are low. 

We also used a subsample of the 1 percent BMA file to evaluate the effects of a 

LRI on physicians' income and to make comparisons with the current FFS system. 

The following procedure codes in BMA were used to calculate a hypothetical LRI 

for 1988.


80000 - 89999 Laboratory procedures 

90000 - 90099 Office visits


90100 - 90199 Home visits


90600 - 90699 Consultations 

The following is a table of BMA procedure codes which were not used in our LRI 

calculations. Our rational for not using them in our LRI calculations is also 

provided. 

A ­

, . . , 

.

Volume and dollar values for hospital outpatient laboratory procedures and 

outpatient clinic visits are not contained in the BMA fie, and therefore, were not 

included in our analysis. Past studies, conducted by the OIG, indicate that hospital ­

outpatient laboratories provide approximately 25 percent of all Medicare laboratory 

servces. 7ls is a significant share of total outpatient laboratory servces provided to 

patients. For this reason, and other reasons mentioned in our monograph, they 

should not be excluded from the LRI. 

L , 

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LR CALTIONS


A LRI is computed by dividing total Part B outpatient expenditures for laboratory 

tests by the total number of paid physician outpatient offce visits in a given year.

results in the same level of aggegate payments as would' be made under the FFS 

system in that year. 

To ilustrate how a LRI might be calculated, we used the 1988 BMA fie and 

redistributed the $1.84 bilion Medicare allowed for laboratory servces across paid 

physician offce visits. Ths calculation resulted in a base LRI of $13.50 per offce 

visit ($1.84 bilion Medicare allowed/1.37 milion offce visits). 

To determine the potential impact on physician specialties, we compared the $13. 

LRI with each specialty s average reimbursement for laboratory servces under the 

FFS system. To do this, we created a subs ample from the BMA consisting patients 

who were seen by a single physician in 1988. This enabled us to obtain a complete 

picture of all laboratory servces a patient received, no matter who biled. Using the 

subsample we calculated the number of physician offce laboratory servces provided 

in-house by each specialty to each patient. We also calculated the number of 

servces each specialty ordered from an outside source. Allowed amounts and 

servce volume for clinical laboratory servces biled by pathologists, osteopathic (DO) 

pathologists and nonphysician specialties such as independent clinical laboratories 

were distributed to all physician specialties based on the proportion of servces each 

physician specialty ordered from an outside source. The same method was used to 

redistribute the allowed dollar value of tests. 

We calculated the weighted average for offce visits in the 1 percent BMA sample 

and in our subsample of patients who were seen by a single physician. We did this 

to determine whether the subs ample, on which the distribution was based, differed 

from significantly from the 1 percent BMA from which it was drawn. The 

weighted average for offce visits in the 1 percent BMA was 3.33 versus 3.51 in the 

subsample. The slight difference between the two numbers shows that the subs ample 

on which our distribution was based is reflective of the whole sample. 

The financial impact that a $13.50 base LRI would have on physicians is shown in 

Table 1 on the following page. The last column in each table indicates whether, on 

average, the physicians in each specialty are likely to be paid more or less than they 

were under the FFS system. 

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Table 1


I ; 

I ­
 Effect of $13. 50 base LRI on Physician Specialties 

FF Data 

Total Avg. OV Total! Averag Total! Average 

Offce Per Bene Lab Lab Svcs. Paid Lab Paid/V +/- 2 

Speialties Visits Servce Per VISit For Lab Under 

01 General Practice 164397 171047 1.04 $1,99,179 $1213


02 General Surgery 59213 225 44058 $ 68 192 $11.


03 Alergy 4873 1993 0.41 603 $ 5.


04 ENT 30316 1.75 9109 0.3 156 879 $ 5.


05 Anesthesiology 1720 204 148 17,574 $10.


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


07 Dermatology 3109 205 19163 $ 476 851 $15.


08 Family Practice 2033692 2498 1.22 969 973 $14.58


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


10 Gastroenterology 19166 204 2024 $ 279 981 $14.


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


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


13 Neurology 20595 10206 $ 143,30 $ 6.


14 Neurological Surger 4734 1.61 1628 0.3 450 $ 4.32


15 Obstetrics $ 1.44


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


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


18 Ophthalmology 51108 1.87 19544 $ 259 173 $ 5.


19 Oral Surgery 490 1.49 467 965 $18.


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


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


24 Plastic Surgery 3185 1.64 2035 851 $17.


25 Physical Medicine 4545 211 1212 235 $ 4.


26 Psychiatry 5171 224 5731 1.1 640 $15.


28 Proctology 1195 1.56 696 621 $ 7.


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


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


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


Radiation Therapy 221 1.44 158 907 $ 8.


33 Thoracic Surgery 6529 1.64 285 0.43 938 $ 6.


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


36 Nuclear Medicine 157 1.91 147 422 $28.


37 Pediatrics 2820 292 1.04 838 $12.5


38 Geriatrics 429 1.4 832 $13.


39 Nephrology 802 10162 1.26 126,568 $15.


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


41 Optometry 4085 2242 0.55 757 $ 7.


48 Podiatry 28746 13134 173 675 $ 6.


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


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


li"	 88 Unknown 222 1.3 $ 6. 

99 Unknown Physician 259 2.5 1122 15,597 $60. 

Source: One percent sample of the 1988 BMA files 

L ! 
 Includes laboratory services billed by non-physiciin speciilties such as inependent clinical laboratori which were ditruted

among the physician speciilties. This was done because only physiciins are reimbursed using LRI 

This column represents whether a physiciin specialty, on average, would be paid more or less under LRI.than under the fee-forservice system.


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ANALYSIS OF TI LRS FIANCIA IMACf


ON SELCID PHYSICI SPECIATI.


The graphs on the following pages show the effects of the LRI on selected physician 

specialties. We selected these nine specialties for this report because, as a group, 

each of these specialties appears to be paid less under the LRI than they were under 

the FFS system, and each specialty had at least 50 practitioners in our subsample. 

Detailed analysis shows that although each specialty as a whole appears to be paid 

less under the LRI, the majority of individual physicians within the specialty will 

actually benefit from the LRI. 

Graphs A through I were prepared from our subsample of the 1 percent 1988 

BMA fie. The subs ample, as previously mentioned, consisted of beneficiaries who 

saw only one physician in 1988. Using the subsample gave us a complete picture of 

all laboratory servces a patient received, no matter who biled. Because each 

patient was seen by a single physician we were able to group physicians by their 

respective specialties. 

Within each specialty, we categorized physicians by how many laboratory servces 

each ordered, on average, per offce visit. For the physicians in each category, we 

divided the total amount Medicare paid them for laboratory servces by the total 

number of office visits they biled, to obtain the average laboratory reimbursement 

for each category.


The graphs, and the tables which accompany them, show the LRI's effect on 

individual physicians within a specialty. They show that the majority of physicians in 

each specialty would have more than adequate funds to cover expenses incurred in 

securig laboratory work. On average, 77 percent of the physicians biling Medicare 

are likely to have more than suffcient funds to cover the costs they incur in securing 

laboratory work. Only atyical users of laboratory servces are likely to experience 

difficulty in covering their costs. 

The data for Specialty 11, Internal Medicine, will ilustrate our analysis and how to 

read the graphs on the following pages. As mentioned earlier we calculated a LRI 

of $13.50 for 1988. This means that $13.50 would be added to the Medicare 

recognized charge for every offce visit biled by physicians. The data on Table 1 of 

Appendix A indicated that internists charge on average $14.61 per offce visit for 

laboratory servces. Because the LRI wduld pay only $13. , it appears that 

physicians specializing in Internal Medicine would lose $1.10 on each offce visit 

biled. 

A ­

. 

( ,, 

When individual use of laboratory servces under the FFS system is examined more 

closely (Graph D and the accompanying table), it shows that the average Medicare 

payment was less than $13.50 for at least 71 percent of the internists. On average 

36 percent were paid $2.51 and 35 percent were paid $9.63. Under the LRI, 71 

percent of internists are likely to receive more money than they did under FFS 

I :	 system. The graph also shows that less than 1 percent of internists provide, on 

average, 11 or more laboratory servces per office visit at an average cost to 

Medicare of $198. 

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"'h 

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GRAH A


AVERAGE LABORATORY PAYMENT


SPECIALTY 7: DERMTOLOGY N = 1104


(PARTIAL GRAPH)
 OF PRACTITION	 AVG PAID PER OFFICE VISIT


60X	 5250 

5225 

AT LEAST 57% ARE PAID tlORE UNDER THE LRI SOX 

$200 

$175 40X 

$150 

S125 

S100 

20X 

S75 

S50 lOX 

S25 

11+ 

AVERAGE NUMBER OF LABORATORY SERVICES PER OFFICE VISIT 

OF PRACTITI01!ERS AVERAGE PAID AVG PAID 11+ SVCS 

19BB BMAD SUBSAMPLE


TABLE OF DATA 

AVERAGE SERVICES SUBSAMPLE 

PER OFFICE VISIT FREQUENCY 

627 

279 

11+


A ­


% OF


SPECIALTY 

56. 

25. 

1.8% 

AVERAGE


PAID


$2. 

$19. 

$42. 

$51. 76


$71. 90


$81. 27


$75. 

$79. 

$159. 

$87. 

$91. 56


$222. 
GRAH B


AVERAGE LABORATORY PAYMENT


SPECIALTY 8: FAMILY PRACTICE , N = 374


(PARTIAL GRAH) Of PRACTITIONERS AVG PAID PER OFFICE VISIT


45" 5200 

AT LEAST 79% ARE PAID tlORE UNDER THE LRI 40" 5175 

35% 

$150 

30% 

5125 

25% 

$100 

20% 

575 

15" 

'50 10" 

525 

11+ 

AVERAGE NUnBER OF LABORATORY SERVICES PER OFfICE VISIT 

Of PRACTITIONERS AVG PAID AVG PAID 11+ SVCS 

198B BnAD SUBSAnPLE


TABLE OF DATA 

AVERAGE SERVICES SUBSAMLE % OF AVERAGE 

PER OFFICE VISIT FREQUENCY SPECIALTY PAID 

4454 42. $2. 

3761 36. $8. 

1212 11. 7% $18. 

455 $30. 

219 $41. 

103 $49. 

$69. 

$73. 

$89. 

$91. 

$91. 

11+ $161. 
GRAH C


AVERAGE LABORATORY PAYMENT
 SPECIALTY 10: GASTROENTEROLOGY 


(PARTIAL GRAPH)
 x OF PRACTITIONERS


4011 

AT LEA5T 64% ARE PAID tiORE UNDER THE LRI 3511 

3011 

2511 

20X 

1511 

1011 

511 

011 

= 692


AVG PAID PER OFFICE VISIT


$300 

$275 

$250 

5225 

$200 

5175 

5150 

5125 

$100 

375 

$50 

$25 

11+ 

AVERAGE NUtlER OF LABORATORY SERVICES PER OFFICE VISIT 

OF PRACTITIONERS AVERAGE PAID '* AVG PAID 11+ SVCS 

1988 BtlAD SUBSAtlPLE


TABLE OF DATA 

AVERAGE SERVICES SUBSAMPLE 

PER OFFICE VISIT FREQUENCY 

252 

189 

11+


A ­


% OF


SPECIALTY 

36. 

27. 

13. 

1.6% 

1.4% 

1.2% 

AVERAGE 

PAID 

$2. 

$12. 

$23. 

$44. 

$45. 

$58. 

$60. 

$80. 

$152. 

$137. 

$102. 

$244. 
GRAH D


AVERAGE LABORATORY PAYMENT


SPECIALTY 11: INTERNAL MEDICINE, N = 145


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


40" $250 

5225 35" 

$200 

3D" 

AT LEAST 71% ARE PAID tlORE UNDER THE LRI $175 

25" 

$150 

20X 5125 

SlOO 

15" 

575 

10" 

550 

525 

11+ 

AVERAGE NUMBER OF LABORATORY SERVICES PER OFFICE VISIT


% PRACTITIONERS AVERAGE PAID '* AVG PAID 11+ SVCS


1988 BMAD SUBSAMPLE


TABLE OF DATA 

AVERAGE SERVICES SUBSAMPLE AVERAGE


PER OFFICE VISIT FREQUENCY SPECIALTY PAID


5814 36. $2.


5627 34. $9.


2372 14. 7 % $19.


1039 $30.


556 $42.


273 1. 7% $55.


156 1. 0% $61.


$78.


$85.


$97.


$106.


11+ $198.


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GRAH E 

AVERAGE LABORATORY PAYMENT


SPECIALTY 24: PLASTIC SURGERY , N = 171


(PARTIAL GRAPH)
 x OF PRACTITIONERS AVG PAID PER OFFICE VISIT


45X $350 

40X 

AT LEAST 43% ARE PAID tlORE UNDER THE LRI $300 

35X 

$250 

30% 

$200 25% 

20X $150 

15% 

$100 

10% 

$50 

15+ 

AVERAGE NUnBER OF LABORATORY SERVICES PER OFFICE VISIT


OF PRACTITIONERS AVERAGE PAID AVG PAID 15+ SVCS 

1968 BtlAD SUBSAtlLE 

TABIE OF DATA 

AVERAGE SERVICES SUBSAMLE AVERAGE


PER OFFICE VISIT FREQUENCY SPECIALTY PAID


43. $2. 

28. $35. 

12. 3 % $45.


$85.


$93.


$59.


1.2% $116.


1.2% $80.


$115.


15+ 1.8% $302.


(There were observations between and in the subsample. 

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GRAH F 

AVERAGE LABORATORY PAYMENT


SPECIALTY 26: PSYCHIATRY , N = 277


(PARTIAL GRAPH)
 OF PRACTITIONERS AVG PAID PER OFFICE VrSIT


$200 

60" 

AT LEAST 70% ARE PAID tlORE UNDER THE LRI $175 

$150 

40% $125 

5100 

575 

20% 

550 

10" 

525 

11+ 

AVERAGE NU ER OF LABORATORY SERVICES PER OFFICE VISIT 

" OF PRACTITIONERS AVERAGE PAID AVG PAID 11+ SVCS 

19BB BnAD SUBSAnPLE


TABLE OF DATA 

AVERAGE SERVICES SUBSAMPLE % OF AVERAGE


PER OFFICE VISIT FREQUENCY SPECIALTY PAID


167 60. $0. 

10. $9. 

$32. 

$40. 

1.8% $54. 

$82. 

$71. 13 

1.4% $116. 

$66. 

1.1% $113. 

$lC9. 

11+ $191. 78 

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GRAH G


AVERAGE LABORATORY PAYMENT 

SPECIALTY 34: UROLOGY, N = 1 , 346 

(PARTIAL GRAH) x OF PRACTITIONERS	 AVG PAID PER OFFICE 


55X


sox


45X


AT LEAST 70% ARE PAID tiGRE UNDER THE LRI . 

40"


35"


30"


25"


20"


15"


10"


11+ 

AVERAGE NUnBER OF LABORATORY SERVICES PER OFFICE VISIT 

" OF PRACTITIONERS AVERAGE PAID AVG PAID 11+ SVCS 

1988 BnAD SUBSAnPLE


TABLE OF DATA 

AVERAGE SERVICES SUBSAMPLE % OF AVERAGE 

PER OFFICE VISIT FREQUENCY SPECIALTY PAID 

243 18. $2. 

696 51. 7%	 $11. 

220 16.	 $20. 

$32. 

$41.93 

1.2% $59.


$64.


$76.


$73.


$110.


$106. 

11+ $ 2 25. 7 1 

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VISTT 

$250 

$225 

$200 

5175 

S1S0 

5125 

5100 

575 

550 

525 
..,.. 

GRAH H


AVERAGE LABORATORY PAYMENT


SPECIALTY 39: NEPHROLOGY, N = 268


(PARTIAL GRA
 OF PRACTITIONERS AVG PAID PER OFFICE VISIT


5500 

5450 3510 

5400 

30" AT LEAST 70% ARE PAID tiGRE UNDER THE LRI 

5350 

25" 

5300 

5250 

I. .. 

5200 15" 

I , 5150 

10" 

5100 

510 

550 

11+ 

I - AVERAGE NUMBER OF LABORATORY SERVICES PER OFFICE VISIT 

OF PRACTITIONERS -4 AVERAGE PAID "' AVG PAID 11+ SVCS 

1988 BMAD SUBSAMPLE


TABLE OF DATA 

AVERAGE SERVICE SUBSAMLE % OF AVERAGE 

PER OFFICE VISIT FREQUENCY SPECIALTY PAID 

101 37. $1. 

32. $9. 

12. 3 % $25. 

$27. 

$40. 

1.9% $57. 

$58. 74


$95.


$100.


$147.


$99.


11+ 1. 6% $475.


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GRAH I 

AVERAGE LABORATORY PAYMENT


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

(PARTIAL GRAH) OF PRACTITIONERS


10" 

AVG PAID PER OFFICE VISIT


$225 

AT LEAST 82% ARE PAID tlORE UNDER THE LRI $200 

5175 

$150 

$125 

$100 

$75 

550 

525 

11+ 

AVERAGE NUnBER OF LABORATORY SERVICES PER OFFICE VISIT


OF PRACTITIONERS AVERAGE PAID AVG PAID 11+ SVCS 

19BB BnAD SUBSAnPLE


AVERAGE SERVICES 

PER OFFICE VISIT


11+ 

TABLE OF DATA 

SUBSAMPLE 

FREQUENCY 

% OF 

SPECIALTY 

AVERAGE 

PAID 

941 

870 

234 

42. 

39. 

10. 

1.0% 

$3. 

$10. 

$19. 

$29. 

$35. 

$58. 

$71. 

$60. 

$111. 56 

$98. 

$98. 

$216. 

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APPENDIX 

ENHCING LR SUCC 
.. ...., .... ...........,,............ . .. . .. .......... ...p............... .................. ............... ....,,... ,.. . .. . .. .....

ENHCING LR SUCCE 

l :
 In researchig our previous study, entitled "Ensuring Appropriate Use of Laboratory -

Servces: A Monograph " we learned the laboratory marketplace is extremely 

adaptable. For nearly 20 years it has demonstrated its abilty to adapt to new laws 

reguations and policies and overcome HCFA' s efiorts to contain costs. We learned 

that a reimbursement mechanism that makes too many exceptions wil increase 

utilization. Therefore, we believe that incorporation of the following elements into 

i , LRI implementation will safeguard the benefits described in the monograph and this 

management advisory report. r . 

i .


Th LR shoul be calcted usg BMA and hoitl outti data. 

A LRI is a one-time event. The 

LRI should be calculated from all 

.... on"..... outpatient laboratory data '',n,..... 

including hospital outpatient data.


Exclusion of any entity providing 

laboratory servces will encourage r ­


a shift of laboratory work to 

excluded persons or businesses. 

On laboratory seres de in the Federal r .. Regter as physin seres shoul be exlu from the 

In 1988 fewer than 1000 different 

laboratory procedure codes were 

used to bil Medicare. Several


thousand codes were not used.


Failure to address all laboratory 

servces would in all likelihood 

result in shifts to codes currently


not in use. Only laboratory
 i .
 servces defined in the Federal


Register as physician servces 

should be excluded from the LRI. 

These excluded servces would be 

paid as physician servces under 

Medicare s resource-based relative value scale (RBRVS). Failure to include all other 

laboratory servces would encourage manipulation of the system. 
All physicin specilties shoul be inclued in the LR paynL 

In our analysis, we found that only atyical physicians in each specialty would 

likely to receive less money under a LRI. The graphs and tables in appendix A 

show that the majority of physicians in most specialties would receive more money 

under a LRI. Therefore, we do not believe a LRI needs to be adjusted for specialty 

differences nor should a specialty be excluded. 
APPENDIX C


DRA REPORT COMMNf AN OIG REPONSE 

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. . , 

( .. . j ; (; :;. .. 

DEPARTMENT OF HEALTH II HUMAN SERVICES	 Of of th 

W8Ihingon, D.C. 	 201 I: 	 FE3 I 2 991 

I .	 TO: Richard P. Kusserow 

Inspector General c.)-­

; q f. 

FROM: Assistant Secretary for

Planning .and Evaluation	 ' :/i . ­ ; ..1


SUBJECT : OIG Draft Report: "Impact of a Laboratory Roll-In I .


Medicare Expenditures" (OEI-OS-89-891S1) -- COMMS 

Thank you for the opportunity to review the subj ect report. We 

generally support the concept of "bundling" as a way to encourage efficient use of services. We agree that HCFA should research 

i:.	 and develop a reimbursement mechanism for laboratory services 

based on bundling to replace the laboratory fee schedule. 

We believe that two major issues that are not addressed in the 

draft report must be resolved before bundling can be considered 

to be a viable alternative reimbursement mechanism. First, the 

issue of case-mix complexity. Graphs A through I show that, for 

the specialties examined, only a relatively small proportion of 

physicians order a large numer of tests per visit. However, the 

analysis does not examine the differences in case-mix across 

physicians to evaluate how the severity of patient illness (e.g., co-morbidities, nonspecific etiologies) affects utilization of

tes s. The second issue is that, while many of the most common 

tests can be obtained at fairly low prices, many special tests 

are unavoidably more expensive. . For example, the report does not 

examine differences in prices by the clinical performance 

characteristics of tests. Under the approach advocated by the 

report, physicians would be financially penalized for adopting 

more diagnostically specific tests, since such tests are often 

more expensive than a standard test, especially when first introduced. 

In order for a bundling strategy to be effective, it must be


sensitive to the circumstances under which laboratory services


are appropriately required. While we agree with the implicit


premise of the report that a simple approach is more desirable


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


laboratory services regardless of case-mix and technolog would


be inadequate.


Mart ' H Gerr 

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DEPARTMENT OF HEALTH &. HUMAN SE	 Health Care 

YICF.	 Financing Administration :' Ie
 I.... . ; I . 	 I.. .. I. 1: 

01''''N 

APR I 5 199/
 Memorandum

Date


Gail R. Wilensky, Ph.D. 


From Administrator


Subject	 OIG Draft Report - "Impact of a Laboratory Roll In on Medicare Expenditures:'
 OEI-05-89-89151


The Inspector General 

Office of the Secretary


We have reviewed the subject draft report, which is a follow-up to OIG' 

previous study entitled "Ensuring Appropriate Use of Laboratory Services: A 

Monograph," OEI-05-89-89150. Both r ports outline a method for rolling laboratory payment into Medicare s recognized charge for a physician offce visit. 

The report found that a bundling approach, called a laboratory roll-in (LRI). could save Medicare over $1 bilion in the fIrst year and more than $12 billion over 5 years. It also found physicians would be suffciently paid by the additional funds

added onto the payment for offce visits (the LRI) to pay for all necessary laboratory work ordered for their patients. OIG recommends that HCF A should 

research and develop the LRI payment mechanism for laboratory services, and 

propose legislation to implement it within 2 years. 

While, in general, we strongly support the concept of bundling related services 

into payment groups, we do not concur with the plan to roll laboratory payment into Medicare s recognized charge for a physician offce visit as it is described in the 

report for the reasons described in the attached comments. Our specific comments on the report s recommendation are also attached for your consideration. 

Thank you for the opportunity to review and comment on this draft report. 

Please advise us whether you agree with our position on the report 

recommendations at your earliest convenience. 

HHS/OIG

OFFICE OF EVALUATION 

Attachment	 AND INSPECTION - ROV 

APR 2 2 1991 

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, .

Comments of the Health Care FinancinlJ Administration 

(HCF A) on the OIG Draft Report - "Impact of a Laboratorv

Roll In On Medicare Exenditures." OEI-05-89-89151 

In general. bundling related services into groups for payment purposes can provide appropriate incentives for the effcient delivery of servces while ensuring quality of 

care. Bundling payment for laboratory tests into physician offce visits is" an 

interesting idea, but is one that would need extensive research and analysis before it 

could be pursued. HCFA does not concur with GIG' s recommendation for four 

primary reasons: (1) the concept is in conflct with the thrust of all recently 

enacted Medicare legislation that governs Medicare certification of laboratories and 

payment for laboratory services, most notably the Clinical laboratOry Improvement 

Amendments of 1988 (CLIA); (2) the Laboratory Roll In (LRI) concept as 

described in this report has serious conceptual and practical problems; (3) enactment of the legislative proposal to reinstate coinsurance on laboratory services 

contained in the FY 1992 President s budget, combined with the administrative 

complexities of the LRI proposal, would virtually eliminate the $1.1 billion annual 

savings estimated by OIG; and (4) it would be diffcult, if not impossible. for HCFA 

to develop laboratory payment reform while implementing Physician Payment 

Reform. Our specific comments follow. 

1. GIG's suggested methodology for paying laboratory fees would not be in


compliance with CLIA or the Omnibus Budget Reconciliation Act of 1989


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


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


Medicare and CLIA, and both wil be based on tests performed. A payment 

system based on the physician offce visit would not identify individual lahoratOry 

test procedures performed. This would make it impossible for Medicare carriers 

to correlate tests performed by the labora!ory with .the laboratory s certific;ltion 

status. 

2. The LRI plan proposed by OIG advocates the same payment to different kinds 

of physicians. This would result in significant inequities in compensation hecause 

test-orderig practices and the costs of tests tyical to a specialty may differ

greatly. Even with an adjustment for different specialties, the LRI plan would 

put individual physicians at risk based on whether their patient mix was sicker 

than average or requift d greater than the average number of clinical lahoratory tests. Risk cannot be spread with individual physicians, who are small volume 

providers. as it can with hospitals and HMOs. 

3. Under the LRI system, information on utilization of specific laboratory tests 

would no longer be available. To assure the availability of such information 

would require that an alternative data collection system be developed. Also. 

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would be difficult fo.r HCF A to determine the future costs oflaboratorv services 

without knowing the costs of laboratory servces to physicians. This information 

would most likely have to be provided on the physician s offce visit bill, which 

would adversely affect any administrative savings anticipated. 

4. While lab tests. may represent 25 percent of the carriers' workload. they are 

usually submitted electronically and are inexpensive to process. Adding 

laboratory tests to doctors' paper claims will result in a smaller overall claims 

volume, but also in fewer electronic medical claims and a higher administrative 

I .	 cost per claim. Assessing the combined effect of these results on administrative 

costs as a whole would require further analysis. 

5. The report references Blue Cross and Blue Shield Association and the American 

College of Physicians findings that 20 to 60 percent of clinical laboratory testing 

may be unnecessary. The calculation in the report, which arrived at $13.50 for 

the amount to be added onto a physician office visit, did not take this into 

account. 

6. OIG calculated that the use of the LRI plan would produce first year savings of 

at least $1.1 billon, and that $980 millon of those savings would be realized 

from patient coinsurance. The FY 1992 President s budget includes a legislative 

proposal to reimpose laboratory coinsurance. If this is enacted, the savings from 

the LRI mechanism would be virtually eliminated. 

After the savings from patient coinsurance have been subtracted, the balance of 

the savings estimated by OIG, $143 milion, was attributed to reductions in 

administrative costs. It is unclear how much, if any, of the administrative savings 

anticipated by OIG could actually be realized because of other factors not taken 

into account in this study. These factors include: the change from electronically 

submitted laboratory claims to additional line items on paper claims; the need 

for a new laboratory certification system under the LRI payment mechanism; the 

possible inflationary effect of potential kickbacks under LRI; and the cost of


developing and maintaining a new system for collecting laboratory data for 

utilzation and payment purposes. 

In addition, provisions enacted in OBRA 90 have a!=o addressed the concerns 

about rapid inflation in laboratory costs that prompted OIG to recommend an 

LRI payment mechanism. Section 4154(a) of OBRA 90 changes the annual 

update factor for the laboratory fee schedules from the Consumer Price Index 

for All Urban Consumers (which usually runs 4 percent to 5 percent) 

2 percent for FY 1991- 1993. Section 4154(b) of OBRA 90 reduces the national 

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. . , ,. 

i. ­

Page 3


limit for each test, now set at 93 percent of the median of the carrer fee 

schedule amounts, to 88 percent of the median of the carrier fee schedule 

amounts, effective January 1, 1991. These provisions should help to serve to 

control the groWth of laboratory reimbursements. 

7. It would be diffcult, if not impossible, for HCF A to develop laboratory payment reform while implementing Physician Payment Reform. The problem is further exacerbated by the demands on HCFA to fully implement other new legislative provisions--notably CLIA and the prohibition on referrals from physicians who have an ownership interest in laboratory entities--which are in conflct with the 

OIG proposal. Given both the administrative complexity of our responsibilities under current law and changes that will be taking place in payments to 

physicians as a result, this would not appear to be an opportune time to develop or implement a LRI policy. 

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. , ,. 

OIG Response to ASPE and RCF A Comments 

Both the Assistant Secretary for Planning and Evaluation (ASPE) and the Health 

Care Financing Administration (HCFA) commented on our draft Management 

Advisory Report. The ASPE agrees with our recommendations and suggeJts that the 

potential differences in patient case-mix among physician practices and the difference 

in prices between "common" and more specialized testing be further explored. 

The HCF A does not concur with our recommendation. Primarily, they feel that the 

LRI: 1) is in conflct with implementation of the Clinical Laboratory Improvement 

Amendments of 1988 (CLIA); 2) will put individual physicians at risk based on the 

complexity of their patient mix; 3) will not save money; and, 4) will be diffcult, if not 

impossible, to develop while implementing Physician Payment Reform. 

We do not believe that the LRI conflcts with CLIA's implementation. Based on 

HCFA' s comments, it appears that enforcement of CLIA regulations is going to be 

- dependent, in part on Medicare carrer tracking of laboratory and physician billings 

for laboratory servces. HCF A maintains that, under the LRI system, information on 

utilization and specific laboratory tests would no longer be available, makiltg their 

enforcement of CLIA diffcult. 

While discrete Medicare claim information on laboratory use will not be available 

under the LRI, this information does exist in HCFA' s certification and survey process 

and could also be obtained through scientifc sampling. In addition, it has always been our belief that reliance on Medicare carrers to scrutinize millons of laboratory 

claim line items is an arduous and costly task. 

We would also point out that approximately two out of three laboratories that 

HCF A will be regulating under CLIA do not submit itemized bils to carrers. 

Hospital, nursing home and dentist laboratories are but a few that do not submit 

itemized bils for laboratory servces to Medicare. It would appear that an alternate 

system of enforcement will have to be developed for these laboratories. This system 

could be adapted for Medicare laboratories, thus removing the need for carrier data 

on laboratory servces. 

The HCF A and ASPE believe that the LRI might put individual physicians at risk 

based on their patient case mix. We considered this issue during the development of 

the LRI and found little evidence to support the patient case mix theory. All of the 

literature we located and our research appear to indicate that individual physician 

case mix does not account for differences in the use of servces. Our work on 

patient case mix was not a rigorous analysis; therefore, we agree with ASPE and 

HCF A that additional study needs to be done. 

Our analysis of laboratory use by physician specialty indicated that expensive 

laboratory servces which might adversely affect sO\le physician specialties have 

C - 7 
already been redefined as physician servces by the Physician Payment Reform 

Commission. On page B-1 of this report, we recommend these servces be exempt from the LRI payment. Because our analysis is preliminary, we agree with both 

HCF A and ASPE that this issue should be studied further. 

Many of HCFA's specific comments regarding the costs of implementing the LRI 

and the subsequent lack of program savings are predicated on HCF A' s need to maintain exhaustive laboratory information to enforce CLIA. This need cannot be realistically met under the LRI. As stated previously, we believe there are alternatives to maintaining discrete laboratory claim information. Should discrete 

laboratory information be necessary to enforce CLIA the costs of developing and maintaining a new system for collecting this data should be offset by the CLIA user fees. 

The HCF A states that a large portion of program savings that would result from the LRI come from reinstating co-insurance on laboratory tests. This co-insurance proposal is included in the Fiscal Year 1992 President' s Budget. If legislation is enacted to reinstate the co-insurance, HCF A believes the savings from the LRI will be virtually eliminated. The HCFA's analysis of potential savings is incomplete and fails to take into consideration the full scope and sources of savings under the LRI. As shown on page 2 of this report, we calculated no program savings for 1992 because our formula is budget neutral for the year of implementation. However, in the four succeeding years, savings of $5 bilion could be realized. This is in addition to the administrative and co-insurance savings. 

Finally, HCFA believes that it would be difficult, if not impossible, to develop laboratory payment reform while implementing Physician Payment Reform and other laboratory initiatives, such as CLIA and the prohibition on laboratory referrals from physician who have ownership interests. 

We appreciate the enormous responsibilties and administrative complexities facing 

HCF A at this time. However, we do not believe that researching the LRI would interfere with .current HCF A initiatives. Once implemented, the management of the LRI is compatible with the methodologies HCFA will need to employ to update the relative values required for physician payment under RBRVS. Relative values for 

physician servces are to be updated at least every 5 years. Under the LRI, the cost of securing laboratory work would be considered practice overhead cost. When the relative values for a physician specialty are adjusted, these overhead costs would be taken into consideration and any inequities in the LRI adjusted at that time. 

We believe the LRI is a viable concept for controllng laboratory expenditures and 

thus continue to recommend that HCFA research and develop it. 

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