Medicare: Modifying Payments for Certain Pathology Services Is Warranted
Published: 2003-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1999, the Health Care Financing Administration, now called the Centers for Medicare & Medicaid Services (CMS), proposed terminating an exception to a payment rule that had permitted laboratories to receive direct payment from Medicare when providing technical pathology services that had been outsourced by certain hospitals. The Congress enacted provisions in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to delay the termination. The BIPA provisions directed GAO to report on the number of outsourcing hospitals and their service volumes and the effect of the termination of direct laboratory payments on hospitals and laboratories, as well as on access to technical pathology services by Medicare beneficiaries. GAO analyzed Medicare inpatient and outpatient hospital and laboratory claims data from 2001 to develop its estimates.
section_title: What GAO Found
paragraphs: In 2001, approximately 95 percent of all Medicare prospective payment system (PPS) hospitals--hospitals that are paid predetermined fixed amounts for services--and critical access hospitals (CAH), which receive reimbursement from Medicare based on their reasonable costs, outsourced some technical pathology services to laboratories that received direct payment for those services. However, the median number of outsourced services per hospital was small--81. If laboratories had not received direct payments for services for hospital patients, GAO estimates that Medicare spending would have been $42 million less in 2001, and beneficiary cost sharing obligations for inpatient and outpatient services would have been reduced by $2 million. Most hospitals are unlikely to experience a financial burden from paying laboratories to provide technical pathology services. If payment to the laboratory is made at the current rate, a PPS hospital outsourcing the median number of technical pathology services outsourced by PPS hospitals, 94, would incur an additional annual cost of approximately $2,900. There would be no financial impact for the 31 percent of rural hospitals that are CAHs, as they would receive Medicare reimbursement for their additional costs. Medicare beneficiaries' access to pathology services would likely be unaffected if direct laboratory payments are terminated. Hospital officials stated they were unlikely to limit surgical services, including those requiring pathology services, because limiting these services would result in a loss of revenue and could restrict access to services for their communities.

section_title: Letter
paragraphs: Hospitals receive fixed, predetermined amounts under Medicare’s hospital  inpatient and outpatient prospective payment systems (PPS) for providing  necessary services to Medicare beneficiaries. By paying hospitals fixed  amounts under a PPS, Medicare seeks to encourage them to operate  efficiently, as hospitals retain the difference if their payments exceed their  costs of providing necessary services. Hospitals that outsource services  for their patients generally pay suppliers of those services directly, and the  suppliers do not receive payment from Medicare.
In 2000, the Congress enacted provisions in the Medicare, Medicaid, and  SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to delay  for 2 years application of a rule issued by the Health Care Financing  Administration (HCFA), the agency responsible for administering  Medicare. The rule terminated an exception to the inpatient and outpatient  PPS that permitted one type of supplier—laboratories—to receive  payment directly from Medicare when providing technical pathology  services to beneficiaries who are hospital patients. The BIPA provisions  applied only to “covered hospitals,” those hospitals that had agreements  with laboratories in effect as of July 22, 1999, the date HCFA proposed the  rule, under which the hospitals outsourced technical pathology services to  laboratories, and the laboratories received payment from Medicare for  these services. Under these agreements, some hospitals may outsource all  of their technical pathology services to laboratories, while others may  outsource only some of their services, such as complex procedures that  are rarely performed or overflow services at times of full capacity.
Numerous issues were raised when HCFA issued its rule in 1999 to  terminate direct Medicare payment to laboratories for technical pathology  services. At the time, HCFA stated that Medicare was paying twice for  those services provided to hospital inpatients, once to the hospital through  the inpatient PPS payment and once to the laboratory through a separate  payment. In addition, outsourcing hospitals had an advantage because  they did not pay the cost of technical pathology services outsourced to  laboratories, while other hospitals had to pay for the cost of these services  from their inpatient PPS payments. Furthermore, application of Medicare  cost-sharing rules resulted in added costs to inpatient beneficiaries  admitted to outsourcing hospitals, compared to those for inpatients at  other hospitals. Some hospitals and laboratories and their affiliated  pathologists voiced concern, however, that termination of the laboratories’  direct payments would increase hospitals’ costs, decrease laboratories’  revenues, and cause hospitals to stop performing surgical services,  particularly in rural areas, reducing beneficiaries’ access to services.
Although the BIPA provisions expired at the end of 2002, the Centers for  Medicare & Medicaid Services (CMS) made an administrative decision to  continue directly paying laboratories for technical pathology services  provided to hospital patients. In recent bills, both the House of  Representatives and the Senate have included language to further delay  application of the CMS rule.
In BIPA, the Congress directed that we report on how terminating direct  laboratory payments would affect hospitals, laboratories, and access to  technical pathology services by Medicare beneficiaries. As agreed with  the committees of jurisdiction, we (1) describe the number and type of  hospitals outsourcing technical pathology services and their service  volumes, (2) estimate how termination of direct laboratory payments  would affect Medicare expenditures, beneficiary cost-sharing obligations,  and hospital costs, and (3) examine how terminating direct laboratory  payments would affect beneficiaries’ access to technical pathology  services in hospitals.
We used Medicare claims and provider data to identify Medicare  beneficiaries receiving technical pathology laboratory services  concurrently with hospital services. Using 2001 data, the most recently  available, we estimated the number of urban and rural PPS hospitals and  critical access hospitals (CAH), which are paid their reasonable costs  rather than PPS payments, outsourcing technical pathology services. We  also estimated the volume of and payments for these services. We relied  on these data because there is no list of covered hospitals and the  laboratories to which they outsource technical pathology services.
We interviewed officials at CMS, the Department of Health and Human  Services Office of Inspector General, and the Congressional Budget Office,  as well as representatives from several Medicare carriers. In addition, we  interviewed representatives from national associations representing  hospitals and pathologists and representatives from 13 laboratories and 17  urban and rural PPS hospitals in eight states and an additional 2  laboratories in another state. We visited a laboratory and a rural hospital  that outsources technical pathology services. We also spoke with officials  from two CAHs. Our methodology is detailed in appendix I. We did our  work from June 2002 through September 2003 in accordance with  generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Medicare payment policies for technical pathology services have changed  over the years as new payment systems for hospital and physician services  have been implemented and modified. Beginning with the implementation  of the hospital inpatient PPS on October 1, 1983, through the  implementation of the Medicare physician fee schedule (MPFS) on  January 1, 1992, and the outpatient PPS on August 1, 2000, payment for  technical pathology services changed as fixed, predetermined payment  replaced reasonable cost or charge-based reimbursement for Medicare  services.
subsections: section_title: Implementation of the Inpatient PPS
paragraphs: Under the inpatient PPS, each inpatient stay is classifed into a diagnosis- related group (DRG) based primarily on the patient’s condition. Each DRG  has a payment weight assigned to it that reflects the relative cost of  inpatient treatment for a patient in that group compared with that for the  average Medicare inpatient. Included in the costs of each DRG are  nonphysician services provided to inpatients by the hospital and its  outside suppliers. A hospital receives a DRG payment from Medicare and a  deductible amount from a beneficiary for each inpatient benefit period.Each year, the DRG weights are recalibrated to account for changes in  resource use, and the payment rate is adjusted by an update factor to  account for changes in market conditions, practice patterns, and  technology. Medicare separately pays physicians, including pathologists,  and certain other professionals for the direct services they provide to  inpatients.
When developing the inpatient PPS in the early 1980s, HCFA determined  that technical pathology services outsourced to laboratories were an  integral part of the professional services provided by the laboratories’  pathologists, not separate nonphysician services. Based on that  determination, the payment for technical pathology services provided by  laboratories was included in the larger payment to the laboratories and not  included in the PPS payments.
section_title: Implementation of the MPFS
paragraphs: In 1992, HCFA implemented the MPFS, which created distinct payments  for the professional and technical components of most diagnostic services,  including pathology services. Although the MPFS included a distinct  payment to laboratories for technical pathology services, HCFA did not  revise its policy to prohibit laboratories from continuing to receive the  separate Medicare payment for outsourced technical pathology services  provided to inpatients. Under the MPFS, beneficiaries are responsible for a  copayment equal to 20 percent of the payment for physician services,  including technical pathology services. Thus, inpatient beneficiaries whose  technical pathology services were outsourced by a hospital to a laboratory  that received direct payment from Medicare were responsible for a  copayment, while other inpatients were not.
section_title: Termination of MPFS Payments to Laboratories for Technical Pathology Services
paragraphs: On July 22, 1999, HCFA proposed ending Medicare payments under the  MPFS to laboratories for technical pathology services provided to hospital  inpatients on or after January 1, 2000. Under the proposal, laboratories,  like suppliers of other nonphysician services, would have to seek payment  from hospitals for technical pathology services provided to hospital  inpatients.
HCFA’s rationale for its proposed rule was that payment for technical  pathology services provided to beneficiaries was already included in the  inpatient PPS. When implementing the inpatient PPS, HCFA established  separate payment rates for rural and urban hospitals based on data from  hospitals’ cost reports submitted to the agency. Hospitals that performed  their own technical pathology services included such costs in their cost  reports, while hospitals outsourcing these services did not. According to  HCFA, urban hospitals generally performed such services, and in part,  their higher rates reflected that. Consequently, in HCFA’s view, when the  separate rural rate was eliminated in 1995 and rural hospitals began  receiving the higher rate paid to most urban hospitals, the cost of technical  pathology services was included in that payment. Thus, HCFA concluded  that when a laboratory received payment from Medicare for technical  pathology services provided to a hospital inpatient, Medicare was paying  twice for the same service—once to the hospital as part of the PPS  payment and once to the laboratory through the MPFS. A second reason  HCFA cited to support its proposed rule was concern that hospital  outsourcing arrangements with laboratories to provide technical  pathology services would proliferate if hospitals realized these  arrangements would reduce their costs without any reduction in their  inpatient PPS payments.
After considering comments from the hospital industry and laboratories,  which stated, in part, that they would need additional time to renegotiate  their agreements, in the final rule, HCFA delayed implementation of the  policy until January 1, 2001.
section_title: Temporary Continuation of Laboratories Receiving MPFS Payments
paragraphs: In December 2000, the Congress enacted provisions in BIPA that stated  that laboratories furnishing technical pathology services to hospital  patients under agreements with hospitals as of the publication date of the  HCFA proposed rule could continue to receive payment directly from  Medicare for these services until January 1, 2003. Because the outpatient  PPS was implemented in August 2000, the provisions applied to services  provided to outpatients as well as inpatients.
section_title: Implementation of the Outpatient PPS
paragraphs: The outpatient PPS pays hospitals a predetermined amount per service  similar to a fee schedule. All services paid under the outpatient PPS,  including technical pathology services, are classified into groups called  ambulatory payment classifications (APC). Like inpatient DRGs, the  relative weights of the APCs are adjusted annually by recalibration and the  payment rates by an update factor to account for changes in resource use,  technology, practice cost, and service delivery. When the outpatient PPS  was implemented, beneficiary copayments for a service were generally 20  percent of the hospitals’ median charges for that service in 1996, updated  to 1999. Therefore, the beneficiary cost-sharing obligation as a percentage  of APC payment rates varies by service. Because the median charges were  often higher than the APC payment rates implemented with the outpatient  PPS, beneficiary copayments were frequently as high or higher than 50  percent of the total APC payment amount. The Balanced Budget Act of  1997 established a mechanism to gradually decrease the cost-sharing  percentages for all APCs to 20 percent over time.
The copayments that beneficiaries are responsible for paying under the  outpatient PPS for technical pathology services that are furnished directly  by hospitals are roughly comparable to the copayments that beneficiaries  are responsible for paying laboratories under the MPFS when services are  outsourced. The outpatient PPS payment rates for technical pathology  services are significantly lower than the corresponding MPFS payment  rates, but outpatient PPS copayments represent a higher percentage of the  payment for technical pathology services than MPFS copayments.
section_title: Medicare Payment Methodologies If Direct Payments to Laboratories Are Terminated
paragraphs: If the BIPA provisions are not reinstated and CMS terminates direct  payments to laboratories, hospitals would have to negotiate payment  amounts with laboratories to pay them directly for services delivered to  inpatient and outpatient beneficiaries or begin to supply these services  themselves. While the hospitals would not experience any direct  adjustments to their inpatient DRG payments, over time, hospital costs of  paying laboratories for technical pathology services would be reflected in  the DRG weights, as the annual recalibration accounts for changes in the  costs of delivering services. For services delivered to outpatients,  hospitals would bill Medicare under the outpatient PPS for technical  pathology services and, therefore, would recover additional revenue even  if they continued to outsource these services to laboratories. Inpatient  beneficiaries of hospitals that outsource technical pathology services  would no longer be responsible for additional copayments to the  laboratories. Outpatient beneficiaries would no longer be responsible for  copayments to laboratories under the MPFS, but instead would be  responsible for copayments to the hospitals where they received their  services under the outpatient PPS.
CAHs, which as of March 2003 constituted 15 percent of all hospitals and  31 percent of rural hospitals, would not be affected by the termination of  direct laboratory payments. CAHs are not paid under the inpatient and  outpatient PPS, but instead are paid based on their reasonable costs of  providing services. Currently, CAHs receive no payment from Medicare for  technical pathology services outsourced to laboratories that directly bill  Medicare because CAHs incur no costs in the delivery of those services. If  direct laboratory payments are terminated, CAHs would be reimbursed by  Medicare for their costs of paying laboratories to perform technical  pathology services, and outpatient beneficiaries who currently are  responsible for paying 20 percent of the payment for their technical  pathology services to the laboratories under the MPFS would instead be  responsible for paying 20 percent of the CAHs’ customary charges. See  table 1 for a description of Medicare payments to outsourcing PPS  hospitals and CAHs, and table 2 for a description of beneficiary cost- sharing obligations at outsourcing PPS hospitals and CAHs, under current  policy and if direct payment to laboratories is terminated.
section_title: Few Hospitals Outsource Large Volumes of Technical Pathology Services
paragraphs: We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95  percent of all such facilities, outsourced at least some technical pathology  services to laboratories that received direct payment from Medicare for  those services (see table 3). However, most hospitals outsourced a small  number of these services to laboratories. In 2001, approximately 1.4  million technical pathology services were outsourced, and the median  number of outsourced services per hospital was 81. Approximately 68  percent of all hospitals outsourced 200 or fewer technical pathology  services, and only 6 percent outsourced more than 1,000 services.  Outsourcing hospitals consisted of 2,428 urban PPS facilities and 1,651  rural PPS facilities, representing 95 percent and 97 percent of urban and  rural PPS hospitals in 2001, respectively, and 694 CAHs.
Among hospitals outsourcing technical pathology services, urban  hospitals, including CAHs, outsourced a median of 97 services and 64  percent of all services, and rural hospitals, including CAHs, outsourced a  median of 61 services and 36 percent of all services. Almost twice as  many services were delivered to outpatient beneficiaries compared to  inpatient beneficiaries, as outpatient services accounted for approximately  64 percent of all outsourced services.
section_title: Medicare Expenditures and Beneficiary Copayments Would Be Reduced, While Hospital Costs Would Increase Slightly, If Direct Payment to Laboratories Is Terminated
paragraphs: If laboratories had not received direct payment for services for hospital  patients, we estimate that Medicare spending would have been $42 million  less in 2001, with $18 million and $24 million in savings for inpatient and  outpatient services, respectively, and overall beneficiary cost sharing  would have been reduced by $2 million. In 2001, payments to laboratories  providing technical pathology services to beneficiaries who were hospital  patients equaled over $63 million, including Medicare payments of about  $51 million ($18 million for inpatient services and $33 million for  outpatient services) and beneficiary copayments of almost $13 million ($5  million for inpatient services and $8 million for outpatient services).  Paying laboratories to provide technical pathology services is unlikely to  impose a large financial burden on most hospitals. However, the extent to  which an individual hospital’s costs and a laboratory’s revenues would  change if direct payment to laboratories is terminated would depend on  the rates negotiated by that hospital and laboratory. If payment to the  laboratory is made at the MPFS rate, a PPS hospital outsourcing the  median number of technical pathology services would incur an additional  cost of approximately $2,900. Additionally, there would be no financial  impact on CAHs if direct laboratory payment is terminated because they  would be reimbursed for their reasonable costs of outsourcing technical  pathology services.
subsections: section_title: Total Payments to Laboratories in 2001
paragraphs: In 2001, estimated payments to laboratories providing technical pathology  services to hospital patients totaled over $63 million, including Medicare  payments of about $51 million and beneficiary copayments of almost $13  million (see table 4). For services provided to inpatients, total laboratory  payments equaled approximately $23 million, with $18 million from  Medicare and $5 million from beneficiaries. For services provided to  outpatients, total laboratory payments equaled approximately $41 million,  including $33 million from Medicare and $8 million from beneficiaries.
section_title: Lower Medicare Payments If Direct Payment to Laboratories Is Terminated
paragraphs: If laboratories had not received direct payment for services for hospital  patients, we estimate that Medicare spending would have been $42 million  less in 2001 (see table 5). The $18 million in inpatient savings would have  resulted from Medicare discontinuing payments for technical pathology  services to laboratories under the MPFS, while making no additional  payments to PPS hospitals for inpatient services. For outpatient services,  Medicare would not have paid laboratories directly, but would have paid  PPS hospitals under the outpatient PPS. If direct payment to laboratories  had been terminated, Medicare would have paid PPS hospitals an  estimated $9 million under the outpatient PPS in 2001 for technical  pathology services, thus saving $24 million.
section_title: Reduced Overall Beneficiary Cost Sharing
paragraphs: If laboratories had not received direct payment for services for hospital  patients, Medicare beneficiaries would have been relieved of  approximately $2 million in cost-sharing obligations (see table 6). In 2001,  inpatients at hospitals that outsourced services were responsible for  paying laboratories approximately $5 million in copayments under the  MPFS. If direct payment to laboratories is terminated, inpatients would  make no copayments to laboratories for technical pathology services. We  estimate that the cost-sharing obligation of outpatients at PPS hospitals  would have increased by $3 million to approximately $11 million under the  outpatient PPS if laboratories had not received direct payment, compared  to an estimated cost sharing of $8 million under the MPFS. However,  outpatients’ cost-sharing obligations for technical pathology services  under the outpatient PPS gradually will decline, as mandated by the law.  As the percentage declines, beneficiary copayments for technical  pathology services under the outpatient PPS should become lower than  under the MPFS, as long as payments for these services generally remain  lower under the outpatient PPS than the MPFS.
section_title: Small Financial Effects Dependent on Negotiations
paragraphs: If outsourcing hospitals agree to pay laboratories the rates the laboratories  currently receive under the MPFS for technical pathology services, these  amounts are unlikely to impose a large financial burden on most hospitals.  In 2001, a PPS hospital outsourcing the median number of services  outsourced by PPS hospitals, 94, would have incurred additional costs of  approximately $2,900 in paying a laboratory for technical pathology  services, representing a small fraction of hospitals’ annual Medicare  revenues. A PPS hospital outsourcing 1,283 services annually—the 95th  percentile of outsourced technical pathology service volume in our  analysis—would have incurred an additional annual cost of just under  $40,000. There would be no financial impact from terminating direct  laboratory payments for rural hospitals that are or become CAHs, as CAHs  would recover from Medicare their reasonable costs of outsourcing  technical pathology services.
The extent to which a hospital’s costs and a laboratory’s revenues would  change if direct laboratory payments are terminated would depend on the  rates negotiated between the two parties. Hospitals’ costs would increase  because they would begin paying the laboratories for technical pathology  services; laboratories’ revenues would decline if hospitals pay lower rates  for the technical pathology services than Medicare currently pays  laboratories under the MPFS. Because larger hospitals and those located  in urban areas have more purchasing power and may have multiple  laboratories from which to choose, these hospitals are likely to fare better  than smaller hospitals and those in rural areas.
Laboratory officials we spoke with voiced concern that some hospitals  would insist that laboratories furnish technical pathology services at no  charge or at extremely low rates in exchange for hospitals referring other  business to the laboratories and their pathologists. However, these  officials also indicated that their laboratories would not perform technical  pathology services at no charge or for very low rates. Furthermore,  hospitals might be deterred from requesting low rates because of concerns  that such arrangements might violate applicable fraud and abuse laws.
Although hospitals and laboratories would face new billing costs—both  one-time and ongoing—if direct payments to laboratories are terminated,  such changes generally would impose a modest additional cost. We spoke  with officials from hospitals and laboratories that already have billing  arrangements for these services, and they did not report to us that these  costs were burdensome.
Beneficiaries’ Access  Medicare beneficiaries’ access to pathology services is unlikely to be  Likely Would Be  Unaffected  disrupted if direct payments to laboratories are terminated because  hospitals are unlikely to limit surgical services, including those requiring  pathology services. In addition, hospitals would likely continue to  outsource technical pathology services to laboratories because this would  generally be less costly than performing these services themselves.
Limiting Surgeries Unlikely  Representatives of outsourcing hospitals with whom we spoke indicated  that their hospitals would not eliminate or restrict surgical procedures if  direct payment to laboratories is terminated. Because a large percentage  of hospital-based surgeries require pathology services, hospitals would  lose an important source of revenue if they restricted surgeries to those  not requiring such services. Outsourcing hospitals stated that they could  not afford this revenue loss. Rural hospitals, which are often the sole  hospitals in their geographic areas, expressed the added concern that  eliminating surgical procedures would reduce their communities’ access  to medical services.
section_title: Continuation of Outsourcing Arrangements with Laboratories
paragraphs: If direct payment to laboratories is terminated, representatives from  hospitals that do not maintain pathology laboratories and outsource  technical pathology services to laboratories said they would continue to  outsource technical pathology services. Few such hospitals have a  sufficiently large volume of technical pathology services to make it cost  effective to perform such services themselves. For most hospitals, the  equipment and personnel expenses associated with maintaining their own  pathology laboratories would likely exceed the cost of outsourcing the  technical pathology services to laboratories. Hospital officials also stated  that they have had difficulty recruiting histotechnicians, and it therefore  would be difficult to staff new, or expand existing, pathology laboratories.
section_title: Conclusions
paragraphs: Termination of direct laboratory payments generally would reduce  Medicare expenditures and beneficiary cost-sharing obligations for  technical pathology services while having little effect on beneficiaries’  access to these services. While termination of direct laboratory payments  would impose a small financial burden on outsourcing PPS hospitals, this  change would have no impact on CAHs. As the relative payment weights of  services provided under the inpatient and outpatient PPS are adjusted  annually, any increased costs hospitals incur to pay laboratories for  technical pathology services will, over time, be reflected in the inpatient  and outpatient PPS payments. Termination of direct laboratory payments  also would eliminate the inequity between beneficiary cost-sharing  obligations at different hospitals.
In addition, continuing direct laboratory payments is an inappropriate  means for providing financial assistance to hospitals. Hospitals, in  receiving fixed payment amounts under a PPS and paying suppliers of  nonphysician services provided to a Medicare patient from such fixed  amounts, have an incentive to provide health care services efficiently.  Permitting hospitals to outsource technical pathology services and have  laboratories seek payment from Medicare eliminates the incentive for the  efficient provision of these services and leads to potential Medicare  double payments.
section_title: Matter for Congressional Consideration
paragraphs: We suggest that the Congress may wish to consider not reinstating the  provisions that allow laboratories to receive direct payment from  Medicare for providing technical pathology services to hospital patients.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Administrator of CMS terminate the policy of  permitting laboratories to receive payment from Medicare for technical  pathology services provided to hospital patients.
section_title: Agency Comments and Comments from National Associations and Our Evaluation
paragraphs: In commenting on a draft of this report, CMS stated that it is important  that payment policy encourage efficiencies in the provision of technical  pathology services. CMS stated that it would carefully consider our  recommendation and noted that the Congress is currently considering this  issue. CMS further stated that it would want to ensure that implementation  of the recommendation does not adversely affect rural hospitals.
As we noted in the draft report, permitting laboratories to receive payment  directly from Medicare for technical pathology services is not an  appropriate or efficient mechanism for providing financial assistance to  hospitals, as it is contradictory to the objectives of a PPS. In addition,  because the median number of technical pathology services annually  outsourced by rural hospitals was low, we do not believe that paying  laboratories directly for these services will place a significant financial  burden on these hospitals.
CMS’s written comments are reprinted in appendix II. The agency also  provided technical comments, which we incorporated where appropriate.
We received oral comments on a draft of this report from the American  Hospital Association (AHA), the College of American Pathologists (CAP),  and the National Rural Health Association (NRHA). These organizations  disagreed with our conclusions, matter for congressional consideration,  and recommendation and suggested that direct laboratory payments  should continue. Generally, all three organizations expressed concerns  about rural hospitals. AHA and NRHA expressed the concern that  termination of direct laboratory payments would place a financial burden  on rural hospitals, and CAP expressed concern that hospitals, including  CAHs, and laboratories would experience an increased administrative  burden in changing their current billing practices. CAP also raised a  question about whether hospitals and laboratories would be able to  successfully negotiate new payment arrangements for outsourced  technical pathology services; if not, in its view, beneficiaries’ access to  services could be jeopardized.
As we noted in the draft report, hospital officials we spoke with, including  those from rural hospitals, stated they would continue to offer technical  pathology services as a part of their surgical services if they had to pay  laboratories directly for technical pathology services. These officials  stated that they would not consider eliminating surgeries if they had to  enter new, or modify existing, arrangements with laboratories to provide  technical pathology services. We acknowledge that modifying their billing  practices will impose costs on hospitals and laboratories; however,  officials from hospitals and laboratories that already have billing  arrangements for technical pathology services did not report to us that  these costs were burdensome.
We are sending a copy of this report to the Administrator of CMS and  appropriate congressional committees. The report is available at no charge  on GAO’s Web site at http://www.gao.gov. We will also make copies  available to others on request.
If you or your staffs have any questions, please call me at (202) 512-7119 or  Nancy A. Edwards at (202) 512-3340. Other major contributors to this  report include Beth Cameron Feldpush, Jessica Lind, and Paul M. Thomas.
section_title: Appendix I: Scope and Methodology
paragraphs: In conducting this study, we analyzed Medicare claims and provider data  obtained from the Centers for Medicare & Medicaid Services (CMS). We  interviewed officials at CMS, the Congressional Budget Office, and the  Department of Health and Human Services Office of Inspector General.  We also interviewed industry representatives from the American Hospital  Association, College of American Pathologists, and National Rural Health  Association, as well as representatives of individual hospitals and  laboratories and a pathology practice management consulting company.  Finally, we conducted a site visit of a laboratory and one of the rural  hospitals to which it provides pathology services.
As there is no list of covered hospitals and the laboratories to which they  outsource technical pathology services, we used 2001 Medicare claims  data, the most recent year for which data are available, for our analysis.  We received the data files directly from CMS. These data reflect the set of  claims submitted to and paid by CMS for services performed in 2001. We  performed our own initial analyses to check the reliability of the data.
We estimated the number of hospitals outsourcing technical pathology  services to laboratories that directly billed Medicare and the volume of  and payments for these services. To do so, we matched Medicare  laboratory claims with claims submitted by prospective payment system  (PPS) hospitals and critical access hospitals (CAH). We assumed that a  laboratory’s service was related to a hospital inpatient admission or  outpatient encounter if the date of service on the laboratory’s claim was  (1) during an inpatient’s stay at a hospital, within 3 days prior to the  inpatient’s admission, or after the inpatient’s discharge or (2) on the day  of or within 3 days after an outpatient surgical procedure at a hospital. We  included in our list of total hospitals only those hospitals listed in the CMS  Provider of Services (POS) file and characterized outsourcing hospitals as  urban or rural according to their designation in the POS file. To identify  hospitals outsourcing technical pathology services that have converted to  CAHs, we matched each hospital’s Medicare provider number to the list of  CAHs maintained by the North Carolina Rural Health Research and Policy  Analysis Center at the University of North Carolina as of March 2003.
To estimate Medicare payments and beneficiary copayments to  laboratories for technical pathology services in 2001, we first calculated  the claims frequency for each type of technical pathology service in our  file of matched laboratory and hospital claims. We estimated the Medicare  payment amount for each type of technical pathology service as 80 percent  of the Medicare physician fee schedule (MPFS) national standard payment  rate for that service and beneficiary cost sharing as the remaining 20  percent, and then we multiplied the claims frequency by the estimated  Medicare and beneficiary cost-sharing amounts to calculate total  laboratory payments. We performed similar calculations to find payments  for inpatient and outpatient claims exclusively. To estimate 2001 Medicare  outpatient PPS payments and beneficiary cost sharing to PPS hospitals if  laboratories had not received direct payments, we multiplied the 2001  outpatient PPS Medicare payment rate and beneficiary copayment amount  for each type of technical pathology service by the frequency of each type  of technical pathology service in the outpatient claims.
To estimate the cost difference to PPS hospitals of paying laboratories to  perform technical pathology services, we first calculated a weighted  average payment rate for technical pathology services for 2001 by  multiplying the 2001 national standard MPFS payment rate by the  frequency percentage of each type of technical pathology service among  PPS hospitals and summing the payments for all services. We multiplied  the median and 95th percentile volume of services outsourced by PPS  hospitals by the estimated weighted average laboratory payment. We then  calculated a weighted outpatient PPS payment rate, including beneficiary  copayments, for technical pathology services in 2001 as described above  for calculating the weighted average MPFS payment rate. Because  approximately 63 percent of technical pathology services provided to  patients of PPS hospitals were provided to outpatients, we estimated the  number of outpatient services by multiplying the median and 95th  percentile volumes by 63 percent. We then multiplied the estimated  number of outpatient services by the estimated weighted average  outpatient PPS payment rate, and subtracted this amount from the  weighted average laboratory payment.
We interviewed representatives of four Medicare carriers and four state  hospitals associations. In addition, we spoke with representatives from 19  hospitals and 13 laboratories from a sample of eight geographically diverse  states—Colorado, Florida, Iowa, North Dakota, Pennsylvania, Tennessee,  South Dakota, and Washington—and an additional 2 laboratories in  Oklahoma. We selected several states in the South, Southeast, and  Midwest where, according to CMS officials, outsourcing arrangements for  technical pathology services were believed to be fairly common. We  interviewed officials from urban and rural hospitals and hospitals and  laboratories with different types of outsourcing arrangements, including a  hospital that outsources only complex and infrequently performed  services and a hospital that currently pays its laboratory for technical  pathology services.