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PLEASE NOTE: The following is written testimony, submitted for the record.

MEDICARE LABORATORY PAYMENT POLICY
AND PATIENT ACCESS TO TECHNOLOGY

Statement of

Bruce Steinwald, M.B.A.
Member of the Committee on
Medicare Payment Methodology for Clinical Laboratory Services
Institute of Medicine/National Academy of Sciences
and
Independent Consultant in Health Economics

Before the

Subcommittee on Health
and the
Subcommittee on Oversight and Investigations
Energy and Commerce Committee
U.S. House of Representatives

MARCH 1, 2001

Good morning, Chairman Greenwood, Chairman Bilirakis and members of the Subcommittees. My name is Bruce Steinwald and I am an independent consultant in health economics in Washington, DC. I served as a member of the Institute of Medicine (IOM) Committee on Medicare Payment Methodology for Clinical Laboratory Services. The IOM is an arm of the National Academy of Sciences, chartered by Congress in 1863 to advise the government on matters of science and technology.

Background to the Study:

Recognizing that Medicare’s payment system for clinical laboratory services may have to be modernized, Congress mandated in the Balanced Budget Act of 1997 that the Secretary of the Department of Health and Human Services arrange for the IOM to review the current Medicare payment methodology for outpatient clinical laboratory services and make recommendations to improve the system. The Department’s Health Care Financing Administration (HCFA) contracted with the Institute of Medicine in 1999 to conduct the study. To meet this charge, the IOM put together a 12-member panel of experts composed of laboratorians, physicians, economists, and health care policy and management experts. We met five times between January and August 2000 to gather information, deliberate over findings, and formulate recommendations. As a result of the study, the IOM released our report, Medicare Laboratory Payment Policy: Now and in the Future, in December 2000.

The focus of the IOM study was different from the current hearing. We examined a wide range of issues related to the Medicare payment methodology in addition to new technology, but our focus was limited to the Medicare Part B fee schedule for outpatient clinical laboratory services only and did not include other types of services or providers. When examining any health services payment methodology, however, one must consider how it incorporates new technology, since that is a crucial factor that affects the adaptability of the payment methodology for the future. In this statement I will briefly put Medicare clinical laboratory payments in context and summarize the key findings and recommendations of the Committee’s report, particularly as they relate to new technology. In addition, I will include a copy of the full report and a short summary of it.

Background:

Clinical laboratory tests are a key component of modern health care. Laboratory tests represent a small share of total health care spending, but play a complementary and an integral role in good medical care by helping physicians to diagnose and treat patients. Technological changes in laboratory testing, both those in the pipeline and those anticipated in the near future, offer the prospect of new opportunities for diagnostic, monitoring, and screening improvements.

Medicare is the largest payer of clinical laboratory services. It pays 29 percent of the nation’s laboratory bill of $30 to $35 billion for inpatient and outpatient laboratory services. The Medicare Part B fee schedule for outpatient clinical laboratory services, the subject of our study, accounts for approximately one-third of what Medicare spent for laboratory services, or 1.6 percent of its total annual budget, in 1998. While this is a small proportion of overall Medicare spending, maintaining beneficiary access to laboratory services is essential. In addition, there is evidence that Medicare payment policy influences other payers’ policies for laboratory services.

The incentive for manufacturers to develop new laboratory technologies and the ability of Medicare beneficiaries to have access to them are affected by Medicare’s payment policy. Medicare’s current system of payment for laboratory services in outpatient settings was designed in the early 1980s. Although specific payment rates have changed over the past 20 years, the basic payment methodology has not. The introduction of new technologies and changes in regulations and the laboratory marketplace have had a significant impact on the structure of the laboratory industry during the past 20 years. Even in the face of these changes, the committee did not find a lack of interest in or adoption of innovation, up to this point in time. It did conclude, however, that current Medicare payment policy for outpatient clinical laboratory services seems not only outdated, but also irrational. Unless it is changed, the committee was concerned that the current payment system could eventually inhibit innovation and reduce beneficiary access to care. Inadequate payment rates could slow the industry’s ability to develop and disseminate new technology and laboratories’ willingness to adopt valuable but more expensive technologies.

Technology Trends:

The laboratory environment has been characterized by ongoing rapid and dramatic innovation since the 1980s. There has been remarkable growth in the range and complexity of available tests and services, which is expected to continue. Laboratory technology is often at the forefront of medical advances. In some cases, testing techniques to diagnose or screen for a particular condition are available before effective treatment. Innovation in laboratory technology, which includes both new tests and advances in equipment and testing techniques, has made testing more efficient and automated. Information technology has revolutionized the transfer of data by decreasing the time it takes to order and receive test results and by creating opportunities for research on large datasets. New technology is positively associated with increased efficiency, reduction in errors, and improved quality in the delivery of health care services.

While efforts to automate central laboratories are likely to continue, trends appear to indicate that much routine testing in the future could be delivered through point-of-care testing at the patient’s bedside and home-based testing. Centralized laboratories are likely to concentrate more on rare and complex tests. The mapping of the human genome and other scientific advances lead laboratory experts to expect major advances in clinical tests and methodologies in the near future, particularly in the areas of genetic testing, surface markers to identify specific types of cancers, pharmacogenomics to individualize drug treatments, and molecular-level tests. Whether new technologies are implemented may depend on their impact on laboratory costs and, if they are more costly, on payers’ willingness to pay for them.

Current Medicare payment system:

Medicare currently pays for outpatient clinical laboratory tests using a prospective payment system established in 1984. Payments for 1,100 tests are set separately in fee schedules for each of 56 geographic jurisdictions, limited by national fee caps called National Limitation Amounts. Payments are based on what laboratories charged in 1983, updated periodically for inflation. For each test, the median of the 56 fees is taken and reduced by 26 percent to calculate the National Limitation Amount. Most fees currently are constrained by the National Limitation Amount. Laboratories accept Medicare fees as full payment; there is no beneficiary cost sharing. The Health Care Financing Administration, which administers the Medicare program, and its private contractors, known as carriers and fiscal intermediaries, make and interpret policy, set prices, and process claims.

Many tests resulting from new technological developments have been added to the fee schedule since 1983. Decisions about how much to pay for new tests are made both by the carriers and by HCFA. There are two different procedures to set the fees for new tests called cross-walking and gap-filling. Cross-walking is designed for new tests that are similar to existing tests, and gap-filling is designed for breakthrough technology. The choice of which procedure to follow is made by HCFA, based largely on how the new technology is handled by the American Medical Association’s panel that assigns Current Procedural Terminology codes for new tests.

When a new technology is similar to an existing test, it is assigned an existing identifying code and the payment amount that is attached to that code will apply to the new technology. Alternatively, if HCFA determines that the new technology is similar to “old” technologies described under two or more existing codes, it may average the existing payment amounts for those codes and apply it to the new test.

The determination of which new tests can be cross-walked to which existing codes is made internally by HCFA, based on AMA advice about CPT codes. There are no published criteria guiding this process, no public description of the process, and generally no participation by the public or stakeholders other than medical organizations. There is no official process for stakeholders to challenge these decisions.

When a testing product is so radically new that there is little relevant experience upon which to base payment, the payment amount for the test is determined through gap-filling. There is no standard data source to provide comparison prices when creating the base fee for such new tests. HCFA relies on the carriers to set their own fees for the first year after the new test has been approved for coverage. HCFA specifies which new CPT codes are to be gap-filled by the carrier (usually more than a dozen new codes) with the issuance of the new annual fee schedule, but it does not tell the carriers how to calculate the payment amount. There is much flexibility in the way each carrier collects information and sets its fees. All 56 carriers go through the gap-fill exercise separately in order to develop their area-specific fee for the test.

There are two distinct problems with gap-filling that can sometimes lead to setting inappropriate payment levels. First, carriers set their fees based on historical experience, current cost data, and analysis, but unless they inflate the fees before the National Limitation Amount is applied, the cap could create payments that are substantially below costs. This occurs because of the nature of the mandated payment formula, which sets the level of the national cap at 74 percent of the median of the carriers’ fees. We understand that legislation passed after our report was released, the Benefits Improvement and Protection Act of 2000, eliminates this reduction of the median for setting the National Limitation Amount for new tests and services. The second problem is that there is no mechanism for reassessing the appropriateness of the new fees and cap once they have been set. Even if the cost of the new test drops significantly after it comes into common use and may become easier to conduct, or even if the gap-fill fee is so low it could limit beneficiary access, there is no routine and practical method for changing it. Hence, neither HCFA nor the carriers regularly look back at fees to see if they are still reasonable.

Assessment of the current Medicare payment system:

The committee defined goals that we believe should guide payment policy. Then we conducted an extensive examination of the current Medicare payment system for outpatient clinical laboratory services and assessed the methodology according to those goals. We examined:

Beneficiary access- The committee found no evidence that beneficiaries currently have difficulty obtaining outpatient clinical laboratory services, including STAT tests.

Flexibility- The committee concluded that existing mechanisms for keeping payments up to date are inadequate. The existing methodology does not provide adjustments to accommodate changes needed in payment levels for specific, individual tests. The process for integrating new technologies into the payment system, including determinations of coverage, assignment of CPT billing codes, and development of appropriate prices, is slow, administratively inefficient, and closed to stakeholder participation. These problems are likely to become increasingly important with the anticipated changes in laboratory technology and medical practice.

Transparency- We concluded that the current payment system lacks “openness” and adequate procedures for stakeholder involvement. Clear and consistent information on how the system works and opportunities for the public and stakeholders to have input into decision processes are limited.

Value- The committee found it had little data with which to judge whether Medicare spending in aggregate is too high or low, whether Medicare is paying reasonable amounts for individual tests and services, or whether physicians are ordering tests appropriately.

Administrative simplicity and efficiency- We concluded that the system, with 56 separate fee schedules and 56 separate processes for coverage determination, is unnecessarily complex and inefficient, particularly in the way the system incorporates new technologies and determines whether or not a laboratory’s claim should be paid.

Recommendations:

Based on our analysis of the current payment method and alternative approaches, the committee reached consensus on 12 recommendations for improving Medicare’s payment system for outpatient clinical laboratory services. Our choices were guided by the previously stated goals. Because many of the changes could require new legislation, implementation of the committee’s recommendations will entail congressional action. The committee recommended that HCFA, the administration, and the Congress work together to develop the necessary enabling authority and support.

The committee’s first six recommendations are interrelated, focus specifically on payment methodology, and broadly define the preferred payment system and specific elements of the system and its implementation. The final six recommendations focus on problems in the current system and can be implemented independently or concurrently with the first six. I will not go into detail here on all the recommendations, since they are included in the committee’s report that I have submitted along with this statement, but I will call attention to the key ones relating to new technology.

The committee’s key recommendation was that Medicare payments for outpatient clinical laboratory services should be based on a single, rational, national fee schedule. In effect, there is already a national fee schedule, since most services are paid at the National Limitation Amounts rather than by carrier-specific fees. A national fee schedule means a single set of payments (instead of 56 fees), with adjustments for differences in local labor costs, prices for goods and services the laboratory purchases, and other relevant factors. The long-term goal of a national fee schedule is to establish relative payment amounts that accurately reflect the relative resource requirements of providing services, minimizing the financial incentives to overuse or underuse services. The committee considered this important for promoting the clinically appropriate use of all laboratory services, both new and old technologies, and ensuring that beneficiaries continue to have access to services.

We recommended that, on an interim basis, relative payments for Medicare outpatient clinical laboratory services should be based on the current National Limitation Amounts. This is an appropriate starting point for the national fee schedule because it formalizes current, de facto Medicare payments and should minimize dislocations and disruptions for laboratories, beneficiaries, and contractors. Nevertheless, HCFA should move quickly to refine the fees, based on a data-driven consensus process. The fee schedule should be updated periodically. HCFA should explore alternative methods for gathering data to be used in the process.

We recommended that, to incorporate new tests into the Medicare laboratory fee schedule, there should be an open, timely, and accessible process that is subject to challenge. The process and fees produced should not impede clinical decision making that is essential to providing appropriate care. The committee concluded that a consistent, public process for developing interim values for new laboratory services is essential for an effective payment system. HCFA should create a committee of laboratorians, pathologists, other physicians and scientific experts, health care policymakers, and economists to advise on setting interim relative values or national fees for new technologies. After interim relative values or fees for new services have been established, Medicare should allow time for diffusion of the new technology and stabilization of costs. The interim relative values for these new services should be reviewed and revised as necessary. Once they are '‘official,'’ these services would be included in the periodic review of relative values for the full fee schedule.

The committee recommended that HCFA should review alternatives to the current system for coding outpatient clinical laboratory services for claims processing. More accurate, open, and timely coding processes for new technologies as well as tests and services should be sought. The committee heard testimony form several sources that the application process for a new Current Procedural Terminology (CPT) code often adds to the time required to incorporate new technologies into the Medicare laboratory payment system. There are also problems with the inadequate specificity of the codes. Coding, the Medicare coverage process, and payment determinations are closely intertwined; tend to lack transparency; and can add considerably to the time required to incorporate a new test, new equipment, or a new testing methodology. The rapid development of anticipated new technologies will exacerbate this problem. HCFA should examine how to reduce coding delays within the current system and should explore alternative coding systems.

As we seek to reform payment policy for clinical laboratory services, it is important to assess the impact these changes have, particularly on both beneficiary access and the diffusion of new technologies. The committee, therefore, also recommended that HCFA collect data to monitor and assess the impact of new policies as they are implemented.

Conclusion:

We believe Congress and HCFA have the opportunity to fix the current payment system for clinical laboratory services, averting the possibility of a crisis in the future. Payments for some individual tests likely do not reflect the cost of providing services and anticipated advances in laboratory technology will exacerbate the flaws in the current system. Problems with the outdated payment system could threaten beneficiary access to care and the use of enhanced testing methodologies in the future, however, the committee found no evidence of this now. Although radical changes are not called for at this time, implementing the committee’s recommendations will likely improve the efficiency of the system and ensure that Medicare beneficiaries continue to have access to high-quality laboratory services.

Thank you for the opportunity to testify and I would be glad to answer any questions you might have.