Good afternoon, I am Paul Raslavicus, MD, President-Elect of the College of American Pathologists. I am President of Health Care Diagnostics, Inc. and associate pathologist at Lawrence Memorial Hospital in Medford, Massachusetts. I practice both anatomic and clinical pathology and have extensive practice experience as a laboratory director in both academic and community hospital settings as well as in an independent laboratory.

The College of American Pathologists (CAP) appreciates the opportunity to discuss our views on Medicare payment methodology for outpatient clinical diagnostic laboratory tests. The CAP is a medical specialty society that represents more than 16,000 physicians who practice anatomic and/or clinical pathology in community hospitals, academic medical centers, forensic laboratories and independent laboratories.

The Committee has asked for CAP views on the strengths and weaknesses of the current Medicare payment methodology, the best methodology for paying for clinical laboratory tests, and how costs of clinical laboratory services vary across different laboratory settings. I will address each of those issues in turn.

Strengths of the Current Payment Methodology

The CAP believes that Medicare's current payment methodology has significant strengths that should be preserved:

• First, the current fee-per-test methodology allows payment to reflect accurately the volume and mix of services provided to each patient. Methods that base payment on larger packages of services, such as clinical laboratory services provided during an outpatient visit, cannot as easily adjust payment for variation in complexity of care for different patients. The CAP believes fee-per-test payment methodology should be retained. This payment method also provides exceptional abilities to monitor trends in utilization of laboratory services, including the potential for developing optimal menus of tests for cost effective management of various disease states.

• There is no Medicare Part B beneficiary coinsurance for clinical diagnostic laboratory tests. This feature of the current payment methodology reduces clinical laboratory billing costs and reduces administrative burdens for the beneficiary as well. Imposition of beneficiary coinsurance for clinical laboratory tests would not affect laboratory test utilization and would be counterproductive to economic efficiency. Restoring copayments would require laboratories to incur additional bill preparation costs that would often exceed the amount billed to the beneficiary.

• Medicare payment rules allow payment for clinical laboratory tests only to the person or entity that performed or supervised the performance of the test with an exception for referrals between laboratories that meet certain conditions specified in the Medicare statute. This "direct payment" rule should be retained.

• The current methodology allows Medicare payment to all qualified clinical laboratories that meet Federal standards established under the Clinical Laboratory Improvement Amendments of 1988 (CLIA'88). This enhances competition, allows Medicare beneficiaries broad access to quality providers and encourages clinical laboratory efforts to enhance services to the beneficiary. A system that allows all qualified providers to participate in the Medicare program should be retained.

• The current fee schedule methodology has been in place since 1984 and is understood by clinical laboratories. Medicare payment is predictable so that clinical laboratories can project the financial implications of their service and operations decisions. Understandability and predictability are important features of the payment methodology that should be carefully considered in evaluating alternatives to the current payment system.

Weaknesses of the Current Payment Methodology

The CAP believes there are significant problems with the current payment methodology that should be corrected:

• First, fee schedule payment levels have been inappropriately constrained and in some cases reduced over the years. During the last fifteen years Congress has systematically and periodically reduced the fee schedule cap or frozen the Consumer Price Index (CPI) increases for outpatient clinical diagnostic laboratory tests. The Balanced Budget Act of 1997 reduced the national cap to 74 percent of the median of all local fee schedules and froze the payment rate until 2002. The result has been to establish fee schedule payment amounts for some services at levels so low that beneficiary access is threatened.

  An example of inappropriate constraints on payment is the screening Pap test. For calendar year 1999 the national limiting cap for the Pap test was $7.15. An amount that was well below the cost incurred by many laboratories to provide the service. The Balanced Budget Refinement Act of 1999 corrected this situation by establishing a national minimum payment amount of $14.60 for the service.

• Although the Medicare statute allows adjustments to the fee schedule for tests involving highly sophisticated equipment or extremely skilled personnel to assure high quality, there is no appropriate on-going process to make these kinds of adjustments on a regular basis. The current procedure for "gap-filling" to determine a fee schedule amount for new services is not consistent across carrier areas and many believe the process does not produce realistic fee schedule amounts. As a result, CAP believes the current fee schedule does not adequately reflect changes in technology and the introduction of new technology into the clinical laboratory.

Preferred Methodology for Paying for Outpatient Clinical Laboratory Tests

The Committee has asked what would be the best methodology for paying for outpatient clinical laboratory testing for Medicare beneficiaries. All payment methodologies have limitations. The CAP does not have a recommendation for an alternative methodology. CAP does have a long history of opposition to a competitive bidding methodology for determining a fee schedule for clinical laboratory tests. A competitive bidding methodology would be complicated and difficult to administer. Competitive bidding has the potential for establishing a payment system that focuses only on lowest price and ignores the issues of service, beneficiary choice and quality. There is also potential for creating a system that would allow low bidders to provide inferior services and exclude other laboratories from participation in the Medicare program. Competitive bidding could drive small laboratories out of business and reduce access to local laboratory services. We believe this would be detrimental to beneficiary access to quality services.

The current payment system has serious weaknesses, but it also has strengths that are important. One possible approach is to look at the problems with the current fee schedule and consider options for refining and improving it rather than searching for an alternative payment methodology. A key issue for consideration is an appropriate process for regular maintenance of the fee schedule so that the fee schedule can be adjusted to reflect changes in technology, changes in resource consumption associated with particular tests, and other factors that justify a change in fee schedule amounts. Currently there is no well defined, rational system for maintaining the fee schedule. The College would be happy to participate in a process that would allow the fee schedule to be adjusted and new procedures priced in a manner that is equitable to clinical laboratories and helps to ensure beneficiary access to quality laboratory services.

Cost Variations in Clinical Laboratories

The Committee also asked how the costs of clinical laboratory services vary across different laboratory settings. CAP believes that hospital clinical laboratory costs are often higher per test than in other settings. There are many reasons why the laboratory services cannot always be produced in the most economically efficient way. Perhaps most obvious is the strong relationship between cost per test and the clinical laboratory's total test volume. Rural laboratories, hospital laboratories and small independent laboratories have a break-even point at a higher cost per test level than exists in the larger laboratories.

The College is concerned about and opposed to the treatment of clinical laboratory services as a commodity. Laboratory services are often not fungible. For certain testing it is critical to patient care that test results be comparable with minimum variability over extended periods of time. Clinical laboratory differences in methodology, reagent source, and instrumentation for certain tests can create differences in testing results that may magnify or mask real differences in the patient analyte being measured. Thus choice of appropriate laboratory cannot be based only on price. Clinical laboratory services often need to be provided in less cost efficient settings to assure timely and appropriate medical care to patients.

Hospitals provide clinical laboratory testing services not only to the inpatient population where payment is made through Medicare Part A payment mechanisms, but to an ever-increasing outpatient population as well. Outpatient tests in many hospitals exceed 50% of total testing volume. These services are provided, as needed, on a twenty-four hour a day basis. This is particularly true for hospital emergency department patients, where much higher per test costs are incurred because of the unpredictability of testing volumes and medical complexity of the patient. In addition, nearby physician offices often refer testing to hospital laboratories when laboratory testing is needed quickly in emergency situations. The services are performed on demand on a twenty-four hour basis.

The high labor-intensive activity of the phlebotomy service is another major cost driver in the provision of laboratory services to the ambulatory population, especially in the emergency department. The hospital must staff the phlebotomy service on a twenty-four hour basis for hospital inpatients and emergency patients.

The costs of clinical laboratory services in the hospital setting are also influenced by a higher intensity of utilization of pathologists' services than is frequently needed in other settings. This is so because the clinical needs of hospital patients are often more complex than for non-hospital patients. More acutely ill patients generate a significantly greater percentage of abnormal testing results, increase the potential for misleading test information due to the presence of interfering therapeutic agents in the patient being tested, and increase the need for pathologist discussion of the possible clinical significance of laboratory results with attending physicians. Pathologist directors also spend significant time determining methodologies, sequences, ranges of normalcy and testing protocols so that the laboratory will generate results for clinicians that are appropriate to the clinical needs of the hospital's patients.

The current clinical laboratory fee schedule is based on historical charges for laboratory tests performed in physician's offices, independent laboratories and hospital laboratories for non-hospital patients. The historical charge basis for the fee schedule does not reflect hospital charges for laboratory tests provided to hospital outpatients. Thus the fee schedule does not reflect higher hospital costs. In addition, no provision is made by Medicare to pay for the medical supervision and management services of pathologists to hospital outpatients through the Medicare Physician Fee Schedule. These costs should be considered in the payment mechanism for outpatient clinical laboratory services.

It is vital for the nation's health care system to recognize that physician involvement in the production of clinical laboratory testing is of significant economic benefit not only in the short term, but also in the long term. Only through the involvement of experts in medicine and in the laboratory sciences can progress be made in the development of testing approaches that are most economically efficient in improving the outcomes of diagnostic interventions and therapy.

In conclusion, the College believes that the current Medicare payment methodology has significant strengths and weaknesses. One approach is to look at the problems with the current fee schedule and consider options for refining and improving it. The CAP would be happy to participate in the refinement of the current fee schedule. Thank you for your consideration of our comments on the payment methodology for outpatient clinical diagnostic laboratory tests. I would be pleased to answer any questions you may have.