Feature Story

It’s ba-a-ack . . . New talks on Medicare competitive bidding

May 2004
Anne Paxton

Competitive bidding for Medicare laboratory services has often reared its head during Medicare funding debates on Capitol Hill, but it usually has been beaten back. Opposition from laboratory groups, including the College, was so resolute in 1985, when Medicare policymakers first floated a competitive bidding plan, that Congress forbade the Health Care Financing Administration from even carrying out a pilot project. The Institute of Medicine roundly panned the concept in a 2000 report that said the disadvantages would outweigh the advantages.

But with the perennial fervor to wring more savings out of Medicare, the idea never died—and this year it gets an alarming new lease on life.

Front-page coverage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 dwelt on the bill’s promised drug benefit for seniors. Far less attention was paid to the inclusion of competitive bidding for laboratory services. But in the end, Congress voted to require the Centers for Medicare and Medicaid Services to conduct a competitive bidding demonstration project and deliver a progress report by the end of 2005.

"Some part of CMS has tried over at least 15 years to get one of these projects going, and it has failed every single time," says Daniel Hanson, MD, medical director of Pathology Laboratories Inc., Toledo, Ohio, and a past member of the CAP Board of Governors. "But there was a lot of give-and-take in getting that Medicare bill through. The demonstration project has been funded before and it’s been scuttled before. But this is the farthest along it’s gotten."

On a parallel front, the state of Florida has moved ahead with long-debated plans to competitively bid a sole-source contract for Medicaid laboratory services. Both the federal and state-level competitive bidding projects have brought concerted protest from the College and other organizations belonging to the Clinical Laboratory Coalition.

CMS officials, at a March 3 "open door listening session," gathered to hear the concerns of laboratory industry representatives, who argued that competitive bidding won’t bring savings-and if it does, it will be at the expense of quality and access to care.

Congress has pinned its hopes on laboratory services emulating the experience of durable medical equipment, Dr. Hanson says. Two pilot tests of competitive bidding for DME, one in Polk County, Fla., and the other in San Antonio, showed savings of 17 percent to 22 percent and led Congress to require a DME competitive bidding phase-in beginning in 2007. But Dr. Hanson points to stark differences between laboratory services and DME that would prevent the market from delivering the hoped-for savings.

"In the DME environment," he says, "patients can make a lot of choices for themselves as to where to buy a wheelchair, for example. In clinical laboratory testing, generally the patient goes to the doctor, the doctor orders a test, and then sends the patient to a specific laboratory, or a restricted number of them. The patient has very little option as to where to go."

Alan Mertz, president of the American Clinical Laboratory Association, agrees. "We are a service, and it’s much more difficult to competitively bid a service than a commodity," he says.

"Laboratory services are complex," he continues. "They involve time-sensitive samples couriered overnight, and quality testing. Getting results back stat to a physician is not like a crutch or a wheelchair, where a product is made and shipped."

With medical products or commodities, he says, "you might have 100 or 150 products where you’re trying to competitively bid, whereas there are 1,100 different tests or CPT codes for laboratory services. And there’s no one company or laboratory that either serves all regions in the U.S. where you have the results or samples transported, or does all 1,100 tests."

While acknowledging that CMS is now statutorily mandated to develop and implement a laboratory bidding demonstration, CAP officials worry about demonstration project logistics. The scheme "raises more questions than answers," Dr. Hanson says. For example, the demo is set to include only tests "furnished by entities that do not have a face-to-face encounter with the individual." But there is widespread confusion over what this means. "Does it mean ’face to face’ between the physician and the patient? What about the phlebotomist and the patient?" Dr. Hanson asks.

An added complication is that a single laboratory test order or requisition from a physician may involve a multitude of tests, some of which have to be referred. "How are they going to handle that?" he asks.

Laboratory groups agree with the plan to exclude Pap testing and colorectal cancer screening from the demo. But a competitive bid for only a small number of tests could lead to low-balling, Dr. Hanson predicts. "If you asked laboratories to bid on the 20 most common tests, they could cut down their price to the point where they were even willing to lose money because they could get a bunch of pull-through tests from physicians."

Mertz says, "We want to make sure that CMS doesn’t just cherry-pick a few of the 1,100 tests." In the DME demonstration in Polk County, he explains, the agency started with a long list of medical equipment and narrowed it down to a handful by the time the demo took place. "If they go ahead with the laboratory demo, we want them to include all 1,100 tests because that’s the only really fair test of whether competitive bidding makes sense."

Similarly, he says, it is unreasonable to exclude physician office laboratories from the demo because they compete directly with laboratory providers. "If they are exempt, it would create an incentive to move testing into offices and avoid being subject to competitive bidding. We say, if they are exempt, then when they supply tests they should be paid the bid price." College officials agree that paying hospital laboratories or physician office labs an amount different from the bid price would be unfair to providers being paid lower amounts.

The CAP has urged CMS to create a laboratory technical advisory committee, composed of representative stakeholders and including pathologist medical directors, to assist CMS in designing the demo—and especially to address the potentially negative impact of competitive bidding on Medicare beneficiaries and the laboratory industry.

The pro-market ideology behind the push for competitive bidding on Capitol Hill is understandable, Mertz says. "But once you dig into it a little deeper, you start to understand it doesn’t work that well for services like this."

"The fee schedule is far from perfect," he adds, "and I think over the longer range, Congress is going to have to look at how the fee schedule was set up and how well it reflects market conditions. But we believe overall we get paid less by Medicare than we do by third-party payers. We’re already getting underpaid under the fee schedule; we’ve been either frozen or cut 14 out of the last 15 years. So if they’re trying to save money, they’re looking in the wrong place."

For the moment, the winner-take- all plan approved in Florida is a much more imminent threat to clinical laboratories than the prospect of competitive bidding under Medicare, says Mark S. Birenbaum, PhD, administrator of the American Association of Bioanalysts.

The state is poised to finalize an RFP (request for proposals) for a three-year contract for one independent laboratory to provide all testing services to Medicaid recipients in the state. Bidders were originally asked to submit bids by May 28, but due to protests filed by one laboratory, the state delayed implementation by two weeks.

At CAP TODAY press time, a new protest by Laboratory Corporation of America had again stopped the countdown to implementation. "But unless they make changes to the RFP," says JoAnne Glisson, senior vice president of ACLA, "once the protests are settled, the clock starts ticking again."

Dr. Birenbaum foresees all kinds of problems if one laboratory wins all state Medicaid business. For example, "What will happen if the winning laboratory stops serving rural areas? If the one winner has a fire in its laboratory, or perhaps there is financial fraud, as occurred with Tyco and Enron. If you are relying on one provider, you could just have an absolute meltdown."

Moreover, he wonders, once other laboratories are unable to serve Medicaid patients and are driven out of business, how would the state handle subsequent bids? "If you have a monopolist, then the monopolist names the price, not the state," he say—and that would defeat the purpose of adopting competitive bidding.

The College and the Florida Society of Pathologists agree, stating in a joint April 12 letter to the state’s deputy chief of staff, Alan Levine: "The reliance on a single-source vendor for clinical laboratory services can imperil patient care services. The designated single vendor may, by virtue of exclusion and domination, substantially eliminate alternatives from the marketplace."

The state’s scheme is rife with difficulties, adds ACLA’s Mertz. Seeking a single laboratory to provide Medicaid services for the entire state represents an about-face by Florida’s Agency for Health Care Administration from a previously discussed 11-region proposal, he charges, adding that even the federal competitive bidding plan for DME has opted against a single-source contract.

The tight time frame is also unworkable, Mertz says. "There is no laboratory in Florida that provides services for the entire state or does all 1,100 tests covered under Medicaid. There are 160 different laboratories in Florida alone that do tests for Medicaid and Medicare, so how do you competitively bid?"

"The other big issue we have," Mertz contends, "is that these are such extremely important diagnostic tools, and any time you competitively bid, the emphasis is on getting the lowest cost or the lowest bid. That tends to emphasize the lowest prices as opposed to getting the best quality of testing. You also start to neglect the access that seniors need to get to their physician or draw station. We just are very concerned about putting so much emphasis on the rock-bottom price versus making sure the quality is there as well as providing access to patients."

ACLA representatives and other lab groups in Florida went to Tallahassee in mid-April to meet with legislators and the governor’s office. They left with some optimism that the RFP is going to be pulled back—but with no assurances, Glisson says.

A California Medicaid program to competitively bid all laboratory services is already underway at the state Office of Medi-Cal Procurement, which issued an RFP on April 5. Only 75 percent of the bidding laboratories will be contracting with Medi-Cal, says Michael Arnold, legislative advocate with the California Clinical Laboratory Association, or CCLA.

"The main purpose is to make it easier for the Department of Health Services to deal with fraudulent services," he says. "They believe there will be budget savings over time because they will eliminate some fraudulent laboratories."

The CCLA has opposed the program from the start because it does not believe the savings will be worth the administrative costs to the state and to the laboratory industry.

California’s program is not as worrisome to ACLA, Glisson says, because it involves nonexclusive contracting. ACLA views the scheme as more of a re-registration mechanism for the state to weed out marginal providers.

"Whether it’s true or not," Glisson says, "California thinks there are some bad actors out there. You have to really want to provide services within the state to go through all the hoops. But I assume the 25 percent the state doesn’t take would not be our members." It’s burdensome for clinical laboratories, she adds, "but we’re not viewing it as a competitive bidding program."

Anne Paxton is a writer in Seattle.