Feature Story

Independent labs on the outs with new Medicare TC billing

HCFA responds
Outpatient PPS at a glance

July 2000
Carl Graziano

On Aug. 1, the world-or, at least, the outpatient side of it-turns upside down for pathologist Ben W. Davis, MD, and other independent laboratory professionals like him.

On that day, after many months’ delay, the Health Care Financing Administration says it will start the outpatient prospective payment system for Medicare. And it is on that day that Dr. Davis’ ability to bill Medicare directly for outpatient technical component services will end, severely disrupting long-standing relationships between his laboratory and the many hospitals it serves.

The change, which HCFA announced in a late-May conference call with the College, means independent laboratories, like Dr. Davis’ PathGroup, Brentwood, Tenn., will have to receive payment for outpatient TC services from hospitals rather than Medicare-payments that, in many cases, will be substantially lower than existing rates. Dr. Davis shares an opinion held by many in the laboratory community that the change means nothing but bad things for providers and beneficiaries, especially those served by rural hospitals.

"It’s going to be an administrative hardship, a financial hardship, and an operational hardship," says Dr. Davis, PathGroup’s president. The group provides technical and professional component anatomic pathology services to 33 rural hospitals in Alabama, Illinois, Indiana, Kentucky, and Tennessee-the sort of hospitals that typically can’t afford in-house surgical pathology services and must use independent laboratories, such as Dr. Davis’.

"Most, if not all, of these rural hospitals are in poor financial condition, in part due to inadequate government payer reimbursement," Dr. Davis says. "Seventy percent of the anatomic pathology services provided to the Medicare patients of these rural hospitals are provided to outpatients. Considering the difficulty in being paid for Part A services from these same hospitals and their current poor financial condition, our ability to be paid for the actual TC cost is going to be challenging, quite challenging."

The administrative burden on hospitals and independent laboratories posed by the new TC policy is formidable, Dr. Davis says.

"These rule changes will create a whole new set of administrative costs for both the hospitals and the independent labs," he says. "Hospitals will have the additional administrative cost of creating new systems, additional personnel time, and the accompanying added training to process, verify, and audit daily detailed invoices from the independent laboratory before posting payment codes to individual patient accounts. "And for the first time, independent labs will have to submit two bills, one to the Part B Medicare carrier for the professional component and one to the hospital for the technical component," he continues. "Current electronic billing protocols with the Medicare carriers and secondary payers will have to be redesigned, and our information systems must be modified to invoice hospitals on a daily basis, so that they may post technical charges to patient accounts prior to discharge. The cost of these administrative changes alone may well exceed the payment we receive from hospitals for the technical component."

The change in TC payment policy raises patient care issues, too, Dr. Davis says. "I believe the cost of the administrative changes will disproportionately fall upon the rural hospitals and providers, who can least afford another negative financial hit," he says. "Moreover, without the service of independent laboratories, these hospitals cannot afford to open their own histology and cytology labs, potentially threatening their ability to provide timely surgical services. The worst result of these rule changes may well be that the access to local surgical services in rural areas that Medicare beneficiaries currently enjoy will be disrupted."

Although HCFA doesn’t explicitly state its position on TC payments to independent laboratories in the April 7 outpatient PPS final rule, a HCFA official made that position clear in a June 16 e-mail message to the College (see "HCFA responds"). That clarification followed a May 31 conference call with the College, in which HCFA officials said a section of the rule that prohibits unbundling of clinical diagnostic laboratory tests provided to hospital outpatients applies to the technical component of Medicare physician fee schedule services, such as pathology. That section states if a specimen is removed from a patient while at a hospital and sent to an independent laboratory for examination, the laboratory must bill the hospital for the technical component of its work. But the hospital is not responsible for payment for the service if the patient leaves the hospital and goes to the laboratory to have the specimen removed and the diagnostic service provided. The conference call came in response to College attempts to clarify the status of independent laboratory billings.

Currently, Part B regulations allow an independent laboratory to bill for the technical component of hospital outpatient specimens. On the inpatient side, HCFA changed the rule last year to eliminate direct billings by independent laboratories starting Jan. 1, 2001.

That change prompted the College to seek legislation that would allow independent laboratories that had contracts in place by July 22, 1999 (the date of the proposed rule making the inpatient TC change) to continue billing Medicare directly for TC services. To that end, the CAP worked with Sens. Kent Conrad (D-ND) and Charles Grassley (R-Iowa) to have such "grandfather" language added to a rural health care bill the senators introduced June 15. A companion bill containing the same grandfather provision was introduced in the House the same day by Rep. Mark Foley (R-Fla.). The College, meanwhile, was working to resolve the billing problem for outpatient services, but, as of this writing, had not taken specific action. The change in outpatient TC payment policy does not affect the ability of an independent laboratory to bill for the technical components for nonhospital patient specimens-office and clinic specimens, for example-as long as the patient is not a registered hospital outpatient when the specimen is removed. And the hospital outpatient PPS does not apply to the professional component of physician services, which remain separately billable.

Under the outpatient PPS, hospital payments will be made through ambulatory payment classifications, or APC, groups rather than on the basis of hospital-specific costs. Although sometimes described as outpatient DRGs, a reference to the diagnosis-related group payment scheme Medicare uses for hospital inpatient payments, the APC system is fundamentally different in important ways. First, whereas a single DRG payment to a hospital bundles payment for nearly all facility costs, a hospital may bill multiple APCs to report the various services provided during an outpatient encounter. For example, hospitals will receive $21.82 (subject to geographic adjustment) for each 88305 outpatient surgical pathology technical component and $687.06 for blood product exchange. If multiple services bundled into an APC are provided, then multiple units of the APC may be billed.

Another difference: The payment rates for the constituent parts of an APC are identifiable, while no similar itemization exists for the lump sum DRG payments. The confusion surrounding technical component payments under the outpatient PPS is only one part of broader problems HCFA has faced carrying out the new system. The desire to accommodate concerns by hospitals and other providers, as well as internal problems meeting deadlines for tasks crucial to the system’s launch, caused the agen-cy to delay the outpatient PPS start date from July 1 to Aug. 1. In a June 2 letter to the American Hospital Association, which has pushed the agency to put the outpatient PPS system on hold, HCFA administrator Nancy-Ann Min DeParle conceded it would be "virtually impossible" for her agency and hospitals to meet the system’s July 1 scheduled start.

Referring to that date, DeParle said: "While we have been working as hard as we can and have achieved several important milestones toward this goal, as you know, there are others that we have missed. Further, our informal surveys of the hospital community indicate that a significant number of hospitals may not be prepared to implement the PPS on July 1."

DeParle said the decision to delay the PPS start grew, in part, from HCFA’s failure to meet an April 1 deadline for release of the "claims expansion and line item processing," the expanded claim form necessary for the new system. She acknowledged that the nine-week delay in releasing the form has "limited the ability of the hospital industry to prepare" for the outpatient PPS.

She stressed HCFA’s commitment to prevent further delays. "[W]e must and will redouble our efforts to ensure that the new system is effective on August 1," she said.

DeParle asked the AHA for its help in urging hospitals not to collect deductibles or coinsurance from beneficiaries on or after Aug. 1 until HCFA has notified them of the correct amounts. To that end, she said, HCFA would mount a public education campaign for hospitals and patients, including fliers and promotion of a toll-free help line. The issue of beneficiary deductibles and coinsurance has been an important part of the debate over the outpatient PPS system’s schedule. The system is designed to gradually reduce the amount of coinsurance beneficiaries pay for outpatient services-often as high as 50 percent of costs-and any delay in starting the new system means a delay in lowering outpatient costs to seniors. The American Association of Retired Persons and many members of Congress, aware of the continuing cost burden on Medicare beneficiaries, have pushed HCFA hard in recent months to get the outpatient PPS system off the ground.

But after that launch occurs, Medicare likely will find that the savings it generates on behalf of beneficiaries ultimately could do more harm than good for many patients and providers, especially those in rural areas, Dr. Davis warns. "I really think this is going to hurt the rural hospital marketplace and their ability to maintain surgical services," he says.

Carl Graziano is CAP TODAY Washington editor and CAP manager of government communications.