Lab Industry Awaits First Domino of Competitive Bidding Project to Tip

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“Not much is going to happen until we have that first domino of OMB approval. After we get OMB approval on the key design elements, we’ll announce demonstration sites, we’ll hold an open-door forum, and then another open-door forum to ask questions about implementation.”

“Everybody has come together and looked at this and recognized that you can’t commoditize clinical laboratory medicine service,” says ACLA’s David Mongillo. “It’s just a tremendously flawed system if they move ahead with this demonstration project.”

The Medicare Clinical Laboratory Competitive Bidding Demonstration project is currently in a quiet period—perhaps the calm before the storm—as everyone waits for the United States Office of Management and Budget (OMB) to approve the structure and budget of the demonstration project. CMS representatives decline to even guess as to when that approval will occur, although Alan Mertz, president of the American Clinical Laboratory Association (ACLA; Washington, DC), has heard rumors that the project is expected to start in the middle of this year.

"It seems the CMS is intent on launching this next year sometime," said Mertz in December. "It’s slipped a little bit. We thought it would be the first quarter of 2007, but now it’s looking like implementation would be June of 2007."

The Clinical Laboratory Competitive Bidding Demonstration project was initiated as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). The goal, according to Linda Lebovic, MPH, MT (ASCP), project officer of the Competitive Lab Bidding Demonstration at CMS, "is to determine whether competitive bidding can be used to provide quality laboratory services at prices below current payment rates."

The demo project is structured around Metropolitan Statistical Areas (MSAs). A set of parameters were used to define the MSAs, resulting in a possible 22 areas for the demonstration project. Competitively bid fees in the demonstration areas will be set for all tests paid under the Medicare Part B clinical laboratory fee schedule. Exceptions are pap smears, colorectal cancer screening tests, and any new tests that might be added to the fee schedule during the demonstration period.

All "independent, hospital and/or physician office laboratories with $100,000 or more in annual Medicare Part B (fee-for-service) payment for nonpatient services will be required to participate in the demonstration." Once the bidding has been made and adjudicated, winners will be announced. There will be multiple winning laboratories in order to assure quality of service competition between laboratories. There will be two demo sites, and the demonstration will run three years.

Within the laboratory industry the demonstration project has caused a fair amount of concern and even controversy. "Lab services are a very complex service that involves very complicated logistics," says Alan Mertz. "Having to pick up specimens in the afternoon, transporting perishable specimens very quickly to a lab and having precise testing done on them that evening, and having absolutely precise and accurate results reported back to physicians usually the next morning."

The laboratory industry performs approximately 1,100 different tests, and few, if any, laboratories provide all of them. Within the industry, there are also specializations. Mertz notes, "You have some labs that focus on nursing homes, others that tend to focus on hospitals and referrals."

Mertz notes that the type of services laboratories provide are equivalent to those performed by physician’s offices and hospitals. "No one would suggest we competitively bid a couple of physicians’ offices in the Washington, D.C., area to service all Medicare beneficiaries. It just doesn’t work. You can lower the price, but we have a system where you wouldn’t have access to those physicians. That’s the basic problem."

An example of the complexity of this project involves MSAs and laboratory-to-laboratory referrals. If a laboratory in one area wins the demonstration project, but regularly sends out some of their tests to a laboratory in another area outside the MSA, they will need to make bids that account for costs that include their send-out reference tests. Mertz says, "For the reference lab, how do you know how much to bid? If that reference lab doesn’t get below this magic bidding level for those tests, they’re out of Medicare for three years."

Comparisons have been made between the demo project and the way in which private insurers use competitive bidding strategies in negotiating with laboratories. However, there are significant differences. Mertz says, "In the private sector, when there are negotiations between plans and labs, it’s exactly that, negotiations. One of the key things that those negotiations center around is guaranteed volume."

A laboratory involved in private payer contracts knows what their proposed volumes will be and what population they are serving. The terms negotiated typically revolve around those figures. Mertz tells Washington G-2 Reports, "It’s a basic economic principle—you always have to know the volume of a product before you can set the price, and you can’t lower the price of something until you know how many units you’re going to sell. That’s what Wal-Mart does. You can’t have any kind of negotiations without knowing that. In this demonstration project, you have absolutely no way of knowing what your volume is going to be."

Once the OMB approves the design of the bidding forms and the sites, a number of things will begin to happen. "Not much is going to happen until we have that first domino of OMB approval," says Lebovic. "After we get OMB approval on the key design elements, we’ll announce demonstration sites, we’ll hold an open-door forum, and then another open-door forum to ask questions about implementation. Then we’ll post information on our Web site and convene a bidder’s conference. We’ll continue to make information and all the materials available on our project Web page, through our CMS listservs and through our demonstration e-mailboxes."

CMS has already sent their instructions to carriers. Nothing else about the schedule is solid. "Right now it’s June," says Mertz. "So if OMB approves fairly soon, that’s what CMS is aiming for."

The MMA was a Republican initiative to reform Medicare. The demonstration project specifically was a Republican House of Representatives proposal. In the 2006 midterm elections, the Democratic Party took over control of both the House and Senate. "We’ve talked to a lot of the Democratic leaders, and they have a lot of skepticism about this. So we’re going to be talking to them more to see if they would take a harder look at this," says Mertz. "That certainly would be well into [2007], but we’ve already started discussing this with them."

According to David Mongillo, vice president of policy and medical affairs for ACLA, "Not always does the clinical lab community come together, but in this case, the clinical laboratory community completely has come together—small labs, sector labs, such as nursing homes and end-stage renal disease labs—and everybody has come together and looked at this and recognized that you can’t commoditize clinical laboratory medicine service. It’s just a tremendously flawed system if they move ahead with this demonstration project."