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By Joseph W. Plandowski
President, Lakewood Consulting Group
04/22/08
Recently, a client contacted me to discuss some disturbing news. He just discovered that a large national specialty reference urology testing laboratory was offering his largest customer, a urology practice, a global fee of $30 for CPT 88305. His concern was that his own laboratory would be forced to close because it costs him more than $30 to turn out each CPT 88305 diagnosis. How could anyone one else survive at that fee?
Once his emotional reaction was separated from the facts, it was evident that only part of the story was reflected in the headlines. Not surprisingly. Yes, $30 was truly the fee. Yes, it was really the global fee. Yes, it was for CPT code 88305. However, while $30 per CPT 88305 is what the urology practice was going to pay out of its pocket, that was not the actual fee the specialty urology reference laboratory was going to realize in the final analysis.
This type of gamesmanship has gone on as long as laboratories have existed. To play the game all you have to do as a laboratory provider is find physician office practices with a high percentage of Medicare patients. Then you offer the practice ridiculously low fees on their non-Medicare patient testing that the practice rebills to insurers of those patients. The rest is straightforward, with the physician office practice pocketing the difference between the high fees billed and the low fees paid.
Some of these games have taken a hit by states that have adopted direct billing laws requiring the party performing the work to directly do the billing, hence bypassing any rebilling by another physician who performs no function other than inflating the testing bill. Furthermore, there are a series of ethics statements issued by the American Medical Association (AMA) related to these games that have been in place, in some cases, for as many as 30 years. It appears that relatively few physicians pay any attention to those statements. Without enforcement, those can be described as a terrible waste of effort and paper.
Let’s examine how the game is played in anatomic pathology. If you don’t believe this is widespread in the industry today, you have your head in the sand. This is as pervasive as it gets. Anatomic pathology is a great place to play these games because the fees and associated profits are very high relative to clinical pathology, which is in the pits.
For illustration purposes, these assumptions apply:
- There are 10 urologists in the single-specialty practice.
- Medicare beneficiaries comprise 50 percent of the practice.
- The urology practice is located in a state without direct billing regulations.
- The urology practice does 12-core prostate biopsies per National Comprehensive Cancer Network (NCCN) standards.
- There are 10,000 billable CPT 88305 slides diagnosed annually.
- The practice only bills non-Medicare patients and allows the reference laboratory to bill Medicare patients in a typical client billing arrangement.
- Immunohistochemistry (IHC) staining (88342) is performed on 20 percent of the slides.
- Fees for CPT 88305 and CPT 88342 are identical: global $100, technical $60, and professional $40, and are the same for Medicare and non-Medicare patients.
- The reference laboratory’s cost of preparing a billable slide is assumed at $10 (technical cost) and the cost of a billable diagnosis by an employed pathologist is $15 (professional cost).
- The practice pays a $30 global fee to the specialty urology reference laboratory for non-Medicare patient diagnosis related to CPT 88305 and 88342.
From the above information, a contribution margin can be determined for the laboratory and the urology practice. What that means is that after the major costs are paid there is a pot of money that goes to pay other costs and what is left becomes take-home money. The following analysis is designed to allow the financially challenged to keep pace so they too can understand what is happening:
Separate Medicare (50 percent) from non-Medicare (50 percent) patients. There are 5,000 billable Medicare and 5,000 billable non-Medicare patient tissue slides.
There are also IHC stained slides at a rate of 20 percent, hence 1,000 billable Medicare (5,000 x 20%) and 1,000 billable non-Medicare (5,000 x 20%) IHC slides.
The urology practice:
- bills 5,000 tissue slides at $100 each for the non-Medicare patients ($500,000) and 1,000 associated IHC slides at $100 each ($100,000) for a total of $600,000 in revenues.
- pays the reference laboratory a global fee of $30 each for the 6,000 (5,000 plus 1,000) billable non-Medicare patient slides for a total of $180,000 in expenses.
- nets a contribution margin of $420,000 ($600,000 less $180,000). From that amount they pay for incremental billing and collection services, incremental staffing to label and package tissue specimens for shipment to the reference laboratory, etc. They keep whatever monies remain.
The reference laboratory:
- bills 5,000 tissue slides at $100 each for the Medicare patients ($500,000) and 1,000 associated IHC slides at $100 each ($100,000) for a total of $600,000 in revenues.
- bills the urology practice a global fee of $30 for each of 6,000 non-Medicare patient slides for a total of $180,000 in revenues.
- pays their technical ($10) and professional ($15) costs per slide for all the billable slides ($25 x [5,000 plus 1,000 Medicare and 5,000 plus 1,000 non-Medicare]) for a total of $300,000 in expenses.
- nets a contribution margin of $480,000 ($600,000 plus $180,000 less $300,000). From that they pay for all their other expenses, such as couriers, billing, administration, etc., and the remainder is profit.
- Let’s look at what happened here before and after the arrival of a large national specialty urology reference laboratory at my client’s urology customer, as follows:
Before Arrival : My client enjoyed the good life. All the tissue specimens from his large customer went into his laboratory. He billed 10,000 CPT 88305 and 2,000 CPT 88242 for total revenues of $1,200,000 ($100 x [10,000 plus 2,000]). There was plenty of money to cover his costs and fill his pockets on the way home.
After Arrival : My client’s good life is about to disappear overnight regardless of his response to the large national specialty laboratory. The reason is simple: his customer just discovered a source of money. Worse for my client, his urology customer realizes that it has been taken to the cleaners by my client for many years. They are asking themselves why my client did not offer the $30 deal to them rather than filling his pockets with “their” money. Even if my client offers an identical deal, he now has to jump a very high distrust barrier now in their minds. And, if he loses the customer, he is out $1,200,000. This is described as devastating.
What to do? Lot ’s of choices for my client, but only a few real answers if he wants to keep the business. Let’s review some of the choices, as follows:
Obtain copies of the AMA’s ethics statements, study them, and take them to a meeting with the senior members of the urology practice. It’s clear that going with the national specialty urology laboratory creates an ethics dilemma for members of the urology practice because the practice can offer nothing to the patient regarding pathology services, except marking up the bill. This approach has a slim chance of success. Kiss the $1,200,000 goodbye.
Contact the OIG with the claim Medicare is being overcharged. Consider that half the billing by the specialty laboratory for identical work is $30 or $100 depending on which party (the practice or Medicare directly) is being billed. The plea to OIG is Medicare should claim the national specialty laboratory’s customary fee is $30 and that is all they should be paid on their direct billings. This may give my client great satisfaction, but his laboratory will long be closed and forgotten before the OIG can do anything, if they so act. Again, kiss the $1,200,000 goodbye.
Go to the customer with a similar offer. A slightly higher price may be justified because of the close working relationship that has existed over many years between my client’s laboratory and the urology practice. Ethics be damned! Also, consider groveling when the issue of keeping their money for all those years is raised. Plead ignorance of the ever changing rules from CMS that permit some of these schemes to exist. Kiss $420,000 of the $1,200,000 goodbye and welcome to the real world of pathology, if the business is retained.
Try a novel approach. Suggest that the urology practice install their own anatomic laboratory with my client’s pathology practice providing professional services under a long-term contract. This approach does take volume out of my client’s laboratory; however, he may be able to downsize by selling his extra equipment and offering a histotech to the urology practice. With this approach, future competition is minimized. However, kiss all the technical revenues goodbye, $720,000 of the $1,200,000; however, the remaining $480,000 comes with virtually no expense.
The stark reality of this situation gets played out every day. It is gut-wrenching for clients like mine. The problem is this: all physicians are under reimbursement cuts. They are all looking for ways to bring ancillary revenues into their practices. They are maxed out in terms of seeing more patients per day who individually bring less to the practice with each reimbursement cut. It is a downward spiral that doesn’t seem to have an escape.
My client and others like him need to recognize the impact of these reimbursement cuts and the resulting implications. They need to be proactive before the representative from a specialty pathology laboratory arrives at their customer’s doorstep with an offer that always includes a way for the customer to obtain a piece of the testing revenues. This is especially the case with large specialty practices that generate high volumes of tissue work, such as urology, gastroenterology, and dermatology.
Specialty pathology laboratories have grown dramatically in number because anatomic pathology is one of the last bastions of decent profitability in the laboratory industry.
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