oversight

Medicare: Modifying Payments for Certain Pathology Services Is Warranted

Published by the Government Accountability Office on 2003-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Committees




September 2003
                 MEDICARE

                 Modifying Payments
                 for Certain Pathology
                 Services Is Warranted




GAO-03-1056 

                                                September 2003


                                                MEDICARE

                                                Modifying Payments for Certain
Highlights of GAO-03-1056, a report to          Pathology Services Is Warranted
congressional committees




In 1999, the Health Care Financing              In 2001, approximately 95 percent of all Medicare prospective payment
Administration, now called the                  system (PPS) hospitals—hospitals that are paid predetermined fixed
Centers for Medicare & Medicaid                 amounts for services—and critical access hospitals (CAH), which receive
Services (CMS), proposed                        reimbursement from Medicare based on their reasonable costs, outsourced
terminating an exception to a                   some technical pathology services to laboratories that received direct
payment rule that had permitted
laboratories to receive direct
                                                payment for those services. However, the median number of outsourced
payment from Medicare when                      services per hospital was small—81.
providing technical pathology
services that had been outsourced               If laboratories had not received direct payments for services for hospital
by certain hospitals. The Congress              patients, GAO estimates that Medicare spending would have been $42
enacted provisions in the Medicare,             million less in 2001, and beneficiary cost sharing obligations for inpatient
Medicaid, and SCHIP Benefits                    and outpatient services would have been reduced by $2 million. Most
Improvement and Protection Act of               hospitals are unlikely to experience a financial burden from paying
2000 (BIPA) to delay the                        laboratories to provide technical pathology services. If payment to the
termination. The BIPA provisions                laboratory is made at the current rate, a PPS hospital outsourcing the
directed GAO to report on the
                                                median number of technical pathology services outsourced by PPS hospitals,
number of outsourcing hospitals
and their service volumes and the               94, would incur an additional annual cost of approximately $2,900. There
effect of the termination of direct             would be no financial impact for the 31 percent of rural hospitals that are
laboratory payments on hospitals                CAHs, as they would receive Medicare reimbursement for their additional
and laboratories, as well as on                 costs.
access to technical pathology
services by Medicare beneficiaries.             Medicare beneficiaries’ access to pathology services would likely be
GAO analyzed Medicare inpatient                 unaffected if direct laboratory payments are terminated. Hospital officials
and outpatient hospital and                     stated they were unlikely to limit surgical services, including those requiring
laboratory claims data from 2001 to             pathology services, because limiting these services would result in a loss of
develop its estimates.                          revenue and could restrict access to services for their communities.

                                                Payments to Laboratories by Medicare and Medicare Beneficiaries for Technical Pathology
GAO suggests that the Congress                  Services Provided to Hospital Inpatient and Outpatients, 2001
may wish to consider not
reinstating the provision that                                                                            Dollars in millions
allows laboratories to receive                                                                                      Services
direct payment from Medicare for                                                       Services provided        provided to
technical pathology services                                                                to inpatients        outpatients              Total
provided to hospital patients. GAO                  Estimated Medicare payments                       $18                $33               $51
recommends that the                                 Estimated beneficiary copayments                    5                  8               $13
Administrator of CMS terminate                      Total                                             $23                $41               $63
                                                                                                                                                 a


the policy of allowing laboratories             Source: CMS.
to receive direct payment. CMS
                                                Note: GAO analysis of 2001 inpatient and outpatient claims and Medicare physician fee schedule
stated it would carefully consider              payment and copayment rates.
our recommendation.
                                                a
                                                Total does not add due to rounding.

www.gao.gov/cgi-bin/getrpt?GAO-03-1056.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact A. Bruce
Steinwald at (202) 512-7119.
Contents 



Letter                                                                                          1
                Results in Brief 
                                                              4
                Background
                                                                     5
                Few Hospitals Outsource Large Volumes of Technical Pathology 

                  Services                                                                    11
                Medicare Expenditures and Beneficiary Copayments Would Be
                  Reduced, While Hospital Costs Would Increase Slightly, If Direct
                  Payment to Laboratories Is Terminated                                       13
                Beneficiaries’ Access Likely Would Be Unaffected 
                            18
                Conclusions                                                                   

                                                                                              19
                Matter for Congressional Consideration 
                                      19
                Recommendation for Executive Action 
                                         19
                Agency Comments and Comments from National Associations and 

                  Our Evaluation                                                              20

Appendix I      Scope and Methodology                                                         23



Appendix II 	   Comments from the Centers for Medicare &
                Medicaid Services                                                             26



Tables
                Table 1: Medicare Payments for Outsourced Technical Pathology
                         Services at PPS Hospitals and CAHs under Current
                         Payment Policy and If Direct Payment to Laboratories Is
                         Terminated                                                           10
                Table 2: Beneficiary Cost-Sharing Obligation for Outsourced
                         Technical Pathology Services at PPS Hospitals and CAHs
                         under Current Payment Policy and If Direct Payment to
                         Laboratories Is Terminated                                           11
                Table 3: Number and Percentage of All Hospitals, Urban and Rural
                         PPS Hospitals, and CAHs Outsourcing Technical
                         Pathology Services by Number of Services in 2001                     12
                Table 4: Estimated Payments to Laboratories by Medicare and
                         Medicare Beneficiaries for Technical Pathology Services
                         Provided to Hospital Inpatients and Outpatients, 2001                14
                Table 5: Estimated Medicare Payments under Current Policy and
                         Projected Annual Savings If Direct Payments to
                         Laboratories Are Terminated, Based on 2001 Services                  15


                Page i              GAO-03-1056 Medicare Payment for Technical Pathology Services
Table 6: Estimated Beneficiary Copayments under Current Policy
         and Projected Annual Savings If Direct Payments to
         Laboratories Are Terminated, Based on 2001 Services                              16




Abbreviations

AHA               American Hospital Association 

APC               ambulatory payment classification 

BIPA              Medicare, Medicaid, and SCHIP Benefits Improvement 

                  and Protection Act of 2000
CAH               critical access hospital
CAP               College of American Pathologists
CMS               Centers for Medicare & Medicaid Services
DRG               diagnosis-related group
HCFA              Health Care Financing Administration
MPFS              Medicare physician fee schedule
NRHA              National Rural Health Association
POS               Provider of Services
PPS               prospective payment system
SNF               skilled nursing facility


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Page ii                 GAO-03-1056 Medicare Payment for Technical Pathology Services
United States General Accounting Office
Washington, DC 20548




                                   September 30, 2003

                                   Congressional Committees

                                   Hospitals receive fixed, predetermined amounts under Medicare’s hospital
                                   inpatient and outpatient prospective payment systems (PPS) for providing
                                   necessary services to Medicare beneficiaries. By paying hospitals fixed
                                   amounts under a PPS, Medicare seeks to encourage them to operate
                                   efficiently, as hospitals retain the difference if their payments exceed their
                                   costs of providing necessary services. Hospitals that outsource services
                                   for their patients generally pay suppliers of those services directly, and the
                                   suppliers do not receive payment from Medicare.

                                   In 2000, the Congress enacted provisions in the Medicare, Medicaid, and
                                   SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)1 to delay
                                   for 2 years application of a rule issued by the Health Care Financing
                                   Administration (HCFA),2 the agency responsible for administering
                                   Medicare. The rule terminated an exception to the inpatient and outpatient
                                   PPS that permitted one type of supplier—laboratories—to receive
                                   payment directly from Medicare when providing technical pathology
                                   services3 to beneficiaries who are hospital patients. The BIPA provisions
                                   applied only to “covered hospitals,” those hospitals that had agreements
                                   with laboratories in effect as of July 22, 1999, the date HCFA proposed the
                                   rule, under which the hospitals outsourced technical pathology services to
                                   laboratories, and the laboratories received payment from Medicare for
                                   these services. Under these agreements, some hospitals may outsource all
                                   of their technical pathology services to laboratories, while others may
                                   outsource only some of their services, such as complex procedures that
                                   are rarely performed or overflow services at times of full capacity.


                                   1
                                    BIPA, Pub. L. No. 106-554, app. F, § 542, 114 Stat. 2763, 2763A-550.
                                   2
                                    In July 2001, the agency’s name was changed from HCFA to the Centers for Medicare &
                                   Medicaid Services. In this report, we refer to the agency as HCFA when discussing actions
                                   it took under that name.
                                   3
                                    Technical pathology services involve the preparation of tissue samples removed during
                                   surgery for examination by a pathologist. Such services are performed by a laboratory
                                   technician, known as a histotechnician, and involve cutting, mounting, and staining the
                                   specimen on a microscope slide. Under Medicare, these services are referred to as the
                                   “technical component” of a pathologist’s service. Medicare covers as a separate service the
                                   pathologist’s examination of a specimen, which is called the “professional component.”



                                   Page 1                    GAO-03-1056 Medicare Payment for Technical Pathology Services
Numerous issues were raised when HCFA issued its rule in 1999 to
terminate direct Medicare payment to laboratories for technical pathology
services. At the time, HCFA stated that Medicare was paying twice for
those services provided to hospital inpatients, once to the hospital through
the inpatient PPS payment and once to the laboratory through a separate
payment.4 In addition, outsourcing hospitals had an advantage because
they did not pay the cost of technical pathology services outsourced to
laboratories, while other hospitals had to pay for the cost of these services
from their inpatient PPS payments.5 Furthermore, application of Medicare
cost-sharing rules resulted in added costs to inpatient beneficiaries
admitted to outsourcing hospitals, compared to those for inpatients at
other hospitals. Some hospitals and laboratories and their affiliated
pathologists voiced concern, however, that termination of the laboratories’
direct payments would increase hospitals’ costs, decrease laboratories’
revenues, and cause hospitals to stop performing surgical services,
particularly in rural areas, reducing beneficiaries’ access to services.

Although the BIPA provisions expired at the end of 2002, the Centers for
Medicare & Medicaid Services (CMS) made an administrative decision to
continue directly paying laboratories for technical pathology services
provided to hospital patients.6 In recent bills, both the House of
Representatives and the Senate have included language to further delay
application of the CMS rule.

In BIPA, the Congress directed that we report on how terminating direct
laboratory payments would affect hospitals, laboratories, and access to
technical pathology services by Medicare beneficiaries.7 As agreed with
the committees of jurisdiction, we (1) describe the number and type of
hospitals outsourcing technical pathology services and their service
volumes, (2) estimate how termination of direct laboratory payments
would affect Medicare expenditures, beneficiary cost-sharing obligations,
and hospital costs, and (3) examine how terminating direct laboratory


4
 HCFA’s 1999 rule pertained to services delivered only to hospital inpatients because the
outpatient PPS was not yet implemented. The outpatient PPS was implemented in August
2000; therefore, when the BIPA provisions were enacted in December of that year, they
applied to both inpatient and outpatient services.
5
 Other hospitals either perform technical pathology services themselves or outsource and
directly pay laboratories for such services.
6
CMS Program Memorandum, Transmittal B-03-001 (Jan. 17, 2003).
7
BIPA § 542(d), 114 Stat. 2763A-551.




Page 2                   GAO-03-1056 Medicare Payment for Technical Pathology Services
payments would affect beneficiaries’ access to technical pathology
services in hospitals.

We used Medicare claims and provider data to identify Medicare
beneficiaries receiving technical pathology laboratory services
concurrently with hospital services. Using 2001 data, the most recently
available, we estimated the number of urban and rural PPS hospitals and
critical access hospitals (CAH),8 which are paid their reasonable costs
rather than PPS payments,9 outsourcing technical pathology services. We
also estimated the volume of and payments for these services. We relied
on these data because there is no list of covered hospitals and the
laboratories to which they outsource technical pathology services.

We interviewed officials at CMS, the Department of Health and Human
Services Office of Inspector General, and the Congressional Budget Office,
as well as representatives from several Medicare carriers.10 In addition, we
interviewed representatives from national associations representing
hospitals and pathologists and representatives from 13 laboratories and 17
urban and rural PPS hospitals in eight states and an additional 2
laboratories in another state. We visited a laboratory and a rural hospital
that outsources technical pathology services. We also spoke with officials
from two CAHs. Our methodology is detailed in appendix I. We did our
work from June 2002 through September 2003 in accordance with
generally accepted government auditing standards.




8
 CAHs were created as part of a program developed to maintain access to hospital services
in rural areas. In general, to be designated as a CAH, a hospital must (1) be in a rural area
more than a 35-mile drive from another hospital (or certified as a necessary provider in the
area), (2) make available 24-hour emergency care services, (3) have no more than 25 beds
(of which no more than 15 may at any time be used for acute care to provide average acute
care stays of no more than 96 hours per patient), (4) meet most Medicare requirements
generally applicable to hospitals, and (5) have a quality assessment and performance
improvement program, as well as procedures for utilization review. 42 U.S.C. § 1395i-
4(c)(2) (2000).
9
 Reasonable cost reimbursement is based on the actual cost of providing services,
including direct and indirect costs of providers, and excludes any costs that are
unnecessary in the efficient delivery of services.
10
  Medicare carriers are the contractors responsible for processing claims and paying
laboratories, physicians, and certain other providers.




Page 3                   GAO-03-1056 Medicare Payment for Technical Pathology Services
                   We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95
Results in Brief   percent of all such facilities, outsourced at least some technical pathology
                   services to laboratories that received direct payment from Medicare for
                   those services. In 2001, out of approximately 1.4 million outsourced
                   technical pathology services, the median number of outsourced services
                   per hospital was 81. Urban hospitals outsourced almost twice as many
                   services as rural hospitals. In addition, 64 percent of these services were
                   for outpatient beneficiaries.

                   If laboratories had not received direct payment for services for hospital
                   patients, we estimate that Medicare spending would have been $42 million
                   less in 2001, with $18 million and $24 million in savings for inpatient and
                   outpatient services, respectively, and overall beneficiary cost sharing
                   would have been reduced by $2 million. Comparatively, in 2001, payments
                   to laboratories providing technical pathology services to beneficiaries who
                   were hospital patients equaled over $63 million, including Medicare
                   payments of about $51 million and beneficiary cost sharing of almost $13
                   million. Most hospitals are unlikely to experience a large financial burden
                   from paying laboratories to provide technical pathology services.
                   However, the extent to which an individual hospital’s costs and a
                   laboratory’s revenues would change if direct laboratory payments are
                   terminated would depend on the rates negotiated by that hospital and
                   laboratory. If payment to the laboratory is made at the current rate, a PPS
                   hospital outsourcing the median number of technical pathology services
                   outsourced by PPS hospitals, 94, would incur an additional annual cost of
                   approximately $2,900. Also, there would be no financial impact from
                   terminating direct laboratory payments for the 31 percent of rural
                   hospitals that are CAHs because they would be reimbursed for their costs
                   of outsourcing technical pathology services.

                   Medicare beneficiaries’ access to pathology services would likely be
                   unaffected if direct payment to laboratories is terminated, as hospital
                   representatives we spoke with stated that, because of financial and
                   community access concerns, their hospitals were unlikely to limit surgical
                   services, including those requiring pathology services. In addition, almost
                   all hospital representatives we spoke with said their hospitals would likely
                   continue to outsource technical pathology services as it would generally
                   be less costly than performing the services themselves.

                   We suggest that the Congress may wish to consider not reinstating the
                   provisions that allow laboratories to receive direct payment from
                   Medicare for providing technical pathology services to hospital patients.
                   We recommend that CMS terminate its policy of permitting laboratories to


                   Page 4               GAO-03-1056 Medicare Payment for Technical Pathology Services
                        receive payment from Medicare for these services. In commenting on a
                        draft of this report, CMS stated that it is important that payment policy
                        encourage efficiencies in the provision of technical pathology services and
                        that it would carefully consider our recommendation. National
                        associations that received a draft of the report for comment disagreed that
                        direct laboratory payments should be terminated, as they believe such a
                        change would have negative effects on beneficiaries’ access to services
                        and on rural hospitals. However, hospital representatives we spoke with
                        said their hospitals would likely continue to outsource technical pathology
                        services. In addition, we do not believe paying laboratories directly for
                        these services will place a significant financial burden on rural hospitals as
                        we estimated that the median number of technical pathology services
                        outsourced by rural hospitals in 2001 was only 61.


                        Medicare payment policies for technical pathology services have changed
Background 	            over the years as new payment systems for hospital and physician services
                        have been implemented and modified. Beginning with the implementation
                        of the hospital inpatient PPS on October 1, 1983, through the
                        implementation of the Medicare physician fee schedule (MPFS) on
                        January 1, 1992, and the outpatient PPS on August 1, 2000, payment for
                        technical pathology services changed as fixed, predetermined payment
                        replaced reasonable cost or charge-based reimbursement for Medicare
                        services.


Implementation of the   Under the inpatient PPS, each inpatient stay is classifed into a diagnosis-
Inpatient PPS           related group (DRG) based primarily on the patient’s condition. Each DRG
                        has a payment weight assigned to it that reflects the relative cost of
                        inpatient treatment for a patient in that group compared with that for the
                        average Medicare inpatient. Included in the costs of each DRG are
                        nonphysician services provided to inpatients by the hospital and its
                        outside suppliers. A hospital receives a DRG payment from Medicare and a
                        deductible amount from a beneficiary for each inpatient benefit period.11
                        Each year, the DRG weights are recalibrated to account for changes in
                        resource use, and the payment rate is adjusted by an update factor to
                        account for changes in market conditions, practice patterns, and



                        11
                         A benefit period starts with an inpatient hospital or skilled nursing facility (SNF)
                        admission and ends after 60 consecutive days of no inpatient care. 42 C.F.R. § 409.60(a)
                        and (b) (2002). For 2003, the deductible for each hospital inpatient benefit period is $840.




                        Page 5                    GAO-03-1056 Medicare Payment for Technical Pathology Services
                           technology. Medicare separately pays physicians, including pathologists,
                           and certain other professionals for the direct services they provide to
                           inpatients.

                           When developing the inpatient PPS in the early 1980s, HCFA determined
                           that technical pathology services outsourced to laboratories were an
                           integral part of the professional services provided by the laboratories’
                           pathologists, not separate nonphysician services. Based on that
                           determination, the payment for technical pathology services provided by
                           laboratories was included in the larger payment to the laboratories and not
                           included in the PPS payments.12


Implementation of the      In 1992, HCFA implemented the MPFS, which created distinct payments
MPFS                       for the professional and technical components of most diagnostic services,
                           including pathology services. Although the MPFS included a distinct
                           payment to laboratories for technical pathology services, HCFA did not
                           revise its policy to prohibit laboratories from continuing to receive the
                           separate Medicare payment for outsourced technical pathology services
                           provided to inpatients. Under the MPFS, beneficiaries are responsible for a
                           copayment equal to 20 percent of the payment for physician services,
                           including technical pathology services. Thus, inpatient beneficiaries whose
                           technical pathology services were outsourced by a hospital to a laboratory
                           that received direct payment from Medicare were responsible for a
                           copayment, while other inpatients were not.


Termination of MPFS        On July 22, 1999, HCFA proposed ending Medicare payments under the
Payments to Laboratories   MPFS to laboratories for technical pathology services provided to hospital
for Technical Pathology    inpatients on or after January 1, 2000.13 Under the proposal, laboratories,
                           like suppliers of other nonphysician services, would have to seek payment
Services                   from hospitals for technical pathology services provided to hospital
                           inpatients.




                           12
                             In this report, we use the term “laboratory” to include both the pathology laboratory and
                           its affiliated pathologists, as many laboratories bill Medicare for both the pathologists’
                           professional services and the technical services.
                           13
                            64 Fed. Reg. 39,608, 39,624 (July 22, 1999).




                           Page 6                   GAO-03-1056 Medicare Payment for Technical Pathology Services
                            HCFA’s rationale for its proposed rule was that payment for technical
                            pathology services provided to beneficiaries was already included in the
                            inpatient PPS. When implementing the inpatient PPS, HCFA established
                            separate payment rates for rural and urban hospitals based on data from
                            hospitals’ cost reports submitted to the agency. Hospitals that performed
                            their own technical pathology services included such costs in their cost
                            reports, while hospitals outsourcing these services did not. According to
                            HCFA, urban hospitals generally performed such services, and in part,
                            their higher rates reflected that. Consequently, in HCFA’s view, when the
                            separate rural rate was eliminated in 1995 and rural hospitals began
                            receiving the higher rate paid to most urban hospitals, the cost of technical
                            pathology services was included in that payment. Thus, HCFA concluded
                            that when a laboratory received payment from Medicare for technical
                            pathology services provided to a hospital inpatient, Medicare was paying
                            twice for the same service—once to the hospital as part of the PPS
                            payment and once to the laboratory through the MPFS. A second reason
                            HCFA cited to support its proposed rule was concern that hospital
                            outsourcing arrangements with laboratories to provide technical
                            pathology services would proliferate if hospitals realized these
                            arrangements would reduce their costs without any reduction in their
                            inpatient PPS payments.

                            After considering comments from the hospital industry and laboratories,
                            which stated, in part, that they would need additional time to renegotiate
                            their agreements, in the final rule, HCFA delayed implementation of the
                            policy until January 1, 2001.14


Temporary Continuation of   In December 2000, the Congress enacted provisions in BIPA that stated
Laboratories Receiving      that laboratories furnishing technical pathology services to hospital
MPFS Payments               patients under agreements with hospitals as of the publication date of the
                            HCFA proposed rule could continue to receive payment directly from
                            Medicare for these services until January 1, 2003.15 Because the outpatient
                            PPS was implemented in August 2000, the provisions applied to services
                            provided to outpatients as well as inpatients.




                            14
                             64 Fed. Reg. 59,380, 59,409 (Nov. 2, 1999).
                            15
                             Although the provisions expired at the end of 2002 (BIPA § 542(c), 114 Stat. 2763A-551),
                            CMS notified carriers that they should continue to pay laboratories separately for technical
                            pathology services.




                            Page 7                   GAO-03-1056 Medicare Payment for Technical Pathology Services
Implementation of the      The outpatient PPS pays hospitals a predetermined amount per service
Outpatient PPS             similar to a fee schedule. All services paid under the outpatient PPS,
                           including technical pathology services, are classified into groups called
                           ambulatory payment classifications (APC). Like inpatient DRGs, the
                           relative weights of the APCs are adjusted annually by recalibration and the
                           payment rates by an update factor to account for changes in resource use,
                           technology, practice cost, and service delivery. When the outpatient PPS
                           was implemented, beneficiary copayments for a service were generally 20
                           percent of the hospitals’ median charges for that service in 1996, updated
                           to 1999. Therefore, the beneficiary cost-sharing obligation as a percentage
                           of APC payment rates varies by service. Because the median charges were
                           often higher than the APC payment rates implemented with the outpatient
                           PPS, beneficiary copayments were frequently as high or higher than 50
                           percent of the total APC payment amount. The Balanced Budget Act of
                           1997 established a mechanism to gradually decrease the cost-sharing
                           percentages for all APCs to 20 percent over time.16

                           The copayments that beneficiaries are responsible for paying under the
                           outpatient PPS for technical pathology services that are furnished directly
                           by hospitals are roughly comparable to the copayments that beneficiaries
                           are responsible for paying laboratories under the MPFS when services are
                           outsourced. The outpatient PPS payment rates for technical pathology
                           services are significantly lower than the corresponding MPFS payment
                           rates, but outpatient PPS copayments represent a higher percentage of the
                           payment for technical pathology services than MPFS copayments.17


Medicare Payment           If the BIPA provisions are not reinstated and CMS terminates direct
Methodologies If Direct    payments to laboratories, hospitals would have to negotiate payment
Payments to Laboratories   amounts with laboratories to pay them directly for services delivered to
                           inpatient and outpatient beneficiaries or begin to supply these services
Are Terminated             themselves. While the hospitals would not experience any direct
                           adjustments to their inpatient DRG payments, over time, hospital costs of


                           16
                            Pub. L. No 105-33, § 4523(a), 111 Stat. 251, 445.
                           17
                             For example, in 2001, the average payment rate under the outpatient PPS for the most
                           commonly performed technical pathology service (representing approximately 56 percent
                           of all technical pathology services outsourced by hospitals in 2001) was approximately $22,
                           which is less than half the payment rate of approximately $51 for the same service under
                           the MPFS. However, the copayment for that service under the outpatient PPS is
                           approximately $12, or 54 percent, compared to approximately $10, or 20 percent, under the
                           MPFS.




                           Page 8                    GAO-03-1056 Medicare Payment for Technical Pathology Services
paying laboratories for technical pathology services would be reflected in
the DRG weights, as the annual recalibration accounts for changes in the
costs of delivering services. For services delivered to outpatients,
hospitals would bill Medicare under the outpatient PPS for technical
pathology services and, therefore, would recover additional revenue even
if they continued to outsource these services to laboratories. Inpatient
beneficiaries of hospitals that outsource technical pathology services
would no longer be responsible for additional copayments to the
laboratories. Outpatient beneficiaries would no longer be responsible for
copayments to laboratories under the MPFS, but instead would be
responsible for copayments to the hospitals where they received their
services under the outpatient PPS.

CAHs, which as of March 2003 constituted 15 percent of all hospitals and
31 percent of rural hospitals, would not be affected by the termination of
direct laboratory payments.18 CAHs are not paid under the inpatient and
outpatient PPS, but instead are paid based on their reasonable costs of
providing services. Currently, CAHs receive no payment from Medicare for
technical pathology services outsourced to laboratories that directly bill
Medicare because CAHs incur no costs in the delivery of those services. If
direct laboratory payments are terminated, CAHs would be reimbursed by
Medicare for their costs of paying laboratories to perform technical
pathology services, and outpatient beneficiaries who currently are
responsible for paying 20 percent of the payment for their technical
pathology services to the laboratories under the MPFS would instead be
responsible for paying 20 percent of the CAHs’ customary charges.19 See
table 1 for a description of Medicare payments to outsourcing PPS
hospitals and CAHs, and table 2 for a description of beneficiary cost-
sharing obligations at outsourcing PPS hospitals and CAHs, under current
policy and if direct payment to laboratories is terminated.




18
 As of March 25, 2003, there were 749 CAHs in 44 states. The North Carolina Rural Health
Research and Policy Analysis Center at the University of North Carolina estimates that as
of April 15, 2003, there were an additional 69 CAH applications pending and an additional
311 rural hospitals actively considering conversion to CAH status.
19
 Medicare defines a “customary charge” as the amount that a provider charges for a
specific service the majority of the time. 42 C.F.R. § 405.503(a) (2002).




Page 9                   GAO-03-1056 Medicare Payment for Technical Pathology Services
Table 1: Medicare Payments for Outsourced Technical Pathology Services at PPS Hospitals and CAHs under Current
Payment Policy and If Direct Payment to Laboratories Is Terminated

                                           PPS hospital outsources to laboratory               CAH outsources to laboratory
                                                                 If direct payment is 
                              If direct payment is
                                           Current policy        terminated                    Current policy        terminated
                                                                                                                              

                                                                       a
 Inpatient      Hospital payment           None                  None                          None                  Reasonable costs
                                                                       b                                                   b
                Laboratory payment         MPFS payment          None                          MPFS payment          None
 Outpatient     Hospital payment           None                  APC payment                   None                  Reasonable costs
                Laboratory payment         MPFS payment          Noneb                         MPFS payment          Noneb
Source: CMS.

                                       Note: GAO analysis of Medicare payment rules for 2003.
                                       a
                                       A hospital receives a DRG payment amount for inpatient services related to the patient’s condition.
                                       There is no additional payment to the hospital if direct laboratory payments are terminated.
                                       b
                                        A laboratory that continues to supply these services for a hospital would receive payment directly
                                       from the hospital.




                                       Page 10                     GAO-03-1056 Medicare Payment for Technical Pathology Services
Table 2: Beneficiary Cost-Sharing Obligation for Outsourced Technical Pathology Services at PPS Hospitals and CAHs under
Current Payment Policy and If Direct Payment to Laboratories Is Terminated

                         PPS hospital outsources to laboratory                             CAH outsources to laboratory
                                             If direct payment is                                           If direct payment is
               Current policy                terminated                          Current policy             terminated
 Inpatient 	   20 percent of MPFS            None 	                              20 percent of MPFS         None
               payment to laboratory                                             payment to laboratory
 Outpatient    20 percent of MPFS            APC copayment (percentage of        20 percent of MPFS         20 percent of CAH’s
               payment to laboratory         payment varies by service)          payment to laboratory      customary charges
Source: CMS.

                                        Note: GAO analysis of Medicare payment rules for 2003.




                                        We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95
Few Hospitals                           percent of all such facilities, outsourced at least some technical pathology
Outsource Large                         services to laboratories that received direct payment from Medicare for
                                        those services (see table 3).20 However, most hospitals outsourced a small
Volumes of Technical                    number of these services to laboratories. In 2001, approximately 1.4
Pathology Services                      million technical pathology services were outsourced, and the median
                                        number of outsourced services per hospital was 81. Approximately 68
                                        percent of all hospitals outsourced 200 or fewer technical pathology
                                        services, and only 6 percent outsourced more than 1,000 services.
                                        Outsourcing hospitals consisted of 2,428 urban PPS facilities and 1,651
                                        rural PPS facilities, representing 95 percent and 97 percent of urban and
                                        rural PPS hospitals in 2001, respectively, and 694 CAHs.




                                        20
                                          We were unable to identify the number of laboratories receiving Medicare payment for
                                        technical pathology services provided to hospital patients because a single laboratory may
                                        submit claims under multiple provider numbers, and CMS does not track different provider
                                        numbers to a single laboratory.




                                        Page 11                     GAO-03-1056 Medicare Payment for Technical Pathology Services
Table 3: Number and Percentage of All Hospitals, Urban and Rural PPS Hospitals, and CAHs Outsourcing Technical
Pathology Services by Number of Services in 2001

                                    All hospitals      Urban PPS hospitals             Rural PPS hospitals
                             (percentage of total       (percentage of total            (percentage of total         CAHs (percentage of
 Number of services                    hospitals)      urban PPS hospitals)            rural PPS hospitals)                  total CAHs)
 1-20                                  1,084 (22)                      384 (15)                       387 (23)                      313 (42)
 21-100                                1,558 (31)                      837 (33)                       506 (30)                      215 (29)
 101-200                                773 (15)                       464 (18)                       212 (12)                        97 (13)
 201-500                                754 (15)                       414 (16)                       277 (16)                            63 (8)
 501-1,000                                   333 (7)                     149 (6)                      178 (10)                             6 (1)
 1,001-2,000                                 145 (3)                      88 (3)                         57 (3)                            0 (0)
 2,001+                                      126 (3)                      92 (4)                         34 (2)                            0 (0)
                                                   a                                                            b
 Total                                4,773 (95)                     2,428 (95)                    1,651 (97)                       694 (93)

Source: CMS.

                                        Note: GAO analysis of 2001 inpatient and outpatient claims and provider data.
                                        a
                                         Percentage of total hospitals by number of services does not total 95 percent due to rounding.
                                        b
                                         Percentage of total rural PPS hospitals by number of services does not total 97 percent due to
                                        rounding.


                                        Among hospitals outsourcing technical pathology services, urban
                                        hospitals, including CAHs, outsourced a median of 97 services and 64
                                        percent of all services, and rural hospitals, including CAHs, outsourced a
                                        median of 61 services and 36 percent of all services.21 Almost twice as
                                        many services were delivered to outpatient beneficiaries compared to
                                        inpatient beneficiaries, as outpatient services accounted for approximately
                                        64 percent of all outsourced services.




                                        21
                                         Among hospitals outsourcing technical pathology services in 2001, urban hospitals
                                        outsourced approximately 892,000 services, and rural hospitals outsourced approximately
                                        496,000 services.




                                        Page 12                     GAO-03-1056 Medicare Payment for Technical Pathology Services
                         If laboratories had not received direct payment for services for hospital
Medicare                 patients, we estimate that Medicare spending would have been $42 million
Expenditures and         less in 2001, with $18 million and $24 million in savings for inpatient and
                         outpatient services, respectively, and overall beneficiary cost sharing
Beneficiary              would have been reduced by $2 million. In 2001, payments to laboratories
Copayments Would         providing technical pathology services to beneficiaries who were hospital
                         patients equaled over $63 million, including Medicare payments of about
Be Reduced, While        $51 million ($18 million for inpatient services and $33 million for
Hospital Costs Would     outpatient services) and beneficiary copayments of almost $13 million ($5
Increase Slightly, If    million for inpatient services and $8 million for outpatient services).
                         Paying laboratories to provide technical pathology services is unlikely to
Direct Payment to        impose a large financial burden on most hospitals. However, the extent to
Laboratories Is          which an individual hospital’s costs and a laboratory’s revenues would
                         change if direct payment to laboratories is terminated would depend on
Terminated               the rates negotiated by that hospital and laboratory. If payment to the
                         laboratory is made at the MPFS rate, a PPS hospital outsourcing the
                         median number of technical pathology services would incur an additional
                         cost of approximately $2,900. Additionally, there would be no financial
                         impact on CAHs if direct laboratory payment is terminated because they
                         would be reimbursed for their reasonable costs of outsourcing technical
                         pathology services.


Total Payments to        In 2001, estimated payments to laboratories providing technical pathology
Laboratories in 2001 	   services to hospital patients totaled over $63 million, including Medicare
                         payments of about $51 million and beneficiary copayments of almost $13
                         million (see table 4). For services provided to inpatients, total laboratory
                         payments equaled approximately $23 million, with $18 million from
                         Medicare and $5 million from beneficiaries. For services provided to
                         outpatients, total laboratory payments equaled approximately $41 million,
                         including $33 million from Medicare and $8 million from beneficiaries.




                         Page 13              GAO-03-1056 Medicare Payment for Technical Pathology Services
                             Table 4: Estimated Payments to Laboratories by Medicare and Medicare
                             Beneficiaries for Technical Pathology Services Provided to Hospital Inpatients and
                             Outpatients, 2001

                                                                                Dollars in millions
                                                             Services provided to     Services provided to
                                                                       inpatients              outpatients          Total
                                 Estimated Medicare
                                 payments                                      $18                       $33          $51
                                 Estimated beneficiary
                                 copayments                                      5                          8          13
                                                                                                                           a
                                 Total                                         $23                       $41         $63

                             Source: CMS.

                             Note: GAO analysis of 2001 inpatient and outpatient claims and 2001 MPFS payment and copayment
                             rates.
                             a
                             Total does not add due to rounding.




Lower Medicare Payments      If laboratories had not received direct payment for services for hospital
If Direct Payment to         patients, we estimate that Medicare spending would have been $42 million
Laboratories Is Terminated   less in 2001 (see table 5). The $18 million in inpatient savings would have
                             resulted from Medicare discontinuing payments for technical pathology
                             services to laboratories under the MPFS, while making no additional
                             payments to PPS hospitals for inpatient services. For outpatient services,
                             Medicare would not have paid laboratories directly, but would have paid
                             PPS hospitals under the outpatient PPS. If direct payment to laboratories
                             had been terminated, Medicare would have paid PPS hospitals an
                             estimated $9 million under the outpatient PPS in 2001 for technical
                             pathology services, thus saving $24 million.




                             Page 14                     GAO-03-1056 Medicare Payment for Technical Pathology Services
                           Table 5: Estimated Medicare Payments under Current Policy and Projected Annual
                           Savings If Direct Payments to Laboratories Are Terminated, Based on 2001
                           Services

                                                                          Dollars in millions
                                              Estimated payments Estimated payments to
                                             to laboratories under PPS hospitals if direct              Projected savings
                                                                                         a
                                                    current policy payment is terminated                 after termination
                               Inpatients                        $18                           $0                        $18
                               Outpatients                         33                            9                       $24
                               Total                             $51                           $9                        $42

                           Source: CMS.

                           Note: GAO analysis of 2001 inpatient and outpatient claims and MPFS and outpatient PPS payment
                           rates.
                           a
                            Calculations for payments if direct laboratory payment is terminated were performed for PPS
                           hospitals only. We were unable to estimate Medicare payments to CAHs because payments depend
                           on CAHs’ reasonable costs, which vary across facilities. Total Medicare payments are likely to be
                           higher. However, as CAHs provided less than 4 percent of all pathology services outsourced to
                           laboratories in our analysis, we do not expect these payments to greatly increase our estimates.




Reduced Overall            If laboratories had not received direct payment for services for hospital
Beneficiary Cost Sharing   patients, Medicare beneficiaries would have been relieved of
                           approximately $2 million in cost-sharing obligations (see table 6). In 2001,
                           inpatients at hospitals that outsourced services were responsible for
                           paying laboratories approximately $5 million in copayments under the
                           MPFS. If direct payment to laboratories is terminated, inpatients would
                           make no copayments to laboratories for technical pathology services. We
                           estimate that the cost-sharing obligation of outpatients at PPS hospitals
                           would have increased by $3 million to approximately $11 million under the
                           outpatient PPS if laboratories had not received direct payment, compared
                           to an estimated cost sharing of $8 million under the MPFS. However,
                           outpatients’ cost-sharing obligations for technical pathology services
                           under the outpatient PPS gradually will decline, as mandated by the law.
                           As the percentage declines, beneficiary copayments for technical
                           pathology services under the outpatient PPS should become lower than
                           under the MPFS, as long as payments for these services generally remain
                           lower under the outpatient PPS than the MPFS.




                           Page 15                    GAO-03-1056 Medicare Payment for Technical Pathology Services
                          Table 6: Estimated Beneficiary Copayments under Current Policy and Projected
                          Annual Savings If Direct Payments to Laboratories Are Terminated, Based on 2001
                          Services

                                                                              Dollars in millions
                                                                                        Estimated
                                                           Estimated          copayments to PPS
                                                      copayments to             hospitals if direct
                                                   laboratories under                  payment is         Projected savings
                                                       current policy                 terminateda          after termination
                              Inpatients                              $5                           $0                        $5
                              Outpatients                               8                          11                      ($3)
                              Total                                  $13                         $11                         $2

                          Source: CMS.

                          Note: GAO analysis of 2001 inpatient and outpatient claims and MPFS and outpatient PPS
                          beneficiary copayment amounts.
                          a
                           Calculations for beneficiary copayments if direct laboratory payment is terminated were performed
                          for PPS hospitals only. We were unable to estimate the change in the cost-sharing obligations of
                          outpatients receiving services from CAHs if direct payment to laboratories is terminated because their
                          cost-sharing amounts depend on the CAHs’ customary charges, which vary across facilities. Total
                          beneficiary copayments are likely to be higher. However, as CAHs provided less than 4 percent of all
                          pathology services outsourced to laboratories in our analysis, we do not expect these copayments to
                          greatly increase our estimates.




Small Financial Effects   If outsourcing hospitals agree to pay laboratories the rates the laboratories
Dependent on              currently receive under the MPFS for technical pathology services, these
Negotiations              amounts are unlikely to impose a large financial burden on most hospitals.
                          In 2001, a PPS hospital outsourcing the median number of services
                          outsourced by PPS hospitals, 94, would have incurred additional costs of
                          approximately $2,900 in paying a laboratory for technical pathology
                          services,22 representing a small fraction of hospitals’ annual Medicare
                          revenues.23 A PPS hospital outsourcing 1,283 services annually—the 95th
                          percentile of outsourced technical pathology service volume in our
                          analysis—would have incurred an additional annual cost of just under



                          22
                           This amount represents estimated payments to the laboratory by the hospital minus
                          payments to the hospital for outpatient services under the outpatient PPS.
                          23
                            According to the American Hospital Association (AHA), in 2001, the median net Medicare
                          revenue, which is the amount actually collected by the hospital, was $30.4 million for urban
                          hospitals and $5.6 million for rural hospitals. AHA based its estimate on an annual survey
                          completed by community hospitals, which includes all nonfederal, short-term general and
                          specialty hospitals whose facilities and services are available to the public.




                          Page 16                     GAO-03-1056 Medicare Payment for Technical Pathology Services
$40,000. There would be no financial impact from terminating direct
laboratory payments for rural hospitals that are or become CAHs, as CAHs
would recover from Medicare their reasonable costs of outsourcing
technical pathology services.

The extent to which a hospital’s costs and a laboratory’s revenues would
change if direct laboratory payments are terminated would depend on the
rates negotiated between the two parties. Hospitals’ costs would increase
because they would begin paying the laboratories for technical pathology
services; laboratories’ revenues would decline if hospitals pay lower rates
for the technical pathology services than Medicare currently pays
laboratories under the MPFS. Because larger hospitals and those located
in urban areas have more purchasing power and may have multiple
laboratories from which to choose, these hospitals are likely to fare better
than smaller hospitals and those in rural areas.

Laboratory officials we spoke with voiced concern that some hospitals
would insist that laboratories furnish technical pathology services at no
charge or at extremely low rates in exchange for hospitals referring other
business to the laboratories and their pathologists. However, these
officials also indicated that their laboratories would not perform technical
pathology services at no charge or for very low rates. Furthermore,
hospitals might be deterred from requesting low rates because of concerns
that such arrangements might violate applicable fraud and abuse laws.24

Although hospitals and laboratories would face new billing costs—both
one-time and ongoing—if direct payments to laboratories are terminated,
such changes generally would impose a modest additional cost. We spoke
with officials from hospitals and laboratories that already have billing
arrangements for these services, and they did not report to us that these
costs were burdensome.




24
  The federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b) (2000), generally prohibits
knowingly and willfully providing remuneration to a referral source for the purpose of
inducing referrals.




Page 17                  GAO-03-1056 Medicare Payment for Technical Pathology Services
                              Medicare beneficiaries’ access to pathology services is unlikely to be
Beneficiaries’ Access         disrupted if direct payments to laboratories are terminated because
Likely Would Be               hospitals are unlikely to limit surgical services, including those requiring
                              pathology services. In addition, hospitals would likely continue to
Unaffected                    outsource technical pathology services to laboratories because this would
                              generally be less costly than performing these services themselves.


Limiting Surgeries Unlikely   Representatives of outsourcing hospitals with whom we spoke indicated
                              that their hospitals would not eliminate or restrict surgical procedures if
                              direct payment to laboratories is terminated.25 Because a large percentage
                              of hospital-based surgeries require pathology services, hospitals would
                              lose an important source of revenue if they restricted surgeries to those
                              not requiring such services.26 Outsourcing hospitals stated that they could
                              not afford this revenue loss. Rural hospitals, which are often the sole
                              hospitals in their geographic areas, expressed the added concern that
                              eliminating surgical procedures would reduce their communities’ access
                              to medical services.


Continuation of               If direct payment to laboratories is terminated, representatives from
Outsourcing Arrangements      hospitals that do not maintain pathology laboratories and outsource
with Laboratories             technical pathology services to laboratories said they would continue to
                              outsource technical pathology services. Few such hospitals have a
                              sufficiently large volume of technical pathology services to make it cost
                              effective to perform such services themselves. For most hospitals, the
                              equipment and personnel expenses associated with maintaining their own
                              pathology laboratories would likely exceed the cost of outsourcing the
                              technical pathology services to laboratories. Hospital officials also stated
                              that they have had difficulty recruiting histotechnicians, and it therefore
                              would be difficult to staff new, or expand existing, pathology laboratories.




                              25
                                One Medicare carrier we spoke with shared this opinion, noting that Medicare requires
                              SNFs to pay nonphysician providers for services and items furnished to their patients, and
                              this requirement has not reduced beneficiary access to SNF care.
                              26
                               A hospital risks termination from Medicare if it places restrictions on whom it will treat
                              without exempting Medicare beneficiaries or applying the same restrictions to everyone. 42
                              C.F.R. § 489.53(a)(2) (2002).




                              Page 18                  GAO-03-1056 Medicare Payment for Technical Pathology Services
                     Termination of direct laboratory payments generally would reduce
Conclusions 
        Medicare expenditures and beneficiary cost-sharing obligations for
                     technical pathology services while having little effect on beneficiaries’
                     access to these services. While termination of direct laboratory payments
                     would impose a small financial burden on outsourcing PPS hospitals, this
                     change would have no impact on CAHs. As the relative payment weights of
                     services provided under the inpatient and outpatient PPS are adjusted
                     annually, any increased costs hospitals incur to pay laboratories for
                     technical pathology services will, over time, be reflected in the inpatient
                     and outpatient PPS payments. Termination of direct laboratory payments
                     also would eliminate the inequity between beneficiary cost-sharing
                     obligations at different hospitals.

                     In addition, continuing direct laboratory payments is an inappropriate
                     means for providing financial assistance to hospitals. Hospitals, in
                     receiving fixed payment amounts under a PPS and paying suppliers of
                     nonphysician services provided to a Medicare patient from such fixed
                     amounts, have an incentive to provide health care services efficiently.
                     Permitting hospitals to outsource technical pathology services and have
                     laboratories seek payment from Medicare eliminates the incentive for the
                     efficient provision of these services and leads to potential Medicare
                     double payments.


                     We suggest that the Congress may wish to consider not reinstating the
Matter for           provisions that allow laboratories to receive direct payment from
Congressional        Medicare for providing technical pathology services to hospital patients.
Consideration

                     We recommend that the Administrator of CMS terminate the policy of
Recommendation for   permitting laboratories to receive payment from Medicare for technical
Executive Action     pathology services provided to hospital patients.




                     Page 19             GAO-03-1056 Medicare Payment for Technical Pathology Services
                        In commenting on a draft of this report, CMS stated that it is important
Agency Comments         that payment policy encourage efficiencies in the provision of technical
and Comments from       pathology services. CMS stated that it would carefully consider our
                        recommendation and noted that the Congress is currently considering this
National Associations   issue. CMS further stated that it would want to ensure that implementation
and Our Evaluation      of the recommendation does not adversely affect rural hospitals.

                        As we noted in the draft report, permitting laboratories to receive payment
                        directly from Medicare for technical pathology services is not an
                        appropriate or efficient mechanism for providing financial assistance to
                        hospitals, as it is contradictory to the objectives of a PPS. In addition,
                        because the median number of technical pathology services annually
                        outsourced by rural hospitals was low, we do not believe that paying
                        laboratories directly for these services will place a significant financial
                        burden on these hospitals.

                        CMS’s written comments are reprinted in appendix II. The agency also
                        provided technical comments, which we incorporated where appropriate.

                        We received oral comments on a draft of this report from the American
                        Hospital Association (AHA), the College of American Pathologists (CAP),
                        and the National Rural Health Association (NRHA). These organizations
                        disagreed with our conclusions, matter for congressional consideration,
                        and recommendation and suggested that direct laboratory payments
                        should continue. Generally, all three organizations expressed concerns
                        about rural hospitals. AHA and NRHA expressed the concern that
                        termination of direct laboratory payments would place a financial burden
                        on rural hospitals, and CAP expressed concern that hospitals, including
                        CAHs, and laboratories would experience an increased administrative
                        burden in changing their current billing practices. CAP also raised a
                        question about whether hospitals and laboratories would be able to
                        successfully negotiate new payment arrangements for outsourced
                        technical pathology services; if not, in its view, beneficiaries’ access to
                        services could be jeopardized.

                        As we noted in the draft report, hospital officials we spoke with, including
                        those from rural hospitals, stated they would continue to offer technical
                        pathology services as a part of their surgical services if they had to pay
                        laboratories directly for technical pathology services. These officials
                        stated that they would not consider eliminating surgeries if they had to
                        enter new, or modify existing, arrangements with laboratories to provide
                        technical pathology services. We acknowledge that modifying their billing
                        practices will impose costs on hospitals and laboratories; however,


                        Page 20              GAO-03-1056 Medicare Payment for Technical Pathology Services
officials from hospitals and laboratories that already have billing
arrangements for technical pathology services did not report to us that
these costs were burdensome.


We are sending a copy of this report to the Administrator of CMS and
appropriate congressional committees. The report is available at no charge
on GAO’s Web site at http://www.gao.gov. We will also make copies
available to others on request.

If you or your staffs have any questions, please call me at (202) 512-7119 or
Nancy A. Edwards at (202) 512-3340. Other major contributors to this
report include Beth Cameron Feldpush, Jessica Lind, and Paul M. Thomas.




A. Bruce Steinwald
Director, Health Care—Economic
 and Payment Issues




Page 21              GAO-03-1056 Medicare Payment for Technical Pathology Services
List of Committees

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 


The Honorable W.J. “Billy” Tauzin 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 


The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 





Page 22              GAO-03-1056 Medicare Payment for Technical Pathology Services
Appendix I: Scope and Methodology 



              In conducting this study, we analyzed Medicare claims and provider data
              obtained from the Centers for Medicare & Medicaid Services (CMS). We
              interviewed officials at CMS, the Congressional Budget Office, and the
              Department of Health and Human Services Office of Inspector General.
              We also interviewed industry representatives from the American Hospital
              Association, College of American Pathologists, and National Rural Health
              Association, as well as representatives of individual hospitals and
              laboratories and a pathology practice management consulting company.
              Finally, we conducted a site visit of a laboratory and one of the rural
              hospitals to which it provides pathology services.

              As there is no list of covered hospitals and the laboratories to which they
              outsource technical pathology services, we used 2001 Medicare claims
              data, the most recent year for which data are available, for our analysis.
              We received the data files directly from CMS. These data reflect the set of
              claims submitted to and paid by CMS for services performed in 2001. We
              performed our own initial analyses to check the reliability of the data.

              We estimated the number of hospitals outsourcing technical pathology
              services to laboratories that directly billed Medicare and the volume of
              and payments for these services. To do so, we matched Medicare
              laboratory claims with claims submitted by prospective payment system
              (PPS) hospitals and critical access hospitals (CAH). We assumed that a
              laboratory’s service was related to a hospital inpatient admission or
              outpatient encounter if the date of service on the laboratory’s claim was
              (1) during an inpatient’s stay at a hospital, within 3 days prior to the
              inpatient’s admission,1 or after the inpatient’s discharge or (2) on the day
              of or within 3 days after an outpatient surgical procedure at a hospital.2 We



              1
               If a beneficiary receives diagnostic preadmission services, including pathology services, in
              the hospital or in an entity owned or operated by the hospital within 3 days preceding the
              beneficiary’s admission as an inpatient, the preadmission services are included in the
              hospital’s inpatient PPS payment. 42 C.F.R. § 412.2(c)(5) (2002). We therefore assumed that
              if a laboratory provided technical pathology services to a beneficiary within 3 days of the
              beneficiary’s inpatient admission, the services were provided in connection with the
              beneficiary’s inpatient stay.
              2
               It is unlikely that a patient would receive a technical pathology service within the time
              period we specified that would be unrelated to the surgical services the patient received at
              the hospital. Nevertheless, our approach may have resulted in the inclusion of some claims
              for technical pathology services that were unrelated to a hospital inpatient admission or
              outpatient encounter, as well as the exclusion of other claims that were related. In
              addition, errors in the claims data, such as an incorrect discharge or encounter date,
              similarly could result in mistakes.




              Page 23                  GAO-03-1056 Medicare Payment for Technical Pathology Services
Appendix I: Scope and Methodology




included in our list of total hospitals only those hospitals listed in the CMS
Provider of Services (POS) file and characterized outsourcing hospitals as
urban or rural according to their designation in the POS file. To identify
hospitals outsourcing technical pathology services that have converted to
CAHs, we matched each hospital’s Medicare provider number to the list of
CAHs maintained by the North Carolina Rural Health Research and Policy
Analysis Center at the University of North Carolina as of March 2003.

To estimate Medicare payments and beneficiary copayments to
laboratories for technical pathology services in 2001, we first calculated
the claims frequency for each type of technical pathology service in our
file of matched laboratory and hospital claims. We estimated the Medicare
payment amount for each type of technical pathology service as 80 percent
of the Medicare physician fee schedule (MPFS) national standard payment
rate for that service and beneficiary cost sharing as the remaining 20
percent, and then we multiplied the claims frequency by the estimated
Medicare and beneficiary cost-sharing amounts to calculate total
laboratory payments.3 We performed similar calculations to find payments
for inpatient and outpatient claims exclusively. To estimate 2001 Medicare
outpatient PPS payments and beneficiary cost sharing to PPS hospitals if
laboratories had not received direct payments, we multiplied the 2001
outpatient PPS Medicare payment rate and beneficiary copayment amount
for each type of technical pathology service by the frequency of each type
of technical pathology service in the outpatient claims.

To estimate the cost difference to PPS hospitals of paying laboratories to
perform technical pathology services, we first calculated a weighted
average payment rate for technical pathology services for 2001 by
multiplying the 2001 national standard MPFS payment rate by the
frequency percentage of each type of technical pathology service among
PPS hospitals and summing the payments for all services. We multiplied
the median and 95th percentile volume of services outsourced by PPS
hospitals by the estimated weighted average laboratory payment. We then
calculated a weighted outpatient PPS payment rate, including beneficiary
copayments, for technical pathology services in 2001 as described above
for calculating the weighted average MPFS payment rate. Because
approximately 63 percent of technical pathology services provided to



3
 We were unable to use the Medicare payments from the matched claims to calculate this
amount because the laboratories’ claims were often for both the technical and professional
services, and the amounts for each could not be separated.




Page 24                 GAO-03-1056 Medicare Payment for Technical Pathology Services
Appendix I: Scope and Methodology




patients of PPS hospitals were provided to outpatients, we estimated the
number of outpatient services by multiplying the median and 95th
percentile volumes by 63 percent. We then multiplied the estimated
number of outpatient services by the estimated weighted average
outpatient PPS payment rate, and subtracted this amount from the
weighted average laboratory payment.

We interviewed representatives of four Medicare carriers and four state
hospitals associations. In addition, we spoke with representatives from 19
hospitals and 13 laboratories from a sample of eight geographically diverse
states—Colorado, Florida, Iowa, North Dakota, Pennsylvania, Tennessee,
South Dakota, and Washington—and an additional 2 laboratories in
Oklahoma. We selected several states in the South, Southeast, and
Midwest where, according to CMS officials, outsourcing arrangements for
technical pathology services were believed to be fairly common. We
interviewed officials from urban and rural hospitals and hospitals and
laboratories with different types of outsourcing arrangements, including a
hospital that outsources only complex and infrequently performed
services and a hospital that currently pays its laboratory for technical
pathology services.




Page 25                GAO-03-1056 Medicare Payment for Technical Pathology Services
Appendix II: Comments from the Centers for
Medicare & Medicaid Services




              Page 26   GAO-03-1056 Medicare Payment for Technical Pathology Services
           Appendix II: Comments from the Centers for
           Medicare & Medicaid Services




(290210)
           Page 27                GAO-03-1056 Medicare Payment for Technical Pathology Services
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