Defining Your Hospital Lab Program’s Value in the Face of PAMA Cuts

Before selling or outsourcing portions of your hospital lab program, consider optimizing the revenue cycle for increased profitability.

In the face of PAMA’s substantial cuts to the Part B Clinical Laboratory Fee Schedule (CLFS) on January 1, 2018, many hospitals are reassessing the value proposition of their laboratory service offering.

Before deciding to sell or outsource portions of your lab program, your health system may want to consider the laboratory's contribution to an enhanced patient experience and the powerful patient management decision support afforded by mining laboratory data. Though such a decision to divest your laboratory operation may produce short-term benefits, it may limit long-term growth strategies and competitiveness for your health system.

The Protecting Access to Medicare Act of 2014 (PAMA) revised the payment methodology for clinical diagnostic laboratory tests paid under the Medicare Clinical Laboratory Fee Schedule (CLFS). With the implementation of PAMA just months away, hospitals are reevaluating their laboratory business. Just how big an impact will PAMA have on your lab’s revenue? In the context of a hospital lab program’s possible three business segments – inpatient, outpatient, and outreach (e.g. non-hospital patient) – it appears only outpatient and outreach will be affected by PAMA, with the greatest impact on outreach.

• Inpatient lab services, governed by Part A, are not impacted by PAMA cuts targeting Part B. Also, Medicare reimburses hospitals for inpatient lab services as part of Diagnosis Related Group (DRG) bundled payments and therefore does not use the CLFS for payment rates.
• Outpatient lab services, governed by Part B, are most often paid by Medicare within Ambulatory Payment Classifications (APC) payment bundles. Medicare has bundled the majority of CLFS and the technical component of most anatomic pathology procedures from the Physician Fee Schedule (PFS) into the Evaluation and Management (E&M) service payment. However, PAMA rates will still apply to a small subset of CLFS CPT codes that are still paid fee-for-service (e.g. molecular diagnostics).
• Outreach lab services performed on non-hospital patients will be the segment most impacted by PAMA.

Hospitals expect their labs to be efficient, productive, and competitive. Can hospital labs gain the efficiency to offset anticipated losses expected with PAMA? Do they have the right equipment? Are they doing the right tests on site? Are they staffed appropriately and processing specimens in an efficient manner? Are test menus optimized across multiple hospital campuses?  Is your lab increasing the number of patients served and tests performed, while decreasing the need to repeat tests through improved specimen handling and result reporting? Operational efficiency benefits from continuous improvement efforts. Track your lab’s success in this area by using key performance indicators (KPIs) such as turnaround time (TAT), count of unresulted or canceled lab tests, reagent and material cost per accession, and labor costs.  While operational efficiency is important, defining your lab program’s value still requires a wider view.

A health system’s lab financials are often rolled-up to combine with hospital figures. As part of a merged Profit and Loss, it can be difficult to track the true financial performance of the lab program. The lab’s financial performance can also be impacted by the sharing of hospital billing and reimbursement resources. Viewed as a secondary initiative by shared resources, lab programs may experience a higher incident of bad debt due to inefficient collections and low net revenue. Lab testing services reimbursement efforts may benefit from separation through the implementation of a lab-centric revenue cycle solution.

Another reason to consider separation, is the unique pre-claim requirements of specialized testing. As health systems bring genetic and molecular testing to their hospital lab program to drive personalized medicine, the steps needed to get reimbursed correctly require expert knowledge and processing. Cutting-edge molecular and genetic tests must meet payers’ medical necessity and prior authorization requirements.

Many hospitals now find themselves in a Medicare Administrative Contractor (MAC) Jurisdiction that has implemented the MolDx program.  In order to be considered for reimbursement, all Part A and Part B claims for molecular diagnostics testing, whether performed in-house or by a reference laboratory, must be submitted to the MAC with the appropriate Diagnostics Exchange (DEX) Z-Code assigned to the test.  Given these and other MolDx billing requirements, your hospital lab program may want to consider laboratory business process outsourcing options to receive maximum reimbursement for specialized testing since many legacy hospital billing systems are unable to adapt to the special billing requirements of the MolDx program.  Even for a mid-sized hospital, hundreds of thousands of dollars may be left on the table because of the inability to submit Z-Codes on your claims for molecular diagnostics testing to your MAC.

Using cost containment as the sole basis for determining a hospital lab program’s worth may be too limiting. How does your hospital outreach lab contribute to your health system’s patient experience? Balancing service and return-on-investment, health systems may want to consider the value of quality testing done onsite with rapid turnaround times.

What about serving the increasing number of hospital-employed physicians? As physician provider’s become hospital employees, labs are jockeying for position. Hospital labs have a unique advantage… location, location, location. But to leverage that advantage, hospital labs need to sell their service, speed, and quality to the ordering physicians. Is your hospital lab program creating valuable connections with hospital employed physicians? Can your outreach lab compete solely on a cost basis? Or is there additional value to be considered?

Laboratory data is actionable and has predictive value. As hospitals and health systems move toward value-based health care, their lab programs could provide a major source of information. What if your hospital lab was viewed as a collaborative partner offering innovative data analytics, utilization management, and diagnostic decision support? What if your lab could gather information on and provide an understanding of referral patterns, helping physicians order the right tests?

Many health system executives feel forced to sell off the lab program because it is not viewed as a core fundamental service. Without a process in place to measure the profitability or value of their lab’s business, hospitals tend to undervalue their worth. You can respond by communicating your lab’s value. You can start by optimizing your lab’s revenue cycle. Quadax, an expert in laboratory billing, can help. With service options sized to fit (Business Process Outsourcing, Software-as-a-Service, Hybrid), your lab can maximize reimbursement and demonstrate its value. Let’s Take On The Revenue Cycle Together! Book a strategy call here.