A Tale of Two Big (Medicare) Mistakes

So here is a glimpse into one small part of the vast U.S. health care industry that shows the incredible difficulty government agencies have in setting accurate and fair payment rates for medical services, even when specifically directed by Congress to do so.  It offers a cautionary tale for those who would put the entire health care system under government control. 

The players in this drama are the 250,000 clinical labs across that country that do everything from routine blood tests to complex genetic tests which can predict whether a patient is likely to positively respond to an innovative oncology treatment. The other key players are government officials at the U.S. Department of Health and Human Services (HHS), the Government Accountability Office (GAO) and ultimately, tens of millions of Medicare beneficiaries.

This tale started in 2014 when Congress passed the Protecting Access to Medicare Act (PAMA)—directing HHS to establish  market-based Medicare payment system for clinical labs that would accurately  reflect prices paid in the commercial market.

So far, so good.

To set market rates, HHS needed to collect payment data from a representative sample of labs regarding how much they were being paid for specific tests by private payers.  But HHS didn’t do that. Instead, it gathered rate information from fewer than 1% of laboratories nationwide, ignoring data from the other 99%, in turn leading to some deep payment cuts to many independent labs and clinics serving rural communities. 

Doug Badger, senior fellow at the Galen Institute, took a deep dive last year into this issue in his paper “Can Medicare Pay Market Rates?

Badger explains that HHS was trying to relieve most laboratories of the reporting burden, collecting data on private-payer rates from approximately 2,000 laboratories of the 250,000 in the United States. When the new payment system was launched in January 2018, it imposed “sharp reductions in Medicare reimbursement rates based upon an unrepresentative segment of the clinical laboratory industry,” he writes.

CMS made some modest adjustments in a November 2018 rule, but the fundamental problem of too few labs reporting—and thus a badly skewed sample—remain.

And now we have Chapter Two of this drama with another government mistake, this time by the GAO, a federal watchdog agency that tracks how funds appropriated by Congress are spent.  The GAO was supposed to analyze the new clinical lab payment program and make recommendations to Congress for changes if needed.

The GAO rightly recommended that HHS collect data from laboratories required to report. It acknowledged that not collecting payment information from a more representative sample of clinical labs could “have a larger effect on the accuracy of Medicare payment rates in future years” when the new law allows greater payment-rate reductions.

But in a stunning act of over-reach, the GAO constructed a hypothetical scenario of how labs might respond to the new PAMA policies and used calculations based upon its false assumptions to headline its report, “Implementation of New Rates May Lead to Billions in Excess Payments.”

Predictably, the report set off alarm bells on Capitol Hill when it came out in November. Sen. Charles Grassley (R-Iowa), now chairman of the Finance committee, sent a letter to the Centers for Medicare and Medicaid Services at HHS—which inherited the sampling methodology from the previous administration—asking what’s going on and whether or not Medicare was being overbilled by billions of dollars.

It turns out that the GAO report badly misunderstood how the market was actually working.

How did that happen you might ask?

GAO decided to concoct a hypothetical payment scenario that made it appear that clinical labs could be overpaid by more than $10 billion from 2018-2020 under the new payment rules.  To put that in perspective, CMS pays roughly $7.1 billion annually for lab tests; $10 billion in excess payments over a few years would represent a nearly 50% annual increase in lab payments, something that would be hard to miss.

Here’s how GAO came up with their numbers:  Doctors seldom order a single test but most often a panel of related tests.  For example, 14 tests measuring blood glucose, potassium, protein levels, and other related indicators are often combined into a single “metabolic” panel.  CMS pays the lab $13.04 for the bundle of tests.  But if each of these 14 tests instead were billed separately, the bill would be $81.91.

So the GAO decided the labs charge the unbundled rates, despite the fact that American Medical Association guidelines say labs must bill for the panel rather than for the individual tests, and despite the fact that bundled or panel billing is near-uniform practice in the clinical lab industry.

After the GAO report came out, the American Clinical Laboratory Association (ACLA) conducted a survey of millions of tests done in 2017 and 2018 and found that just 120 were billed individually rather than as a panel, out of more than 20 million sampled.  That is a tiny fraction of 1%—most likely representing mistakes.

As the ACLA report demonstrates, there are numerous checks in the system to make sure labs are billed appropriately. And industry representatives rightly complained that GAO issued the report without asking them whether its hypothetical speculation had any basis in actual practice.

Industry representatives sent a scathing letter to James Cosgrove, director of health care for the GAO, saying its report “demonstrates a fundamental misunderstanding by GAO of actual, real-world billing practices of clinical laboratories.”

Further, it said, “This misunderstanding leads to an inflammatory and false claim” that Medicare is overpaying clinical labs and “inappropriately billing for the individual components of panel tests.”  Talking to the organizations in advance “would have resulted in a better informed, accurate report,” they said.

The industry is in the midst of a lawsuit that is targeting the government for ignoring Congress’ direction to gather representative data upon which to base its new rates.  And now, the GAO has piled on with a report based upon hypotheticals that do not represent reality, which the industry is strongly urging GAO to correct.

These theoretical and baseless assumptions have real world impacts for many labs and the thousands of patients who rely on their services. Medicare is a dominant player in the clinical lab industry and its policies can have huge impacts on their ability to keep their doors open or provide the same level of service that seniors have come to expect.

Not surprisingly, it is the little guys and the patients they serve who are likely to be hurt most by the current payment mess.  Struggling rural hospitals, labs that cater to nursing homes, and other smaller labs may find it difficult to stay in business with rates that don’t reflect the market.

So, after looking at this microcosm of the payment mess that the government has created, we have to ask: Do we really want the federal government setting payment rates for the entire $3.5 trillion health care system when it clearly has this much trouble with this one small sector of the industry?

Bernie, are you listening?