College of American Pathologists
Printable Version

  Reeling in expense of reference lab testing


CAP Today




August 2010
Feature Story

Karen Lusky

Ever notice that most success stories seem to include the proverbial false start? That’s definitely true for Baystate Reference Laboratories, a hospital-based lab that found itself in 2007 having to reduce the whopping $5,243,281 it was spending for send-out testing.

There was “a big push from the administration” to cut the send-out spending by at least $500,000 for 2008, says Jason Newmark, director of diagnostic services for Baystate Medical Center, the “academic mothership” for Bay­state Health, a three-hospital integrated delivery system that includes Baystate Reference Laboratories, or BRL.

BRL set a target referral test spending goal of $4.8 million for 2008 and set out to achieve it. And that year, the lab spent $5,262,794—even more than the year before, Newmark said at the Executive War College last spring in a packed presentation titled “Taking Back Control of Reference and Send-out Lab Testing Costs: Baystate’s Success Story.”

So BRL convened a Lean team that came up with the strategies Baystate has since used to rack up about $1.3 million in savings on send-out testing. That sum includes $620,000 in actual savings in fiscal 2009 and a projected $670,000 for 2010, based on eight months of financial data, reported Sharon Scott, manager of referral testing and special contracts at BRL. She co-presented with Newmark at the Executive War College.

At the same time, the reference testing volume rose by about 34 percent, and the cost per test slid to $19.02 from $35.75.

And, Scott told CAP TODAY, “We have just scratch­ed the surface of some of the strategies we identified.”

The strategies flowed from the Lean team’s root-cause analysis of the cause of BRL’s high volume (and associated high costs) of send-out tests. And the team didn’t have to dig deep to uncover the first surprise: BRL didn’t use 40 reference labs, as was commonly believed. It used more than 124.

True, BRL has one major reference lab, which accounts for about 75 percent of its overall reference lab expenses, and a secondary reference lab. The rest are relatively small, Newmark said, and some perform the “very, very esoteric tests and are the laboratories you send the onesy-twosies to.”

Even so, 124 reference labs is a “monster to manage,” he conceded, and this monster wasn’t being managed.

Nor was CPT coding, some of which had to be revised. For example, the reference lab might have an erroneous CPT code that BRL needed to change based on new CPT coding rules, to avoid payment denials or underpayment from its third-party payers.

Not using the right CPT codes, Newmark told War College conferees, is “just flushing money down the toilet.”

Ensuring accurate CPT codes that matched the hospital pricing file yielded about $38,000 in savings. Not exactly a drop in the bucket, but far from the $500,000 goal.

As part of its CPT and hospital pricing file analysis, the Lean team used a spreadsheet to record each send-out test, its reimbursement, and its cost, Scott says. Then it sorted the tests in various ways and found, for example, that the 20 highest-volume send-out tests were creating a more than $500,000 operating loss. The top 20 tests with the greatest cost-to-reimbursement differential showed a $757,098 loss; the 20 most expensive tests, $193,111.

Sorting the tests as such helped the team find ways to cut the financial losses, Scott told CAP TODAY. One option was to put a high-volume test or a test losing money on a reference lab’s “hot list”—those tests for which a reference lab is willing to provide an additional discount to the referring lab.

The first hot list review found that BRL’s primary reference lab had 31 tests on it. Yet only two of those were high-volume tests. One of the tests on the list wasn’t even a test Baystate was ordering, and two others had been brought in-house recently (immunofixation serum and urine tests).

The take-home message for labs: Work with your reference lab to customize the hot list to meet your needs. “You don’t have to use the list the reference lab gives you,” Scott said. To determine what tests should be on the hot list, ask for utilization reports from the reference lab. You can also perform the type of analysis BRL performed to determine what should be on your list. Scott suggested reviewing the hot list at least twice a year.

The Baystate Lean team also took a look at BRL’s fee schedule negotiations with its reference labs. “We found that for the majority of the 124 reference labs, we did not have a set fee schedule on file” or a contract, Scott reported. And overall, BRL wasn’t getting a fair shake on its pricing.

Yet the referring lab has more clout than it might think in pricing negotiations, Newmark and Scott say. In BRL’s case, $3.5 million to $4 million of reference work is “a pretty big carrot.”

“Ideally,” Newmark told CAP TODAY, “we would tell each lab exactly what the other lab offered for price per test,” a practice BRL has avoided for compliance reasons. “Nonetheless, we do often state the level of discounts we would require, and for which tests,” as well as the service levels that are ­expected.

Effectively negotiating price, however, requires the lab to be able to compare tests “apples to apples,” Newmark says, which BRL found difficult to do for tests whose descriptions varied from lab to lab. To address this problem, the lab’s technical supervisors and medical directors matched the test descriptions—a time-consuming endeavor that Newmark describes “as much more easily said than done.”

To keep the pricing and contract negotiations on the front burner, BRL now has a send-out lab negotiation team that works together when negotiating contracts with reference labs. BRL also created a reference laboratory oversight supervisory and management position, which Scott holds. (The new position didn’t add expense because Scott already had a management position that was reconfigured.)

The most dramatic savings has come from third- party billing for selected genetic and molecular tests. Third-party billing is the term used to refer to instances in which the outside lab bills patients’ insurers directly for referred testing, or, on occasion, the patients themselves. This approach “eliminates the middleman, which is us,” Scott said.

BRL projected about $460,000 in savings from third-party billing, which proved to be on the mark. It expects to achieve about $432,000 in savings annually.

That third-party billing can be a smart move for referring labs isn’t lost on the outside labs that bill them a sometimes hefty markup for doing the tests. Newmark found that out at last year’s War College when he asked a reference lab rep why the lab would charge his lab $100 for a test that it knew would be reimbursed only $50. “Why not just bill the insurer” yourself? Newmark asked. “You pay better,” the rep replied.

While reference labs do not routinely market third-party billing as a service, says Nora Hess, operations managing consultant with Chi Solutions, Ann Arbor, Mich., most are willing to provide it if you request it. They may agree, in part, just so they can maintain the hospital reference lab account. And a large reference lab has the testing volume to perform or refer tests for less than it’s charging the hospital, Hess points out.

Baystate pilot-tested the third-party billing strategy in four of its molecular/genetics labs, targeting tests that were losing the most money. “Now,” Scott says, “when we want to bring in a large-volume test, a new test, or a very expensive test, we do our best to calculate the return on investment to see if we should third-party bill” or have the test billed to BRL.

The third-party billing approach comes with a caveat, however: You must account for the associated reduction of gross revenue and testing volume. If the lab doesn’t communicate that concept up front and continually to the hospital administrative team, Newmark says, “you will find yourself being questioned time and time again on why your gross revenue is down.”

Do administrators eventually see the light? Newmark responds with a resigned laugh and a diplomatic answer: “When we are asked, we consistently say, ‘Look at our expenses; they are also down.’ In fact, our actual margin is now better than it was previously when we were being charged for tests and billing payers.” An example illustrates the savings:

For test A, BRL charges $1,000 per test (gross charge), is billed $500 per test by the reference lab, and is reimbursed an average of $300 per test by its payers.

If BRL sent out 500 tests, it would realize a loss of $100,000 as follows:

  • $500,000 in gross charges.
  • $250,000 in fees from the reference lab.
  • $150,000 in reimbursement from payers.

With third-party-billing, it would see the following:

  • Reduction in gross charges of $500,000.
  • Reduction in volumes of 500 tests.
  • Reduction of expense of $250,000 from reference lab fees.
  • Reduction of $150,000 in reimbursement.
  • Overall savings of $100,000.

Successfully implementing third-party billing requires more than explaining the concept to administrators alarmed about vanishing gross revenues. The reference labs selected have to have the necessary contracts with payers and the ability to bill the payers directly, Scott said, noting that many of the esoteric labs will not third-party bill. But talk to them, she added, and “find out what they are able to do.”

The referring lab has to know the federal and state regulations governing third-party billing, Scott cautioned (see “More on lab-to-lab referrals,” page 18). At the outset, in fact, Baystate’s compliance and managed care staffs and its medical leadership were wary of third-party billing practice. (Bay­state has not implemented third-party billing for Medicare or Medicaid patients, though Scott says they are looking into the feasibility of doing so for Medicare.)

Labs moving to third-party billing also have to give everyone involved in the process a heads up about the change, including pro­vid­ers, patients, and payers, Scott said. For one, the lab has to worry about patients getting billed for out-of-network charges for testing billed by an outside lab. To identify the potential for that to occur, BRL looks at the payer mix for the tests it wants to third-party bill to see what kinds of contracts the reference lab has with its payers.

BRL has encountered only a handful of problems with out-of-network testing in the 18 months the lab has been third-party billing. And to Scott’s knowledge, no patients have had to pay for the total cost of a test outside of their deductible and co-pay.

BRL would like to expand its third-party billing into other lab areas. But that won’t be as easy to do as it was for genetics/molecular send-out testing, for which the process to enter insurance information on requisition forms is manual, Scott says.

She is quick to concede that third-party billing for even genetics and molecular testing is no walk in the park. “It requires a lot of extra triage and being able to differentiate between government and commercial payers,” she says. BRL didn’t add more staff to do that but is trying to change its computer systems, which now have billing and ordering set up as two different systems. “Once we straighten that out, third-party billing won’t be as complex.”

Like many labs, Baystate has to make those tricky

buy-versus-make decisions about which tests to provide in-house or send to an outside lab. “We take a high-level look at this,” Newmark says, which includes examining not only cost but also the need for a shorter turnaround time and control over the testing, among other factors. In other words, “It’s not all about the money.”

BRL expects to save about $227,000 a year by bringing in selected molecular and genetics testing, which represents about five percent of its referred testing. Newmark and Scott declined to say which tests it will be, but they note the projected savings do not include capital expenditures or additional staffing. Newmark believes that once the lab gets over that lump sum of money, it will, over time, see a savings because it costs less to perform the tests in-house.

BRL has also started reviewing its instrumentation to determine all of the testing the equipment can actually do, Scott says. “And we’ve begun extensive investigation into test cost accounting and return on investment.”

Weighing in on the ROI issue, Jeffrey Kant, MD, director of the Division of Molecular Diagnostics at the University of Pittsburgh Medical Center, who spoke on molecular testing reimbursement at the War College, says a key question is how rapidly the cost of the equipment will be recovered.

To answer that question, the University of Pittsburgh Medical Center has a sophisticated financial spreadsheet into which information is entered, such as the life expectancy of equipment. It’s not “back of the napkin stuff,” Dr. Kant says. One consideration is whether it makes more sense to have a lease arrangement rather than buy equipment. “It’s very, very rare” to find that’s the case, Dr. Kant says, presumably because of the impact of depreciation and cost reporting.

BRL is also focusing on utilization review for test- ing, especially expensive off-the-menu testing it has to send out, sometimes reluctantly.

Scott raised the all-too-common problem of physicians deciding they need a new test they heard about at a meeting or read about, and it’s a costly test with no reimbursement and no CPT code yet.

“If the test happens to be research- or investigational-use only, then you have to make sure you’re following federal and state guidelines for billing,” Scott advised. Also “try to find other labs that have performed the appropriate validation studies so that the test is approved for billing.” Or, look for a test already on the test menu that might work as an alternative.

“We have found situations where state-funded programs might help pick up the cost of a test,” Scott says. For example, one test offered by a reference lab measures HIV drug resistance, the results of which will determine whether an HIV-infected patient will do well on certain HIV therapy. And Massachusetts has a program (HIV Drug Assistance Program, or HDAP) that will pay for the drug and testing for uninsured patients, she says.

BRL is also talking about having a committee whose makeup will include a pathologist to look at how to manage situations in which a physician orders a test that isn’t on the menu.

Dr. Kant says it’s essential for pathologists to be involved in utilization management. “Just the mere exercise of taking the time to contact someone and ask them to think about the testing makes a difference frequently,” he says. Dr. Kant recently asked a neurologist who had ordered a panel with eight tests to consider starting with the two tests that provide the highest probability of identifying the patient’s problem. “It’s true we pay more for eight tests done separately than the panel price up front, but it’s not a lot more.”

Dr. Kant notes that sometimes ordering clinicians “throw the kitchen sink at trying to figure out what’s causing the patient’s problem. Or they order an expensive test and get a diagnosis, but that diagnosis doesn’t affect how they manage the patient.”

“Sometimes we will review our experience with the send-out tests we do,” he says, to educate clinicians. Say, for example, the review shows a certain test has a “very high yield” of negative results. That information might convince clinicians to “sharpen their clinical criteria” so they order the testing for only half of their patients, he says.

BRL’s next step is to begin consol- idating what is now 120 rather than 124 reference labs, an endeavor that Newmark said has met with resistance from some medical directors and managers because of histories of quality issues with some reference labs and the effort required to convert reference labs—interfaces, reference range changes, and the like.

But Newmark called it “crazy” to have that many reference labs and not look for opportunities to consolidate. “You’ve got 120 different requisitions and samples and packaging requirements, and that gets really, really complicated, he says. “Not to mention, through consolidation, you should be able to negotiate better price discounts.” He expects to see a lot of progress in consolidating reference lab testing to a handful of laboratories in the next few months. Bay­state is also investigating the creation of a centralized send-out laboratory with the aim of consolidating and streamlining the send-out pro­cess­es across its three hospitals.

In addition, BRL is working with other local and regional hospitals to assess opportunities to form alliances or joint ventures. That way, he says, “we ­can negotiate reference lab rates together versus on our own—ideally resulting in savings for all parties.”

Karen Lusky is a writer in Brentwood, Tenn.



Related Links Related Links