College of American Pathologists
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cap today

Tracking yet another storm in Florida

December 2004
Anne Paxton

Competitive bidding, as it is shaping up in Florida, can be summed up in three numbers: 100 million, 1 million, and one.

As in: one vendor to perform all outpatient anatomic and clinical pathology laboratory services for more than 1 million Medicaid beneficiaries in the state. That’s the scheme on tap as Florida prepares to award a projected $100 million, three-year Medicaid laboratory testing contract to a single provider.

For some seven months, the project has been in a holding pattern. When the state issued a request for proposals last March, it encountered problems right away. A protest from one laboratory prompted the state to drop a requirement that bidders have CAP or JCAHO accreditation.

Only CLIA certification would be required, said the state Florida Agency for Health Care Administration, or AHCA. After the RFP’s deadline was extended, 10 laboratories announced they intended to compete. However, the controversial plan hit another speed bump based on a number of concerns raised by the CAP, the Florida Society of Pathologists, and other groups. The state withdrew its original RFP in April.

But the succeeding version, slated to appear in the next few weeks in the form of an "invitation to negotiate," promises to be even less welcome, and the College is expressing serious concern.

The CAP and the Florida Society of Pathologists view competitive bidding as a risky experiment because it treats medical services as "interchangeable commodities," they say, rather than essential components of quality health care with life-and-death implications.

In September, after action by the CAP House of Delegates and Board of Governors, the CAP called upon Florida governor Jeb Bush and the state legislature to rescind the competitive bidding proposal, or at least defer it until an impartial study can assess the potential adverse impact on medical quality.

"It’s important to remember that the laboratory is not a good place to be cut," says Patricia Gregg, MD, president-elect of the Florida Society of Pathologists. "It’s a very cost-effective part of the program because about 60 percent of medical decisions are based on lab information, but it makes up only two percent of the Medicaid budget."

"When the state begins to treat these vital services like a commodity, and decides to monkey with the market by redirecting revenue, the industry will suffer," she adds. "Unfortunately, patients could end up paying the price."

Setting up a Medicaid monopoly for medical laboratory services without an adequate study of the ramifications could jeopardize the health and well-being of patients, the FSP warns.

"It could increase turnaround time for patient results, reduce access to critical or specialized laboratory services, or cause systemic disruption in the delivery of vital laboratory services if a vendor or technology fails," says FSP president Mario Gonzalez, MD.

As CAP TODAY went to press, the state had not yet re-launched the bidding process by issuing an invitation to negotiate, or ITN. "But we have every expectation they will go ahead with the new proposal, and we’re reasonably sure it will be similar to the RFP issued last spring, with a single winner to be chosen," says Alan Mertz, president of the American Clinical Laboratory Association.

An ITN, Mertz explains, would follow a somewhat different course from an RFP. "They would still end up with a single winner, but before picking that winner they could go to several companies that bid and say, ’Hey, we want to negotiate with you and get you to change your proposal, maybe adopt some things that other bidders offered.’ They could go back and forth with several bidders."

"The difference this time," he adds, "is that apparently the bidder will also have to offer a capitated amount per Medicaid beneficiary rather than a fee schedule."

He says Florida officials are aware of the CAP’s and ACLA’s reservations but haven’t yet responded to them. "Certainly, in our estimation, capitation makes an unworkable proposal even more unworkable," he says.

Laboratories are reimbursed for Medicaid services at rates that are only 65 percent to 70 percent of Medicare Part B fees. That discount is typical of payment for all Medicaid services, but it hasn’t prevented Medicaid from surpassing Medicare to become the single largest health insurance program in the nation, spending more than $250 billion in fiscal year 2002.

Florida’s Medicaid program, predicted to cost $14.5 billion in the next fiscal year, has seen laboratory payments rise from $25.1 million in 2000 to $40.7 million in the fiscal year ending last June 30.

The sole-source competitive bid in Florida is part of an overall effort to overhaul the Medicaid program there, Dr. Gonzalez notes. "Governor Bush has stated his belief that Florida can serve as a model for Medicaid reform for other states, and he intends to significantly reduce this budget during 2005."

Medicaid fees for all independent laboratory procedures will be reduced by 10 percent, in fact, if the Florida agency has been unable, by April 1, 2005, to enter into a risk-based contract with a single independent lab or multiple labs where Medicaid payment is made on a per-eligible per-month basis.

Theoretically, at least four entities could compete for the job of sole-source provider of Florida Medicaid laboratory services: Quest Diagnostics and Laboratory Corporation of America, Nationwide Laboratory Services (formerly Royco Inc. and before that, ESRD Laboratories) in Fort Lauderdale, and a network of smaller independent laboratories throughout the state.

Philip C. Chen, MD, PhD, is president of Cognoscenti Health Institute, a clinical laboratory in Orlando with annual revenue of $5 million and 62 employees. He has helped spearhead formation of the network of 26 laboratories in the state that may bid on the contract, and he has informally served as spokesman for a coalition that raised enough objections to the RFP that it was scuttled temporarily.

Many laboratories in the state were not even notified when the RFP was first issued, he recalls. "We actually heard from one of our colleagues about it and it was 10 days after the RFP was issued, with the total time frame to respond being 28 days," Dr. Chen says.

Independent laboratories throughout the state joined with the CAP, FSP, ACLA, and allies from the physician and business communities to generate many letters and visits to lawmakers as well as the governor’s office. Among the opponents was the Florida Health Care Coalition, composed of large employers such as Disney Corp. and Lockheed Martin.

Many of their objections related to the dangers of turning laboratory services over to a monopoly. But the biggest problem with the RFP was that it was written by people who lacked expertise in laboratory medicine, Dr. Chen says. "So a lot of operational and service issues were guaranteed to happen."

For example, under the RFP, other laboratory service providers like hospitals, physician office laboratories, and ESRD facilities wouldn’t have to compete to be paid by state Medicaid, and they could conceivably choose to perform only higher-paying work, forcing the bidder to take on more lower-paid tests.

There were other unknowns, Dr. Gregg says: "Inpatient services were not included, so for that patient who is an outpatient or non-registered patient, we’re not sure whether hospital laboratories would be required to comply with this final award. That makes it very hard to bid, because it’s hard to know, or maybe impossible to know, whether patients will go to an outpatient lab or be referred to a hospital lab. Patients may decide the hospital lab is closer and easier than the single winner, and the lab thinking it’s the winner won’t be getting enough revenue with a fee schedule arrangement. Or, if the bid is for a capitated rate, then it won’t be feasible to predict how many services you’re actually bidding to perform."

Minimum quality requirements for preanalytical, analytical, and postanalytical operations and services were also conspicuously missing from the RFP, Dr. Chen says. The RFP required testing services to be provided in a "timely and cost-effective manner," but there are no specific national standards for such criteria. The CLIA requirements’ weakest areas are in quality assurance and laboratory information systems, Dr. Chen says.

"These two components are the most critical areas of operation in large reference laboratories to ensure correct results are delivered in a timely manner," he says. "Upon removing CAP and JCAHO accreditation requirements, how does the [Florida] Agency ensure that the quality of these two areas of analytical operations are protected?"

Some other features of the original RFP, laboratories fear, will be included in the invitation to negotiate and will preclude their competing for the contract. For example, the bidder is required to post a $20 million performance bond and have a statewide network.

Dr. Chen doubts the invitation to negotiate will resolve these issues. "When I heard they were going to issue the RFP again, I immediately asked AHCA how the old problems would be addressed, and they basically said they didn’t add any additional expertise. It was pretty much still the AHCA internal people working on it."

A key factor behind the push for competitive bidding is Florida’s plan to bring electronic health records to state residents. In October, the governor’s Health Information Infrastructure Advisory Board called for Florida to be a lead state in creating an "interoperable system" in which health care providers and patients have immediate access to patient information.

Says Dr. Chen: "The official position of the state is they want two things. They claim they are trying to control Medicaid costs, and they want electronic medical records. So one of their arguments for a single vendor is they want to build an interface with a prescription drug ordering system." That system is being pilot-tested at the moment, though Dr. Chen contends that few physicians are using it to order drugs. "Doctors will not pull out a specific PDA to order medication for Medicaid and use something else for patients with a different payer."

Nevertheless, the pilot test continues, and the state wants real-time electronic transmission of laboratory results to be interfaced with real-time prescription tracking and dispensing. "They argue that to make that link, they cannot deal with a lot of different vendors," Dr. Chen says. But that argument doesn’t hold, he says, because all transactions for Medicare and Medicaid must follow standard procedures, and laboratories are fully capable of conforming to them.

At the federal level, a Centers for Medicare and Medicaid Services’ demonstration project is underway to test the feasibility of competitive bidding, but its findings will not be announced for some time. "I’m not sure why Florida wants to jump ahead of the demonstration project. I think it’s premature and unwise," Dr. Gregg says.

"I am very concerned that the services now provided by more than 150 laboratories in Florida would be nearly impossible to re-create on a short time frame," she adds.

Will a single-vendor approach actually generate competition? It’s debatable, Dr. Chen contends. Many laboratories provide Medicaid testing in the state. "But no laboratory can cover the entire state. It’s just geographically impossible. Even Quest Diagnostics has said openly that it could not cover it without jeopardizing adequate access," he says.

Only one laboratory is actively pursuing a Medicaid contract with the state at this point, he says: Fort Lauderdale’s ESRD/Royco laboratory, which recently was renamed Nationwide Laboratory Services. "They are not working with our group. They have done ESRD testing but no general laboratory services. They’ve built a brand new 90,000-square-foot facility, they’re lining up provider networks, and apparently it’s part of their strategy to win this statewide contract."

Scott Hopes, MPH, PhD, vice president of Nationwide, confirms that the majority of the company’s work before 2004 was provided to the dialysis industry, but says the company has diversified its laboratory testing this year.

The state’s delay in issuing the invitation to negotiate has occurred primarily because of unforeseen emergencies, he says. "The AHCA has been dealing with numerous crises since the state was hammered with four hurricanes and a tropical storm. A number of hospitals were destroyed, and the agency has spent the better part of the last two months on that." He expressed confidence that the ITN would be issued "any day now."

When that happens, though, look for the controversy to re-ignite. ACLA has already decided how it will respond to an ITN, says Mertz, who insists that the state has no chance of realizing savings from competitive bidding.

"I’m not even sure that budget issues are really what’s driving this," he says. "What the state claims it will get in savings from going to competitive bidding is $3.5 million per year. Out of a $12 billion program, that’s so small it will have a negligible impact on the budget balance sheet for Medicaid."

"In fact, we’d argue that if you go to a single bidder—since there’s no company, even including larger ones like Quest and LabCorp, that can cover the entire state—you’ll have tremendous access problems. You may shave a dollar or two off the cost of a $20 test. But when you take away access to the laboratory for patients who have to travel a great distance to get a test, it will cost the program more than what you saved."

The competitive bidding plan for laboratories has been compared with a similar arrangement Florida wants to set up with a pharmacy chain for drugs under Medicaid. But Mertz is quick to point out that pharmacy savings wouldn’t translate to laboratory services.

"Pharmacy is very different from laboratory services where you are logistically dealing with blood to be picked up in the afternoon, transported, and quickly tested within a certain number of hours to have a result the next day. A lot of pharmacies can do mail-order and you don’t even need to have the pharmacy in the neighborhood."

"If one patient doesn’t get a glucose checked, or tests needed to diagnose heart disease don’t get done, the cost of not treating that person for diabetes or heart disease is so fantastically much more money, it’s the ultimate example of penny-wise and pound foolish."

"When you look at the facts," Mertz says, "competitive bidding is not something that will have any impact on saving money for Medicaid. In truth, it will end up costing far more."

Anne Paxton is a writer in Seattle.