College of American Pathologists
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Esoteric tests lighten hospital labs’ wallets

July 2003
Karen Lusky

When it comes to paying for expensive esoteric lab tests,
the expression “the buck stops here” applies all too aptly to hospital labs.

Jack Shaw, executive director of Joint Venture Hospital Laboratories, Detroit, put the conundrum squarely on the table in his presentation, “New budget-busting threat: strategies to cope with high-priced specialty testing,” at this year’s Executive War College on laboratory and pathology management in New Orleans.

Shaw’s bottom-line warning: “It’s not possible for the hospital lab to solely absorb the burden for the geometrically growing financial liability associated with genetic and molecular biological tests.”

While the discrepancy between third-party payment and some reference testing is a part of the problem, Shaw honed in on the fiscal threat posed by esoteric labs specializing in tests that have little or no competition. “That’s affecting our hospital laboratory network on the receiving end,” he told War College attendees, “because there are no alternatives for some of this testing. And the costs are significantly higher than what we have come to expect as the norm.”

This “square peg in a round hole syndrome,” as Shaw described it, is especially problematic for Joint Venture Hospital Laboratories, or JVHL. Two-thirds of its business is capitated, and, at this point, its contracts don’t include carve-outs for the specialty testing. “This is a relatively new phenomenon,” Shaw said during his presentation in May, “and if we entered into a capitated agreement three years ago, it’s pretty safe to say we weren’t seeing $2,700 per unit for esoteric testing.”

Yet the high-ticket testing is a growing problem for other hospital labs as well. Mark Lifshitz, MD, director of clinical laboratories at New York University Medical Center, told CAP TODAY that he sees a “certain arrogance” in how some diagnostic companies or labs that offer patented reference testing deal with hospital labs. “Their approach is to say to the hospital lab: ‘This is what it costs, and this is what you must pay us. And if the reimbursement is only a tenth of that, that’s your problem.’”

Some esoteric labs, Shaw says, have agreed that the cost of the testing is an issue and have negotiated discounted fee schedules with JVHL. “That certainly helps, and those labs look like the guys in the white hats compared to some of the other ones,” he adds. “But, unfortunately, the labs willing to negotiate fees tend to be the ones that have market competition and not the ones with the highest cost tests.”

The difference between the price tag on some of the specialty tests and available third-party payment can be staggering. One JVHL hospital member, St. John’s Health System, is left holding the bag for $80,000 out of $100,000 worth of testing this fiscal year for Athena alone, which holds a patent on certain tests, says Marsha Cooper, system laboratory business director.

Cooper expects the problem will grow. “We are seeing a twofold increase [in esoteric testing] compared to last year,” she says. “And it’s our understanding that Myriad, for one, is rolling out several more high-dollar tests.” Cooper says the companies claim the tests are covered by insurance, but the CPT codes they provide normally pay about 20 percent of the charge.

A multi-dimensional problem
As Shaw underscored in his War College presentation, big-ticket boutique testing is a multi-faceted problem with no simple or single solution.

Hospital labs that attempt to control their financial exposure by asking physicians or their patients or payers to pick up the tab—or by refusing to do the test altogether—risk alienating their customer base in an increasingly competitive market environment. “As a result, some labs and pathologists take a deep breath and go ahead and do the test,” Shaw says. “But that’s a problem, too, because at some point it will come back to haunt them when their bottom line evaporates.” Even so, he adds, alienation is a factor that hospital labs in a competitive market must consider.

Further hindering utilization management, many hospitals lack the systems to flag the high-priced tests before they are performed, when the lab or pathologist could intervene by talking to the ordering clinician about the test’s expected clinical benefit, cost, and potential alternatives. “Hospitals don’t have financial systems geared to doing line-item reconciliation, so there’s a disconnect between charges and collections,” says Edward Catalano, MD, professional director of stat laboratory and outreach services at Palmetto Health Richland, Columbia, SC.

Furthermore, some of the labs developing the patented tests are marketing them directly to the physicians, and even patients, who are driving the demand for the new technology. “The diagnostic companies selling one or two new technology products or doing the lab testing don’t like to market to and go through the lab,” Dr. Lifshitz says. “The lab understand the economics of the test and its clinical usefulness. But if the company markets the high-priced tests to clinicians, they are going to want to do it if it’s available—and they usually don’t understand that no one is really paying for it.”

Clinicians also have a disincentive to act as the gatekeeper for new technology, thanks to the specter of malpractice litigation. “If the physician doesn’t offer a test to that one person out of 1,000 who really could have benefited, then the physician could be sued,” Dr. Catalano says.

The possibility of self-pay
So why couldn’t ordering physicians pass the financial liability for testing to patients who could weigh the cost against the benefit?

In Shaw’s view, if physicians want hospital labs to handle these “problem” tests, they may need to give commercially insured patients a form similar to the Medicare advance beneficiary notice, or ABN, to ensure the patients understand that they must pay for the testing.

“If the patient accepts financial liability for the testing, the hospital lab can then more readily process the specimen,” he says.

Yet physicians are still learning to use the new ABNs, even for Medicare laboratory testing, “and the whole nature of outreach lab testing is such that the labs often don’t see the patients,” Shaw points out. “And once the lab has possession of the specimen, they are usually stuck with the financial liability for it.” Hospitals, he adds, “have never practiced in a way where they seek guarantee of payment before doing a lab test.”

Shaw predicts, however, that once physicians become more experienced with ABNs, and as labs provide more Web-based order-entry systems that automatically generate the ABNs, these forms may increasingly be used for Medicare patients and those with commercial insurance coverage.

Self-pay may be a feasible answer for a subset of the population, agrees Ronald Weiss, MD, senior vice president and director of business development for ARUP Laboratories, Salt Lake City. “Of course, the likelihood of that diminishes for tests that cost hundreds or even thousands of dollars,” he says. “But as private insurance companies and health plans begin to respond to growing demand and improved evidence-based support for certain genetic tests, copayment models may appear which share the financial risk in selected clinical situations.”

Stemming the hemorrhage
In the meantime, hospitals are attempting to address the cost shifting at a time when many of them are facing paper-thin margins or swimming in red ink. St. John’s Health System, for example, is discussing what changes in processing will be required to address the problem. “Right now,” says Cooper, “we have a pathologist who calls the ordering physician, not to tell him how to order but to educate the physician about the cost of the test and to discuss the medical reason for it. The pathologist is also available to discuss alternative testing.”

NYU Medical Center has taken itself out of the loop for outpatient tests performed by one specialty company that markets neurological tests. The hospital took that tack, says Dr. Lifshitz, after the company refused to negotiate a better price, even though the hospital lab was getting only a $100 reimbursement on a $1,000 test when it used the CPT codes provided by the company.

“On the outpatient side, our lab refused to process the tests anymore,” Dr. Lifshitz explains. ”Any doctors interested in the testing had to establish their own accounts with the company.” That decision, he adds, primarily affects neurologists, who don’t tend to order many clinical lab tests.

On the inpatient side, the hospital lab implemented a filtering system that requires Dr. Lifshitz to clear all of the tests the company performs before they are sent out.

Dr. Lifshitz has also had to address inpatient testing that isn’t related to the patient’s diagnosis and doesn’t change the treatment plan, which quickly erodes the hospital’s DRG, especially with high-priced specialty testing. “The point is, you need a dialogue between the pathologist and the clinician,” Dr. Lifshitz says, “and if you don’t establish a filtering system, there’s not going to be a dialogue to try to rationalize the utilization of certain tests and/or look for alternative sources.

“For example,” he adds, “sometimes the test is part of a specialized panel that a specialty reference lab is doing for a huge price—and when you look at it, three-fourths of the constituents are offered by a major lab like Quest for a fraction of the price, and the clinician says he doesn’t need the other 25 percent.”

Rush-Presbyterian St. Luke’s Medical Center, Chicago, is also asking physicians to send certain high-priced esoteric tests ordered on an outpatient basis directly to the reference lab and to have the patient/insurer guarantee payment, says Robert DeCresce, MD, Rush’s medical director of clinical laboratories. “That’s very unpopular because the patient may discover their insurance will cover only a small portion of a several hundred dollar test,” he says, but it’s preferable to the hospital absorbing the bulk of the cost.

The hospital lab arranges to send out the tests. “But we want the relationship to be between the lab, patient, and insurer rather than having the hospital in the middle,” Dr. DeCresce says. “You can’t do that, of course, for an inpatient, which means the cost of the test eats the hospital DRG.”

The laboratory also has the pathologist call the ordering physician, who is often a resident in training, to ask why he or she is ordering the test. “If the physician isn’t going to do anything differently and is ordering it because he or she is curious—and it costs $1,000—that’s not a good use of resources,” Dr. DeCresce says. “We are a teaching hospital and want to have some curiosity, but there is a price limit on it.”

Edward Uthman, MD, medical director of the laboratory and former chief of staff at Polly Ryon Memorial Hospital, Richmond, Tex., says his lab has had to confront situations where clinicians were requesting high-ticket testing on the tissue block after the patient left the hospital. “The problem with that is that the hospital system is not set up to submit charges after a period of time [post discharge],” he explains. So unless the patient registers for outpatient services—which the lab is encouraging patients to do—there’s no mechanism for submitting charges.

“For the low-priced tests, it doesn’t make so much of a financial impact [when the lab can’t submit charges], but when you are talking about a $400 FISH to detect women with amplified HER-2 genes, it’s a problem,” Dr. Uthman says.

Dr. Uthman’s general approach in working with clinicians on clinical lab use is to stay off the stump, however. “Over the years, I have learned not to preach to clinicians too much,” he says. “So I let them do four to five tests that I know aren’t going to be that helpful—and they soon figure the test isn’t that useful.” At that point, he informs them of the high cost of the test. “And they don’t want to burn up resources, so they stop using it,” he says.

Without judicious use of esoteric testing, payers and hospitals eventually may take a “shotgun rather than a scalpel approach and render the testing off limits to everyone, including patients who could really benefit from it,” Dr. Catalano cautions.

Pathologists are, however, “perfectly positioned” to use a multi-pronged approach to help manage the use of esoteric testing, says ARUP’s Dr. Weiss. “The best approach to utilization management combines physician education, consensus decisionmaking, and administrative interventions, such as formularies and pre-approval steps,” he says. For example, in their role as hospital-based physicians, pathologists can identify and work with clinician opinion leaders to determine how best to manage the medical staff’s use of expensive technologies, he says.

Consensus reviews ideally will result in a list of “approved” esoteric tests for use in determining appropriate medical necessity when orders are received in the laboratory, Dr. Weiss says. “This approach places the burden of recognition on the laboratory staff,” he adds, “and is best managed with prompts in the laboratory information system, if available, to initiate critical review of the order. Ideally, problem-prone manual systems to catch these infrequent orders should be engineered out of the process.”

In addition, pathologists in academic and reference labs should continue to foster the development of clinically useful esoteric tests, particularly genetic tests, Dr. Weiss suggests. “In the effort to protect quality and manage utilization, pathologists also should continue to work with state and federal agencies to see that future regulatory interventions do not sacrifice innovation and access that is based on true medical need,” he says.

Pursuing better reimbursement
Shaw urges hospital labs and pathologists to work with insurance companies to determine appropriate payment for tests. “In addition,” he says, “we need to work with the esoteric labs providing the tests to find a middle ground where we negotiate a price that will allow us to at least cover our costs.”

Hospital laboratory directors also stress that esoteric lab companies should pursue better reimbursement. “They need to go through the process to obtain CPT codes with appropriate payment,” St. John’s Cooper maintains, “rather than giving us existing codes that were developed for much less expensive testing.”

To that end, Shaw points to Cytyc Corp.’s success in getting its ThinPrep test reimbursed at a fairer rate so the test is now at least a break-even proposition for labs. “They provided data to demonstrate the cost-benefit of the test to the insurance companies,” he says.

Cytyc also built support for the monolayer cytology by marketing the technology to ob-gyn offices and women’s advocacy groups. “You have to have that strong advocacy base in order to get payers’ attention because they have a line around the block every day with requests for new coverage,” Dr. Catalano says.

“The underlying issue and question is: What cost are we willing to pay for what potential benefit?” sums up Dr. Lifshitz. “It boils down to whether you need a Chevy or a Mercedes to get from Point A to Point B. If someone is going to reimburse you for a Mercedes, then everyone will select that. But if someone is only going to pay for a Chevy, then that’s a different story, and you need to question whether you really need the Mercedes—and whether you are willing to pay for it.”

Karen Lusky is a writer in Brentwood, Tenn.