If  direct laboratory payments are terminated, CAHs would be reimbursed by  Medicare for their costs of paying laboratories to perform technical  pathology services, and outpatient beneficiaries who currently are  responsible for paying 20 percent of the payment for their technical  pathology services to the laboratories under the MPFS would instead be  responsible for paying 20 percent of the CAHs’ customary charges. Few Hospitals Outsource Large Volumes of Technical Pathology Services

We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95  percent of all such facilities, outsourced at least some technical pathology  services to laboratories that received direct payment from Medicare for  those services (see table 3). In 2001, approximately 1.4  million technical pathology services were outsourced, and the median  number of outsourced services per hospital was 81. Medicare Expenditures and Beneficiary Copayments Would Be Reduced, While Hospital Costs Would Increase Slightly, If Direct Payment to Laboratories Is Terminated

If laboratories had not received direct payment for services for hospital  patients, we estimate that Medicare spending would have been $42 million  less in 2001, with $18 million and $24 million in savings for inpatient and  outpatient services, respectively, and overall beneficiary cost sharing  would have been reduced by $2 million. Paying laboratories to provide technical pathology services is unlikely to  impose a large financial burden on most hospitals. If payment to the  laboratory is made at the MPFS rate, a PPS hospital outsourcing the  median number of technical pathology services would incur an additional  cost of approximately $2,900. In 2001, a PPS hospital outsourcing the median number of services  outsourced by PPS hospitals, 94, would have incurred additional costs of  approximately $2,900 in paying a laboratory for technical pathology  services, representing a small fraction of hospitals’ annual Medicare  revenues. There would be no financial impact from terminating direct  laboratory payments for rural hospitals that are or become CAHs, as CAHs  would recover from Medicare their reasonable costs of outsourcing  technical pathology services. Beneficiaries’ Access  Medicare beneficiaries’ access to pathology services is unlikely to be  Likely Would Be  Unaffected  disrupted if direct payments to laboratories are terminated because  hospitals are unlikely to limit surgical services, including those requiring  pathology services. Appendix I: Scope and Methodology

In conducting this study, we analyzed Medicare claims and provider data  obtained from the Centers for Medicare & Medicaid Services (CMS). To do so, we matched Medicare  laboratory claims with claims submitted by prospective payment system  (PPS) hospitals and critical access hospitals (CAH).
Why GAO Did This Study

In 1999, the Health Care Financing Administration, now called the Centers for Medicare & Medicaid Services (CMS), proposed terminating an exception to a payment rule that had permitted laboratories to receive direct payment from Medicare when providing technical pathology services that had been outsourced by certain hospitals. The Congress enacted provisions in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to delay the termination. The BIPA provisions directed GAO to report on the number of outsourcing hospitals and their service volumes and the effect of the termination of direct laboratory payments on hospitals and laboratories, as well as on access to technical pathology services by Medicare beneficiaries. GAO analyzed Medicare inpatient and outpatient hospital and laboratory claims data from 2001 to develop its estimates.

What GAO Found

In 2001, approximately 95 percent of all Medicare prospective payment system (PPS) hospitals--hospitals that are paid predetermined fixed amounts for services--and critical access hospitals (CAH), which receive reimbursement from Medicare based on their reasonable costs, outsourced some technical pathology services to laboratories that received direct payment for those services. However, the median number of outsourced services per hospital was small--81. If laboratories had not received direct payments for services for hospital patients, GAO estimates that Medicare spending would have been $42 million less in 2001, and beneficiary cost sharing obligations for inpatient and outpatient services would have been reduced by $2 million. Most hospitals are unlikely to experience a financial burden from paying laboratories to provide technical pathology services. If payment to the laboratory is made at the current rate, a PPS hospital outsourcing the median number of technical pathology services outsourced by PPS hospitals, 94, would incur an additional annual cost of approximately $2,900. There would be no financial impact for the 31 percent of rural hospitals that are CAHs, as they would receive Medicare reimbursement for their additional costs. Medicare beneficiaries' access to pathology services would likely be unaffected if direct laboratory payments are terminated. Hospital officials stated they were unlikely to limit surgical services, including those requiring pathology services, because limiting these services would result in a loss of revenue and could restrict access to services for their communities.