Is your office-based lab profitable?

September 17, 2018

In his latest blog post, Rick Rutherford, CMPE, discusses the effects of recent major changes in the method that Medicare reimburses in-office clinical lab services.

Mr. Rutherford, former director and founder of the practice management department of the AUA, has been a thought leader and writer on urology management for more than 20 years.

Many urology practices currently operate in-office clinical labs that have proven profitable while also providing one-stop shopping for their patients. Since urologists service so many Medicare beneficiaries, the effects of recent major changes in the method that Medicare reimburses these lab services make it critical that the business management team evaluate the revenue and costs of clinical lab services annually to determine if this service remains financially viable.

In 2016, the Centers for Medicare & Medicaid Services (CMS) issued proposed new rules that base Medicare clinical lab fee schedule (CLFS) reimbursements on comparison data compiled from mandatory reporting from independent labs, physician office labs, and urgent care centers. The complexity of the information reporting structure resulted in the postponement of changes in the CLFS until Jan. 1, 2018.

Also by Rick Rutherford, CMPE: 6 questions to ask before adopting new technology

An 

 of the 2018 CLFS published by the American Medical Association in October 2017 showed that the payments were reduced for approximately 75% of lab tests. Fee cuts for each clinical laboratory testing code were limited to 10% per year from 2018 through 2020. Additional reporting data would be analyzed annually to compare physician office lab fees with the potential for a 15% cut per year from 2021 through 2023.

For a typical urology office-based lab, the resulting Medicare fee cuts from 2017 to 2018 are as follows:

  • Urinalysis CPT Code 81000: from $4.35 in 2017 to $4.02 for 2018-minus 7.6%
  • PSA CPT Code 84153: from $25.23 in 2017 to $22.71 for 2018-minus 10%
  • Urine culture CPT Code 87086: from $11.07 in 2017 to $9.96 for 2018-minus 10%.

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Labs with higher complexity Clinical Laboratory Improvement Amendments (CLIA) classifications deliver a greater variety of tests, and many have higher fees for them.The net revenue reduction should be evaluated annually. In addition, the increasing costs of lab supplies, equipment services costs, quality testing services, and staff compensation must be reviewed. As the profit margin shrinks from year to year, a savvy urology practice must make strategic decisions about whether to divest its lab operations to an outside manager or consider it to be a “loss-leader” to preserve those patient services that may differentiate it from its competition.

Read: Medicare proposed rule outlines significant changes

According to an article by Jeremy Belanger of the Chapman Law Group about these changes, a revision in the threshold that determines which labs are required to report their fees to CMS may even increase the administrative expenses further for office-based labs in 2019. The proposed Medicare fee schedule rule published in July by CMS included requests for comments on changing the low expenditure threshold for reporting. Comments were requested on lowering it to $6,250, which would pull in more small labs, or raising it to $18,750, which could do the opposite. Belanger explains that this could result in an “increased burden on practitioners to collect and report data.”

The reporting costs will be an important factor in the profitability analysis moving forward.