Vachette Pathology

In many cases hospitals allow pathology groups to purchase the technical component of the histology lab. In this case the pathology group purchases the technical component at a fair market price and then bills a global charge to insurance carriers. The group is responsible for paying the hospital for the agreed-upon rate for each technical charge billed out. This can be done for all carriers with the exception of the government payers unless the purchasing lab is grandfathered in under certain CMS rules.

The reason some groups chose to have the ability to bill the technical component is that this process allows the pathology practice to garner more revenue and to help the hospital understand the direct revenue available from this technical work.

In most cases if a hospital bills out the technical component they will be paid under a DRG or under an APC payment structure. The hospital can only bill the technical component directly if they have an independent lab and a separate tax ID number. By outsourcing this to the pathology practice they may be able to lower their overall Part A costs and at the same time get a solid understanding of the actual revenue generated from the technical side of their histology lab.

Often Vachette is asked to review the financial relationship between these two parties to determine a fair and equitable rate. Below is a case study reviewing the aspects of this type of problem.

Review of Technical Component Payback

Thank you for allowing Vachette Pathology to review the business relationship between Sample Hospital and Medical Center and Sample Pathology Group LLC. Our review is just our opinion -- nothing more and nothing less.

In this case the payback for the purchased technical component is considerably below the national trend.

For example the compensation of $18.75 for an 88305-TC is well below the industry standard and in my opinion may leave both parties at risk for investigation. It would be hard to find this number defendable as either the true cost for this service therefore leading to a potential case of inurnment or fair market price providing that the service provider is another hospital owned histology lab.

Suggestions:

1. The compensation for these services should be built with a rational process. For example, this compensation is often built on the standard Medicare fee schedule minus the practices cost for performing the service, i.e. courier and billing cost. It is common that the pathology practice pay around 75% or 80% of the current Medicare technical component payment rate for the state. It can easily be assumed that the cost for courier, supplies, billing, etc, can cover the missing 20%-25%. Another proposed example is building the compensation on the current OPPS fee schedule.

2. Many hospitals pay their pathology groups a flat fee for oversight of all their screening paps smear. The compensation of $8.00 that Sample Hospital is paying per screening  Pap is considerably above the industry norm of $2.00 to $4.00 per screening pap.

3. Although there are no distinct national benchmarks for in-hospital histology costs we have done some work in the private lab industry and reviewed their histology costs. It can be said that the cost of $27.00 to $32.00 for an 88305-TC is very competitive even in the independent laboratory market place; therefore this is an excellent cost for a hospital-owned histology lab. The costs for cytology work are somewhat inflated as this area usually requires higher priced employees and this is usually directly transferable to the cost of these services. It is not unusual for this area to be a loss leader.

Overview:

Overall the compensation for the technical component is below the industry standard, the compensation for screening pap smears is well above the industry standard. The good news here is that neither party should suffer from any change in this arrangement.

On October 30, 2008, the Centers for Medicare and Medicaid Services (CMS) released the new 2009 Medicare Physician Fee Schedule final rule that included revisions to the Medicare anti-markup restriction.

The rule that took effect on January 1, 2009, was intended to stop the abuse of marking up diagnostic tests billed by the ordering physician or other Part B supplier. One beneficial fact of this rule is that the pathology group purchasing the work from the hospital may now charge the complete Medicare TC rate to Medicare. (Under the old rules they could only charge the amount that they were paying and they were not allowed to profit off from this work.)

This means that under the old rules the pathology practice was only allowed to bill $18.75 for an 88305-TC  to Medicare for a TC case. Now they can bill their full charge and collect any difference between what they get paid and what they pay the hospital.

As for commercial carriers there has been no change. Overall the pathology practice can charge their full price and keep any margin above what they are paying to the hospital.

Summary:

It is our recommendation that Sample Hospital and Medical Center renegotiate the amount that Sample Pathology Group LLC pays them for technical component compensation. Furthermore the compensation for oversight of the screening paps should be reduced to a fair market rate.