News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

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News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

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Alternative payment models and value-based payment schemes create financial unknowns for clinical laboratories and anatomic pathology groups

What happens to pathologists and clinical laboratories when fee-for-service reimbursement ceases to be the primary payment method for anatomic pathology services and medical laboratory tests?

After all, fee-for-service reimbursement for lab tests is what underpins today’s financial model for lab test services. Under this transaction-based business arrangement, a clinical laboratory that can increase its specimen volume will realize a lower average cost-per-test because of economies of scale within the lab. At the same time, the lower costs mean a bigger net margin available from profit, given the fixed price of the reimbursement for lab tests.

So what is a medical laboratory to do as healthcare shifts to a value-based reimbursement (VBR) model, formerly known as pay-for-performance? The answer to that question won’t take long to answer because of a recent announcement by the Department of Health and Human Services (HHS).

HHS officials announced new goals and timelines for transitioning Medicare payments away from fee-for-service (FFS), a change that ultimately will impact how clinical laboratories and pathology groups get paid for tests, screenings, and other work.

Medicare Sets Specific Dates for Value-based Reimbursement Implementation

The passage of the Patient Protection and Affordable Care Act (ACA) ignited a push to drive down healthcare costs by replacing the traditional fee-for-service payment system—which rewards productivity and volume—and replacing it with reimbursements and incentives tied to quality of care and care coordination.

HHS has now established explicit dates it wants a percentage of Medicare payments to be linked to alternate payment models. These include such forms of care delivery as Accountable Care Organizations (ACOs), patient-centered medical homes (PCMH), and bundled and value-based payments.

In a January 2015 news release that praised new payment models as a way to incentivize providers to reduce “duplicative or unnecessary x-rays, screenings, and tests,” HHS stated Medicare’s goal is to tie 30% of traditional fee-for-service payments to value-based payment models by the end of 2016, and 50% by the end of 2018.

In addition, HHS set a goal of tying 85% of all traditional Medicare payments to quality or value by 2016! This jumps to 90% by 2018. Medicare officials expect to accomplish this through initiatives such as the Hospital Value-based Purchasing and Hospital Readmissions Reduction programs.

40% of Payments Now Tied to Value-Based Payment Programs

“This is the first time in the history of the program that explicit goals for alternative payment models and value-based payments have been set for Medicare. Changes assessed by these metrics will mark our progress in the near term, and we are engaging state Medicaid programs and private payers in efforts to make further progress toward value-based payment throughout the healthcare system,” wrote HHS Secretary Sylvia Mathews Burwell in an editorial published in the New England Journal of Medicine (NEJM).

The conversion to value-based reimbursement is under way. “In 2011, Medicare made almost no payments to providers through alternative payment models. But today, value-based reimbursements represent about 20% of Medicare payments,” HHS stated in a news release. Meanwhile, Modern Healthcare reports an estimated “40% of commercial health insurers payments to hospitals and doctors now are tied to value-based incentives.”

Yet providers remain skeptical about the benefits of ACOs and other new models of healthcare delivery. The Physician’s Foundation’s 2014 Biennial Physician Survey indicates over one-quarter of physicians surveyed participate in an ACO, but less than 13% of physicians believe ACOs will enhance quality and reduce cost. Nearly 63% of physicians surveyed disagree that hospital employment of physicians is a positive trend.

Physicians Distrust Payers: Bonus Payments Will Be Bargaining Chips

When responding to the 2014 FTI Consulting Payer-Provider Survey, 41% of FFS-physicians said, “Their biggest obstacle” to entering into a value-based arrangement “is their distrust of payers.” On the flip side, payers believe only a tiny fraction (5%) of providers are willing to accept the downside financial risks required by most value-based reimbursement strategies.

All of which indicates that a change in reimbursement models is unlikely to eliminate payment disputes between payers and providers in the short-term.

Healthcare consultant Deborah Walker Keegan, Ph.D.

Healthcare consultant Deborah Walker Keegan, Ph.D., President of Medical Practice Dimensions, Inc., recommends that healthcare providers begin preparing now for a shift to a value-based reimbursement model. (Photo copyright Medical Practice Dimensions, Inc.)


“Instead of merely haggling on fee-for-service rate increases, value-based contracting may spur the two sides to butt heads over other issues,” wrote Bob Herman in Modern Healthcare. “Experts predict that determining lump-sum payments, quality metrics to be used for bonuses or penalties, and arrangements for how shared savings should be split will be the new payment bargaining chips.”

Nonetheless, Deborah Walker Keegan, Ph.D., a fellow in the American College of Medical Practice Executives, recommends that healthcare providers prepare for swift changes in the next two to five years.

“This is really a tough time because physicians still need high productivity, but they also need to start measuring value,” Walker told Medical Economics. “The trend adds even greater urgency for physicians to better understand payment reform and plan to adapt.”

To Thrive Clinical Laboratories Should Adopt Patient-centric Approach

Using current business models, pathology medical laboratories will find it difficult to do business in the near future, said Rob Atlas, CEO and President of Atlas Medical, during an exclusive interview with Dark Daily. In Is a Patient-Centric Approach to Clinical Laboratory Management the Best Way to Move from Volume to Value?” (December, 2013), Atlas notes that some early-adopter labs have started to deploy capabilities that are patient-centric, as the healthcare system shifts to a value-based, patient-centric approach.

Rob Atlas, CEO of Atlas Medical and an expert in medical laboratory informatics

Rob Atlas, CEO of Atlas Medical and an expert in medical laboratory informatics, says it’s time for clinical laboratories to transition from volume-centric to patient-centric organizations. (Photo taken during the 18th Annual Executive War College on Laboratory and Pathology Management.)

“In our strategic conversations with lab organizations nationwide, we see them recognizing the need to add more value and, to accomplish this, they must become patient-centric,” said Atlas. “Many clinical laboratories today are developing data repositories to logically link all transactional and other information about a patient. These repositories allow physicians to see all relevant information, identify trends, and provide better care as a result, enabling labs to provide greater value to their customers, patients and payers.”

Remaining a value to hospitals, physicians, and payers is quickly becoming the new paradigm. Clinical laboratories and pathology groups that understand the shift and learn to work within it will find themselves ahead of the pack and fully reimbursed.

—Andrea Downing Peck

Related Information:

Eliminating fee for service models would significantly reduce healthcare costs 

American Hospital Association Says Medicare’s Value-Based Purchasing Could Put Hospital Revenue at Risk 

Is a Patient-Centric Approach to Clinical Laboratory Management the Best Way to Move from Volume to Value? 

Shifting reimbursement models: The risks and rewards for primary care 

Medicare Officials Announce Bundled Reimbursement Initiative and Clinical Pathology Laboratory Tests Are to Be Included 

The Great Divide: How Payers and Providers View Value-Based Arrangements 

Survey: Value-based Medicare crowds out specialists 

Specialist Doctors Head for Exit as U.S. Shifts Payments

Is a Patient-Centric Approach to Clinical Laboratory Management the Best Way to Move from Volume to Value? 

Rob Atlas to speak at Executive War College 2015 next month in New Orleans