Medicare Clinical Laboratories Competitive Bidding Demonstration

Medicare Clinical Laboratories Competitive Bidding Demonstration

Order Code RS22769
Updated May 2, 2008
Medicare Clinical Laboratories Competitive
Bidding Demonstration
Barbara English
Information Research Specialist
Knowledge Services Group
Summary
Medicare pays for clinical laboratory services based on a fee schedule originally
established in 1984. Section 302(b) of The Medicare Prescription Drug, Improvement,
and Modernization Act, P.L. 108-173, mandated the implementation of the Medicare
Clinical Laboratory Competitive Bidding Demonstration to explore whether quality
laboratory services offered through competitive bidding could be provided at prices
below current Medicare rates. Opponents of competitive bidding had asked the Centers
for Medicare and Medicaid Services (CMS) to postpone the demonstration, citing
problems such as its complexity and its effect on small businesses. Their concern was
expressed during an open forum sponsored by CMS, and as a result, CMS made some
changes to the proposal. The President’s FY2008 Budget estimated that payments to
clinical laboratories would decrease, saving $110 million in FY2008 and $2.38 billion
from FY2008 through FY2012 if competitive bidding replaced the fee schedule. On
April 28, 2008, a U.S. District Court granted an injunction blocking implementation of
the first demonstration project scheduled to take place in the San Diego area. Plaintiffs
in the action were local area laboratories that alleged the demonstration project, as
planned, would result in substantial economic harm. Legislation has been introduced
in the 110th Congress that would eliminate the competitive bidding project.
Background
Clinical laboratories provide tests on specimens taken from the human body (such
as blood or urine) to help physicians diagnose a patient’s health. Under current law,
Medicare Part B-covered tests (with some restrictions) include cholesterol and blood lipid
tests, fecal occult blood testing, Pap smear tests, prostate-specific antigen tests, and
diabetes screening tests.
Medicare has paid for clinical laboratory services based on a fee schedule originally
established in 1984. Section 302(b) of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) mandated the Medicare Clinical Laboratory
Competitive Bidding Demonstration to determine whether competitive bidding can be

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used to provide quality laboratory services at prices below current Medicare rates. Details
of the proposal were outlined in a “Draft Bidders” package dated July 3, 2007.1
Competitive bidding is a process whereby interested parties submit sealed bids to an
entity for prices that the parties would charge for the product or service. The entity
awards contracts to the bidders with the best prices and terms.
Competitive bidding has been suggested for years as a possible cost-savings measure
for some Medicare services. For example, under authority of the Balanced Budget Act
of 1997 (BBA ‘97), the Centers for Medicare and Medicaid Services (CMS), the agency
that administers Medicare, implemented competitive bidding demonstration projects to
examine the effects this process would have on durable medical equipment (DME)
markets in communities of varying sizes. It has stated that it successfully tested
competitive bidding models for DME in Polk County, Florida, and San Antonio, Texas.2
Competitive Bidding Under MMA
The MMA required CMS to conduct a demonstration project, lasting three years,
using competitive bidding to establish payment levels for clinical laboratory services. The
demonstration covers most tests provided to beneficiaries enrolled in the traditional
fee-for-service (FFS) Medicare program who reside in the competitive bidding area
(CBA).3 The competitively set demonstration fee schedule was to be used to pay for
laboratory services in the CBA for the duration of the demonstration. Multiple winners
were expected in each CBA. Beneficiaries would only be able to receive services from
winning bidders. CMS outlined how the proposed competitive bidding process would
work.
! Certain laboratories would be required to bid in the demonstration. These
are laboratory firms with $100,000 or more in annual Medicare Part B
(fee-for-service) payments for tests (covered in the demonstration)
provided to beneficiaries residing in the CBAs, regardless of where the
laboratory firm is located.
! Small laboratories or laboratory firms with less than $100,000 in annual
Medicare Part B (fee-for-service) payments for demonstration tests
provided to beneficiaries residing in the CBAs would not be required to
bid.
1 This document is available at [http://www.cms.hhs.gov/DemoProjectsEvalRpts/downloads/
MMA302b_Draft_Bidder.pdf].
2 Evaluation of Medicare’s Competitive Bidding Demonstration for DMEPOS: First-Year
Annual Evaluation Report, HCFA Contract No. 500-95-0061/T.O. #3, September 2000 (Revised
January 2001), prepared for Health Care Financing Administration Office of Strategic Planning
by Research Triangle Institute (RTI), Project Number 7346-002-008; the report can be found at
[http://www.cms.hhs.gov/DemoProjectsEvalRpts/downloads/karon_2001_1.pdf].
3 Pap smears and colorectal cancer screening tests are excluded from this demonstration and
physician office laboratories performing testing services for their patients are also exempt.

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Table 1. How Payment to Clinical Laboratory Providers Would Be
Made Under the Mandated Demonstration
Both Required and
Non-Required
Required and Non-
Non-Required
Required Bidders
Bidders Residing
Required Bidders That
Bidders That Bid
That Did Not Bid
in the CBA That
Bid and Won
but Did Not Win
Did Not Bid
Would be paid the
Would not be paid
Would not be paid
Would be paid the
competitive bidding
anything by Medicare
anything by Medicare
demonstration fee
demonstration test fee
for the duration of the
for the duration of the
schedule during
amount for tests provided to
demonstration tests
demonstration for
the demonstration
beneficiaries residing in the
provided in the CBAs
tests provided in the
period
CBA
CBAs
Source: “Medicare Program: Medicare Clinical Laboratory Services Competitive Bidding Demonstration
Project,” Federal Register, Notice, Oct. 17, 2007, p. 58856.
CMS has stated that the demonstration would apply in two Metropolitan Statistical
Areas (MSAs). The fundamental criteria for selecting demonstration sites required that
each area
! allows for potential program savings from the demonstration,
! is administratively feasible,
! represents the laboratory market, and
! will yield demonstration results that can be generalized to other MSAs.
The project has not yet begun. The San Diego metropolitan area was selected by
CMS as the first of the two locations (the second area has not been selected). A Bidder’s
Conference took place in San Diego-San Marcos, California, on December 5, 2007. CMS
was expected to announce the winning bidders on or around April 11, 2008.
However, on April 28, 2008, a federal judge granted a preliminary injunction
blocking implementation of the San Diego Demonstration. This action was sought by San
Diego area laboratories. The plaintiffs alleged the demonstration project, as currently
planned would result in substantial economic harm.4 As a result of the injunction, CMS
is not allowed to
! announce the winners in the Demonstration Project’s bidding;
! implement and carry out the Demonstration Project for the San
Diego-Carlsbad-San Marcos metropolitan area; and
! disclose any information included in the bid applications submitted in
connection with the Demonstration Project for the San
Diego-Carlsbad-San Marcos metropolitan area.
4 Sharp Healthcare, Internist Laboratory, and Scripps Health vs. Michael Leavitt, Secretary of the
Department of Health and Human Services, United States District Court for the Southern District
of California, Case No. 08-CV-0170-W (POR).

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Issues
The clinical laboratory industry is generally opposed to competitive bidding. It
argues that lab testing is an essential part of quality health care and that tests provide
physicians with objective data needed to help promptly diagnose, treat, and monitor
diseases and other medical conditions. The industry states that, unlike equipment or
supplies, laboratory services are not a commodity. It further states that competitive
bidding would reduce the number of labs serving the community, thereby negatively
impacting access.5
Changes Made by CMS. CMS held an Open Door Forum on the demonstration
on July 16, 2007. Opponents asked CMS to postpone the demonstration, citing additional
problems, such as its complexities, impact on quality of service, and the effect on small
businesses.6 The following changes were made to the laboratory demonstration design by
CMS since the July 16 Open Door Forum in response to public comment on the draft
“Bidder’s Package”:7
! Laboratories providing services exclusively to beneficiaries residing in
nursing homes or receiving home health services in the competitive
bidding area would not be required to bid, but would be paid at the
demonstration fee schedule for demonstration tests otherwise paid under
the Part B Clinical Laboratory Fee Schedule.
! A non-winning required bidder laboratory could serve as a reference
laboratory8 to laboratories participating in the demonstration; however,
they would not be allowed to bill Medicare directly for demonstration
tests performed for Medicare fee-for-service beneficiaries residing in the
competitive bidding area.
5 “Competitive Bidding for Lab Services is Not the Answer,” American Clinical Laboratory
Association at [http://www.clinical-labs.org/issues/bidding/index.shtml]; “Competitive Bidding
Demonstration Project: Immediate Request for Action,” The American Society for Clinical
Laboratory Science at [http://www.ascls-wi.org/CompetitiveBiddingEducation.pdf]; Statement
of the American Clinical Laboratory Association on the Medicare Clinical Laboratory
Competitive Bidding Demonstration Project at [http://www.clinical-labs.org/documents/
CompetitiveBiddingFinalCommentsCBDemo8-7-07.pdf]; and “Repeal Competitive Bidding
Demo Now,” American Society of Clinical Pathology at [http://www.ascp.org/HomePageContent/
ActionAlerts/RepealCompetitiveBiddingDemoProjectNow.aspx].
6 Statement by the American Clinical Laboratory Association to the Special Open Door Forum,
Medicare Clinical Laboratory Services Competitive Bidding Demonstration Project, July 16,
2007, at [http://www.clinical-labs.org/documents/openddoorforum_july2007.pdf].
7 CMS website at [http://www.cms.hhs.gov/DemoProjectsEvalRpts/downloads/
MMA302b_Summary_Changes.pdf].
8 These are laboratories that perform clinical laboratory diagnostic tests, provide the
interpretation of such tests, or both, furnished without a face-to-face encounter with the
individual. See Medicare Secondary Payer (MSP) Manual, Chapter 3 - MSP Provider, Physician,
and Other Supplier Billing Requirements, 20.1 - General Policy at [http://www.cms.hhs.gov/
manuals/downloads/msp105c03.pdf].

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! Laboratories would have to bid on 303 Health Care Procedure Coding
System codes. These test codes represent the top 99% of the tests paid
under the Part B Clinical Laboratory Fee Schedule based on volume and
payment in 2006.
Clarifications of the “Clinical Laboratories Demonstration Non-Required
Bidder” Since the July 16, 2007, Open Door Forum. A non-required bidder
would be9
! a small business laboratory, which CMS defines as one that would supply
less than $100,000 annually in demonstration tests to Medicare
fee-for-service beneficiaries residing in the CBA during each year of the
demonstration, could choose to be a “passive” laboratory. A passive-small
business laboratory would have a $100,000 ceiling on annual payment
from Medicare for demonstration tests for the duration of the
demonstration.
! a laboratory that exclusively serves beneficiaries entitled to Medicare
because they have end-stage renal disease (ESRD) residing in the CBA
could choose to be a “passive” laboratory under the demonstration. A
passive-ESRD laboratory could continue to provide services to ESRD
beneficiaries residing in the CBA and receive payment from Medicare for
demonstration tests paid under the competitively set Part B Clinical
Laboratory Fee Schedule (demonstration fee schedule) for the duration of
the demonstration.
! a laboratory that exclusively serves beneficiaries residing in nursing
homes or receiving home health services in the CBA could choose to be
a “passive” laboratory under the demonstration. A passive-nursing home
laboratory could continue to provide services to beneficiaries residing in
nursing homes or receiving home health services in the CBA and could
receive payment from Medicare for demonstration tests paid under the
demonstration fee schedule for the duration of the demonstration.
The President’s Budget. The Administration views competitive bidding as a way
to stem increasing costs. It noted that when Congress required the demonstration, it
determined that competitive pricing for clinical laboratories warranted consideration to
make best use of Medicare resources.10 The President’s FY2008 and FY2009 Budgets
proposed replacing the current fee schedule with competitive bidding.11 The FY2009
9 Refer to “Medicare Program: Medicare Clinical Laboratory Services Competitive Bidding
Demonstration Project,” Federal Register, Notice, October 17, 2007, p. 58856.
10 Timothy P. Love, Director, Office of Research, Development and Information, Centers for
Medicare and Medicaid Services. Testimony at “The Medicare Clinical Laboratory Competitive
Bidding Demonstration” hearing, before the Committee on Small Business, U.S. [House of
Representatives] Senate, July 25, 2007, at [http://www.hhs.gov/asl/testify/2007/07/
t20070725b.html].
11 Executive Office of the President of the United States, Major Savings and Reforms in the
(continued...)

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Budget assumed that if competitive bidding were implemented, payments for laboratory
services would decrease, saving $110 million in FY2009 and $2.29 billion from FY2009
through FY2013.12 No action was taken on this proposal.
Action in the 110th Congress
The House Committee on Small Business held a hearing on July 25, 2007, to
examine the demonstration’s potential impact on small businesses. Chairwoman Nydia
Velázquez introduced a bill, H.R. 3453, Community Clinical Laboratory Fairness in
Competition Act of 2007, that would repeal the competitive bidding project for clinical
laboratories.13
Senator Ken Salazar introduced S. 2099, Preserving Access to Laboratory Services
Act of 2007, on September 26, 2007. This bill also would repeal the Medicare
competitive laboratory bidding project.
In addition, Chairman John Dingell of the House Energy and Commerce Committee
submitted questions to the Department of Health and Human Services’s Secretary Michael
Leavitt in a letter on August 7, 2007, regarding stakeholders’ concerns.14
Other Documents of Interest
CMS. Report to Congress — Initial Report on the Medicare Clinical Laboratory
Competitive Bidding Demonstration.
[http: / / www.cm s .hhs .gov/ Dem oP roject s Eval R pt s / downloads/MMA302b_
NewCongress.pdf].
Statement of the Clinical Laboratory Coalition in Response to CMS’s Open Door Forum
[http://www.clinical-labs.org/documents/CompetitiveBiddingFinalCommentsCBDemo
8-7-07.pdf].
CMS. “CMS Selects First Location for Clinical Laboratory Competitive Bidding
Demonstration.” Press release. October 16, 2007.
[http://www.cms.hhs.gov/DemoProjectsEvalRpts/downloads/MMA302b_PressRelease
.pdf].
11 (...continued)
President’s 2008 Budget, February 2007, p. 153; Budget in Brief, Centers for Medicare for and
Medicaid Services, FY2009 (hereafter cited as Budget in Brief, 2009), p. 62.
12 Budget in Brief, 2009.
13 “Velázquez Introduces Legislation to Repeal CMS Proposed Competitive Bidding Project,”
News From the House Committee on Small Business, Nydia M. Velázquez, Chairwoman.
August 4, 2007.
1 4 A copy of that letter may be found at [http://www.fscls.org/pdf/
Competitive%20Bidding%20-%20Dingell%20Letter%20to%20Leavitt%20080707.pdf].