A brief history of medical diagnosis and the birth of the clinical laboratory

Medical Laboratory Observer, Dec, 1999 by Darlene Berger

Part 4--Fraud and abuse, managed care, and lab consolidation

A look at the administrative functions of the laboratory over the last 30 years supports the theory that the business of healthcare in the U.S. is no different from any other business. It will probably always be relatively easy to find reputable labs that want nothing more than an honest week's pay for an honest week's work; but there will always be those that want an honest week's pay for an honest day's work, too. Medicare law is like the federal tax code in that lab operators will continue to look for loopholes that allow them to profit in some way that may or may not always be ethical or legal. As a result, government investigation and prosecution of Medicare and Medicaid fraud and abuse now seem almost commonplace. Managed care also made its mark on the lab, causing reference and hospital labs to lay off workers and trim costs wherever possible in an effort to maximize profit in a new, corporate style of healthcare.

This article (the last in the lab history series) attempts to describe the effects of fraud and abuse, the resulting government crackdowns that came in response, and the effects of managed care on the U.S. laboratory.

Fraud and abuse

Conspicuously high costs lead to more regs. When Nixon assumed office in 1970, his administration confronted repidly escalating Medicare and Medicaid costs. In a July 1969 press conference, he declared a massive healthcare emergency and predicted a breakdown in the medical system if the "$60 billion crisis" wasn't addressed. Several factors contributed to the crisis. First, private insurers and government programs effectively insulated patients and providers from the true cost of healthcare and therefore reduced the incentive to weigh costs against benefits. Second, hospitals were encouraged to solve financial problems by maximizing reimbursements. In the end, the solution for hospitals became a problem for society. Medicare also paid physicians according to "customary fees" assumed to be "prevailing" fees for an area. This encouraged young physicians with no record of fees to bill at unprecedented levels as well as encouraged doctors to practice in high-priced areas.

At first, Medicare allowed a charge of 1% of lab fees for unidentified costs, but in 1968, it was reduced to zero, eliminating Medicare contributions to hospital profit, bad debt, or charity allowances. Hospitals responded with cost-shifting, and independent labs responded with price increases.

The U.S. government then countered with more than 100 amendments to the Social Security Act in 1972. These new laws included fee schedules for routine laboratory work on the basis of the lowest charge paid within a region, significant limitations on other reimbursements for hospitals, and extensive limits on prevailing charges for physicians.

Kickback scams and overcharging. In 1976, several reports began to surface of independent laboratories paying kickbacks to doctors in return for their Medicaid business. Cash, salary subsidies for lab employees, obscene sums of money for small or nonexistent office space, medical supplies, and personal perks such as cars for physicians, were some of the kickbacks reported. Multiple tests were billed to Medicaid by independent labs on behalf of physicians when in reality, only a fraction of the billed tests were actually ordered. Relatively few labs were involved in the bilking, but they gave all laboratories a bad reputation.

Independent labs were not the only opportunists. A 1976 General Accounting Office report found that some physicians who did their own billing were overcharging Medicare and Medicaid patients 100% to 400% on tests performed for them by commercial laboratories. One physician in Atlanta had paid out only $15 for a test and received $276. Other transgressions included charging for in-office tests that were performed by an independent lab. To combat overcharging, the Department of Health, Education and Welfare proposed limiting reimbursement to the lowest charge in the range of "going rates" in an area. The College of American Pathologists President Dennis Dorsey argued at the time that rates that seem out of line with national statistical norms may be legitimate to a local area and may not be abusive. Pathologists constrained by an income ceiling might be forced to concentrate on providing services for which adequate compensation was available, Dorsey maintained. After the dust settled, the U.S. enacted legislat ion that banned 100% reimbursement by Medicare for lab services performed in an independent laboratory for hospital inpatients when the hospital pathologist did separate billing for these services.

The Medicare-Medicaid Fraud and Abuse Amendments of 1977 also offered a new means of enforcement One section calls for disclosure of an ownership of 5% or more in a facility such as an independent laboratory in order to participate in Medicare and Medicaid. Another makes it illegal to either pay or receive any remuneration, including a kickback, bribe, or rebate, for referring a patient or a specimen from Medicare or Medicaid patients. Previously misdemeanors, such kickbacks became felonies, and violators were punished with up to 5 years in prison, a $25,000 fine, or both.