Medicare: Modifying Payments for Certain Pathology Services Is	 
Warranted (30-SEP-03, GAO-03-1056).				 
                                                                 
In 1999, the Health Care Financing Administration, now called the
Centers for Medicare & Medicaid Services (CMS), proposed	 
terminating an exception to a payment rule that had permitted	 
laboratories to receive direct payment from Medicare when	 
providing technical pathology services that had been outsourced  
by certain hospitals. The Congress enacted provisions in the	 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 (BIPA) to delay the termination. The BIPA provisions 
directed GAO to report on the number of outsourcing hospitals and
their service volumes and the effect of the termination of direct
laboratory payments on hospitals and laboratories, as well as on 
access to technical pathology services by Medicare beneficiaries.
GAO analyzed Medicare inpatient and outpatient hospital and	 
laboratory claims data from 2001 to develop its estimates.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1056					        
    ACCNO:   A08597						        
  TITLE:     Medicare: Modifying Payments for Certain Pathology       
Services Is Warranted						 
     DATE:   09/30/2003 
  SUBJECT:   Beneficiaries					 
	     Cost control					 
	     Federal regulations				 
	     Health care programs				 
	     Health care services				 
	     Hospital care services				 
	     Hospitals						 
	     Laboratories					 
	     Payments						 
	     Cost analysis					 
	     Medicare Program					 

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GAO-03-1056

United States General Accounting Office

GAO

                       Report to Congressional Committees

September 2003

MEDICARE

         Modifying Payments for Certain Pathology Services Is Warranted

GAO-03-1056

September 2003

MEDICARE

Modifying Payments for Certain Pathology Services Is Warranted

In 2001, approximately 95 percent of all Medicare prospective payment
system (PPS) hospitals-hospitals that are paid predetermined fixed amounts
for services-and critical access hospitals (CAH), which receive
reimbursement from Medicare based on their reasonable costs, outsourced
some technical pathology services to laboratories that received direct
payment for those services. However, the median number of outsourced
services per hospital was small-81.

If laboratories had not received direct payments for services for hospital
patients, GAO estimates that Medicare spending would have been $42 million
less in 2001, and beneficiary cost sharing obligations for inpatient and
outpatient services would have been reduced by $2 million. Most hospitals
are unlikely to experience a financial burden from paying laboratories to
provide technical pathology services. If payment to the laboratory is made
at the current rate, a PPS hospital outsourcing the median number of
technical pathology services outsourced by PPS hospitals, 94, would incur
an additional annual cost of approximately $2,900. There would be no
financial impact for the 31 percent of rural hospitals that are CAHs, as
they would receive Medicare reimbursement for their additional costs.

Medicare beneficiaries' access to pathology services would likely be
unaffected if direct laboratory payments are terminated. Hospital
officials stated they were unlikely to limit surgical services, including
those requiring pathology services, because limiting these services would
result in a loss of revenue and could restrict access to services for
their communities.

Highlights of GAO-03-1056, a report to congressional committees

In 1999, the Health Care Financing Administration, now called the Centers
for Medicare & Medicaid Services (CMS), proposed terminating an exception
to a payment rule that had permitted laboratories to receive direct
payment from Medicare when providing technical pathology services that had
been outsourced by certain hospitals. The Congress enacted provisions in
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 (BIPA) to delay the termination. The BIPA provisions directed GAO
to report on the number of outsourcing hospitals and their service volumes
and the effect of the termination of direct laboratory payments on
hospitals and laboratories, as well as on access to technical pathology
services by Medicare beneficiaries. GAO analyzed Medicare inpatient and
outpatient hospital and laboratory claims data from 2001 to develop its
estimates.

Administrator of CMS terminate the policy of allowing laboratories to
receive direct payment. CMS stated it would carefully consider our
recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-03-1056.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact A. Bruce Steinwald at (202)
512-7119.

GAO suggests that the Congress may wish to consider not reinstating the
provision that allows laboratories to receive direct payment from Medicare
for technical pathology services provided to hospital patients. GAO
recommends that the

Payments to Laboratories by Medicare and Medicare Beneficiaries for
Technical Pathology Services Provided to Hospital Inpatient and
Outpatients, 2001

Dollars in millions

Services provided to inpatients

Services provided to outpatients Total

Estimated Medicare payments $18 $33 $51 Estimated beneficiary copayments 5 8 $13

Total $23 $41 $63a Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and Medicare
physician fee schedule payment and copayment rates.

aTotal does not add due to rounding.

Contents

  Letter

Results in Brief
Background
Few Hospitals Outsource Large Volumes of Technical Pathology

Services

Medicare Expenditures and Beneficiary Copayments Would Be Reduced, While
Hospital Costs Would Increase Slightly, If Direct Payment to Laboratories
Is Terminated

Beneficiaries' Access Likely Would Be Unaffected
Conclusions
Matter for Congressional Consideration
Recommendation for Executive Action
Agency Comments and Comments from National Associations and

Our Evaluation

                                       1

                                      4 5

11

13 18 19 19 19

20

Appendix I Scope and Methodology

Appendix II 	Comments from the Centers for Medicare & Medicaid Services

Tables

Table 1: Medicare Payments for Outsourced Technical Pathology Services at
PPS Hospitals and CAHs under Current Payment Policy and If Direct Payment
to Laboratories Is Terminated

Table 2: Beneficiary Cost-Sharing Obligation for Outsourced Technical
Pathology Services at PPS Hospitals and CAHs under Current Payment Policy
and If Direct Payment to Laboratories Is Terminated

Table 3: Number and Percentage of All Hospitals, Urban and Rural PPS
Hospitals, and CAHs Outsourcing Technical Pathology Services by Number of
Services in 2001

Table 4: Estimated Payments to Laboratories by Medicare and Medicare
Beneficiaries for Technical Pathology Services Provided to Hospital
Inpatients and Outpatients, 2001

Table 5: Estimated Medicare Payments under Current Policy and Projected
Annual Savings If Direct Payments to Laboratories Are Terminated, Based on
2001 Services 10

11 12 14 15

Table 6: Estimated Beneficiary Copayments under Current Policy and
Projected Annual Savings If Direct Payments to Laboratories Are
Terminated, Based on 2001 Services

Abbreviations

AHA American Hospital Association
APC ambulatory payment classification
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement

and Protection Act of 2000 CAH critical access hospital CAP College of
American Pathologists CMS Centers for Medicare & Medicaid Services DRG
diagnosis-related group HCFA Health Care Financing Administration MPFS
Medicare physician fee schedule NRHA National Rural Health Association POS
Provider of Services PPS prospective payment system SNF skilled nursing
facility

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United States General Accounting Office Washington, DC 20548

September 30, 2003

Congressional Committees

Hospitals receive fixed, predetermined amounts under Medicare's hospital
inpatient and outpatient prospective payment systems (PPS) for providing
necessary services to Medicare beneficiaries. By paying hospitals fixed
amounts under a PPS, Medicare seeks to encourage them to operate
efficiently, as hospitals retain the difference if their payments exceed
their costs of providing necessary services. Hospitals that outsource
services for their patients generally pay suppliers of those services
directly, and the suppliers do not receive payment from Medicare.

In 2000, the Congress enacted provisions in the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)1 to delay for
2 years application of a rule issued by the Health Care Financing
Administration (HCFA),2 the agency responsible for administering Medicare.
The rule terminated an exception to the inpatient and outpatient PPS that
permitted one type of supplier-laboratories-to receive payment directly
from Medicare when providing technical pathology services3 to
beneficiaries who are hospital patients. The BIPA provisions applied only
to "covered hospitals," those hospitals that had agreements with
laboratories in effect as of July 22, 1999, the date HCFA proposed the
rule, under which the hospitals outsourced technical pathology services to
laboratories, and the laboratories received payment from Medicare for
these services. Under these agreements, some hospitals may outsource all
of their technical pathology services to laboratories, while others may
outsource only some of their services, such as complex procedures that are
rarely performed or overflow services at times of full capacity.

1BIPA, Pub. L. No. 106-554, app. F, S: 542, 114 Stat. 2763, 2763A-550.

2In July 2001, the agency's name was changed from HCFA to the Centers for
Medicare & Medicaid Services. In this report, we refer to the agency as
HCFA when discussing actions it took under that name.

3Technical pathology services involve the preparation of tissue samples
removed during surgery for examination by a pathologist. Such services are
performed by a laboratory technician, known as a histotechnician, and
involve cutting, mounting, and staining the specimen on a microscope
slide. Under Medicare, these services are referred to as the "technical
component" of a pathologist's service. Medicare covers as a separate
service the pathologist's examination of a specimen, which is called the
"professional component."

Numerous issues were raised when HCFA issued its rule in 1999 to terminate
direct Medicare payment to laboratories for technical pathology services.
At the time, HCFA stated that Medicare was paying twice for those services
provided to hospital inpatients, once to the hospital through the
inpatient PPS payment and once to the laboratory through a separate
payment.4 In addition, outsourcing hospitals had an advantage because they
did not pay the cost of technical pathology services outsourced to
laboratories, while other hospitals had to pay for the cost of these
services from their inpatient PPS payments.5 Furthermore, application of
Medicare cost-sharing rules resulted in added costs to inpatient
beneficiaries admitted to outsourcing hospitals, compared to those for
inpatients at other hospitals. Some hospitals and laboratories and their
affiliated pathologists voiced concern, however, that termination of the
laboratories' direct payments would increase hospitals' costs, decrease
laboratories' revenues, and cause hospitals to stop performing surgical
services, particularly in rural areas, reducing beneficiaries' access to
services.

Although the BIPA provisions expired at the end of 2002, the Centers for
Medicare & Medicaid Services (CMS) made an administrative decision to
continue directly paying laboratories for technical pathology services
provided to hospital patients.6 In recent bills, both the House of
Representatives and the Senate have included language to further delay
application of the CMS rule.

In BIPA, the Congress directed that we report on how terminating direct
laboratory payments would affect hospitals, laboratories, and access to
technical pathology services by Medicare beneficiaries.7 As agreed with
the committees of jurisdiction, we (1) describe the number and type of
hospitals outsourcing technical pathology services and their service
volumes, (2) estimate how termination of direct laboratory payments would
affect Medicare expenditures, beneficiary cost-sharing obligations, and
hospital costs, and (3) examine how terminating direct laboratory

4HCFA's 1999 rule pertained to services delivered only to hospital
inpatients because the outpatient PPS was not yet implemented. The
outpatient PPS was implemented in August 2000; therefore, when the BIPA
provisions were enacted in December of that year, they applied to both
inpatient and outpatient services.

5Other hospitals either perform technical pathology services themselves or
outsource and directly pay laboratories for such services.

6CMS Program Memorandum, Transmittal B-03-001 (Jan. 17, 2003).

7BIPA S: 542(d), 114 Stat. 2763A-551.

payments would affect beneficiaries' access to technical pathology
services in hospitals.

We used Medicare claims and provider data to identify Medicare
beneficiaries receiving technical pathology laboratory services
concurrently with hospital services. Using 2001 data, the most recently
available, we estimated the number of urban and rural PPS hospitals and
critical access hospitals (CAH),8 which are paid their reasonable costs
rather than PPS payments,9 outsourcing technical pathology services. We
also estimated the volume of and payments for these services. We relied on
these data because there is no list of covered hospitals and the
laboratories to which they outsource technical pathology services.

We interviewed officials at CMS, the Department of Health and Human
Services Office of Inspector General, and the Congressional Budget Office,
as well as representatives from several Medicare carriers.10 In addition,
we interviewed representatives from national associations representing
hospitals and pathologists and representatives from 13 laboratories and 17
urban and rural PPS hospitals in eight states and an additional 2
laboratories in another state. We visited a laboratory and a rural
hospital that outsources technical pathology services. We also spoke with
officials from two CAHs. Our methodology is detailed in appendix I. We did
our work from June 2002 through September 2003 in accordance with
generally accepted government auditing standards.

8CAHs were created as part of a program developed to maintain access to
hospital services in rural areas. In general, to be designated as a CAH, a
hospital must (1) be in a rural area more than a 35-mile drive from
another hospital (or certified as a necessary provider in the area), (2)
make available 24-hour emergency care services, (3) have no more than 25
beds (of which no more than 15 may at any time be used for acute care to
provide average acute care stays of no more than 96 hours per patient),
(4) meet most Medicare requirements generally applicable to hospitals, and
(5) have a quality assessment and performance improvement program, as well
as procedures for utilization review. 42 U.S.C. S: 1395i-4(c)(2) (2000).

9Reasonable cost reimbursement is based on the actual cost of providing
services, including direct and indirect costs of providers, and excludes
any costs that are unnecessary in the efficient delivery of services.

10Medicare carriers are the contractors responsible for processing claims
and paying laboratories, physicians, and certain other providers.

Results in Brief

We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95
percent of all such facilities, outsourced at least some technical
pathology services to laboratories that received direct payment from
Medicare for those services. In 2001, out of approximately 1.4 million
outsourced technical pathology services, the median number of outsourced
services per hospital was 81. Urban hospitals outsourced almost twice as
many services as rural hospitals. In addition, 64 percent of these
services were for outpatient beneficiaries.

If laboratories had not received direct payment for services for hospital
patients, we estimate that Medicare spending would have been $42 million
less in 2001, with $18 million and $24 million in savings for inpatient
and outpatient services, respectively, and overall beneficiary cost
sharing would have been reduced by $2 million. Comparatively, in 2001,
payments to laboratories providing technical pathology services to
beneficiaries who were hospital patients equaled over $63 million,
including Medicare payments of about $51 million and beneficiary cost
sharing of almost $13 million. Most hospitals are unlikely to experience a
large financial burden from paying laboratories to provide technical
pathology services. However, the extent to which an individual hospital's
costs and a laboratory's revenues would change if direct laboratory
payments are terminated would depend on the rates negotiated by that
hospital and laboratory. If payment to the laboratory is made at the
current rate, a PPS hospital outsourcing the median number of technical
pathology services outsourced by PPS hospitals, 94, would incur an
additional annual cost of approximately $2,900. Also, there would be no
financial impact from terminating direct laboratory payments for the 31
percent of rural hospitals that are CAHs because they would be reimbursed
for their costs of outsourcing technical pathology services.

Medicare beneficiaries' access to pathology services would likely be
unaffected if direct payment to laboratories is terminated, as hospital
representatives we spoke with stated that, because of financial and
community access concerns, their hospitals were unlikely to limit surgical
services, including those requiring pathology services. In addition,
almost all hospital representatives we spoke with said their hospitals
would likely continue to outsource technical pathology services as it
would generally be less costly than performing the services themselves.

We suggest that the Congress may wish to consider not reinstating the
provisions that allow laboratories to receive direct payment from Medicare
for providing technical pathology services to hospital patients. We
recommend that CMS terminate its policy of permitting laboratories to

receive payment from Medicare for these services. In commenting on a draft
of this report, CMS stated that it is important that payment policy
encourage efficiencies in the provision of technical pathology services
and that it would carefully consider our recommendation. National
associations that received a draft of the report for comment disagreed
that direct laboratory payments should be terminated, as they believe such
a change would have negative effects on beneficiaries' access to services
and on rural hospitals. However, hospital representatives we spoke with
said their hospitals would likely continue to outsource technical
pathology services. In addition, we do not believe paying laboratories
directly for these services will place a significant financial burden on
rural hospitals as we estimated that the median number of technical
pathology services outsourced by rural hospitals in 2001 was only 61.

Background 	Medicare payment policies for technical pathology services
have changed over the years as new payment systems for hospital and
physician services have been implemented and modified. Beginning with the
implementation of the hospital inpatient PPS on October 1, 1983, through
the implementation of the Medicare physician fee schedule (MPFS) on
January 1, 1992, and the outpatient PPS on August 1, 2000, payment for
technical pathology services changed as fixed, predetermined payment
replaced reasonable cost or charge-based reimbursement for Medicare
services.

Implementation of the Inpatient PPS

Under the inpatient PPS, each inpatient stay is classifed into a
diagnosis-related group (DRG) based primarily on the patient's condition.
Each DRG has a payment weight assigned to it that reflects the relative
cost of inpatient treatment for a patient in that group compared with that
for the average Medicare inpatient. Included in the costs of each DRG are
nonphysician services provided to inpatients by the hospital and its
outside suppliers. A hospital receives a DRG payment from Medicare and a
deductible amount from a beneficiary for each inpatient benefit period.11
Each year, the DRG weights are recalibrated to account for changes in
resource use, and the payment rate is adjusted by an update factor to
account for changes in market conditions, practice patterns, and

11A benefit period starts with an inpatient hospital or skilled nursing
facility (SNF) admission and ends after 60 consecutive days of no
inpatient care. 42 C.F.R. S: 409.60(a) and (b) (2002). For 2003, the
deductible for each hospital inpatient benefit period is $840.

technology. Medicare separately pays physicians, including pathologists,
and certain other professionals for the direct services they provide to
inpatients.

When developing the inpatient PPS in the early 1980s, HCFA determined that
technical pathology services outsourced to laboratories were an integral
part of the professional services provided by the laboratories'
pathologists, not separate nonphysician services. Based on that
determination, the payment for technical pathology services provided by
laboratories was included in the larger payment to the laboratories and
not included in the PPS payments.12

Implementation of the MPFS

In 1992, HCFA implemented the MPFS, which created distinct payments for
the professional and technical components of most diagnostic services,
including pathology services. Although the MPFS included a distinct
payment to laboratories for technical pathology services, HCFA did not
revise its policy to prohibit laboratories from continuing to receive the
separate Medicare payment for outsourced technical pathology services
provided to inpatients. Under the MPFS, beneficiaries are responsible for
a copayment equal to 20 percent of the payment for physician services,
including technical pathology services. Thus, inpatient beneficiaries
whose technical pathology services were outsourced by a hospital to a
laboratory that received direct payment from Medicare were responsible for
a copayment, while other inpatients were not.

Termination of MPFS Payments to Laboratories for Technical Pathology
Services

On July 22, 1999, HCFA proposed ending Medicare payments under the MPFS to
laboratories for technical pathology services provided to hospital
inpatients on or after January 1, 2000.13 Under the proposal,
laboratories, like suppliers of other nonphysician services, would have to
seek payment from hospitals for technical pathology services provided to
hospital inpatients.

12In this report, we use the term "laboratory" to include both the
pathology laboratory and its affiliated pathologists, as many laboratories
bill Medicare for both the pathologists' professional services and the
technical services.

1364 Fed. Reg. 39,608, 39,624 (July 22, 1999).

HCFA's rationale for its proposed rule was that payment for technical
pathology services provided to beneficiaries was already included in the
inpatient PPS. When implementing the inpatient PPS, HCFA established
separate payment rates for rural and urban hospitals based on data from
hospitals' cost reports submitted to the agency. Hospitals that performed
their own technical pathology services included such costs in their cost
reports, while hospitals outsourcing these services did not. According to
HCFA, urban hospitals generally performed such services, and in part,
their higher rates reflected that. Consequently, in HCFA's view, when the
separate rural rate was eliminated in 1995 and rural hospitals began
receiving the higher rate paid to most urban hospitals, the cost of
technical pathology services was included in that payment. Thus, HCFA
concluded that when a laboratory received payment from Medicare for
technical pathology services provided to a hospital inpatient, Medicare
was paying twice for the same service-once to the hospital as part of the
PPS payment and once to the laboratory through the MPFS. A second reason
HCFA cited to support its proposed rule was concern that hospital
outsourcing arrangements with laboratories to provide technical pathology
services would proliferate if hospitals realized these arrangements would
reduce their costs without any reduction in their inpatient PPS payments.

After considering comments from the hospital industry and laboratories,
which stated, in part, that they would need additional time to renegotiate
their agreements, in the final rule, HCFA delayed implementation of the
policy until January 1, 2001.14

Temporary Continuation of In December 2000, the Congress enacted
provisions in BIPA that stated Laboratories Receiving that laboratories
furnishing technical pathology services to hospital MPFS Payments patients
under agreements with hospitals as of the publication date of the

HCFA proposed rule could continue to receive payment directly from
Medicare for these services until January 1, 2003.15 Because the
outpatient PPS was implemented in August 2000, the provisions applied to
services provided to outpatients as well as inpatients.

1464 Fed. Reg. 59,380, 59,409 (Nov. 2, 1999).

15Although the provisions expired at the end of 2002 (BIPA S: 542(c), 114
Stat. 2763A-551), CMS notified carriers that they should continue to pay
laboratories separately for technical pathology services.

Implementation of the Outpatient PPS

The outpatient PPS pays hospitals a predetermined amount per service
similar to a fee schedule. All services paid under the outpatient PPS,
including technical pathology services, are classified into groups called
ambulatory payment classifications (APC). Like inpatient DRGs, the
relative weights of the APCs are adjusted annually by recalibration and
the payment rates by an update factor to account for changes in resource
use, technology, practice cost, and service delivery. When the outpatient
PPS was implemented, beneficiary copayments for a service were generally
20 percent of the hospitals' median charges for that service in 1996,
updated to 1999. Therefore, the beneficiary cost-sharing obligation as a
percentage of APC payment rates varies by service. Because the median
charges were often higher than the APC payment rates implemented with the
outpatient PPS, beneficiary copayments were frequently as high or higher
than 50 percent of the total APC payment amount. The Balanced Budget Act
of 1997 established a mechanism to gradually decrease the cost-sharing
percentages for all APCs to 20 percent over time.16

The copayments that beneficiaries are responsible for paying under the
outpatient PPS for technical pathology services that are furnished
directly by hospitals are roughly comparable to the copayments that
beneficiaries are responsible for paying laboratories under the MPFS when
services are outsourced. The outpatient PPS payment rates for technical
pathology services are significantly lower than the corresponding MPFS
payment rates, but outpatient PPS copayments represent a higher percentage
of the payment for technical pathology services than MPFS copayments.17

Medicare Payment If the BIPA provisions are not reinstated and CMS
terminates direct Methodologies If Direct payments to laboratories,
hospitals would have to negotiate payment Payments to Laboratories amounts
with laboratories to pay them directly for services delivered to Are
Terminated inpatient and outpatient beneficiaries or begin to supply these
services

themselves. While the hospitals would not experience any direct
adjustments to their inpatient DRG payments, over time, hospital costs of

16Pub. L. No 105-33, S: 4523(a), 111 Stat. 251, 445.

17For example, in 2001, the average payment rate under the outpatient PPS
for the most commonly performed technical pathology service (representing
approximately 56 percent of all technical pathology services outsourced by
hospitals in 2001) was approximately $22, which is less than half the
payment rate of approximately $51 for the same service under the MPFS.
However, the copayment for that service under the outpatient PPS is
approximately $12, or 54 percent, compared to approximately $10, or 20
percent, under the MPFS.

paying laboratories for technical pathology services would be reflected in
the DRG weights, as the annual recalibration accounts for changes in the
costs of delivering services. For services delivered to outpatients,
hospitals would bill Medicare under the outpatient PPS for technical
pathology services and, therefore, would recover additional revenue even
if they continued to outsource these services to laboratories. Inpatient
beneficiaries of hospitals that outsource technical pathology services
would no longer be responsible for additional copayments to the
laboratories. Outpatient beneficiaries would no longer be responsible for
copayments to laboratories under the MPFS, but instead would be
responsible for copayments to the hospitals where they received their
services under the outpatient PPS.

CAHs, which as of March 2003 constituted 15 percent of all hospitals and
31 percent of rural hospitals, would not be affected by the termination of
direct laboratory payments.18 CAHs are not paid under the inpatient and
outpatient PPS, but instead are paid based on their reasonable costs of
providing services. Currently, CAHs receive no payment from Medicare for
technical pathology services outsourced to laboratories that directly bill
Medicare because CAHs incur no costs in the delivery of those services. If
direct laboratory payments are terminated, CAHs would be reimbursed by
Medicare for their costs of paying laboratories to perform technical
pathology services, and outpatient beneficiaries who currently are
responsible for paying 20 percent of the payment for their technical
pathology services to the laboratories under the MPFS would instead be
responsible for paying 20 percent of the CAHs' customary charges.19 See
table 1 for a description of Medicare payments to outsourcing PPS
hospitals and CAHs, and table 2 for a description of beneficiary
cost-sharing obligations at outsourcing PPS hospitals and CAHs, under
current policy and if direct payment to laboratories is terminated.

18As of March 25, 2003, there were 749 CAHs in 44 states. The North
Carolina Rural Health Research and Policy Analysis Center at the
University of North Carolina estimates that as of April 15, 2003, there
were an additional 69 CAH applications pending and an additional 311 rural
hospitals actively considering conversion to CAH status.

19Medicare defines a "customary charge" as the amount that a provider
charges for a specific service the majority of the time. 42 C.F.R. S:
405.503(a) (2002).

Table 1: Medicare Payments for Outsourced Technical Pathology Services at
PPS Hospitals and CAHs under Current Payment Policy and If Direct Payment
to Laboratories Is Terminated

PPS hospital outsources to laboratory

CAH outsources to laboratory

                                 Current policy

If direct payment is
terminated Current policy

If direct payment is terminated

Inpatient     Hospital        None       Nonea       None       Reasonable 
                  payment                                               costs 
              Laboratory         MPFS       Noneb          MPFS     Noneb     
              payment           payment                 payment 
Outpatient    Hospital        None        APC        None       Reasonable 
                  payment                  payment                      costs 
              Laboratory         MPFS       Noneb          MPFS     Noneb     
              payment           payment                 payment 

Source: CMS.

Note: GAO analysis of Medicare payment rules for 2003.

aA hospital receives a DRG payment amount for inpatient services related
to the patient's condition. There is no additional payment to the hospital
if direct laboratory payments are terminated.

bA laboratory that continues to supply these services for a hospital would
receive payment directly from the hospital.

Table 2: Beneficiary Cost-Sharing Obligation for Outsourced Technical
Pathology Services at PPS Hospitals and CAHs under Current Payment Policy
and If Direct Payment to Laboratories Is Terminated

PPS hospital outsources to laboratory

CAH outsources to laboratory

If direct payment is Current policy terminated Current policy terminated

If direct payment is

Inpatient 	20 percent of MPFS payment to laboratory

None 	20 percent of MPFS payment to laboratory

 None Outpatient 20 percent of MPFS APC copayment (percentage of 20 percent of
                                      MPFS

  20 percent of CAH's customary chargespayment to laboratory payment varies by
                         service) payment to laboratory

Source: CMS.

Few Hospitals Outsource Large Volumes of Technical Pathology Services

Note: GAO analysis of Medicare payment rules for 2003.

We estimate that in 2001, 4,773 PPS hospitals and CAHs, representing 95
percent of all such facilities, outsourced at least some technical
pathology services to laboratories that received direct payment from
Medicare for those services (see table 3).20 However, most hospitals
outsourced a small number of these services to laboratories. In 2001,
approximately 1.4 million technical pathology services were outsourced,
and the median number of outsourced services per hospital was 81.
Approximately 68 percent of all hospitals outsourced 200 or fewer
technical pathology services, and only 6 percent outsourced more than
1,000 services. Outsourcing hospitals consisted of 2,428 urban PPS
facilities and 1,651 rural PPS facilities, representing 95 percent and 97
percent of urban and rural PPS hospitals in 2001, respectively, and 694
CAHs.

20We were unable to identify the number of laboratories receiving Medicare
payment for technical pathology services provided to hospital patients
because a single laboratory may submit claims under multiple provider
numbers, and CMS does not track different provider numbers to a single
laboratory.

Table 3: Number and Percentage of All Hospitals, Urban and Rural PPS
Hospitals, and CAHs Outsourcing Technical Pathology Services by Number of
Services in 2001

                      All hospitals Urban PPS      Rural PPS      
                                    hospitals      hospitals      
                                    (percentage of (percentage of        CAHs 
               (percentage of total total          total          (percentage 
                                                                           of 
    Number of            hospitals) urban PPS      rural PPS      total CAHs) 
    services                        hospitals)     hospitals)     
      1-20               1,084 (22)       384 (15)       387 (23)    313 (42) 
     21-100              1,558 (31)       837 (33)       506 (30)    215 (29) 
     101-200               773 (15)       464 (18)       212 (12)     97 (13) 
     201-500               754 (15)       414 (16)       277 (16)      63 (8) 
    501-1,000               333 (7)        149 (6)       178 (10)       6 (1) 
1,001-2,000              145 (3)         88 (3)         57 (3)       0 (0) 
     2,001+                 126 (3)         92 (4)         34 (2)       0 (0) 
      Total             4,773 (95)a     2,428 (95)    1,651 (97)b    694 (93) 

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and provider
data.

aPercentage of total hospitals by number of services does not total 95
percent due to rounding.

bPercentage of total rural PPS hospitals by number of services does not
total 97 percent due to rounding.

Among hospitals outsourcing technical pathology services, urban hospitals,
including CAHs, outsourced a median of 97 services and 64 percent of all
services, and rural hospitals, including CAHs, outsourced a median of 61
services and 36 percent of all services.21 Almost twice as many services
were delivered to outpatient beneficiaries compared to inpatient
beneficiaries, as outpatient services accounted for approximately 64
percent of all outsourced services.

21Among hospitals outsourcing technical pathology services in 2001, urban
hospitals outsourced approximately 892,000 services, and rural hospitals
outsourced approximately 496,000 services.

Medicare Expenditures and Beneficiary Copayments Would Be Reduced, While
Hospital Costs Would Increase Slightly, If Direct Payment to Laboratories
Is Terminated

If laboratories had not received direct payment for services for hospital
patients, we estimate that Medicare spending would have been $42 million
less in 2001, with $18 million and $24 million in savings for inpatient
and outpatient services, respectively, and overall beneficiary cost
sharing would have been reduced by $2 million. In 2001, payments to
laboratories providing technical pathology services to beneficiaries who
were hospital patients equaled over $63 million, including Medicare
payments of about $51 million ($18 million for inpatient services and $33
million for outpatient services) and beneficiary copayments of almost $13
million ($5 million for inpatient services and $8 million for outpatient
services). Paying laboratories to provide technical pathology services is
unlikely to impose a large financial burden on most hospitals. However,
the extent to which an individual hospital's costs and a laboratory's
revenues would change if direct payment to laboratories is terminated
would depend on the rates negotiated by that hospital and laboratory. If
payment to the laboratory is made at the MPFS rate, a PPS hospital
outsourcing the median number of technical pathology services would incur
an additional cost of approximately $2,900. Additionally, there would be
no financial impact on CAHs if direct laboratory payment is terminated
because they would be reimbursed for their reasonable costs of outsourcing
technical pathology services.

Total Payments to In 2001, estimated payments to laboratories providing
technical pathology

Laboratories in 2001 	services to hospital patients totaled over $63
million, including Medicare payments of about $51 million and beneficiary
copayments of almost $13 million (see table 4). For services provided to
inpatients, total laboratory payments equaled approximately $23 million,
with $18 million from Medicare and $5 million from beneficiaries. For
services provided to outpatients, total laboratory payments equaled
approximately $41 million, including $33 million from Medicare and $8
million from beneficiaries.

Table 4: Estimated Payments to Laboratories by Medicare and Medicare
Beneficiaries for Technical Pathology Services Provided to Hospital
Inpatients and Outpatients, 2001 Dollars in millions

Services provided to Services provided to inpatients outpatients Total

                      Estimated Medicare                         
                                payments     $18             $33          $51 
                   Estimated beneficiary                         
                              copayments      5                8 
                                   Total     $23             $41         $63a 

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and 2001 MPFS
payment and copayment rates.

aTotal does not add due to rounding.

Lower Medicare Payments If Direct Payment to Laboratories Is Terminated

If laboratories had not received direct payment for services for hospital
patients, we estimate that Medicare spending would have been $42 million
less in 2001 (see table 5). The $18 million in inpatient savings would
have resulted from Medicare discontinuing payments for technical pathology
services to laboratories under the MPFS, while making no additional
payments to PPS hospitals for inpatient services. For outpatient services,
Medicare would not have paid laboratories directly, but would have paid
PPS hospitals under the outpatient PPS. If direct payment to laboratories
had been terminated, Medicare would have paid PPS hospitals an estimated
$9 million under the outpatient PPS in 2001 for technical pathology
services, thus saving $24 million.

Table 5: Estimated Medicare Payments under Current Policy and Projected
Annual Savings If Direct Payments to Laboratories Are Terminated, Based on
2001 Services

Dollars in millions

Estimated payments Estimated payments to to laboratories under PPS
hospitals if direct Projected savings current policy payment is
terminateda after termination

                             Inpatients $18 $0 $18

                              Outpatients 33 9 $24

                                Total $51 $9 $42

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and MPFS and
outpatient PPS payment rates.

aCalculations for payments if direct laboratory payment is terminated were
performed for PPS hospitals only. We were unable to estimate Medicare
payments to CAHs because payments depend on CAHs' reasonable costs, which
vary across facilities. Total Medicare payments are likely to be higher.
However, as CAHs provided less than 4 percent of all pathology services
outsourced to laboratories in our analysis, we do not expect these
payments to greatly increase our estimates.

Reduced Overall Beneficiary Cost Sharing

If laboratories had not received direct payment for services for hospital
patients, Medicare beneficiaries would have been relieved of approximately
$2 million in cost-sharing obligations (see table 6). In 2001, inpatients
at hospitals that outsourced services were responsible for paying
laboratories approximately $5 million in copayments under the MPFS. If
direct payment to laboratories is terminated, inpatients would make no
copayments to laboratories for technical pathology services. We estimate
that the cost-sharing obligation of outpatients at PPS hospitals would
have increased by $3 million to approximately $11 million under the
outpatient PPS if laboratories had not received direct payment, compared
to an estimated cost sharing of $8 million under the MPFS. However,
outpatients' cost-sharing obligations for technical pathology services
under the outpatient PPS gradually will decline, as mandated by the law.
As the percentage declines, beneficiary copayments for technical pathology
services under the outpatient PPS should become lower than under the MPFS,
as long as payments for these services generally remain lower under the
outpatient PPS than the MPFS.

Table 6: Estimated Beneficiary Copayments under Current Policy and
Projected Annual Savings If Direct Payments to Laboratories Are
Terminated, Based on 2001 Services

                              Dollars in millions

                    Estimated copayments to laboratories under current policy

Estimated copayments to PPS

hospitals if direct payment is terminateda

Projected savings after termination

                              Inpatients $5 $0 $5

                             Outpatients 8 11 ($3)

                                Total $13 $11 $2

Source: CMS.

Note: GAO analysis of 2001 inpatient and outpatient claims and MPFS and
outpatient PPS beneficiary copayment amounts.

aCalculations for beneficiary copayments if direct laboratory payment is
terminated were performed for PPS hospitals only. We were unable to
estimate the change in the cost-sharing obligations of outpatients
receiving services from CAHs if direct payment to laboratories is
terminated because their cost-sharing amounts depend on the CAHs'
customary charges, which vary across facilities. Total beneficiary
copayments are likely to be higher. However, as CAHs provided less than 4
percent of all pathology services outsourced to laboratories in our
analysis, we do not expect these copayments to greatly increase our
estimates.

Small Financial Effects Dependent on Negotiations

If outsourcing hospitals agree to pay laboratories the rates the
laboratories currently receive under the MPFS for technical pathology
services, these amounts are unlikely to impose a large financial burden on
most hospitals. In 2001, a PPS hospital outsourcing the median number of
services outsourced by PPS hospitals, 94, would have incurred additional
costs of approximately $2,900 in paying a laboratory for technical
pathology services,22 representing a small fraction of hospitals' annual
Medicare revenues.23 A PPS hospital outsourcing 1,283 services
annually-the 95th percentile of outsourced technical pathology service
volume in our analysis-would have incurred an additional annual cost of
just under

22This amount represents estimated payments to the laboratory by the
hospital minus payments to the hospital for outpatient services under the
outpatient PPS.

23According to the American Hospital Association (AHA), in 2001, the
median net Medicare revenue, which is the amount actually collected by the
hospital, was $30.4 million for urban hospitals and $5.6 million for rural
hospitals. AHA based its estimate on an annual survey completed by
community hospitals, which includes all nonfederal, short-term general and
specialty hospitals whose facilities and services are available to the
public.

$40,000. There would be no financial impact from terminating direct
laboratory payments for rural hospitals that are or become CAHs, as CAHs
would recover from Medicare their reasonable costs of outsourcing
technical pathology services.

The extent to which a hospital's costs and a laboratory's revenues would
change if direct laboratory payments are terminated would depend on the
rates negotiated between the two parties. Hospitals' costs would increase
because they would begin paying the laboratories for technical pathology
services; laboratories' revenues would decline if hospitals pay lower
rates for the technical pathology services than Medicare currently pays
laboratories under the MPFS. Because larger hospitals and those located in
urban areas have more purchasing power and may have multiple laboratories
from which to choose, these hospitals are likely to fare better than
smaller hospitals and those in rural areas.

Laboratory officials we spoke with voiced concern that some hospitals
would insist that laboratories furnish technical pathology services at no
charge or at extremely low rates in exchange for hospitals referring other
business to the laboratories and their pathologists. However, these
officials also indicated that their laboratories would not perform
technical pathology services at no charge or for very low rates.
Furthermore, hospitals might be deterred from requesting low rates because
of concerns that such arrangements might violate applicable fraud and
abuse laws.24

Although hospitals and laboratories would face new billing costs-both
one-time and ongoing-if direct payments to laboratories are terminated,
such changes generally would impose a modest additional cost. We spoke
with officials from hospitals and laboratories that already have billing
arrangements for these services, and they did not report to us that these
costs were burdensome.

24The federal anti-kickback statute, 42 U.S.C. S: 1320a-7b(b) (2000),
generally prohibits knowingly and willfully providing remuneration to a
referral source for the purpose of inducing referrals.

Beneficiaries' Access Medicare beneficiaries' access to pathology services
is unlikely to be

disrupted if direct payments to laboratories are terminated because Likely
Would Be hospitals are unlikely to limit surgical services, including
those requiring Unaffected pathology services. In addition, hospitals
would likely continue to

outsource technical pathology services to laboratories because this would

generally be less costly than performing these services themselves.

                          Limiting Surgeries Unlikely

Representatives of outsourcing hospitals with whom we spoke indicated that
their hospitals would not eliminate or restrict surgical procedures if
direct payment to laboratories is terminated.25 Because a large percentage
of hospital-based surgeries require pathology services, hospitals would
lose an important source of revenue if they restricted surgeries to those
not requiring such services.26 Outsourcing hospitals stated that they
could not afford this revenue loss. Rural hospitals, which are often the
sole hospitals in their geographic areas, expressed the added concern that
eliminating surgical procedures would reduce their communities' access to
medical services.

Continuation of Outsourcing Arrangements with Laboratories

If direct payment to laboratories is terminated, representatives from
hospitals that do not maintain pathology laboratories and outsource
technical pathology services to laboratories said they would continue to
outsource technical pathology services. Few such hospitals have a
sufficiently large volume of technical pathology services to make it cost
effective to perform such services themselves. For most hospitals, the
equipment and personnel expenses associated with maintaining their own
pathology laboratories would likely exceed the cost of outsourcing the
technical pathology services to laboratories. Hospital officials also
stated that they have had difficulty recruiting histotechnicians, and it
therefore would be difficult to staff new, or expand existing, pathology
laboratories.

25One Medicare carrier we spoke with shared this opinion, noting that
Medicare requires SNFs to pay nonphysician providers for services and
items furnished to their patients, and this requirement has not reduced
beneficiary access to SNF care.

26A hospital risks termination from Medicare if it places restrictions on
whom it will treat without exempting Medicare beneficiaries or applying
the same restrictions to everyone. 42 C.F.R. S: 489.53(a)(2) (2002).

Conclusions

Termination of direct laboratory payments generally would reduce Medicare
expenditures and beneficiary cost-sharing obligations for technical
pathology services while having little effect on beneficiaries' access to
these services. While termination of direct laboratory payments would
impose a small financial burden on outsourcing PPS hospitals, this change
would have no impact on CAHs. As the relative payment weights of services
provided under the inpatient and outpatient PPS are adjusted annually, any
increased costs hospitals incur to pay laboratories for technical
pathology services will, over time, be reflected in the inpatient and
outpatient PPS payments. Termination of direct laboratory payments also
would eliminate the inequity between beneficiary cost-sharing obligations
at different hospitals.

In addition, continuing direct laboratory payments is an inappropriate
means for providing financial assistance to hospitals. Hospitals, in
receiving fixed payment amounts under a PPS and paying suppliers of
nonphysician services provided to a Medicare patient from such fixed
amounts, have an incentive to provide health care services efficiently.
Permitting hospitals to outsource technical pathology services and have
laboratories seek payment from Medicare eliminates the incentive for the
efficient provision of these services and leads to potential Medicare
double payments.

Matter for Congressional Consideration

Recommendation for Executive Action

We suggest that the Congress may wish to consider not reinstating the
provisions that allow laboratories to receive direct payment from Medicare
for providing technical pathology services to hospital patients.

We recommend that the Administrator of CMS terminate the policy of
permitting laboratories to receive payment from Medicare for technical
pathology services provided to hospital patients.

Agency Comments and Comments from National Associations and Our Evaluation

In commenting on a draft of this report, CMS stated that it is important
that payment policy encourage efficiencies in the provision of technical
pathology services. CMS stated that it would carefully consider our
recommendation and noted that the Congress is currently considering this
issue. CMS further stated that it would want to ensure that implementation
of the recommendation does not adversely affect rural hospitals.

As we noted in the draft report, permitting laboratories to receive
payment directly from Medicare for technical pathology services is not an
appropriate or efficient mechanism for providing financial assistance to
hospitals, as it is contradictory to the objectives of a PPS. In addition,
because the median number of technical pathology services annually
outsourced by rural hospitals was low, we do not believe that paying
laboratories directly for these services will place a significant
financial burden on these hospitals.

CMS's written comments are reprinted in appendix II. The agency also
provided technical comments, which we incorporated where appropriate.

We received oral comments on a draft of this report from the American
Hospital Association (AHA), the College of American Pathologists (CAP),
and the National Rural Health Association (NRHA). These organizations
disagreed with our conclusions, matter for congressional consideration,
and recommendation and suggested that direct laboratory payments should
continue. Generally, all three organizations expressed concerns about
rural hospitals. AHA and NRHA expressed the concern that termination of
direct laboratory payments would place a financial burden on rural
hospitals, and CAP expressed concern that hospitals, including CAHs, and
laboratories would experience an increased administrative burden in
changing their current billing practices. CAP also raised a question about
whether hospitals and laboratories would be able to successfully negotiate
new payment arrangements for outsourced technical pathology services; if
not, in its view, beneficiaries' access to services could be jeopardized.

As we noted in the draft report, hospital officials we spoke with,
including those from rural hospitals, stated they would continue to offer
technical pathology services as a part of their surgical services if they
had to pay laboratories directly for technical pathology services. These
officials stated that they would not consider eliminating surgeries if
they had to enter new, or modify existing, arrangements with laboratories
to provide technical pathology services. We acknowledge that modifying
their billing practices will impose costs on hospitals and laboratories;
however,

officials from hospitals and laboratories that already have billing
arrangements for technical pathology services did not report to us that
these costs were burdensome.

We are sending a copy of this report to the Administrator of CMS and
appropriate congressional committees. The report is available at no charge
on GAO's Web site at http://www.gao.gov. We will also make copies
available to others on request.

If you or your staffs have any questions, please call me at (202) 512-7119
or Nancy A. Edwards at (202) 512-3340. Other major contributors to this
report include Beth Cameron Feldpush, Jessica Lind, and Paul M. Thomas.

A. Bruce Steinwald Director, Health Care-Economic and Payment Issues

List of Committees

The Honorable Charles E. Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable W.J. "Billy" Tauzin
Chairman
The Honorable John D. Dingell
Ranking Minority Member
Committee on Energy and Commerce
House of Representatives

The Honorable William M. Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives

                       Appendix I: Scope and Methodology

In conducting this study, we analyzed Medicare claims and provider data
obtained from the Centers for Medicare & Medicaid Services (CMS). We
interviewed officials at CMS, the Congressional Budget Office, and the
Department of Health and Human Services Office of Inspector General. We
also interviewed industry representatives from the American Hospital
Association, College of American Pathologists, and National Rural Health
Association, as well as representatives of individual hospitals and
laboratories and a pathology practice management consulting company.
Finally, we conducted a site visit of a laboratory and one of the rural
hospitals to which it provides pathology services.

As there is no list of covered hospitals and the laboratories to which
they outsource technical pathology services, we used 2001 Medicare claims
data, the most recent year for which data are available, for our analysis.
We received the data files directly from CMS. These data reflect the set
of claims submitted to and paid by CMS for services performed in 2001. We
performed our own initial analyses to check the reliability of the data.

We estimated the number of hospitals outsourcing technical pathology
services to laboratories that directly billed Medicare and the volume of
and payments for these services. To do so, we matched Medicare laboratory
claims with claims submitted by prospective payment system (PPS) hospitals
and critical access hospitals (CAH). We assumed that a laboratory's
service was related to a hospital inpatient admission or outpatient
encounter if the date of service on the laboratory's claim was (1) during
an inpatient's stay at a hospital, within 3 days prior to the inpatient's
admission,1 or after the inpatient's discharge or (2) on the day of or
within 3 days after an outpatient surgical procedure at a hospital.2 We

1If a beneficiary receives diagnostic preadmission services, including
pathology services, in the hospital or in an entity owned or operated by
the hospital within 3 days preceding the beneficiary's admission as an
inpatient, the preadmission services are included in the hospital's
inpatient PPS payment. 42 C.F.R. S: 412.2(c)(5) (2002). We therefore
assumed that if a laboratory provided technical pathology services to a
beneficiary within 3 days of the beneficiary's inpatient admission, the
services were provided in connection with the beneficiary's inpatient
stay.

2It is unlikely that a patient would receive a technical pathology service
within the time period we specified that would be unrelated to the
surgical services the patient received at the hospital. Nevertheless, our
approach may have resulted in the inclusion of some claims for technical
pathology services that were unrelated to a hospital inpatient admission
or outpatient encounter, as well as the exclusion of other claims that
were related. In addition, errors in the claims data, such as an incorrect
discharge or encounter date, similarly could result in mistakes.

Appendix I: Scope and Methodology

included in our list of total hospitals only those hospitals listed in the
CMS Provider of Services (POS) file and characterized outsourcing
hospitals as urban or rural according to their designation in the POS
file. To identify hospitals outsourcing technical pathology services that
have converted to CAHs, we matched each hospital's Medicare provider
number to the list of CAHs maintained by the North Carolina Rural Health
Research and Policy Analysis Center at the University of North Carolina as
of March 2003.

To estimate Medicare payments and beneficiary copayments to laboratories
for technical pathology services in 2001, we first calculated the claims
frequency for each type of technical pathology service in our file of
matched laboratory and hospital claims. We estimated the Medicare payment
amount for each type of technical pathology service as 80 percent of the
Medicare physician fee schedule (MPFS) national standard payment rate for
that service and beneficiary cost sharing as the remaining 20 percent, and
then we multiplied the claims frequency by the estimated Medicare and
beneficiary cost-sharing amounts to calculate total laboratory payments.3
We performed similar calculations to find payments for inpatient and
outpatient claims exclusively. To estimate 2001 Medicare outpatient PPS
payments and beneficiary cost sharing to PPS hospitals if laboratories had
not received direct payments, we multiplied the 2001 outpatient PPS
Medicare payment rate and beneficiary copayment amount for each type of
technical pathology service by the frequency of each type of technical
pathology service in the outpatient claims.

To estimate the cost difference to PPS hospitals of paying laboratories to
perform technical pathology services, we first calculated a weighted
average payment rate for technical pathology services for 2001 by
multiplying the 2001 national standard MPFS payment rate by the frequency
percentage of each type of technical pathology service among PPS hospitals
and summing the payments for all services. We multiplied the median and
95th percentile volume of services outsourced by PPS hospitals by the
estimated weighted average laboratory payment. We then calculated a
weighted outpatient PPS payment rate, including beneficiary copayments,
for technical pathology services in 2001 as described above for
calculating the weighted average MPFS payment rate. Because approximately
63 percent of technical pathology services provided to

3We were unable to use the Medicare payments from the matched claims to
calculate this amount because the laboratories' claims were often for both
the technical and professional services, and the amounts for each could
not be separated.

Appendix I: Scope and Methodology

patients of PPS hospitals were provided to outpatients, we estimated the
number of outpatient services by multiplying the median and 95th
percentile volumes by 63 percent. We then multiplied the estimated number
of outpatient services by the estimated weighted average outpatient PPS
payment rate, and subtracted this amount from the weighted average
laboratory payment.

We interviewed representatives of four Medicare carriers and four state
hospitals associations. In addition, we spoke with representatives from 19
hospitals and 13 laboratories from a sample of eight geographically
diverse states-Colorado, Florida, Iowa, North Dakota, Pennsylvania,
Tennessee, South Dakota, and Washington-and an additional 2 laboratories
in Oklahoma. We selected several states in the South, Southeast, and
Midwest where, according to CMS officials, outsourcing arrangements for
technical pathology services were believed to be fairly common. We
interviewed officials from urban and rural hospitals and hospitals and
laboratories with different types of outsourcing arrangements, including a
hospital that outsources only complex and infrequently performed services
and a hospital that currently pays its laboratory for technical pathology
services.

Appendix II: Comments from the Centers for Medicare & Medicaid Services

Appendix II: Comments from the Centers for Medicare & Medicaid Services

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