Note from Hugh

CMS issued a transmittal (Change Request 6088) last week titled “Pathology Services: Notification of the Sunset for the Payment of Physician Pathology Services for Independent Laboratories.” Because of the use of the terms “Physician” and “Independent Laboratories,” many hospitals may have assumed that this transmittal was not relevant to hospitals. That would be a mistake.

This issue has a long and interesting history. Apparently, for many years after the implementation of the Inpatient Prospective Payment System (i.e., DRGs), CMS permitted non-hospital laboratories to provide, bill and be paid for the technical component of pathology services furnished to hospital inpatients. This arguably resulted in Medicare overpaying for such cases because DRG payments are generally intended to include payment for all non-physician services furnished to hospital inpatients. CMS attempted to “fix” this problem in 1999 by promulgating regulations preventing non-hospital laboratories from being paid for technical component pathology services furnished to hospital patients.

However, in response to industry concerns, Congress temporarily delayed implementation of the 1999 CMS regulation until December 31, 2006 (at least with respect to certain “grandfathered” laboratories). Congress then extended the implementation delay under December 31, 2007.  Following that extension, Congress extended the delay for another six months until June 30, 2008. 

The purpose of Change Request 6088 is to announce that the Congressionally mandated delay has now expired and that CMS has implemented the 1999 regulation effective for dates of service on or after July 1, 2008.

What does this mean for hospitals? It means that, effective for dates of service on or after July 1, 2008, hospitals must include the charges for technical component pathology services furnished to their patients on the hospital claim. Outside laboratories may no longer bill Medicare directly for these services. Importantly, this applies to be both hospital inpatients and hospital outpatients.

One issue that I have not analyzed is the extent to which hospitals could still obtain technical component pathology services from an outside laboratory “under arrangements.” However, even if that is permissible, it would require that the outside laboratory bill the hospital rather than Medicare. Hospitals that are interested in exploring some sort of “under arrangements” relationship with an outside laboratory should consult regulatory counsel for guidance.

The bottom line is; however, as of July 1, hospitals will be responsible for the cost of technical component pathology services furnished to their patients. Hospitals will be able to bill Medicare for these services; however, hospitals will generally not receive any additional payment for technical component pathology services furnished to inpatients because payment for such services will generally be treated as included in the DRG payment. On the other hand, hospitals will generally receive separate payment for technical component pathology services furnished to outpatients unless such services are treated as “packaged” under the outpatient prospective payment system.