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Can In-Office Pathology Labs Survive a 52% Cut of the Technical Component?

Posted Nov 19 2012 12:00am

Some hospital-based pathology groups may be celebrating Medicare’s recent rate cut for surgical pathology CPT code 88305-TC. Some of them believe it may reduce the profit motive for some of the in-office pathology labs. This type of lab has been discussed in previous notes (see: Many Big Urology Practices Now Utilize an In-Office Histology Lab and Their Own PathologistReporting Cases of Lab Billing Fraud to the Office of the Inspector General (OIG)Pathologists Who Staff In-Office Labs: Who Are They and What Motivates Them? ). Here are some more details about this rate cut (see:  2013 Medicare Physician Fee Schedule ).

The final 2013 Medicare Physician Fee Schedule [released on...November 1, 2012] contains a 52 percent cut for the highest volume technical component anatomic pathology code, CPT Code 88305-TC. This reduction, which will be effective January 1, 2013, brings the payment in line with the Medicare outpatient APC payment rate for the same service. The 88305-TC has been acknowledged by most observers as being over-priced by Medicare and a reduction was expected. However, the size of the reimbursement cut is greater than most have anticipated. The professional component (CPT Code 88305-26) will be increased by two percent. Overall, Medicare reimbursement for the global 88305 anatomic pathology services will be reduced by one-third. 

Recall that this 52% reduction in the technical component (TC) of CPT code 88305 comes on the heels of a previous reduction (see: New Palmetto GBA Prostate Billing Guideline: A Foretelling of Healthcare’s Future? ). Here is a quote from that note:

...Palmetto [the nation's largest Medicare administrative services contractor] dictated that they will not pay for more than 4 individual CPT 88305 codes per [surgical pathology] case (see:  PROSTATE BIOPSY CODING/BILLING GUIDELINES ).

Here's a comment about this new rate cut with discussion about the survival of in-office labs that was published in Laboratory Economics (Vol. 7, No. 11, Nov. 2012):

In-office pathology labs will survive, but will have smaller profit margins, according to Joe Plandowski, co-founder of IOP LLC.... His consulting firm has helped build about 50 in-office pathology labs, primarily at gastroenterology groups, over the past 10 years. He says that large in-office pathology labs currently have a 50% profit margin and can withstand the rate cut. “Assuming one-third of a specialty practice is covered by Medicare, the net effect on their lab will be about 10%. So the practice will initially survive on a 40% profit margin,” according to Plandowski. He says that if third-party payers follow Medicare over the next year, the profit margin will drop to about 20% at in-office labs. Plandowski says that to offset the technical rate cut, specialty groups will seek to reduce professional pay to contracted pathologists. He says they will now be paid $12 to $18 per read versus $20 to $25 previously. “We are going to aggressively bid out the in-office pathology professional work versus the prior collegial approach we have taken with local hospital-based pathologists.” And IOP’s Bernie Ness adds, “If any groups decide to close their in-office labs and start referring Medicare work out again, it will not go to local pathology groups, as CAP members are dreaming about. It will go back to the commercial labs that the groups used before.”

I think that Joe and Bernie might be right in the short-term but I think the handwriting is on the wall regarding in-office histology labs that have proliferated in urology and gastroenterology practices. The high margins for the TC of the work supported this trend. Also keep in mind that many of these large urology and GI practices are now being purchased by hospital systems that will reroute the specimens to their in-house pathology practices (see: The Increasing Tempo of Physician Practice Purchases by HospitalsWill Hospital Purchases of Medical Practices Affect the Office EHR Business ).

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