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Response to the Recent Note about the Future of In-Office Labs

Posted Nov 23 2012 12:00am

I suggested in a recent note that changes in surgical pathology reimbursement by Medicare will have a chilling effect on the proliferation and status of in-office histology labs in GI and urology practices (see: Can In-Office Pathology Labs Survive a 52% Cut of the Technical Component? ). Here's the last paragraph from the note:

I think that Joe [Plandowski] and Bernie [Ness] 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 ).

Joe Plandowski, one of the founders of IOP (In Office Pathology) , responded with the following email to me:

I read the article and found the last paragraph troubling because it provides mis-information on the realities of in-office pathology labs.

There are simple reasons in-office pathology labs are highly profitable and it has nothing to do with high technical fees. If that was the case, all specialty pathology reference labs like Aurora Diagnostics, Bostwick Labs, CBLPath prior to its acquisition, etc. would have shown high profitability due to high technical fees. Understand that in-office pathology labs do not have a sales/marketing forces or a courier operations, their lab billing is highly incremental because they are already sending a clinical services bills, and they do not spend money on interfacing with clients' offices for order entry and results reporting. There are no clients, only owners and they are tied to the lab through their existing EMR system which is interfaced to the lab's software.

A 30% cut to in-office labs (except urology - see below) means their margins will fall to 20%. However, that same 30% cut in CPT 88305 will devastate all pathologist-owned anatomic labs and by a host of specialty commercial anatomic pathology reference labs such as Bostwick Labs, OUR labs, GI Pathology, Caris, etc. The reason is their margins aren't high enough to cover a 30% top line hit. Many of them will go out of business. The impetus for this change is the flawed Mitchell study funded by CAP and ACLA. While CAP and ACLA spent over $200K to kill in-office pathology labs, as in war, the collateral damage they created will kill their own members. Panic is starting to settle in as the non-hospital based lab industry begins to comprehend what has just happened to them.

CAP is taking a hands off position on the 88305-TC issue because they are a hospital-based pathologist organization. The PC of 88305 is going up by 2% so hospital-based pathologists who only bill 88305-26 (PC) are thrilled while the TC of 88305 is going down by 52%. The problem is the MPPR logic used by CMS to cut 88305-TC was not applied to 88305-26. It should be and this is being pointed out to CMS. If 88305-26 is cut by 52%, the specialty of pathology will consist of pathologist-technicians.

Purchasing of practices with in-office pathology labs is no bargain for hospitals. They are going to be hit with the same 88305 cuts and will be doing the same profitability analysis as others are now doing. CPT 88305 is highly manual work. There is no automation for grossing, embedding, microtomy, mounting tissue on a slide, etc. There are tissue processors,  automated tissue stainers and automated coverslippers but they need to be loaded and unloaded manually slide-by-slide. Scale doesn't help much in performing 88305.

Urology is a special case. If the Palmetto decision and the 52% 88305-TC cut stand as is, no lab can afford to perform testing on prostate biopsies. Under these conditions, my recommendation to urologists is they close down their in-office pathology labs and send the tissues to ACLA member labs. The reason for noting ACLA member labs is ACLA funded the study that created the problem in urology and ACLA's members should suffer the consequences. It is important to understand the impact to commercial reference pathology labs that have specialized in urology specimens --- they will go out of business. This is a serious and dire scenario, but one that will unfold in the next few months unless there is some sort of available relief that has not risen on the horizon as of today.

I personally think that the reason that health systems are purchasing urology and GI practices does not hinge only on the 88305 codes for pathology specimens. The overarching strategy for hospitals is now to capture as much of the medical speciality referral business as they can. This is part of an overall, ACO-driven approach, predicated on integration of all services and the introduction of greater quality and efficiency within the integrated whole (see: Accountable Care Organizations: Principles ). Everyone understands that the margins will be going down for all health services. The large health systems hope to prosper using economies of scale and by being the last player standing.

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