September 2007 Clinical Laboratory News: Competitive Bid Repeal Bill Introduced as CMS Moves On

September 2007: Volume 33, Number 9

Competitive Bid Repeal Bill Introduced as CMS Moves On 
Will Demo Drive Smaller Labs Out of the Market?
By Julie McDowell


The July 3 release of the Competitive Bidding Demonstration Project Draft Bidder’s Package by the Centers for Medicare & Medicaid Services (CMS) has prompted an outpouring of anger and confusion from the clinical laboratory community. Even though legislators have wanted to test a market-based pricing model for Medicare reimbursement for clinical laboratory services for more than 10 years, many laboratorians are upset about whom CMS will subject to the bidding process outlined in the Draft Package and what it will entail. The outcry from laboratorians led to a House Committee hearing and even prompted Rep. Nydia M. Veláquez (D-N.Y.) to introduce legislation in early August to repeal the demonstration project, which CMS is currently required to implement under a congressional mandate. But officials still plan to make an announcement soon about the first of two planned demonstration sites—called competitive bidding areas (CBAs)—even though many laboratorians are worried about not only the impact of the project on quality and access to testing services, but also what this shift toward market-driven Medicare reimbursement could have on their laboratories’ financial future.

The purpose of this demonstration is to determine whether market-driven competitive bidding can be used to provide quality laboratory services below current Medicare payment rates, explained CMS officials shortly after the release of the Draft Bidder’s Package at an Open Door Forum held July 16 in Baltimore, Md.,. “This demonstration was mandated by Section 302 (b) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,” explained Linda Magno, Director, Medicare Demonstrations Program Group. She explained that required bidders will have to bid on about 99% of the current laboratory fee schedule, which encompasses about 360 tests.

During the presentation, CMS officials also explained that physician office laboratories performing testing services for their patients are exempt from the demonstration project. Furthermore, a laboratory that exclusively provides end-stage renal disease (ESRD) testing services to Medicare beneficiaries residing in the demonstration area would not be required to bid. However, ESRD laboratories will be paid for laboratory services using the (Medicare Part B) demonstration fee schedule for tests included in the demonstration and outside the bundled payment for ESRD beneficiaries residing in the CBA, officials explained.

In addition to these facilities, laboratories supplying less than $100,000 in tests annually for Medicare beneficiaries residing in the CBA will also not be required to submit a bid, officials explained. These labs, and those that serve ESRD beneficiaries residing in the demonstration area exclusively, will be paid for the duration of the project under the competitively set demonstration fee schedule, which CMS says must represent a one percent savings compared to the current fee schedule.

Magno also explained that the demonstration project would cover all the applicable tests provided to beneficiaries enrolled in the traditional Medicare fee-for-service program who reside in the CBA. “Beneficiaries who travel outside that CBA during the demonstration period and who require laboratory services will be able to access services from most laboratories in the United States,” she said. “Medicare, however, will not pay for services—anywhere—that are furnished by a non-winning laboratory.”

With many labs nervous about preparing bids, CMS officials also outlined a tentative timeline for the project at this meeting. As of press time, CMS planned to release the final Bidder’s Package and announce the first CBA site before the end of the summer. A Bidder’s Conference is scheduled to be held near the first CBA location shortly after the final Package is released, and the bids will be due sometime this fall. Labs are currently scheduled to be notified of their bid status in Winter 2007, with the demonstration commencing in Spring 2008.

Small, Hospital Labs Speak Out

Concerns over the impact of the demonstration project on small labs led the House of Representatives Committee on Small Business to hold a July 25 hearing, “Competitive Bidding for Clinical Lab Services: Where is it Heading and What Small Businesses Can Expect.” Veláquez, who is Committee Chairwoman, presided over the hearing and heard testimony from representatives of independent reference labs and CMS. On Aug. 4, shortly after the hearing, she introduced H.R. 3453, “The Community Clinical Laboratory Fairness in Competition Act of 2007.” “This new process would essentially allow the government to pick and choose the losers and winners here,” said Velázquez in a prepared statement. “If this proposal is allowed to go forward, many small labs will suffer in their ability to serve patients. CMS clearly ignored how small firms are able to offer quality and urgent lab service. The legislation I am introducing would rectify this omission and ensure small laboratories are able to continue serving their communities.”

Criticism of the project also continues to come from the laboratory groups, including the Clinical Laboratory Coalition (CLC), whose members include AACC, the American Clinical Laboratory Association (ACLA), and the College of American Pathologists.

The CLC argues that since clinical laboratory services are not a commodity, no competitive bidding model will meet the objective of providing testing below current Medicare reimbursement rates while continuing to maintain quality and access to care. “Medicare beneficiaries receive over 250 million laboratory tests each year, and there are over 1,000 different tests, performed by more than 13,000 hospital, national, and community clinical independent laboratories—not to mention over 100,000 physician laboratories,” explained CLC officials in a statement released after the Open Door Forum. “The demonstration’s current design would force approximately 90 percent of all clinical laboratories serving in a demonstration site to bid—including small business laboratories defined by CMS as supplying a threshold of just $100,000 in Medicare lab tests annually—while promising only a limited number of ‘winners’. ‘Non-winners’ would not be permitted to participate in the Medicare program for three years, even though Medicare commonly comprises at least 40 percent of a small clinical laboratory’s business.”

Like small, local laboratories, hospital outreach labs are also concerned about the impact that the demonstration will have on their operations and budgets. To meet the $100,000 annual Medicare billing bid threshold, a hospital outreach lab would only have to do about 27 tests per day, estimates Roslyne Schulman, Senior Associate Director for Policy at the American Hospital Association. With more facilities launching outreaching testing programs, hospitals have to depend on this revenue to fund other services, including community clinics and other outreach programs, she explained. If an outreach laboratory bids and then loses, it could have a devastating impact on the hospital’s budget and jeopardize quality. “Lab testing is a complicated service to provide—patient specimens have to be collected, specimens have to be transported in a timely manner, highly trained personnel have to perform the tests, and results need to be reported back quickly to hospitals, because the care that is provided largely depends on the lab results,” she explained. “This competitive bidding demonstration puts these aspects of lab services at risk because people will be driven to provide the lowest possible bid—an unrealistically low bid. And they will find it hard to keep up the quality and access to these services if they are not able to recover their costs.”

In addition to costs, Schulman is worried that CMS has not adequately clarified which labs are exempt from submitting a bid. When assessing if they meet the $100,000 threshold, labs need to also estimate their Medicare revenue for the project’s three years, because non-bidding labs—called passive labs in the Bidder’s Package—will not be reimbursed beyond that amount for work performed on Medicare beneficiaries in the CBA during the project. “This demonstration is going to cause big shifts in the marketplace, therefore how can labs know if their volumes will go up or down?” said Schulman. “It’s going to be difficult for them to determine whether they are required bidders by estimating their Medicare revenue not just for the next year, but for the next two years after that during the demonstration.”

The large reference labs have also come out against the project. Don Horton, LabCorp’s Vice President of Public Policy & Advocacy, explained that while the company is committed to making pricing decisions responsibly, it’s impossible for his company to write a financially sound bid for this demonstration, because they don’t have all the necessary information. “We’re being asked to bid without knowing how many winners are going to be selected and without knowing the actual volume of testing for the competitive bidding area,” he explained. “We’re being asked to take a shot in the dark and anything that we come up with based on the current design is not going to be economically rational for us or any other bidder.”

One of the justifications for this demonstration project cited by federal officials is the antiquity of the current clinical laboratory fee schedule, now over 20 years old. Horton agrees that it’s time to reform the system, but doesn’t believe the demonstration project is the answer. “We’re working with a fee schedule that was put in place in 1984,” he said. “It’s now irrational and just not based on our current reality. But even though it’s imperfect, it’s a known entity and it’s something that we should work from as a better alternative to pricing laboratory services than taking the extreme approach of competitive bidding.”

Congress Listens to Concerns

At the July 25 hearing held by the House of Representatives Committee on Small Business, Chairwoman Veláquez and members considered comments from clinical laboratory representatives, as well as Timothy P. Love, CMS’s Director for the Office of Research, Development, and Information.

One primary focus of the hearing was CMS’s small business definition for exemption as a lab billing under $100,000 for Medicare beneficiaries each year. “Virtually all independent and most hospital labs doing business in the demonstration area will exceed the limit [of $100,000 per year],” said Rep. Veláquez when she opened the hearing. “Even the smallest labs have business revenue of at least $1 million to $2 million annually. And for those that are below the threshold, the new payment structure will mean that they are paid Medicare fees that simply won’t cover costs.” Critics have complained that CMS’s current figure is too low, given that the U.S. Small Business Administration’s (SBA) designation is less than $12.5 million in annual revenues. According to the CLC, Medicare commonly comprises 40% of a small laboratory’s business, which would calculate to $4 million in annual revenues, according to the SBA definition. Therefore, critics argue that labs reaching this $4 million threshold be exempt from the demonstration—a point echoed by Rep. Veláquez throughout the hearing.

In response, CMS’s Love defended the agency’s desire for “robust competition” among the largest possible number of suppliers, as well as allowing smaller laboratories an opportunity to have a voice in the project. “By raising the [$100,000] threshold, we are concerned that it would be too exclusive to the benefit of the large laboratories,” he said at the hearing, adding that CMS is not planning on revising this requirement in the final Bidder’s Package.

Veláquez and other committee members also pressed Love on how CMS would ensure that the nation’s two largest reference laboratories—Quest (Lyndhurst, N.J.) and LabCorp (Burlington, N.C.)—don’t dominate the competition by submitting low bids that would be impossible for the small laboratories to compete with or even match. Love responded that by including a large number of suppliers in each CBA would ensure a “level playing field.” He added that labs would also be evaluated on elements other than price, including quality, geographic coverage, capacity, and financial stability.

At the hearing, the House Committee also heard from several representatives from small independent labs who are concerned that this demonstration project might force them out of business. Mary Jo Bonifas, Manager of Laboratory Services for United Clinical Laboratories (UCL) in Dubuque, Iowa, testified that she was concerned about the consequences of being either a winning or losing bidder. UCL is the consolidation of laboratory services from two hospitals and a pathologist-owned independent lab. “If United Clinical Laboratories is a bid winner, I am guaranteed less reimbursement than I currently receive for the same testing as a result of the design of the demonstration, since winning bids must by definition be lower than the current reimbursement under the Medicare Part B fee schedule,” she explained at the hearing, adding that some projections assume a winning bid must be at least 5–10% below current reimbursement. “With already extremely small profit margins, what will this do to my bottom line? Even if I win, can I afford to do testing if reimbursement, in some cases, is below my costs to do the test? The bottom line is, can my laboratory survive? There is a high possibility it cannot.”

The Bidding Details

Love’s testimony on the evaluation criteria reiterated what other CMS officials had stated at the earlier Open Door Forum. At this meeting, CMS officials also detailed some complex aspects of the Draft Bidder’s Package, including how labs need to submit a composite bid, which summarizes all of the bid prices for the tests included in the demonstration (See Box and Tables, below).

How to Compose a Bid

At the July 16th Open Door Forum, CMS officials provided a detailed explanation of the Draft Bidder’s Package, including how laboratories are to calculate and submit bids and how the bids will be evaluated. Specifically, agency officials explained that labs will be submitting only one single price—a composite bid—that summarizes the bid prices for all the demonstration tests. The bid price will be submitted by HCPCS code. The composite bid will then be calculated by CMS using a formula involving test weights and bid prices for each test. CMS will assign each demonstration test a weight after the competitive bid areas (CBA) are announced and officials have conducted a market analysis on volume and payment information for each CBA. The test weights will be CBA-specific. Officials provided the tables below to illustrate how a composite bid would be calculated.

After CMS has evaluated all the composite bids, officials will establish a financially competitive range based on the composite bid prices, laboratory test capacity, and projected demand for tests in the CBA. This competitive range will include multiple winning bidders and will be set to ensure adequate capacity and access. CMS will also establish a cutoff composite bid price for each test, which will be the price used for reimbursement. These prices will also be used to determine the fee schedule applicable for demonstration tests provided to beneficiaries residing in the CBA regardless of where the laboratory test is performed or billed.

The handouts and related materials from the Open Door Forum can be found on the CMS Web site.



Example Composite Bid Price Implied by Medicare Part B Clinical Laboratory Fee Schedule
HCPCS Test Description
Test Weight
Bid Price*
[E]=[C] x [D]
Complete cbc w/auto diff wbc
Assay of parathormone
Glycoslylated hemoglobin test
Sum: Composite
Bid Price

*For this example, the bid prices are equivalent to what is on the Medicare Part B Clinical Laboratory Fee Schedule, 2007. Actual composite bid prices will be calculated using the actual bid prices supplied in the application form by the bidder. A composite bid price will be calculated for each bidder.

Source: Centers for Medicare & Medicaid Services



Cutoff Composite Bid Price

Laboratories are placed from left to right in ascending order of their composite bid price.

Lab 2
Lab 1
Lab 4
Lab 3
Composite Bid Price
Cumulative Capacity
Projected Area Demand for Tests (total)
Cutoff Bid Price
Financially Competitive Range

The cutoff composite bid price is the bid at which cumulative capacity equals or exceeds projected demand (this occurs at Lab 4’s bid of $27.14).

Source: Centers for Medicare & Medicaid Services

Besides the composite bidding instructions, there are several key issues in the Draft Bidder’s Package that laboratorians need to focus on, explained Peter Kazon, an attorney with Alston & Bird LLP (Washington, D.C.) specializing in laboratory testing regulation. He outlined these points at a Healthcare Forum held on July 18 at the AACC Annual Meeting in San Diego, Calif.

Kazon believes that one of the most confusing aspects of the Draft Bidder’s Package involves subcontractors. This is an issue for required bidders who are “niche labs.” Even though these labs might perform only five tests on the demonstration list, CMS will require them to provide the entire menu of 360 demonstration tests. “This means that these labs will have to find subcontractors to provide those services,” he explained. “However, that subcontractor lab will either be a passive bidder or required bidder who will be submitting its own bid.” Labs will have to identify these subcontractors in their bid. However, if that subcontracting lab is a required bidder, but loses the bid, then the referring laboratory will not be able to use that subcontracting lab to receive Medicare reimbursement. What’s unclear, he explained, is how labs are to proceed if the subcontractor included in their bid submission ends up a losing bidder.

It’s also important for laboratories to understand that even if they are not located in the CBA, they still might be a required bidder. “Where you are located is not really important,” said Kazon. “What determines whether you get paid under this demonstration project is the patient’s zip code.” Even if you are located in another part of the country, you still might be a required bidder if you do over $100,000 in testing for Medicare beneficiaries in the CBA in a year. “In addition, if the patient leaves the CBA and goes to a lab elsewhere in the country, then that lab would get paid according to the competitive lab fee schedule,” he explained.

Given these complexities and the unknown financial impact, it’s not surprising that the laboratory community is on edge, said Kazon. In addition, no one knows what CMS will do with the information gathered from the project, although the outcome of the demonstration project is likely to have an impact on Medicare reimbursement, said Kazon. “The chances of CMS officials simply creating a report and walking away from this project are pretty slim,” he said. “CMS will likely use the information and data from these three years to expand the demonstration project, or reconsider how lab tests are reimbursed in the future.”

For More Information

A full copy of the Draft Bidder’s Package can be accessed on the CMS Web site. A list of the draft demonstration test list is also available on the CMS Web site. Questions regarding the demonstration project can be e-mailed to CMS at

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