Are Your Lab Tests Viable under PAMA Medicare Reimbursements? - Matthew Clark Disclosures
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12/12/2018
Are Your Lab Tests Viable under PAMA
Medicare Reimbursements?
Matthew Clark
© MFMER | slide-1
Disclosures
Relevant Financial Relationship(s):
Nothing to Disclose
Off Label Usage:
Nothing to Disclose
© MFMER | slide-2
112/12/2018
Agenda
• Background
• Terms and Definitions
• Quick Start Guide
• Budgeting
• Cost Modeling
• 7 Steps to successful cost reduction
© MFMER | slide-3
Background
• 2014 Protecting Access to Medicare Act (PAMA)
• New clinical laboratory fee schedule (CLFS) went into effect
January 1, 2018
• Estimated impacts vary, but most put the reductions in the
CLFS in the range of 10% to 15% per year for the next 5
years
© MFMER | slide-4
212/12/2018
Disclaimer
• Regardless of if a test has a positive or negative
margin, medical need should always outweigh
financial performance.
• The information created as part of this type of
analysis is intended to focus resources on areas of
waste and improvement.
© MFMER | slide-5
Cost Definition
Cost Type Categories Cost Type Categories
• Staff Labor • Overhead
• Medical Labor • Facilities charges
• IT charges
• Supplies & Materials
• Hospital/Clinic Management
• Depreciable Assets • Non-revenue work units
• Expensed Equipment • Write-offs
• Royalties
© MFMER | slide-6
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Cost Definition (continued)
Direct and Indirect Fixed and Variable
• Direct costs are expenses that • Fixed costs are expenses that
are closely related to the test or have no link or a weak link to
service being provided (a few volume
degrees) • Instruments, lab space
• Reagents, Controls • Variable costs are expenses that
• Indirect costs are expenses that have a strong link to volume
are loosely related to the test or • Reagents, controls
service being provided (many
degrees)
• Safety glasses, staff
computers, anti-fatigue mats
© MFMER | slide-7
Cost Definition (continued)
• Actual Cost
• How much does the test cost as it is performed
today?
• Standard Cost
• How much should the test cost when performed in
optimal conditions?
© MFMER | slide-8
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Reimbursement Definition
• Payer Types
• Government (Medicare/Medicaid)
• Private (Health Insurance)
• Personal (Patient)
• Charity (Charity Care)
• All 4 combined create the weighted average reimbursement
• Government tends to be the most widely understood and
universal value, also one of the larger payers
© MFMER | slide-9
Quick Start
Items that can be done without cost modeling in place
© MFMER | slide-10
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Supplies & Materials
• What items do I spend the most on, in total, over the course of a
year?
• How many of them did I purchase?
• How many results can I get out of each unit purchased?
• How many billable results did I have in the same time period?
• What is my QC plan?
• What is my reimbursement?
© MFMER | slide-11
Supplies & Materials (continued)
Purchasing Data Calculations
• Total Spend = $200,000 per year • Purchase Price = $2,000 per box
• Total Purchased = 100 boxes per • Purchased Results = 1,000
year • Price per Result = $200
• Results = 10 per box • QC Volume = 100 results per year
• Required QC = 1 result per box • QC Cost = $20,000 cost per year
• Billed Patients = 850 per year • Total Cost = $235 per billed patient
• Reimbursement = $325 • Total Cost to Reimbursement ratio = 72%
• Unknown Losses = 50 results per year
© MFMER | slide-12
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Depreciable Assets
• What is my annual depreciation schedule?
• How many billable results do I have in a year?
• How many results can the equipment generate in a year?
• What is my reimbursement?
© MFMER | slide-13
Depreciable Assets (continued)
Asset Data Calculations
• Purchase Price = $175,000 • Actual Cost = $2.22 per billable
• Depreciation Schedule = $35,000 • Standard Cost = $1.40 per billable
per year for 5 years • Actual Cost to Reimbursement = 12.3%
• Full Capacity Volume = 25,000 • Standard Cost to Reimbursement = 7.8%
per year
• Unused Capacity = 9,250 billables
• Billed Volume = 15,750 per year • Unused Capacity Value = $7,585 per year
• Reimbursement = $18 per test • Unused Capacity Value = $37,925 over
the life of the depreciation schedule
© MFMER | slide-14
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Budgeting
Setting Targets and Goals
© MFMER | slide-15
Economic Cost
• Uses the test reimbursement, a test type classification, and local
knowledge of the laboratory’s cost structure to create a “test
budget”
• The test budget allocates the reimbursement into the cost type
categories and provide target conditions
• The test budget won’t break the cost down to specific steps in
the process
© MFMER | slide-16
812/12/2018
Test Type Classifications
What they do Examples of Groupings
• High level groupings of tests that • Traditional Chemistry
have similar methodologies
• Traditional Microbiology
• Allows comparisons of tests
within a group • Hematology
• Allows for variation in cost • Molecular
distribution based on • Mass Spectrometry
classification
• Anatomic Pathology
• Advanced Genomics
© MFMER | slide-17
Test Type Classification
The chart to the right is just an
example of what a test type
classification may look like.
The intent is to show how
various testing methods can
change how the costs are
distributed between the various
cost type categories.
Ultimately, you’ll need to decide
how many test type categories
are needed to represent your
laboratory and how the cost
types are distributed within
each.
© MFMER | slide-18
912/12/2018
Budgeting Example
Budgeting Data Traditional
Labor Intensive Calculations
• Test Reimbursement = $50 • Cost Category Budgets
• Bench Labor = $15.00
• Cost Category Allocations
• Director Labor = $2.50
• Bench Labor = 30%
• Supplies = $7.50
• Director Labor = 5%
• Equipment = $7.50
• Supplies = 15%
• Overhead = $7.50
• Equipment = 15%
• Net Contribution = $10.00
• Overhead = 15%
• Net Contribution = 20% • Total = $50
© MFMER | slide-19
Reverse Engineering Bench Labor
• What is my reimbursement?
• What is my test type category?
• What is my cost type allocation?
• What is my indirect cost deduction?
• How many billable results did I have in the same time period?
• What is my full burdened bench labor rate?
© MFMER | slide-20
1012/12/2018
Reverse Engineering Labor (continued)
Labor Data Calculations
• Reimbursement = $85 • Bench Labor Dollars = $12.75 per test
• Test Type = Molecular • Indirect Labor Deduction = ($3.19) per
test
• Bench Labor Allocation = 15%
• Direct Bench Labor Dollars = $9.56
• Indirect Labor Deduction = 25% per test
• Billed Patients = 8,500 per year • Direct Bench Labor Time = 12.7
• Fully Burdened rate = $45 per minutes per test
hour ($0.75/minute) • Indirect Bench Labor Time = 4.3
minutes per test
• FTE = 2,080 hours per year
© MFMER | slide-21
Reverse Engineering Labor (continued)
Calculations (continued) Inferred Conclusion
• Direct Labor per year = 1,799.2 hours • I know it will take at least 1.2 FTE to
• Direct Labor FTE = 0.87 FTE support this test, without volume
variations and TAT taken into
• Indirect Labor per year = 609.2 hours consideration
• Indirect Labor FTE = 0.29 FTE • If I measure how long the direct
• Total Labor hours per year = 2,408.4 effort takes, I can then get an idea of
hours if I’m over budget or not. I can then
work on finding efficiencies in the
• Total Labor FTE per year = 1.2 FTE
process
© MFMER | slide-22
1112/12/2018
Cost Modeling
Understanding how each cost type category contributes to the overall cost of the
test
© MFMER | slide-23
Actual Cost
• Use a form of time driven Activity Based Costing (ABC)
• Document the workflows in the laboratory
• Assign the expenses from the financial statement to the
workflow
• Run the billed volume through the workflow to calculate costs
• Can start with high level workflows and go more granular as
needed.
• Software is available, so are spreadsheets that provide a point in
time snapshot.
© MFMER | slide-24
1212/12/2018
Financial Costs
Registration $66,110
Actual Cost - Activity Based Costing
Order Test $52,777
Specimen Collection $83,888
Delivery $63,328
Processing $126,665
Testing $84,999
QA/QC $14,999
Lab/Validate Result $180,554
Report Results $12,778
Store/Disposal $37,222
$723,320
$.95 Step 3- Specimen Collection $1.51
Testing Operational Costs Step 1- Patient Registration $1.19 Step 2- Order Lab test
Step 4- Specimen Transportation $1.14 Step 5- Specimen Processing $2.28 Step 6- testing Process QA/QC $.27 Step 7- Specimen Testing $1.53
Total Process
Cost = $13.02
Step 8- Lab/Validate Results $3.25 Step 9- Report Results $.23 Step 10- Store/Dispose Specimen $.67
© MFMER | slide-25
Standard Cost
• Uses most of the information loaded into the Actual Cost ABC
model
• Instead of using actual spend from the financial statement, it
calculates the cost of each process step based on the
component cost and infers what the expense could have been
© MFMER | slide-26
1312/12/2018
Financial Costs
Standard Cost – Activity Based Costing
Registration $45,555
Order Test $30,555
Specimen Collection $62,222
Delivery $43,888
Processing $118,332
Testing $73,333
QA/QC $12,778
Lab/Validate Result $148,887
Report Results $11,667
Store/Disposal $10,555
$557,772
$.55 Step 3- Specimen Collection $1.12
Testing Operational Costs Step 1- Patient Registration $.82 Step 2- Order Lab test
Step 4- Specimen Transportation $.79 Step 5- Specimen Processing $2.13 Step 6- testing Process QA/QC $.23 Step 7- Specimen Testing $1.32
Total Process
Cost = $10.04
Step 8- Lab/Validate Results $2.68 Step 9- Report Results $.21 Step 10- Store/Dispose Specimen $.19
© MFMER | slide-27
Identifying Specific Cost Savings to
Improve Viability
• A few areas of opportunity we will explore
• Cost of Poor Quality (COPQ)
• Equipment Utilization
• Service Agreements
• Overhead Misalignment
• Supply & Material Costs
• Staffing to Workload
• Process Flow & Design
© MFMER | slide-28
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Where to Start
• Identify the areas of opportunity
• Prioritize to the critical few
• Measure the critical few
• Re-prioritize on data not on feelings
• Know the critical few
• You cannot improve what you don’t understand
© MFMER | slide-29
Where to Start
• Select the strategic one
• Multiple projects can have unfavorable interactions
• Conquer and control the strategic one
• Repeat!
• Today’s threat is PAMA (and several others)
• Tomorrow will be a new burning platform and threat
• Cost analysis and reduction should be a regular
aspect of your operation
© MFMER | slide-30
1512/12/2018
Continuous Cost Control
Identify
Opportunities
Identify and
Control the Prioritize the
Conquered Critical Few
7 Steps of
Effective
Cost
Conquer the Control Measure the
Strategic One Critical Few
Select the Know the
Strategic One Critical Few
© MFMER | slide-31
Prioritize the Critical Few
• Why the critical few?
• Time is limited and resources are costly
• Firefighting is expensive and thins resources
• Identify opportunities
• It is not always the test that is losing money
• Know the Process interactions
• Interactions that are not known or understood
+ =
© MFMER | slide-32
1612/12/2018
Identifying Specific Cost Savings
• COPQ - Cost of Poor Quality
• Specific costs associated with maintaining quality
• Excess standards and controls
• Cost of standby
• Repeats
• Confirmation runs
• Duplicates
• Cancellations
• Dilutions
© MFMER | slide-33
Identifying & Eliminating Waste
• Instrumentation and support equipment utilization
• Do You know what is the utilization of the 2 most expensive
laboratory instruments at your site?
• Redundancy costs
• Excessive ready time
• Cost of QC to be in ready state
• Unscheduled downtime
• Service contracts
© MFMER | slide-34
1712/12/2018
Identifying & Eliminating Waste
• Overhead allocations
• This could be a full day seminar to try to understand how this
takes place
© MFMER | slide-35
Identifying & Eliminating Waste
• Supply and Material Costs
• Often one of the highest costs
• How well do you know your vendors
• What percentage of the test cost budget does this consume?
• Are suppliers sharing their process improvement savings with you?
• Corporate margins
• Sole supplier/options
• VMI Vendor Managed Inventory
• Sole Source provider risks…..
© MFMER | slide-36
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Identifying & Eliminating Waste
• Underutilization
• Excess usage of supplies and materials
• Bottom of container waste
• Incorrect container format
• Partial plate runs
• Standard sized “kit” waste
• Obsolescence
• Inventory control
• Low inventory turns
© MFMER | slide-37
Identifying & Eliminating Waste
• Staffing Costs
• Are your processes mapped and modeled?
• Staff to volume schedule vs staff to task
• Know your daily/hourly direct workload?
• Know your indirect workload?
• Process flow through the lab
• Constraints
• Wait times
• Batching
© MFMER | slide-38
1912/12/2018
Measure the Critical Few
• Document requirements
• Perception should not replace measured data
• Actual material usages required vs consumed
• Timings for process steps
• Flow of work through lab
• How well are you meeting these
requirements?
• How do you know that?
• Show me the data!
© MFMER | slide-39
Know the Critical Few
• Root cause analysis
• Clearly articulate what is happening
• Provide data
• Understand the interaction of factors
© MFMER | slide-40
2012/12/2018
Select the Critical One
High
Project 1
Simplify the
Return on Investment
Just do it!
Project?
Project 4 Project 3
Project 2 Project 5
Is Project
Lower Priority?
Worth Doing?
Project 6
Low Difficulty, Cost, Risk High
© MFMER | slide-41
Improve your Test Cost
• Focus on the critical parameter or cost
• Evaluate options for improving
• Optimize on your options
Identify
Opportunities
Identify and
Control the
• Implement the savings plan
Prioritize the
Conquered
Critical Few
• Monitor 7 Steps of
Effective Cost
Control
• Balanced metrics Conquer the
Strategic One
Measure the
Critical Few
• Test cost revue becomes a normal
business practice Select the
Strategic One
Know the
Critical Few
• REPEAT THE PROCESS!!
© MFMER | slide-42
2112/12/2018
Session Review
• Systematic approach to cost control
• Know your opportunity
• Show me the data!
• Know your target
• Show me the data!
• Verify your target
• Show me the data!
• Focused work
• Controls to monitor
• REPEAT!!
© MFMER | slide-43
Questions & Discussion
© MFMER | slide-44
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