Are Your Lab Tests Viable under PAMA Medicare Reimbursements? - Matthew Clark Disclosures

 
12/12/2018

Are Your Lab Tests Viable under PAMA
Medicare Reimbursements?
Matthew Clark

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                          Disclosures

                Relevant Financial Relationship(s):
                         Nothing to Disclose

                         Off Label Usage:
                         Nothing to Disclose

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Agenda
• Background
• Terms and Definitions
• Quick Start Guide
• Budgeting
• Cost Modeling
• 7 Steps to successful cost reduction

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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

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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.

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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

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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

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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?

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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

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Quick Start
Items that can be done without cost modeling in place

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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?

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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

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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?

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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

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Budgeting
Setting Targets and Goals

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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

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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

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 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.

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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

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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?

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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

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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

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Cost Modeling
Understanding how each cost type category contributes to the overall cost of the
test

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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.

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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

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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

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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

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 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

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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

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 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

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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

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  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

                     +                        =

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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

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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

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 Identifying & Eliminating Waste
 • Overhead allocations
   • This could be a full day seminar to try to understand how this
     takes place

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 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…..

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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

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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

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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!

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 Know the Critical Few
 • Root cause analysis
      • Clearly articulate what is happening
      • Provide data
      • Understand the interaction of factors

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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

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 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!!

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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!!

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                Questions & Discussion

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