Laboratory Billing Fee Schedule
Ibex RCM, due to our long history and experience as a laboratory billing company, often gets questions about lab billing, in particular related to how to set fee schedules. This article give some additional information on this subject.
Many laboratories set their billing fee schedule at something conservative like 1.5x or 2x the Medicare rate. The primary reason for this is that they may be going up against competitors that are also billing low fee schedules and they simply match the competitor. Many marketing/sales people in the lab space are compensated on volume of specimens instead of margin and therefore will typically suggest billing a low fee schedule since it makes their job easier to get sales. You may also consider compensating your sales team on something that aligns incentives more closely with your financial results, meaning collections. It may be hard to have good salespeople wait until collections occur, but many of our clients have migrated to a split model where some part of the sales compensation occurs at the time of receipt of sample and some part is based off of the actual collections. This balances the need for salespeople to be rewarded immediately for success, but also aligns incentives to ensure that good quality business is being brought in.
There is data available to tell you what the average charge by CPT code is. It provides information about % distributions like 75th percentile or 25th percentile and even regional differences in pricing. These data may be purchased. A good laboratory billing service will also be able to tell you not only what the the average fee schedules are, but also how they are changing and why.
Multiple vs $
Some have asked whether it makes any difference whether you charge a multiple of Medicare (e.g. 180% of Medicare or 1.8x), compared to specific dollar amounts for each CPT like $25. In terms of the laboratory revenue cycle management it makes little difference. Reimbursement shouldn’t be affected assuming the two are quite close in actual dollar amount. The only factor that changes is when Medicare annually updates its fee schedule. Multiples are easier to scale, meaning if it was 2x last year and the Medicare allowable increased from $12.24 to $12.48, we simply load the new Medicare fee schedules into our system and the multiplier stays. When it is manually set at a specific dollar amount, each and every CPT code must be reviewed individually and changed individually. This is more impact on the laboratory than the lab billing company since all that manual work would translate into an excel data file that would be given to the laboratory billing company and uploaded into the billing system.
OoN or Contracted?
If your laboratory is primarily contracted, meaning you are in-network with effectively all of the payers, then the most important factor is to make sure that your lab fee schedule is set above your highest contracted rate. Most contracts will be within the 1.0x-1.5x range these days, although contracted rates vary wildly by payer and geography. This means that if you are predominantly contracted, you may be able to set your fee schedule at something very conservative like 1.5x or 1.8x MCR.
Some of the worst commercial contracts can be at or below the Medicare rate. Some of the worst reimbursement states include California lab billing and Florida lab billing, in part due to the high penetration of managed care in these states. Some commercial rates are even tied to Medicaid rates and also significantly below the Medicare allowable. Some lucrative contracts pay more than 2x Medicare and a few still pay a percent of billed charges like 80% or 90%, which means that if you bill 5x Medicare, you would receive 4x in reimbursement! We often suggest contracting with commercial insurers that offers a high reimbursement, like 2x. In these cases, it may be more appropriate to set your lab fee schedule at 3x or even higher.
Most laboratories receive a lot of samples OoN. In these situations, the laboratory fee schedule becomes an important tool for both revenue optimization, as well as marketing and sales.
Sales vs Accounting in Your Lab
Your sales team may want the opposite of finance, meaning that they typically want to move as much volume as possible, which means simplifying their life by setting a really low fee schedule and guaranteeing minimal patient balances. Accounting wants the highest possible fee schedule in order to maximum the per sample reimbursement and assumes sales will be able to deliver the same volume of sales with just higher reimbursement and profitability. The reality is somewhere in between and the lab should look to balance these two conflicting needs and determine whether you would rather have more samples at a lower average reimbursement or fewer samples at a higher average reimbursement?
High Fee Schedules
Traditionally insurers paid a higher reimbursement to an OoN lab than in-network, effectively trading off higher volume with a contract in exchange for lower reimbursement. There is a very wide range of payment from different payers, even for the same CPT code within the same payer. This is in part because many payers were consolidated in a rollup and probably also because of legacy plans and internal IT system discontinuities. The Usual and Customary Rate (UCR) should be the average of the fees charged for same service by providers in that geographic area, therefore it should be the average fee schedule set by labs or 2x-3x MCR since there are few if any labs that charge less than 1.75x-2x Medicare and some that charge 6x or more.
While few people love statistics, understanding the payment distribution is important in laboratory billing in order to understand where to put your lab fee schedule. While it is not exact, there is a somewhat lognormal distribution to the payer reimbursement:
With the y-axis being % of claims and x-axis being the $ reimbursement, which means that most payments come in clustered around the average, but some small percentage (the far right tail) come in at significantly higher reimbursement like 5x or even sometimes 10x the Medicare rate.
Payers pay OoN the LOWER of either their UCR or your fee schedule, while in network they pay the lower of the contracted rate or your fee schedule. So if they pay the lower, and their UCR is for example 4.3x MCR and you billed 3x, you would receive 3x and left 1.3x on the table for that claim. The question you have to ask yourself is how much of that long tail do you want to capture? Wherever you set your fee schedule, you will cut off the rest of the tail to the right.
Here is a sample analysis that illustrates why this is the case. Let’s say most OoN PPOs will pay you 1.0x-2.5x, but 1 in 10 will pay 6x and 1 in 50 will pay 10x. Here is your average reimbursement under a couple fee schedule scenarios:
As you can see from this example, the lower you set your fee schedule, the lower your average out-of-network reimbursement, so you are leaving revenue behind.
A fee schedule can be changed as often as you would like. We have sometimes had clients increase or decrease their fee schedule depending on the current need. A few have even increased and lowered it or vice versa in an attempt to test the market and what we were telling them. At one point we increased the fee schedule for one lab client in Texas from 3x to 4x and it increased their reimbursement 20% – meaning they suddenly got 20% more revenue without any increase in samples or any other changes in the business! This is extraordinary since there are very few ways a business can achieve this type of margin improvement. Their profits effectively doubled overnight.
So if a higher lab fee schedule means a higher average reimbursement and more profits, why not just put your fee schedule at 6x or 10x or 30x? First, if your charges are egregious (and the definition of egregious here is difficult to be too specific since that is a qualitative word, however, data on fee schedule distribution may be a good way to look at this), payers may decide to flag your laboratory and shut down reimbursement. They may do one of many things, including reviewing or auditing your claims, which means that for six months to a year or more none of your claims will get paid. They may also try and pursue a legal strategy and claim that the lab is doing something unethical or illegal.
Nothing is more important in setting an OoN lab fee schedule than patient balance billing. This is the primary market force countering high fee schedules. First, some definitions and an explanation of patient balance billing.
“Fee Schedule” is the provider’s total charge for a particular procedure code.
“Allowed Amount” is the price that the payer will pay, which should be but is not always the Usual and Customer Rate (UCR).
“Usual and Customary Rate” is supposed to be the average rate charged by physicians of a similar specialty in the same geography for a particular service. UCR is not regulated well, therefore it has morphed over time and become many different things because it is internally calculated and analyzed by insurance companies, who have a vested interest in manipulating this figure.
“Insurance Payment” is the amount that is paid by the insurance company after subtracting the patient responsible portion.
When medical billing is done for an out of network healthcare provider, the Fee Schedule is submitted to the payer. The payer determines it Allowed Rate and sends that back with the ERA/EOB. The payer then pays the Allowed Rate minus the patient responsible portion – any deductible, coinsurance, and copay.
The difference between the ‘Insurance Payment’ and the ‘Fee Schedule’ is the “Patient Balance”.
An example may help to illustrate this where the allowed amount for simplicity is 120% of the Medicare rate:
Medicare rate $1,500
Fee Schedule $3,000 (2x)
Allowed Amount $1,800 (120%)
Unmet Deductible $500
Coinsurance (40%) $600
Insurance Payment $400
Patient Balance $2,600
The above examples shows a patient balance of $2,600 when the fee schedule is 2x. Imagine what it will be when the fee schedule multiple is 10x. In the above example with a 10x fee schedule, the billed charges would be $15,000 and the patient would receive a balance bill of $14,600. This is obviously untenable.
The key differentiator in out-of-network “balance billing” is typically that the patient is responsible for the entire balance of the charge between what the payer pays and the laboratory fee schedule, unlike when a laboratory is contracted with the insurer where the patient is only responsible for the difference between the payment and the contracted rate, which is typically much lower.
Triple Whammy to Patients
Payers typically pay a smaller percent coinsurance out of network, patients typically have a higher deductible, and the patient is liable for the complete balance to the fee schedule, not just the contracted rate. This makes for an enormous deterrent to patients to getting OoN laboratory services because the billing can be so hard on them.
Adjusting Patient Balances
What most laboratories have done in the lab billing process is to treat the patients as if they are in network, meaning that the patient will not have a greater financial liability than if they had seen an in-network laboratory. See our other articles about patient balance billing, including treating patients as if they are in network for information on this practice. You may also talk to your laboratory billing company about the mechanics of how to implement this for your lab.
Some patients may still complain about high patient balances since they will receive an EOB from the insurance company that suggests that the patient owes a great deal of money. Older patients often misunderstand this and believe that the EOB is a patient statement and that they must pay it. Fortunately, most elderly patients are covered by Medicare and therefore would not receive an EOB that suggests large balances. Many laboratories as part of the revenue cycle management process give sales collaterals to their sales team that help them educate ordering physicians and let them know that the patients will not receive large bills and therefore they will not receive complaints from patients. Patient complaints are the number one deterrent for a physician practice in ordering tests from an OoN lab.
The ability to adjust patient balances means that the patients are not receiving huge bills and therefore they are free to choose the laboratory that best meets their clinical needs.
Most OoN laboratories fix their fee schedule at between 2.5x and 4x, although this does vary somewhat by region around the United States and by individual state. Some states that have higher average reimbursement like Wisconsin may have higher distributions. Some states that have laws more favorable to OoN providers including labs may also have higher fee schedules. When there is a great deal of competition, we may even see labs setting their fee schedule as low as 1.5x-2x Medicare rate. We saw toxicology laboratory billing for a number of years setting fee schedules as high as 6x Medicare since the market leaders Ameritox and Millenium were driving this practice. Rates have since come down as legal scrutiny on some of those companies have forced them to be more conservative, as well as increased competition in the market, and payers implementing more severe sanctions for high fee schedules.