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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

• Staff Labor• Medical Labor• Supplies & Materials• Depreciable Assets• Expensed Equipment• Royalties

Cost Type Categories

• Overhead• Facilities charges• IT charges• Hospital/Clinic Management• Non-revenue work units• Write-offs

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Cost Definition (continued)Direct and Indirect

• Direct costs are expenses that are closely related to the test or service being provided (a few degrees)

• Reagents, Controls• Indirect costs are expenses that

are loosely related to the test or service being provided (many degrees)

• Safety glasses, staff computers, anti-fatigue mats

Fixed and Variable

• Fixed costs are expenses that have no link or a weak link to volume

• Instruments, lab space• Variable costs are expenses that

have a strong link to volume• Reagents, controls

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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 StartItems 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

• Total Spend = $200,000 per year• Total Purchased = 100 boxes per

year• Results = 10 per box• Required QC = 1 result per box• Billed Patients = 850 per year• Reimbursement = $325

Calculations

• Purchase Price = $2,000 per box

• Purchased Results = 1,000

• Price per Result = $200

• QC Volume = 100 results per year

• QC Cost = $20,000 cost per year

• Total Cost = $235 per billed patient

• 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

• Purchase Price = $175,000• Depreciation Schedule = $35,000

per year for 5 years• Full Capacity Volume = 25,000

per year• Billed Volume = 15,750 per year• Reimbursement = $18 per test

Calculations

• Actual Cost = $2.22 per billable

• Standard Cost = $1.40 per billable

• Actual Cost to Reimbursement = 12.3%

• Standard Cost to Reimbursement = 7.8%

• Unused Capacity = 9,250 billables

• Unused Capacity Value = $7,585 per year

• Unused Capacity Value = $37,925 over the life of the depreciation schedule

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BudgetingSetting 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

• High level groupings of tests that have similar methodologies

• Allows comparisons of tests within a group

• Allows for variation in cost distribution based on classification

Examples of Groupings

• Traditional Chemistry• Traditional Microbiology• Hematology• Molecular• Mass Spectrometry• 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

• Test Reimbursement = $50• Cost Category Allocations

• Bench Labor = 30%• Director Labor = 5%• Supplies = 15%• Equipment = 15%• Overhead = 15%• Net Contribution = 20%

Calculations

• Cost Category Budgets• Bench Labor = $15.00• Director Labor = $2.50• Supplies = $7.50• Equipment = $7.50• Overhead = $7.50• Net Contribution = $10.00

• 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

• Reimbursement = $85• Test Type = Molecular• Bench Labor Allocation = 15%• Indirect Labor Deduction = 25%• Billed Patients = 8,500 per year• Fully Burdened rate = $45 per

hour ($0.75/minute)• FTE = 2,080 hours per year

Calculations

• Bench Labor Dollars = $12.75 per test

• Indirect Labor Deduction = ($3.19) per test

• Direct Bench Labor Dollars = $9.56 per test

• Direct Bench Labor Time = 12.7 minutes per test

• Indirect Bench Labor Time = 4.3 minutes per test

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Reverse Engineering Labor (continued)

Calculations (continued)

• Direct Labor per year = 1,799.2 hours

• Direct Labor FTE = 0.87 FTE

• Indirect Labor per year = 609.2 hours

• Indirect Labor FTE = 0.29 FTE

• Total Labor hours per year = 2,408.4 hours

• Total Labor FTE per year = 1.2 FTE

Inferred Conclusion

• I know it will take at least 1.2 FTE to support this test, without volume variations and TAT taken into consideration

• If I measure how long the direct effort takes, I can then get an idea of if I’m over budget or not. I can then work on finding efficiencies in the process

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Cost ModelingUnderstanding 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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Actual Cost - Activity Based Costing

Step 1- Patient Registration $1.19 Step 2- Order Lab test $.95 Step 3- Specimen Collection $1.51

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

Step 8- Lab/Validate Results $3.25 Step 9- Report Results $.23 Step 10- Store/Dispose Specimen $.67

Total Process Cost = $13.02

Financial CostsRegistration $66,110Order Test $52,777Specimen Collection $83,888Delivery $63,328Processing $126,665Testing $84,999QA/QC $14,999Lab/Validate Result $180,554Report Results $12,778Store/Disposal $37,222

$723,320

Testing Operational Costs

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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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Standard Cost – Activity Based Costing

Step 1- Patient Registration $.82 Step 2- Order Lab test $.55 Step 3- Specimen Collection $1.12

Step 4- Specimen Transportation $.79 Step 5- Specimen Processing $2.13 Step 6- testing Process QA/QC $.23 Step 7- Specimen Testing $1.32

Step 8- Lab/Validate Results $2.68 Step 9- Report Results $.21 Step 10- Store/Dispose Specimen $.19

Total Process Cost = $10.04

Financial CostsRegistration $45,555Order Test $30,555Specimen Collection $62,222Delivery $43,888Processing $118,332Testing $73,333QA/QC $12,778Lab/Validate Result $148,887Report Results $11,667Store/Disposal $10,555

$557,772

Testing Operational Costs

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• 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

Identifying Specific Cost Savings to Improve Viability

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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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Identify Opportunities

Identify and Prioritize the Critical Few

Measure the Critical Few

Know the Critical Few

Select the Strategic One

Conquer the Strategic One

Control the Conquered

7 Steps of Effective

Cost Control

Continuous Cost Control

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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

Too much walking No measurement system

Reagents stored outside Lab

No standard work

No spare parts on hand

New Lab personnel Humidity in Summer Instrument stalls

MachinesManpower

Methods/ProcessMaterials

Process Downtime

Problem Statement

Measurement

Mother Nature

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Select the Critical One

Just do it! Simplify the Project?

Lower Priority? Is Project Worth Doing?

Project 1

Project 4 Project 3

Project 2

Project 6

Project 5

Low Difficulty, Cost, Risk High

HighR

etur

n on

Inve

stm

ent

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Improve your Test Cost• Focus on the critical parameter or cost• Evaluate options for improving• Optimize on your options• Implement the savings plan• Monitor

• Balanced metrics• Test cost revue becomes a normal

business practice• REPEAT THE PROCESS!!

Identify Opportunities

Identify and Prioritize the Critical Few

Measure the Critical Few

Know the Critical Few

Select the Strategic One

Conquer the Strategic One

Control the Conquered

7 Steps of Effective Cost

Control

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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