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"Grandfather ­TC" Anatomic Pathology Services Contracting with hospitals not covered by legislative override Purpose: A review of options available to an independent laboratory when negotiating with a hospital to receive reimbursement for providing anatomic pathology technical component services to the hospital's patients1. Background Effective July 23, 1999 Medicare changed its position on separate reimbursement to independent laboratories for anatomic pathology technical component services to Fee for Service Medicare hospital in and out patients. Pathologists' practices that provide or wish to provide TC Services to a hospital's patients where the hospital is not covered by the legislative override of Medicare's changed policy will need to negotiate hospital reimbursement for their TC Services . Which hospitals are involved? At this time only hospitals that did not have an arrangement with an independent laboratory that was separately billing for anatomic pathology technical component services on July 22, 1999 or those not covered by a legislative override of Medicare's changed policy are impacted by this change. The concepts in this document could also apply to independent laboratory / hospital relationships that chose to have the hospital reimburse the independent laboratory for anatomic pathology technical component services. What services are covered? The services addressed are limited to physician anatomic pathology technical component services (TC Services) included in the CMS physician fee schedule and are provided to by an independent laboratory. Topics Covered This document addresses the following: Understanding Boundaries of Responsibility Laboratory Information Systems considerations How hospitals are reimbursed for TC Services Units of billing options based on the information that is available Knowing your cost Alternatives for structuring the financial relationship What payers are included? Collecting fees

. Through out this document the terms pathologists' practice, practice and independent laboratory are used interchangeably.

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August 2007 College of American Pathologists

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"Grandfather ­TC" Anatomic Pathology Services Boundaries of Responsibility Before entering into negotiations the practice should walk through each step of the process of providing TC services and understand which organization and who (individual, position or department) in that organization is responsible for each step in the process and its associated cost. In other words, where are the boundaries of responsibility? Here is an abbreviated list of considerations: Acquiring the specimen o Specimen containers o Specimen labeling o Requisitions Patient Demographics o Order placement Specimen transportation & tracking Accessioning the specimen o Patient demographics Gross Room o Personnel o Supplies o Equipment o Maintenance ­ cost and performance of routine o Transcription o Rent Frozen Section Room o Supplies o Equipment o Maintenance ­ cost and performance of routine o Transcription o Rent o CLIA licensing Transcription Report delivery Reference Laboratory Services o Pathologist ordered o Referring physician ordered o Patient requested Blocks and slides o Who retains custodianship? o Who retrieves them during the retention period? Secretarial Support (non-transcription) for pathologists o In the lab o At the hospital

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"Grandfather ­TC" Anatomic Pathology Services Is the hospital involved in any outreach activities? If so, will they be included in this agreement or part of the practices outreach? o How will hospital owned physician offices be included in relationship? o Surgery Centers ­ both hospital related and independent While the above list does not cover everything or apply in every situation it does provide a starting point for developing a practice's initial boundaries of responsibility. In the practice's preparation for negotiations it will need to know where it assumes the boundaries of responsibility exist for each step. Also, how flexible, and to what extent each responsibility boundary can be shifted and the impact of shifting major boundaries of responsibility will have on the pathologist's practice. Having this information before entering into negotiations and developing a mutual understanding of the boundaries of responsibility between the practice and the hospital will help prevent misunderstandings and promote a positive relationship with the hospital. Laboratory Information Systems (LIS) considerations The product of most pathology practices is information which in today's world is predominantly handled electronically. In a relationship between a hospital and an independent laboratory there is typically one of three ways by which the LIS and its support is provided. Type 1 ­ From negotiation standpoint the simplest alternative is to have the practice own the LIS and use paper based requisitions and reports. In this approach the practice has the responsibility for the LIS. Along with this responsibility comes the capitalization cost, the freedom to choose the LIS vendor and the responsibility for its functionality and support. Type 2 - The next possibility is the hospital has an information system and the practice uses owns the LIS. This typically involves interfacing the two systems. Here are some key questions that will need to be answered when developing the interface: What information will be exchanged? o Patient demographics The key information for processing the specimen needs to arrive in the practice's system at the same time or before the specimen. When will billing demographics arrive in the practice's system and how will the timing affect the quality of the information received? o Requisition How will the service be ordered so tracking can begin at the point of the specimen is obtained? How and when in the process are specimens labeled and how does this effect the interface and/or equipment (e.g. printers) requirements and connectivity.

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"Grandfather ­TC" Anatomic Pathology Services o Report How will the report information be transferred? HL7? Text? Data Fields? PDF? How will information appear in the hospitals system to the referring physician? o Billing Information CPT Codes for the hospital's billing · How are they converted to APCs for outpatient billing? Diagnosis Codes · How will pathologists' diagnosis codes be returned to the system? Timing ­ In the hospital's finance department's efforts to get bills out as quickly as possible, how will they handle the `late' charges generated by technical component services? Who is responsible for the cost for the interface? o Hospital information system portion? o Practice's LIS? Identify the responsible individuals for implementing the interface o Understand the priority and importance of the interface o Identify executives responsible for timely implementation o Identify who, when and what of the initial documents to be exchanged to negotiate the information format and data elements to be transferred. Data table maintenance o Who is responsible for maintaining each organizations translation tables in sync? o What is the process for adding/changing/deleting tests? Upgrades and systems changes o Practice system changes How will the practice notify the hospital of pending system changes? What lead time is required for information or interface changes? Type 3 - While there may be other possibilities the last one listed here is the situation where the hospital's system will be used for all phases of providing TC Services. Questions the practice may want consider for this possibility are: Who is responsible for implementation and training on system upgrades affecting the provision of technical component services? What is the process of implementing operational changes? How can the practice request and perhaps expedite software enhancements / upgrades? No matter if the practice uses its own LIS and receives paper requisitions and distributes paper reports, interfaces an LIS with the hospital's system or uses the hospital's system for all functions the practice should understand the impact the LIS arrangement on the hospital/practice relationship. Areas of relationship the LIS could

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"Grandfather ­TC" Anatomic Pathology Services impact are the start date, operations, finances, and the practice's ability to make changes to improve patient care, operational efficiency and regulatory compliance. How hospitals are reimbursed for TC Services This section provides an introduction to how hospitals are reimbursed for TC Services from Medicare. Understanding how and what amount your hospital will be reimbursed for TC Services will help the practice negotiate with the hospital. The practice may also want to learn how their state's Medicaid and the hospital's other third party payers reimburse the hospital for technical component services. In considering the hospital's third party reimbursement, consideration should be made for the typically higher hospital charges, the hospitals relative negotiating position with third party-payers and the recent changes in RVUs that have increased TC Service reimbursement amounts. Hospital inpatients ­ Generally the hospital does not receive additional reimbursement for TC Services due to Prospective Payment System's(PPS) Diagnosis Related Groups (DRGs). The practice may want to be aware of how accurate and timely service affects hospital costs. A practice that demonstrates its understanding of its impact on the hospital's other costs will be in a better position to retain the hospital as a customer and negotiate reimbursement for its services. Hospital outpatients ­ Generally the hospital receives additional reimbursement for TC Services under the Outpatient Prospective Payment System (OPPS). OPPS Addendum B which is available from the Federal Register provides the current year translation from HCPCS / CPT codes into the appropriate OPPS Ambulatory Payment Classifications (APCs). APCs are what are filed by the hospital for reimbursement under OPPS. For example, Federal Register Vol 71 No 226 page 68353 lists the following as translating to a APC 0343 which has payment rate of $32.03: 85097 86078 88112 88172 88173 88182 88189 88304 88305 88319 88331 88333 88342 88346 88347 88355 88360 88385 89049 89220

For the hospital the payment rate will be adjusted for its economic area and other factors. The calculation for the actual payment rate is complicated. Annually CMS provides computer code to help hospitals determine their reimbursement rates. CMS reviews CPT to APC conversion and when justified, changes what CPTs are included in each APC. More and current information regarding OPPS can be found at www.cms.gov . When attempting to understand what the hospital will receive for TC Services the practice may also want to consider the hospital's billing cost. Billing costs will affect the

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"Grandfather ­TC" Anatomic Pathology Services net revenue the hospital has available to pay the practice from their reimbursement for TC Services. The practice may be in a better negotiating position with the hospital if it makes an effort to assist the hospital in accurately capturing all TC Service charges. Billing unit options based on the information that is available Later in this document we will review different methods for charging the hospital for technical component services. The methods available to the practice will depend on the information that is reliably available. CPT Codes - When approaching this topic the first billing unit that comes to mind is CPT codes. When considering using CPT codes the practice will need to decide whether to use all CPT codes or just those associated with TC Services. For example, 85097 does not have a 85097-TC listed in the CMS physician fee schedule as it is considered a professional only service. However, 85097 does receive a reduced reimbursement when provided in a facility and it does translate to APC 0343. The net result is the practice will receive lower reimbursement for 85097 and the hospital can receive TC Service reimbursement. This example demonstrates that if a practice is going to use CPTs as a billing unit, it should understand the impact of not including some `professional only' CPTs. Case Counts - Another potential data element on which to base the practice's charges to the hospital is case count. If the practice's system allows accurate counting and reporting of case counts this can be a used in billing the hospital for the practice's TC Services. If the practice uses accession numbers to count cases it should be aware that some computer system implementations use multiple accession numbers for one case. For example, an accession number is assigned for the primary specimen and then additional accession numbers for special stains. This does not eliminate the possibility of using case counts for billing but it should be understood by all parties how a case is counted. Block and Slide Counts - The final potential unit to be reviewed is the use of block and slide counts. If the practice's system can reliably count blocks and slides these data elements can provide a basis for billing to the hospital. Key consideration is whether or not the practice is capturing counts for recuts and special stains. In some situations a good implementation of this method will be considered the most accurate way of the hospital paying the cost of the TC Services provided to its patients. KNOW YOUR COST Now that the practice knows what billing units are available and where it expects the boundaries of responsibility to be drawn, the practice can analyze its costs of providing TC Services. This is not to suggest that the practice does not know the cost in total, but the key is to know the cost by billing unit.

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"Grandfather ­TC" Anatomic Pathology Services The purpose of knowing the practice's cost is not to rack up accounting fees but to enable the practice to understand at what point it needs to walk away from the negotiations. A hospital ­ practice relationship where the practice is losing money can not endure indefinitely and presents a compliance concerns for both parties (providing services below cost is generally considered inducement or a kickback). A practice that knows it costs will know where it can be flexible and where it must be rigid in the negotiation process. Overhead, capital requirements and other considerations When determining the cost of providing TC Services the practice may want to consider not only the operational cost of services but also its overhead cost and capital requirements. A practice that is not able to continue investing in itself may be sacrificing its future. Also, a practice should keep in mind that by providing TC Services to the hospital it is freeing the hospital's capital to invest in other ventures. The practice should also take into account the cost of directing the lab providing the TC Services as this cost is not included in its professional reimbursement. When considering costs the practice may want to lump together cost for routine testing and consider separately the cost for more expensive services like flow cytometry. The next section will review calculating costs and how to use cost in association with particular billing units. ALTERNATIVES FOR STRUCTURING THE FINANCIAL RELATIONSHIP Some hospitals may consider not reimbursing a practice for TC Services but this approach is not best interest for either party. As mentioned above, providing services to a referral source below cost exposes both parties to charges of inducement and possibly subjects them to repayment of reimbursement, fines and criminal charges. The hospital would also be creating an unsustainable relationship. Before the hospital succumbs to the `who cares' syndrome it should consider the investment it would require to change TC Service providers. CPT based billing ­ This is typically the first and easiest billing unit practices and hospitals consider. For some it is quickly followed by setting the price schedule at some percentage of the Medicare fee schedule. The advantage of this method is it is easily understood and typically easy to implement. It also has the advantage of incorporating new services using a standardized method and overtime adjusting their value relative to other services. However, it further subjects both the practice and the hospital to the vagaries of politics and CMS. One way to limit the impact of government changes to the fee schedule is to define the local and date of the Medicare Fee Schedule on which the price schedule is based. While the hospital and the pathologists' practice goals are quality cost effective patient care, the influences on the Medicare fee schedule are much broader. Another

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"Grandfather ­TC" Anatomic Pathology Services disadvantage is the wide variety of costs that can be associated with a single CPT code like 88305. Depending on the case mix CPT dependent billing can either be lucrative or provide a death knell to the pathologists' practice. A practice that knows its costs for each CPT will be in the best position to negotiate a customized fee schedule or exceptions to a percent of Medicare Fee Schedule pricing. Cost plus based billing ­ Another approach that practices have found successful is using a cost plus based method for billing TC Services to the hospital. Commonly a cost plus based system uses either a case count or block/slide count billing unit. The advantage of this system is it provides a way for the pathologists' practice and the hospital to predict and manage their cost and revenue. It also provides the basis for fact based negotiations when there are changes in the costs of delivering TC Services Whether this approach is setup as cost plus or at cost depends on the goals of the hospital-practice relationship, and a practice's margin requirements. Another consideration is how the practice is able to generate capital to expand its test menu and make improvements in patient care, customer service and efficiency. This approach does require more initial work in establishing the reliability of the billing unit and associate costs. It also requires and can help foster a cooperative relationship between the hospital and the pathologists' practice. However, it can pay off in making it easier to establishing a win-win atmosphere for the hospital-practice relationship. Case based ­ The simplest way to look at this is to compute the cost of providing TC Services over a specific period of time (preferably a year) and the number of cases for the same time period and divide the number of cases into the total costs. For each billing period the practice would create a count and listing of cases to bill the hospital. This method can be more refined by systems by breaking down case counts and associated cost by type of case. Block / Slide based ­ This approach requires separating out the total cost for blocks and total cost on slides. The appropriate total cost is then divided by the total number of blocks and slides respectively. A practice can make the above cost based methods more robust by separating out the counting of and associated costs for high cost and/or special tests and charge them by an appropriate billing unit. For example, if flow cytometry was to be billed separately its cost would be removed from the total cost and perhaps billed at cost based on CPT or billed by flow cytometry case by just using CPT 88185 as the billing unit. Setting up an approach that provides for special testing can allow for the addition of new tests as a separate more manageable issue from routine services. When setting up the financial relationship the practice may not want to limit its options to just one approach or billing unit. Carving out specific high volume or high cost services can be beneficial to both parties. The practice will want to find a balance between a simple approach that is easy to implement and one that is so complicated no one can understand it. Whatever approach is used it should allow for the introduction of new

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"Grandfather ­TC" Anatomic Pathology Services services, and the management of costs and revenues for high volume and high cost services. What payers are included? The Grandfather ­TC issue does not cover all payers for all practices. Each practice will decide and negotiate for which payers TC Services will be billed to the hospital and not to the payer. Medicare or other subset of payers ­ If the direct billing to patients for TC Services limitation only affects Medicare (or other subset of payers), the practice may want to bill all unaffected payers directly. This can be advantageous to both the practice and the hospital. Typically, pathologists' practices are better at billing and collecting for their services than hospitals and for the hospital it avoids the issue of late charges for nonMedicare patients. Practices who direct bill in this manner will want to be able to bill the hospital for patients that are subsequently found to be Medicare patients and understand how patients who are subsequently found to not be Medicare patients will be handled. Other practices have found it advantageous to put a time limit on when a patient can be switched between Medicare and non-Medicare status. All payers ­ In situations where the payer contracting is problematic for the practice or there are other advantages to the practice, it may want to bill all TC Services directly to the hospital. Collecting the fees When establishing this type of relationship with a hospital the practice will want to have a strategy in place to handle non-payment of fees. In the contract the practice may want to specify when charges are to be generated and when payment is due. The contract may also include what penalty the hospital will incur for delayed payments. If the hospital continues to not pay appropriately, the practice should consider specifying at what point non-payment will terminate the relationship between the hospital and the practice. The practice may want to consider how quickly the hospital gets paid when billing for TC Services. A major difference in when the practice gets paid and when the hospital gets paid can have an impact on the fees the practice receives. If the practice is getting paid much sooner than the hospital then it can likely expect to get a lower fee. However, if the opposite is true the practice may want to negotiate higher fees since it is helping to finance the hospital. In general, if the pathologists' practice is consistent in promptly following-up on any delayed payments and demonstrating an attitude that timely payment is important, the hospital is more likely to be a consistent and timely payer.

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"Grandfather ­TC" Anatomic Pathology Services Conclusion Practices that prepare for negotiating with their hospitals are more likely to achieve a win-win relationship. The preparation should include: Understanding the boundaries of responsibility ­ the organization responsible for the operation and cost of each step of the process of providing TC Services Laboratory Information Systems considerations ­ what system will be used, how it will be implemented, supported and enhanced and which organization is responsible for the associated costs. How hospitals are reimbursed for TC services ­ No additional reimbursement for inpatients and OPPS APCs for outpatients. Billing unit options ­ CPT, Case and/or block and slide counts Know your cost ­ Knowing when to walk away and where there is flexibility. Alternatives for structuring the financial relationship ­ Which billing unit or combination of billing units and what is the basis for the fee schedule. What payers are included? ­ Medicare, Medicare and subset of other payers or all payers. Collecting fees ­ Practice strategy to collect delayed or non-existent payments and the impact of timing can have on the fee schedule.

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