How Medicare Screwed Up Cost Saving in Lab Tests

(MoneyWatch)  Good deeds rarely go unpunished in the field of healthcare reform. And punishment is exactly what's befallen a Medicare demonstration project intended to save money by creating a competitive-bidding system for diagnostic laboratory tests.

A federal judge yesterday issued a preliminary junction that stalls the effort, which was to get underway April 11 in San Diego County. Medicare normally pays for lab tests at a fixed rate set by a complex formula, but in 2003 Congress ordered the program to devise a way for diagnostic laboratories to bid for the business the same way many federal contractors do. (At least if they're not Blackwater.)

Three local healthcare outfits -- Scripps Health and Sharp Healthcare, both nonprofit hospital groups that operate their own labs, and a diagnostic lab called Internist Laboratory -- filed suit, arguing that the program would harm patient care and drive smaller labs out of business. Judge Thomas Whelan agreed that the plaintiffs were likely to win the case, and ordered Medicare to put the program on hold pending a trial.

It's certainly true that cost savings in healthcare typically come out of someone else's pocket, as the WSJ Health Blog noted recently. Naturally, most such efforts spark a fight, usually accompanied by charges that the savings would harm patients. And that seems to be where the medical labs stand; the head of the American Clinical Laboratory Association told the WSJ blog that the judge's ruling "strengthens the case that Congress should repeal competitive bidding for labs."

In fact, it's not clear it does anything of the sort. Medicare and the contractor who helped design the pilot project, RTI International, apparently took a number of shortcuts in putting it together. They don't, for instance, seem to have followed federal administrative rules that require publication of new program guidelines in the Federal Register for public comment, and appear to have disregarded a congressional stipulation that explicitly limited the program to "entities that did not have a face-to-face encounter with the individual" -- a definition that would presumably exempt integrated hospital systems like Scripps and Sharp.

So don't feel too bad for Medicare if it ends up losing this one, because it pretty clearly did a terrible job. But there's no reason to buy the medical-lab spin on things, either, springing as it does from sheer self-interest. At least you can judge for yourself: The lab association has already put the judge's opinion on its Web site (PDF link).

(Photo of the 45th General Hospital Laboratory during World War II from Flickr user otisarchives1, used under Creative Commons.)