BILL ANALYSIS Ó
AB 1124
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Date of Hearing: March 17, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1124 (Muratsuchi) - As Amended: February 14, 2014
Policy Committee: Health Vote:13-0
Urgency: Yes State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill suspends the "low-price rule" for Medi-Cal clinical
laboratory pricing for an additional 15 months. Specifically,
this bill suspends until July 1, 2015, for purposes of clinical
laboratory pricing, a regulation that prohibits providers from
charging Medi-Cal higher rates than rates they charge to other
purchasers for the same service.
This bill also changes a deadline by which the Department of
Health Care Services (DHCS) must adopt emergency regulations
implementing a new payment methodology for lab services for an
additional two years, until July 1, 2016.
FISCAL EFFECT
1)Suspending the application of the low-price rule for an
additional 15 months while a new methodology is being
developed could increase Medi-Cal costs by an unknown amount
(GF/federal funds) by eliminating the incentive for providers
to ensure Medi-Cal is being charged their lowest price.
2)It appears this bill will not affect the timing of DHCS's
implementation of a new rate methodology. The new methodology
may result in additional state savings (or higher costs) over
current interim rates. The additional sunset date extension
lessens any urgency to implement the new methodology. Further
delays in implementing the new payment methodology could
result in forgone savings, plausibly in the millions of
dollars annually (GF/federal funds), if new rates are several
percentage points lower than current interim rates. The
actual potential foregone savings (or potential additional
costs) associated with the new rate methodology is unknown.
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COMMENTS
1)Purpose . According to the author, DHCS has projected they will
not be able to complete development of a new rate methodology
for reimbursing clinical lab services under Medi-Cal by the
April 1, 2014 sunset on the suspension of the low-price rule.
This bill extends the sunset to June 30, 2015. If the
extension is not granted, the low-price rule would go back
into effect. The author contends this bill provides DHCS the
additional time needed to develop the new rate methodology.
This bill is sponsored by the California Clinical Laboratory
Association.
2)Background: Low-Price Rule and Litigation . The low-price rule,
Section 51501(a) of Title 22 of the California Code of
Regulations, requires all providers to ensure they do not
charge Medi-Cal any more than they charge other purchasers of
comparable services under comparable circumstances.
Disagreements over interpretation of the rule have engendered
litigation. In 2011, the California Attorney General settled,
with Quest Diagnostics for $241 million and LabCorp for $49.5
million, charges that the lab providers overbilled Medi-Cal
based on pricing arrangements that offered other payers
discounts below what Medi-Cal was billed, in alleged violation
of the rule.
3)New Payment Methodology . As part of the 2012-13 budget, the
administration proposed and the Legislature adopted trailer
bill language requiring DHCS to establish a new reimbursement
methodology for lab services (AB 1494 (Budget Committee)
Chapter 28, Statutes of 2012). The intent was to establish
fair prices and avoid further litigation related to the
low-price rule. AB 1494 attempted to construct a process by
which DHCS develops a rate by examining what other payers are
paying for lab services. It required labs to submit certain
data for this purpose, and suspended the low-price rule until
July 1, 2013 while the methodology was being developed.
Subsequent legislation (AB 82 (Committee on Budget), Chapter
23, Statutes of 2013) suspended the low-price rule again until
April 1, 2014 because the methodology had not been developed
by the original sunset date. This bill is the second sunset
extension.
Until the new methodology is developed, lab rates are set at
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their historic levels (80% of Medicare rates) and subject to
an up to 10% payment reduction until the new methodology is
developed. This reduction was on top of a prior 10% reduction
that applied to most provider types, pursuant to AB 97 (Budget
Committee), Chapter 3, Statutes of 2011. Neither reduction has
been implemented due to delays in federal approval, but
implementation is planned for this year and both reductions
will be recouped retroactively from lab providers.
Existing law suspends the low-price rule indefinitely once the
new methodology is in place. While the low-price rule is
suspended, lab providers are no longer required to ensure
Medi-Cal gets the lowest price. Current statutory provisions
adopted in AB 1494 also do not require Medi-Cal gets the
lowest price, but require that reimbursement not exceed the
lowest of:
a) The amount billed.
b) The charge to the general public.
c) 80% of the lowest maximum allowance established by the
federal Medicare Program for the same or similar services.
d) A reimbursement rate based on an average of the lowest
amount that other payers and other state Medicaid programs
are paying for similar clinical laboratory or laboratory
services.
Given neither the amount billed, nor the charge to the general
public (charges that do not reflect negotiated volume
pricing), nor 80% of Medicare rates (see below) appear to
meaningfully constrain rates, it appears (d) is likely to
functionally control the rate unless Medicare prices change
significantly in the future. Thus, the state's ability to
ensure adequate access to lab services at low prices in the
fee-for-service program hinges on DHCS's capacity to develop
the new methodology, and to collect, analyze, and process the
data to develop fair rates on an ongoing basis. DHCS states
they have worked extensively with stakeholders to ensure an
optimal design for data submission, and they received the
requested data from labs in August 2013. They have since
analyzed the data and developed several methodologies, which
they intend to share this spring. Once the methodology has
been finalized following inclusion of stakeholder input, DHCS
will submit it for federal approval and will implement upon
gaining approval.
1)Medicare Lab Rates that Dictate Current Medi-Cal Rates Called
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High and Outdated . Currently, while the new methodology is
being developed, the statutory maximum amount Medi-Cal may pay
for a lab test is 80% of the lowest price Medicare pays for
the test, with payment reductions applied as noted above.
This bill continues this status quo for an additional 15
months. Medicare rates are commonly used as a pricing
benchmark throughout the health care system, and are usually
higher than Medi-Cal rates and lower than commercial rates.
However, in this case, the Department of Health and Human
Services Office of the Inspector General (OIG) indicates in a
July 2013 report that Medicare lab rates for common services
were 18-30% higher on average than the rates negotiated by
three commercial plans that serve the vast majority of federal
workers through the Federal Employee Health Benefits Program
(FEHBP).
This report examined 20 tests that accounted for 47% of the
volume and 56% of the expenditures for lab tests reimbursed by
Medicare in 2010. This is significant for the state, since
current Medi-Cal rates are set at 80% of Medicare rates, and
Medicare rates are also intended to provide a backstop against
high prices according to the AB 1494 methodology described
above. Given OIG's findings, Medicare rates may not provide a
meaningful backstop going forward, increasing pressure on the
state to ascertain a fair price for Medi-Cal.
2)Excluding Payment Reductions, Current Medi-Cal Lab Rates
Appear Relatively High . Unlike many Medi-Cal payment rates
which are far below commercial rates, staff analysis indicates
current average Medi-Cal rates for those 20 high-volume
services studied in the OIG report compare favorably to
commercial rates paid by the FEHBP plans (on average, reported
Medi-Cal rates were nearly 90% of FEHBP rates). Medi-Cal rates
are also highly correlated with FEHBP rates. Of the 20
services studied, 13 were at least 90% of FEHBP rates, eight
were actually higher than FEHBP rates, and only seven were
lower. For comparison, a 2001 study funded by the California
Health Care Foundation found that Medi-Cal fee-for-service
rates for a variety of high-volume services ranged from 35% to
60% of commercial rates. An analysis by the Kaiser Family
Foundation of 2012 physician payments found Medi-Cal rates
were approximately 51% of Medicare rates on average.
As described above, lab payments are currently subject to two
separate payment reductions from the "80% of Medicare" maximum
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rate levels established in statute. These reductions appear
to put current interim lab rates more in line with the lower
rates Medi-Cal pays for other services. The chart below
illustrates an example of a common test with the Medicare
rate, Medi-Cal rate, and average FEHBP rates reflected, as
well as the Medi-Cal payment reductions.
3)Urgency . This bill contains an urgency clause, stating it is
necessary the bill take immediate effect in order to ensure
DHCS can establish a new pricing methodology by the new
statutory deadline.
Analysis Prepared by : Lisa Murawski / APPR. / (916) 319-2081