Medicare consists of two parts: Medicare Part A covers inpatient hospitalization costs, once the annual deductible has been met, for almost everyone age 65 and older plus the permanently disabled and those with chronic renal disease. Coverage under Part A is automatic. Payment for inpatient care in most hospitals is based on a fixed fee determined for each diagnosis (diagnosis-related groups, DRGs). DRGs are not applied to physician services. Laboratory tests performed for Medicare inpatients are considered a part of the DRG payment. Medicare Part B covers physician services, outpatient clinical laboratory, and x-ray tests for eligible persons along with other medical services and supplies not covered under Part A. Part B is voluntary; however, most who are eligible sign up. There is an annual deductible and a 20% co-payment for all Part B services except outpatient clinical laboratory services.

Most clinical laboratory procedures are paid from laboratory fee schedules issued by individual Medicare carriers. Medicare carriers are contractors, usually large insurance companies, who administer Part B Medicare services in each state. There are 57 carriers, including one for each state and territory plus two in California and three in New York. All physician services, including pathology services not included in the laboratory fee schedule, are paid according to the Physician Fee Schedule. Unlike the laboratory fee schedule, under this schedule co-payments of 20% are collected from the beneficiary so that the actual payment received from Medicare for a given procedure is 80% of the Physician Fee Schedule amount.

Before Medicare pays for any test or diagnostic service, two basic criteria must be met: (a) the service must be covered by Medicare, and (b) the service must be medically necessary and indicated. Once these two criteria are met, Medicare pays for most clinical laboratory tests based on the applicable Laboratory Fee Schedule. Each carrier publishes a unique laboratory fee schedule and adjusts payment levels as determined by Congress during the annual budget process. Updates, when granted, are effective January 1st.

national fee limitations

National caps apply to most laboratory tests. These caps define the maximum amount a carrier may pay for a given test. The 1998 National Limitation amounts for any given test are based on 74% of the median amount listed on all carriers’ fee schedules for a particular laboratory test. National caps were reduced from 76% to 74% effective January 1, 1998, resulting in a reduction of 2.63% for most clinical laboratory tests.

Fee schedules may be adjusted only by statutory changes approved by Congress. When the fee schedule is adjusted by a given percentage, national caps are adjusted up or down by the same amount. Medicare payment for clinical laboratory tests is always the lowest of the fee schedule, the national cap, or the actual amount billed. The changes shown in Table 1,have been made to laboratory fees since 1984, when the Laboratory Fee Schedule was established. The dollar amounts at the right-hand side of Table 1 show the effect of fee schedule changes on a test that was reimbursed at $10.00 in 1984.

Certain clinical diagnosis procedures listed in the Pathology and Laboratory sections of the Physicians’ Current Procedural Terminology (CPT) are not considered a part of the laboratory fee schedule. The procedures listed below are paid from the Physician Fee Schedule at 80% of the amount listed on that fee schedule. The beneficiary is responsible for the remaining 20% once the annual deductible has been met. These procedures are not subject to national limitations:

    * Clinical pathology consultations
    * Bone marrow smears and biopsy
    * Blood bank physician services
    * Skin tests
    * Anatomical and surgical pathology services
    * Duodenal and gastric intubation
    * Sputum and sweat collection

Medicare tests must be billed on an assigned basis. This means that the provider must accept the Medicare reimbursement as payment in full for any covered laboratory test. Medicare patients may not be billed for any additional amounts for covered tests. (See below for policies regarding tests that are not covered by Medicare). Medicare patients may be billed for non-covered services. The mandatory assignment requirement for laboratory tests applies regardless of whether the physician is participating (accepts assignment for all Medicare services) or non-participating (does not accept assignment for all Medicare services).

Direct billing is also required for all Medicare-reimbursed laboratory tests. Tests must be billed directly to Medicare by the laboratory or physician performing the tests. If an outside laboratory performs a test on a referral from a physician, only the reference laboratory may legally bill Medicare for the procedure.

However, hospitals and reference laboratories that send specimens to other laboratories may bill Medicare for tests performed by the other laboratories if the referring laboratory meets any one of the following three exceptions:

    * (a) The referring laboratory is located in or is part of a rural hospital;
    * (b) The referring laboratory is wholly owned by the reference laboratory, or the referring laboratory wholly owns the reference laboratory, or both referring laboratory and reference laboratory are wholly owned by a third entity; or
    * (c) No more than 30% of the clinical diagnostic tests for which a laboratory receives requests annually are performed by another laboratory other than an ownership-related laboratory.

For the purpose of the 30% exception, each CPT code billed counts as one test. For example, when CPT code 80054 is billed, it is counted as one test although 12 tests are performed.