Grandfather Expiration Leaves Pathology Labs Shortchanged – Amending Your Independent Lab Agreement


Prior to January 1, 2010, Medicare reimbursed independent laboratories directly for the technical component of anatomic pathology services if the hospital they serve was grandfathered through use of an independent laboratory in 1999. This grandfather provision expired on January 1, and although a permanent grandfathering provision was provided for in both the House and Senate healthcare reform bills, laboratories that are relying on Medicare’s reimbursement may never receive payment for services provided to these grandfathered hospitals. Ultimately, if your hospital has enjoyed this grandfather provision for the past 10 years, you may now need to amend your contract with your laboratory to begin paying the laboratory fair market value (FMV) for the technical component of anatomic pathology services.

How Are Anatomic Pathology Services Compensated?

Pathology is divided into two major specialties: clinical and anatomic. Clinical pathology pertains to medical leadership, oversight, and services related to diagnostic testing activities and functions within the laboratory. Anatomic pathology, as defined by the College of American Pathologists, is “a branch of the medical specialty of pathology that principally focuses on the diagnosis of human disease through the examination of cells, fluids, and tissues, using appropriate technologies.” The scope of the practice of anatomic pathology also includes assisting clinicians in patient management (e.g., through participation in multidisciplinary care conferences such as tumor boards) and in hospital-defined medical staff activities, such as patient care oversight committees, education, and administration and management.

The reimbursement environment for anatomic pathology services is complex. Until January 1, 2010, Medicare would reimburse an independent lab directly for the technical component of anatomic pathology services if the hospital had an arrangement with an independent lab as of July 22, 1999. For hospitals that did not have an arrangement with an independent lab on that date, Medicare considers the technical component of anatomic pathology services to be included in the Part A DRG payment to the hospital. In this situation, it is presumed that the hospital and lab will establish an agreement whereby the hospital compensates the lab for technical anatomic pathology services provided by it under the outsourcing agreement. With the expiration of the grandfather provision, Medicare no longer reimburses any independent labs directly for the technical component of anatomic pathology services. The entire technical component payment for all hospitals and labs is considered part of the Part A payment made to the hospital.

Medicare continues to reimburse physicians directly for the professional component of anatomic pathology services. Nongovernmental payors typically reimburse pathologists directly for professional anatomic pathology services and will pay the hospital or the physicians directly for the technical component, depending on which entity owns the anatomic pathology laboratory.

The figure on the following page illustrates the historical funding for anatomic pathology services and the current funding after the expiration of the grandfather clause. Without an amendment to existing contracts with independent labs, the labs will no longer be receiving payment for the technical services for anatomic pathology.

What Should You Do?

If your hospital was grandfathered through 2009, the independent lab you are using has probably already contacted you about payment for the technical services for anatomic pathology that Medicare is no longer directly paying. To date, Medicare has offered two options to affected labs: continue to submit claims (which may be reprocessed at a later date if/when new legislation extends the expiring provisions) or avoid reprocessing by holding onto claims for a period of time to see whether new legislation is enacted. Neither of these options is ideal for the labs. The best the labs can hope for under these options is to get paid by Medicare some time in the future. But they risk never getting reimbursed by Medicare, and the hospital may be unable to reimburse them for services provided if the hospital and lab do not have a contract in place to provide such reimbursement.

We recommend replacing or amending the existing contract with your lab to begin reimbursing the lab for the technical services provided in relation to anatomic pathology. Reimbursement levels for the technical services must be reasonable and financially sound, conform to FMV principles, and meet the objectives of the hospital and the lab. Legal counsel may recommend a provision for the termination or revision of the amendment should the grandfather provision be extended or other legislative action occur that would allow the lab to receive reimbursement from Medicare directly.