In this article:
By Frederick L. Kiechle, MD, PhDWhen initiating a new molecular diagnostic test in your laboratory, you must evaluate the potential financial benefits. Is it wise to introduce the test in your lab (make) or to continue sending the test out to a reference lab (buy)?
The costs associated with this decision are outlined in Table 1, which shows in-house vs. send-out lab costs to a reference lab. You will also need to calculate the spend at the reference lab, the in-house cost for the molecular assay, and finally a way of estimating potential reimbursement. For a positive profit margin, reimbursement estimates are important to include and assess.
Spend Calculation for the Reference Lab
There are two numbers required to define the money your laboratory spends on a molecular test sent to a reference lab:
1. The volume of tests per time interval (Table 1 volume is listed per 12 months)
2. The reference lab total change for the performance and reporting of the test result to your
lab (Table 1; see send-out costs).The multiplication of these two numbers will provide the money spent to send the tests to a reference lab per year.
For example, for the panel of NG/CT at Memorial Healthcare System in South Broward County, Fla., were 9,622 tests sent out annually at a change per the two-test panel of $18. The total spend for this reference test is 9,622 tests x $18, which equals $173,196. Notice other expenses associated with sending these tests out are not included, like processor time and manual result entry if there is no reference lab computer interface. Therefore, modification of this format may be implemented if desired.
Calculation of In-House Cost for the Molecular Test
The first issue to resolve is which costs to include from the list of direct and indirect costs.2 In this case, direct costs can be specifically associated with the clinical pathology laboratory and specialty area, the molecular diagnostics laboratory cost center (where costs are managed), or responsibility centers where both revenue and costs are managed.2 Direct cost includes equipment depreciation (buy, lease, reagent rental), personnel time, reagents, quality control and proficiency testing.
Direct cost can be divided further into fixed, independent of output; and variable, dependent on the output volume. These two forms of direct cost will not be further defined due to space limitations. Indirect costs are shared by the overall operation and have often been called joint costs or common costs. Joint costs include electric, water, paint, floors and building maintenance. These are usually allocated to the cost/responsibility center at the end of the fiscal year. They may be thought of as a form of taxation, which varies, dependent of the sections margin contribution.
The addition of the direct and indirect costs equals the total cost analysis for a lab test. Most labs calculate total direct costs and/or incremental costs. Incremental costs are the most useful since it measures the cost of doing one more test. The incremental cost analysis for a lab usually includes reagents, quality control, proficiency testing material and medical technologist time greater than x minutes where x = 1-5 minutes. It does not include equipment allocations or any indirect costs.
Returning to Table 1, the incremental cost for doing the NG/CT assays was calculated as $10.99 (MHS cost) per test. If all NG/CT reference lab tests (9,622) had been performed using this assay in-house, the total cost would be 9,622 tests x $10.99 per test, which equals $105,746.
Is it going to reduce laboratory costs by bringing the NG/CT molecules assay in house? The answer is yes, since the reference lab spend of $173,196 menus $105,746 for in-house costs equals $67,450 for the annual savings. Table 1 also illustrates a grand total savings of $87,876 for all 10,049 send-out tests ($207,617 - $119,741).
Another issue to consider if it applies to your situation is how to reconcile the cross charge your financial department may include as an internal addition charge for a molecular test performed at a core molecular lab at a multi-hospital system. For a hospital sending the molecular test to the core molecular lab, this cross charge directly affects their laboratory budget. It is an additional fee used to help support the core molecular lab. If this fee changes every month based on volume, it becomes a variable cost (dependent on volume) with indirect cost flavor. It is more indirect than direct since it is used to pay for the infrastructure of the core molecular laboratory needed to support the molecular services provided for all hospitals in the healthcare system. In short, this number should not be included in the initial assessment of make vs. buy for a new in-house molecular assay. Let your hospital finance department determine how best to monitor the cross-charge adjustment fee.
Table 1 simplifies the calculation of potential reimbursement by multiplying the molecular-based test volume by the average National Medicare Limit for the steps involved in the specific molecular amplification procedures (Table 2).3 Other reimbursement numbers may also be used like the state-specific average payers reimbursement (used in Table 1) or third party payers reimbursement amount. Current Procedural Terminology (CPT) codes for pathology and laboratory can be found between 80000 and 90000. Molecular diagnostics codes can be found between 838900 and 83914.
The Medicare part B interpretation CPT code for all molecular assays is currently the generic 83912 for all molecular assays with exceptions. It will not be paid for all bacterial or viral detection assays (see Table 2 for examples). It will be reimbursed for HIV genotypes, HCV genotypes, HBV genotypes and all other molecular assays. The technical component is more complex compared to the professional billing interpretation. The CPT codes, and the number of times they are used, are dependent on the molecular assay selected.
For example, Factor V Leiden mutation detection on the Third Wave Invader system requires these codes for the technical component in 2004: 83891 x 1; 83892 x 2; 83905 x 1; 83903 x 1; 83896 x 5. In 2012, the American Medical Association CPT code book will outline a new set of codes for molecular diagnostics that will replace the use of the “stacking codes” (83890-83914), which focus on methodology rather than specific analyses in conjunction with a set of identifying diseases and mutation modifier to this code set.4,5 These changes will not affect microbiology and most cytogenetic assays.
Stacking codes should be eliminated by 2013.4-5 The new molecular diagnostic coding changes are not final as of July 12, 2011. In general, they will divide molecular tests into two tiers. Tier 1 tests are the most commonly performed tests and each will have a specific CPT codes. Tier 2 tests have been assigned to nine resource level codes similar to the currently existing system for surgical pathology. Tests not included in tiers 1 and 2 would be coded using the existing stacking codes for the new 2012 CPT coding rules.4,5
Back to Table 1 and the simplified approach. If the cost of doing the test is greater than the per-test reimbursement, this assay will lose money. In 2005, I analyzed the profit and loss for 26 molecular tests at a large hospital with 46 percent of its total lab tests coming from an outreach program. Six tests (HIV viral load, HCV viral load, HCV qualitative, HBV viral lead, mycobacterium TB, and qualitative CMV) lost $200,368 in 2005. However, 20 tests made $1,950,662. These values provided an extended net profit of $1,750,294 or percent margin of 58.5 percent.6 Remember, if those six financial-loser assays were sent out to a reference lab, the hospital loses even more money since the send-out charge is almost always greater than the in-house lab cost. It becomes a question of losing less money.
With or without the additional volume a hospital-based outreach program will provide, the molecular diagnostics laboratory will provide the greatest growth in test volume in a hospital clinical laboratory, if it is adequately supported by hospital administration.
Three final thoughts:
1. Medicaid usually pays less for molecular tests than Medicare
(see Table 8.2 in reference 3.)
2. Reimbursement estimates will be improved if the payer case mix (percent of Medicare,
Medicaid and other third-party payers) is used for the estimation of a specific molecular
3. During the evaluation of molecular lab equipment, compare the reagent volume and
related costs among vendors. The six molecular assays that lost money in 2005 are all
making revenue secondary to daily runs instead of STAT CMV assay and for the five
others, the introduction of equipment using less reagent volume.
Memorial Healthcare System Molecular Testing:
12 Month Financial Review
South Broward County, Fla.
Test Name Volume MHS
4 $10.99 $18 $41.65 $44 $72 $167 Enterovirus 144 31.11 119.33 41.65 4,480 17,183 5,998 NG Probe 15 10.99 18 41.65 165 270 625 NG/CT 9,622 10.99 18 83.30 105,746 173,196 801,513 HSV 1
264 32.25 64 41.65 9,306 16,896 109,956 Subtotal $10,049 $119,741 $207,617 $918,25
NG = Neissera gonorrhoeae
CT = Chlamydia trachomatis
HSV = Herpes simplex virus
Costs Per Test and Average National Reimbursement per Test
Based on 2004 Data
Test Cost per test National average
BK DNA detection
Factor II PT 20210
Hepatitis B Quant
Hepatitis C genotype
Hepatitis C Qual
Hepatitis C Quant
HPV high risk
Herpes simplex 1 and 2
Factor V Leiden
Angiotension I (ACE)
Platelet Glycoprotein III (a)
Glycoprotein P1A1/A2 genotype
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- 2. Baker JJ, Baker RW. Cost classification In: Health Care Finance. Basic Tools for Non-Financial Managers. Aspen Publishers, Inc. Gaithersburg, Maryland. 2000: pp 40-47.
- 3. Watson MS, Schoonmaker M. Billing and Reimbursement for Molecular Diagnostics. IN: Molecular Diagnostics: Techniques and Applications for the Clinical Laboratory. (Eds: Grody WW, Nakamura RM, Strom CM, Kiechle FL). Academic Press, Inc.: Boston, MA. 2010: pp 83-97.
- 4. Carlson B. Seeking a Coding Solution for Molecular Tests. Biotechnical Healthcare 2010; 7(4): 16-10.
- 5. Paxton A. Molecular CPT codes Topple Old ‘Stacking’ Codes. CAP Today 2011; 25(4): 5, 6, 8.
- 6. McLeod PS. Experience Teaches Valuable Lessons at Beaumont. Picking Winners and Losers for the Molecular Test Menu. The Dark Report 2005; 12(12): 9-14.