Considerations for the Nephrology Physician Office Lab
Jennifer Huneycutt, CPA, CMPE
Originally written for and published in RPA News – January 2016 Edition
Used with permission

Having a physician office laboratory (POL) as part of the services provided in a nephrology practice has proven to be a financial winner for some and simply a convenience for others.  There are many factors to consider when evaluating the prospect of incorporating a POL in your practice or forecasting the continued operation of an existing one in today’s reimbursement landscape.

For the patient with kidney disease, once they present at your office, they will need a nephrologist as part of their care team for life. In the office setting we see these patients routinely and they are used to having bloodwork as part of their experience.  Having labs performed in the nephrologist’s office offers convenience, faster turnaround and medical management, as well as streamlined billing.  Due to regular exposure to this patient population, phlebotomists and medical assistants in the nephrologist’s office often possess greater venipuncture skills and have a greater awareness of the special requirements of these patients.

When you begin performing tests that are considered moderately complex in addition to those that are CLIA waived like the urinalysis or hemocue, you will need a lab director.  While it is possible to outsource this function, it is more cost effective and efficient to have an interested physician in the practice perform this role for the group.  The certification process for a nephrologist is relatively simple and can be achieved by obtaining at least 20 continuing medical education (CME) credit hours in laboratory practice commensurate with the director responsibilities.  A list of accredited providers can be found at

You will need to understand your current lab test volumes.  These can be obtained from your EMR, lab information system, or by asking your reference lab.  If you have multiple office locations, you will want this information provided by location so that you can properly evaluate the costs of running your lab. There is a significant amount of fixed cost associated with the Physician Office Laboratory and financial success is dependent on the mix of tests and relative volumes. It is important to note that while a reported cost per test from an equipment vendor may indicate there is a great margin between reimbursement and the cost per test, an irregular frequency of performing the test can negatively impact that margin and make it a money loser before you even factor in fixed costs.  An experienced Medical Technologist can guide you through these considerations when selecting equipment.

A properly designed and executed workflow is the best friend of a nephrology practice and the lab workflow is no exception.    Performing these tests in house has a number of advantages.  First, there is less handling of specimens and you are in control of each step in the process.  This can result in fewer lost specimens and improved integrity of the sample itself. How many times have you had to call a patient back for a lost specimen or because the reference lab courier didn’t pick up? These issues aren’t uncommon to the busy nephrology office. 

Performing these tests in your office also enables streamlined interfacing between the lab and your EMR which provides the ability to trend discrete results over time.  When the patient has gotten their labs drawn at another provider’s office and brings you a copy of the results, these are typically scanned into the chart as opposed to being captured as discrete data points.  Interfaces with reference labs are also more challenging to manage than your own internal interface.  It’s not uncommon for a reference lab to change a test code or alter their system in some way that requires intervention by the practice.  It’s also not unusual for these changes to occur without notice.

Controlling the entire lab workflow also gives you the greatest flexibility in when tests are performed.  Depending on the physical space available and other practice workflows, you could perform the patient’s labs and then see the patient with results in hand all in the same visit.  Another thing to consider with the timing of the lab results is what resources are available when a critical result comes through.  Typically labs drawn during the day would be processed and resulted during business hours.  No more calls at 2:00 am for an elevated creatinine or low glucose and think about how much easier it is to handle the critical potassium value while you have your clinical staff available.  Even if you choose to run your lab after regular business hours, you have more control over the definition of criticals and when the staff does call you with the truly critical, they will have more information that they are able to share with you to provide greater context and aid decision making.

Labs performed in your office may be a shift for your patients.  While this means great benefit to you and your patient, you must consider your starting point.  Will you change the timing or place that a patient has their blood drawn?  How will you educate and encourage the patient to change with you?  Practices who invest time, money and resources into developing a lab that then do not, or are unable to, articulate the benefits of why patients should change underutilize those resources and can obliterate an otherwise successful pro forma.  This is particularly challenging in a setting where the patients have been sent to lab draw stations outside the practice for years and years.  A strategy to educate providers and staff and to communicate the benefits to patients in advance of the change can go a long way to ensure appropriate utilization of the lab.

Negotiating in advance to evaluate how private payors will reimburse labs is a must.  Some payors have very restrictive panels of lab providers and may not be willing to pay for labs done in your practice without some compelling reason to do so.  Large reference labs are often able to provide deep discounts to carriers due to volume and in return a payor may limit their network.  Understanding this, it can also lead to private payor reimbursement that is significantly less than Medicare if you don’t, or aren’t able to demonstrate your value proposition.  Often, Medicare is one of the best payors of lab services which has led to recent legislation that will surely impact reimbursement.

The future of lab reimbursement is in a state of flux.  On April 1, 2014, Congress enacted the Protecting Access to Medicare Act of 2014 (PAMA).  This legislation requires that the payment amount for CDLTs (Clinical Diagnostic Lab Tests) furnished on or after January 1, 2017, be equal to the weighted median of private payor rates determined for the test, based on certain data reported by laboratories during a specified data collection period.  On October 1, 2015 a proposed rule to address this statute was published in the Federal Register.  CMS expects this legislation to save$360 million in the program’s first year, $2.94 billion over five, and $5.14 billion over the next 10 years as it phases in the changes.  Medicare currently spends approximately $8 billion annually in payments for CDLTs.  As proposed, it requires Applicable Laboratories to report the following:

  • The payment rate that was paid by each private payor for each test during the data collection period, and
  • The volume of such tests for each such payor

Applicable Laboratories are defined as an entity that receives at least $50,000 per year in Medicare reimbursement from the Clinical Lab Fee Schedule (CLFS) and at least 50% of the total Medicare revenues of its entire organization be received from payments under the CLFS and Physician Fee Schedule (PFS).  Medicare expects that almost no hospitals, approximately 48% of reference labs and only 6% of POLs will be required to report this data.  Most successful nephrology office labs will have Medicare lab revenue exceeding this floor and being a physician office automatically implies the second requirement.  This would imply that nephrology practices with physician office labs will likely be among the chosen few.
The proposed data collection period for determining CY 2017 CLFS payment rates is July 1, 2015 through December 31, 2015 with a reporting period of January 1, 2016 – March 31, 2016.  Clearly this is problematic as there is no finalized rule in place as of this article’s submission deadline and the data collection period has passed.  The comment period on this proposed rule ended November 24, 2015. 

A final thought to consider is how a running your own lab might impact your ability to be successful in alternative payment models that reward high quality and low cost.  By controlling these factors in the lab, you just may be one step ahead in the game.  In January 2015, HHS made the following statement, “To help drive the health care system towards greater value-based purchasing – rather than continuing to reward volume regardless of quality of care delivered – HHS has set a goal to have 30 percent of Medicare payments in alternative payment models (categories 3 and 4) by the end of 2016 and 50 percent in categories 3 and 4 by the end of 2018.”  As the recent SGR repeal legislation would indicate, Medicare, through its new Merit-based Incentive Payment System, or “MIPS”, is serious about achieving this goal. Can operating your own lab position you for success in these models?

While the challenges seem plentiful, operating your own lab still offers great benefits to the patient and the practice.  Careful analysis and consideration should be undertaken to weigh the pros and cons when considering this venture.

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