Management of Pathology Practices

January 2010

Management Home Page


Underpayment of Pathology Technical Component

By Mick Raich, Vachette Pathology


In many cases, hospitals allow pathology groups to purchase the technical component (TC) of the histology lab at a fair market price.  The pathology group then bills a global charge to insurance carriers and pays the hospital the agreed-upon rate for each technical charge.  This process allows the pathology practice to garner more revenue, and to help the hospital understand the direct revenue available from this technical work.  This can be done for all carriers except government payers, unless the purchasing lab is grandfathered in under certain CMS rules. 


In most cases, if a hospital bills out the technical component, they will be paid under a DRG or under an APC payment structure.  The hospital can only bill the technical component directly if they have an independent lab with a separate tax identification number.  By outsourcing the technical component to the pathology practice, they may be able to lower their overall Part A costs, and at the same time get a solid understanding of the actual revenue generated from the technical side of their histology lab.


We are often asked to determine a fair and equitable rate between the hospital and the pathology group for the technical component. Below is a case study reviewing this problem.


Review of Technical Component Payback


Thank you for allowing Vachette Pathology to review the business relationship between Sample Hospital and Medical Center and Sample Pathology Group LLC. Our review is just our opinion -- nothing more and nothing less. 


In this case, the payback for the purchased technical component is considerably below the nation trend.  For example, the compensation of $18.75 for an 88305-TC is well below the industry standard, and may leave both parties at risk for investigation.  It would be hard to justify this rate as either the true cost for this service or a fair market price for a hospital owned histology lab.




1.  The compensation for these services should be derived from a rational process.  For example, this compensation is often built on the standard Medicare fee schedule minus the cost for performing the service, i.e. courier and billing cost.  It is common that the pathology practice pays around 75% or 80% of the current Medicare technical component payment rate for the state.  It can easily be assumed that the cost for courier, supplies, billing, etc, can cover the missing 20%-25%.  Another proposed example is building the compensation on the current OPPS fee schedule.


2.  Many hospitals pay their pathology groups a flat fee for oversight of all their screening pap smears.  The compensation of $8.00 that Sample Hospital is paying per screening Pap is considerably above the industry norm of $2.00 to $4.00 per screening pap.


3.  Although there are no distinct national benchmarks for in-hospital histology costs, based on our work in the private lab industry, the cost of $27.00 to $32.00 for an 88305-TC is very competitive, even in the independent laboratory market place; therefore this is an excellent cost for a hospital-owned histology lab.  The costs for cytology work are somewhat inflated as this area usually requires higher priced employees and this is usually directly transferable to the cost of these services.  It is not unusual for this area to be a loss leader.



Overall the compensation for the technical component is below the industry standard, and the compensation for screening pap smears is well above the industry standard. The good news is that neither party should suffer from any change in this arrangement.


On October 30, 2008, the Centers for Medicare and Medicaid Services (CMS) released the new 2009 Medicare Physician Fee Schedule final rule that included revisions to the Medicare anti-markup restriction.  The rule that took effect on January 1, 2009 was intended to stop the abuse of marking up diagnostic tests billed by the ordering physician or other Part B supplier.  One benefit of this rule is that the pathology group purchasing the work from the hospital may now charge the complete Medicare TC rate to Medicare.  Under the old rules they could only charge the amount that they were paying and they were not allowed to profit off from this work.


This means that under the old rules, the pathology practice was only allowed to bill $18.75 for an 88305-TC to Medicare for a TC case.  Now they can bill their full charge and collect any difference between what they get paid and what they pay the hospital.


There has been no change for commercial carriers.  Overall the pathology practice can charge their full price and keep any margin above what they are paying to the hospital.



It is our recommendation that Sample Hospital and Medical Center renegotiate the amount that Sample Pathology Group LLC pays them for technical component compensation.  Furthermore the compensation for oversight of the screening paps should be reduced to a fair market rate.


Mick Raich is the President and CEO of Vachette Pathology.  Vachette Pathology provides practice management and consulting services to over 50 pathology groups nationwide.  Contact: or call 866-407-0763.