The effects of a fixed-fee reimbursement system introduced by the Federal Government on laboratory testing in the United States.

Rapid growth of health care expenditures during the 1970s in the United States led to implementation of a prospective payment system (PPS) based on diagnosis-related groups (DRG) for Medicare inpatient reimbursement in 1983. With the introduction of DRG/PPS, hospitals encouraged earlier discharges and discouraged admission of patients who may require expensive services. Patient care has moved into more outpatient and non-hospital settings which have been less regulated and paid on a cost-reimbursement basis. The change of reimbursement system has converted hospital laboratories from "profit center" under the fee-for-service reimbursement practice to possible "cost center" at least for inpatient laboratory services with the advent of DRG/PPS. Hospitals have reduced laboratory operating expenses by constraining laboratory growth and development. Laboratory testing in non-hospital settings such as physicians' office laboratories, which were exempt from license and quality control by governmental regulations, has increased exponentially since implementation of DRG/PPS. To improve the quality of laboratory testing in such unregulated laboratories, the federal government has promulgated the Clinical Laboratory Improvement Amendments of 1988 (CLIA '88), requiring on-site survey and license under CLIA '88 for all laboratories in the United States regardless of the size, complexity, or location of laboratory. Implementation of DRG/PPS resulted in a temporary success in reducing Medicare Part A budget growth, but had only a small impact to slow the actual growth of total national health care expenditures or laboratory-related expenditures. Nevertheless, the change of reimbursement practice has created a large incentive to reduce unnecessary resource utilization, and cost-effective laboratory testing has become an essential concept during the DRG/PPS era.