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Payer concerns about dermatopathology reimbursement driving consolidation, discussion about importance of referral relationship

The subspecialty of dermatopathology is one vital to efficient and successful treatment of patients with skin ailments. Some practitioners have close relationships with outside pathologists stretching over years, while others handle their own pathology in-house. Indeed, fueled by a combination of factors — including a permissive regulatory environment favoring in-sourcing, economic opportunities in pathology that could offset downward reimbursement pressures in other areas, and an increase in the number of dermatology group practices and of industry consultants advising and assisting with building in-office labs — dermatology was the leading specialty opening new in-office labs in 2011, representing 63 percent of all new physician office labs, according to Lab Economics.

But this growth is taking place even as lawmakers, payers, and employers search for ways to limit the growth of health care costs. Dermatopathology, whether practiced in-house or referred out, now finds itself in the spotlight of insurers who are looking for ways to spend less.

Growth versus change

The current transition in the health care delivery system involves both consolidation and coordination of care, with the ultimate goal for most lawmakers being a better control of treatment costs. According to University of Texas-Southwestern dermatopathologist Clay Cockerell, MD, who serves as managing director of Dermpath Diagnostics Cockerell and Associates in Dallas, a number of labs are responding by seeking to expand to prepare for possible payer efforts to bring down the price of dermatopathology. [pagebreak]

“There’s been a lot of consolidation of dermatopathology — smaller operations that have been acquired by large companies and things of that nature. There are a lot of different organizations trying to build up the number of laboratories they operate. Big businesses have gotten involved in it over recent years. Some have done well in the field, and others not so well,” Dr. Cockerell said. “Especially from the standpoint of pricing, there’s been a lot of pressure on how much will be paid for by third-party insurers, Medicare, and Medicaid.” Such scrutiny has not yet been followed by reductions in the level of reimbursement, but Dr. Cockerell suggested this is likely to change in the future. “Reimbursement will reach a certain level where it won’t be viable for the price to go much lower. So I think that you’ll find pathologists who are able to do it in a fairly efficient way on a low margin, and they’ll be the ones who do most of the work.”

Murad Alam, MD, co-chair of the American Academy of Dermatology’s Dermatopathology Rapid Response Committee, said that the important step for dermatologists and dermatopathologists right now is to illustrate the value of trained dermatopathologists to payers and legislators. [pagebreak]

“I think that in the context of dermatology, one challenge that we’ll be facing is explaining the need for our services effectively to payers. We do a lot of biopsies in aggregate, and there are significant costs to the health care system,” Dr. Alam said. (Billings to Medicare alone for one CPT code, 88305, surgical pathology, gross and microscopic examination, crossed the $1 billion mark last year.) “I think, however, that from a clinical care standpoint, we provide outstanding care to our patients because there’s such a large volume of knowledge developed within dermatology that goes into interpreting biopsy results and ensuring our patients get the best care.”

According to Thomas Olsen, MD, former chair of the Academy’s Dermatopathology Task Force and laboratory director at Dermatopathology Laboratory of Central States in Dayton, Ohio, retaining access to self-referral is vital for many dermatologists who have significant patient loads. Dermatologists who choose to build a lab in-house, he said, make a significant financial commitment.

“One of the ways to offset the cost of running a practice is to put a lab in. It’s something you can’t justify until you get a larger practice. It’s probably about a $250,000-$300,000 investment to run it for the first year, to pay people and get it up and running,” Dr. Olsen said. “The reason it’s an attractive option is that you can see a return very quickly. If you have four dermatologists in your group, the average number of biopsies done per year is between 1,500 and 2,000. You multiply that out to what Medicare reimburses, and you can find yourself profitable right away. You can offset that cost quickly, but you need that critical mass of patients.” [pagebreak]

Darryl Bronson, MD, MPH, co-chair of the Academy’s Dermatopathology Rapid Response Committee and vice president-elect of the Academy, who divides his time between a clinical practice and dermatopathology, said that the attractive economics have drawn a number of dermatologists and general pathologists to the dermatopathology field in the past decade, which has played a role in bringing greater scrutiny to the subspecialty.

“There are a lot of forces that are competing for the money that’s involved in dermatopathology, reading the slides and also processing them. That’s why there’s a lot of competition out there. What we’ve been trying to do is maintain the right for all dermatologists whose core training includes dermatopathology to be able to practice it,” Dr. Bronson said. “Up until now, it hasn’t been a major problem, but we have had a number of times in the past where the major labs, in association with some of the insurance programs, tried to restrict the rights of the dermatologist to practice dermatopathology. Those efforts were not successful, but it keeps coming up, and there are efforts to try and save money by suggesting that if people are doing their own dermatopathology, they’ll be doing an excessive amount of it. I personally don’t think there’s much credence to that.” The committee and the Academy, he said, will continue to defend the right of dermatologists to read their own slides by noting how their training during residency equips them to do so. [pagebreak]

Scrutiny of volume discounts

The insurers and lab companies face scrutiny of their own, according to William Brady, the American Academy of Dermatology’s senior manager of practice management resources and a staff liaison to many of the committees and task forces that have been discussing dermatopathology issues for half a decade or more.

“In the fall of 2011, the Senate started investigating lab discount practices for certain payers. The investigation has focused on the discounted pricing from labs in exchange for referrals based on the previously established exclusive arrangements among certain national labs and large payers,” he said. “The concern is about possible violation of the anti-kickback law and potential Medicare fraud.”

But despite this federal scrutiny of discount pricing, observers have long expected the large health insurance companies to leverage their exclusive volume-for-discount arrangements with national labs to address the growth in physician office labs, Brady said. Now that trend appears to be starting. “As health insurance companies move forward with directing patients to lower cost labs and with growing out-of-pocket costs for patients, the concern is that health insurance companies will force contracted physicians (with in-office labs) to accept the discounted rates already established with exclusive national labs for anatomic pathology lab services. Should the contracted physician refuse, the alternative would be to cut all their contracted fee-for-service rates across the board in exchange for keeping their pathology service rates unchanged. Some health plans have already started to pursue this payment strategy,” Brady said. [pagebreak]

Facing down challenges

One illustration of payer efforts to tamp down perceived overpayment for services was the recent back-and-forth between dermatopathologists and Hartford, Conn.-based managed care company Aetna over who it would reimburse for dermatopathology. The disagreement originated from a study of urology labs by Georgetown University-based health economist Jean Mitchell, PhD. Dr. Mitchell found that self-referring urologists billed for 72 percent more pathology services than their colleagues without that financial incentive. That study, according to Joe Plandowski, a co-founder of In-Office Pathology, LLC, had significant flaws — for example, it suggested placing multiple specimens from prostate biopsies in a single vial, making a positive reading less meaningful because it would not be possible to correlate it with a specific site — and is contradicted by multiple studies by the Office of the Inspector General. Plandowski noted that the Mitchell study was funded by both the College of American Pathologists (CAP) and the American Clinical Laboratory Association.

Nevertheless, Aetna referenced the study when it announced earlier this year that in order to receive payment for surgical pathology services, practices would have to not only be certified under the Clinical Laboratory Improvement Amendments (CLIA), which dermatopathology labs are, but also accredited through CAP, which most are not. Failing this, practices would be required to refer their pathology to one of Aetna’s preferred in-network labs. This prompted concern from a number of dermatologists and dermatopathologists, and led to the creation of the Academy rapid-response committee to more efficiently address issues related to dermatopathology reimbursement. [pagebreak]

“The extra certification was cumbersome and expensive, without necessarily adding anything to what the patient receives,” Dr. Bronson said. “Out of that grew this new committee.”

Soon after the Academy’s committee responded to Aetna with concerns, the insurer released a statement indicating that dermatology practices with in-office laboratories would be exempted from the policy, and would not be required to submit additional accreditation documentation to continue receiving payment. (Letters were erronesouly sent to some dermatologists indicating that this was not the case, but Aetna has again confirmed to the AADA that dermatologists are exempt from the policy.) Other specialties will have to comply, however, as Aetna seeks to more effectively enforce its agreements with national lab vendors.

“Aetna agreed with Academy leadership and dropped the issue, but it’s a cautionary note if there are practices with in-house labs being looked at, and they are finding a higher number of biopsies than outside labs, dermatopathologists run the risk of having the same thing happening again, and the payer might not be so quick to reverse course,” Dr. Cockerell said. “I think that like anything else, doctors are under pressure when reimbursement gets cut to make it up in other ways. I think you just have to be careful that it passes the smell test. It shouldn’t look like there’s a major difference between third-party labs and in-house dermatopathologists. The payers are going to be looking at this independently of each other.” [pagebreak]

Joan Guitart, MD, a member of the Dermatopathology Rapid Response Committee and director of the dermatopathology unit at Northwestern University’s Feinberg School of Medicine, said that the dermatology exemption served as a victory, but also a reminder of the forces converging on the practice of dermatopathology.

“This event should help dermatologists feel the need to stick together and face the threats of outside entities that try to impinge on our area of expertise. Many dermatopathologists do feel threatened and feel that the new rules being considered by payers may affect our business,” Dr. Guitart said. “This is a huge victory for our small subspecialty, but we still face big commercial labs, and there will continue to be pressure on us from private payers. The committee will continue to monitor for future threats and try to be pre-emptive in our solutions,” he said.

The committee is likely to be busy as the pace of change picks up, according to Brady.

“Starting in 2007, United Healthcare and Aetna struck exclusive pathology lab service arrangements with LabCorp and Quest, respectively,” Brady said. “However, these exclusive contracts still included significant carve outs/loopholes and didn’t prevent physicians from reading their own slides. The large health insurance companies are concerned about network leakage’ (physicians continuing to use out-of-network labs), but they have been sensitive to enforcing exclusivity for fear of backlash by physicians,” he added. [pagebreak]

More recently, though, Blue Cross Blue Shield plans, Cigna, and Humana have moved to tighten requirements around billing for pathology. BCBS plans have started denying out-of-network lab claims. Cigna has halved the claim filing timetable from 180 days to 90, an issue for labs that need to collect demographic information from referring providers before they can file a claim. And Humana has advised some dermatologists who offer in-house dermatopathology that they should refer their pathology to one of Humana’s preferred national lab vendors rather than reading it themselves.

The future of dermatopathology

In advocating for the future of dermatopathology, Dr. Cockerell said, it’s vital to illustrate the difference between dermatopathology and the work done by general pathologists.

“Dermatopathology is not a commodity or solely process-based, like a blood test. It requires skilled physicians who are trained to look at samples,” he said. “We’ve been fighting this battle for many years. A lot of the managed care companies think that just anybody can do skin pathology, but it requires careful correlation of clinical features. Even the simplest thing like a basal cell carcinoma can have issues. You need people who are trained and practice it on a daily basis before you can judge it in a very expert way.” [pagebreak]

Dr. Olsen agreed, citing dermatopathology’s vital role in the education of every dermatologist.

“I think the type of hard data from the urology study is exactly what the payers are interested in at this time. But it’s important to remember that the situation is different in dermatology because dermatopathology is so much a part of our training. When you take your boards, you have to put effort into dermatopathology. And I personally believe that if residents apply themselves, they should be able to read their own cases. Few do, because they have other interests in dermatology, but the training is there,” Dr. Olsen said. (According to the Academy’s 2009 Dermatology Practice Profile Survey, 16.6 percent of respondents processed their own slides, and 11.4 percent interpreted them in-house. Almost 64 percent chose to refer both slide prep and interpretation to an outside lab. The 2012 version of the survey asked slightly different questions to explore the trend of in-office labs; see sidebar.) “I think that while the urology situation looks like overutilization, so much of our derm training is dermatopathology. If that lab is in the practice it helps the nexus of that practice, helps the physicians understand what’s going on with the biopsies much better.”

Another issue of concern to both dermatopathologists and general dermatologists is the ability of practitioners to send slides to the pathologist of their choice. The rise of large group practices (see “Dermatology, Inc.” p. 22 in the August issue of Dermatology World) has already sped the narrowing of pathology referral choices for some dermatologists. One frequently expressed concern is that payers may begin removing that choice for small practices. [pagebreak]

“I think choice will be preserved, but I also think there will be a tendency for derm practices to put in pathology labs. If reimbursement declines, practices will naturally try to make up that shortfall elsewhere,” Dr. Olsen said. “But an increase in in-house pathology labs will be countered by people from the College of American Pathologists,” he said, adding that members of Congress may propose legislation to counter the in-house trend. He also noted that CPT codes for dermatopathology, including 88304 and 88305, may see cuts to their practice expense valuations; such a change could alter the calculus for all involved. 

Trending - positive or negative?

A number of factors currently at play may impact dermatopathology in the long term, in both positive and negative ways. Robert Brodell, MD, a member of the American Academy of Dermatology’s Dermatopathology Rapid Response Committee and the director of Skin Pathology Services, Inc., in Warren, Ohio, outlined a number of trends currently affecting dermatopathology.


  1. Consolidation: “National labs seem to be gaining a larger percentage of the pathology business as smaller labs decide to join the larger groups in an effort to ensure that pathology specimens from as many third-party payers as possible can be referred to them,” Dr. Brodell said.
  2. Regulation: “The increasing number of regulations make it even more difficult for small labs to keep their heads above water,” Dr Brodell said. He noted that the regulatory burden includes CLIA, OSHA, the Resource Conservations and Recovery Act, the Clean Air Act, SARA TITLE III, Stark, workers compensation, the Americans with Disabilities Act, and Recovery Audit Contract (RAC) audits.
  3. Health plans choosing sides: A number of health plans are moving away from independent labs. Aetna terminated the participation of a number of independent labs in early March, sending letters informing them of the decision to require additional credentials with 180 days’ notice. (Dermatologists were exempted thanks to AADA advocacy efforts.) Larger lab operations, like Quest and LabCorp, market directly to payers, demonstrating their lower cost for common lab tests.

    Positive factors related to the future of dermatopathology

    1. “44 million Americans having some form of insurance coverage, as a result of the health system reform efforts, should result in more pathology specimens being generated for study,” Dr. Brodell said.
    2. “Insurance companies and the federal government both recognize the importance of a definitive diagnosis based on dermatopathology,” Dr. Brodell said.

    Negative factors related to the future of dermatopathology

    1. “National labs are gaining market share at the expense of smaller labs — continued consolidation will lead to fewer and fewer employment options for dermatopathologists just finishing their training,” Dr. Brodell said.
    2. “Medicare, Medicaid, and insurance companies will continue to pay less for dermatopathology readings,” Dr. Brodell said.
    3. “Accountable care organizations (ACOs) authorized in the Affordable Care Act will put added pressure on charges for dermatopathology specimens as physicians and hospitals try to split up an ever-shrinking health care expense pie,” Dr. Brodell said.

Survey: Nearly a quarter of dermatologists have in-office labs

According to the American Academy of Dermatology’s recently completed 2012 Dermatology Practice Profile Survey, nearly a quarter of respondents have in-office histology labs, and most of them are being used for both slide preparation and slide reading of dermatopathology specimens. The survey found 23.5 percent of respondents indicating they had an in-office lab; the figure rose to 32.4 percent in dermatology groups and 34.9 percent in academic practices, but was only 20.6 percent in multispecialty groups and 13.0 percent in solo practices. Another 4.6 percent of respondents indicated they have plans to open an in-office lab in 2013 or 2014.

Overall, 10.6 percent of those who said they have an in-office lab indicated that they use it to prepare slides before sending them to an outside dermatopathology lab to be read. Meanwhile, 33.0 percent had hired a dermatopathologist to prepare and read slides in the office, and 45.2 percent performed both slide prep and reading themselves.

The survey was completed by 1,406 respondents, including 538 in solo practice, 552 in dermatology groups, 155 in multispecialty groups, and 109 in academic practice.



Trending - positive or negative?
Survey: Nearly a quarter of dermatologists have in-office labs