Clinical laboratory tests play an integral role in helping physicians diagnose and treat patients. New developments in laboratory technology offer the prospect of improvements in diagnosis and care, but will place an increased burden on the payment system. Medicare, the federal program providing coverage of health-care services for the elderly and disabled, is the largest payer of clinical laboratory services. Originally designed in the early 1980s, Medicare's payment policy methodology for outpatient laboratory services has not evolved to take into account technology, market, and regulatory changes, and is now outdated. This report examines the current Medicare payment methodology for outpatient clinical laboratory services in the context of environmental and technological trends, evaluates payment policy alternatives, and makes recommendations to improve the system.