All hospital labs need to understand the negative financial impact to their labs and have a plan to absorb the fee cuts and remain clinically and financially viable

If you believe some experts, in just 13 months many of the nation’s hospital medical laboratory outreach programs will experience a financial disaster that could put them out of business and reduce Medicare patients’ access to lab testing services. This event happens on January 1, 2018, when Medicare officials implement substantial cuts to the Part B Clinical Laboratory Fee Schedule (CLFS).

These fee cuts are the result of the section of the Protecting Access to Medicare Act (PAMA) that requires the Centers for Medicare and Medicaid Services (CMS) to collect private-payer lab test price data from the nation’s medical laboratories and use that data to establish fees for the CLFS. CMS officials estimate that the fee cuts will reduce payments to labs by as much as $400 million in 2018.

What puts the laboratory outreach programs of the nation’s hospitals and health systems at significant financial risk is the fact that CMS, as verified by reports issued by the Office of the Inspector General (OIG), intends to reduce fees on the 25 highest-volume highly-automated lab tests that make up 59% of what Medicare spent on clinical laboratory tests in 2014.

Stated differently, the OIG says that, in 2014, Medicare paid a total of $7 billion for clinical laboratory tests. Of this total, the Medicare program paid $4.1 billion for the top 25 tests. In a report issued in September, the OIG wrote, “Changes in the Medicare payment rates for these 25 tests could have a significant impact on overall Medicare spending for lab tests when the new payment system for lab tests goes into effect in 2018.” [Italics by Dark Daily.]

This is why forward-looking lab administrators running hospital laboratory outreach programs are concerned about the financial sustainability of their labs after Medicare fee cuts are enacted on January 1, 2018. These same 25 high-volume, highly-automated lab tests identified by CMS and OIG make up the largest proportion of their labs’ test volume.

Potentially Devastating Financial Impact

What will compound the negative financial impact of the coming PAMA lab test fee cuts is the fact that many community hospitals provide medical laboratory testing to the nursing homes in their areas. It is why Medicare patients can represent from 40% to 70% of the total annual test volume performed by the outreach lab. Therefore, deep cuts to Medicare lab test fees in 2018 will be a financial double-whammy for these labs.

“The potentially-devastating financial impact of these Medicare cuts in lab test fees on hospital and health system laboratories throughout the United States has been recognized by critics of how CMS has written the final rule to implement PAMA lab test private payer market price reporting,” observed Robert L. Michel, Editor-in-Chief of The Dark Report. “Several lab industry leaders and consultants have pointed out two major issues with the final rule that center upon hospital laboratories.

“The first issue is that CMS will not require the greatest number of hospitals with laboratory outreach programs to report the prices they are paid by private health insurers,” continued Michel. “Only a small number of hospital labs with NPIs [National Provider Identifiers] are required to report. So, a large proportion of the price data from this sector of the clinical laboratory industry will not be included in the data CMS will use to set Medicare fees for 2018 and beyond.

“The second issue is that it is widely known that hospital labs are typically paid higher prices than the Medicare CLFS by health insurers, compared to commercial labs. There are rational reasons why this is true,” he explained. “Payers need patient access in communities not served by the national labs, for example. Payers also recognize that community hospital labs that provide such patient access have higher average costs per-test than national labs. But CMS has excluded these hospital laboratories from the PAMA reporting requirement. Which is why some lab leaders claim that CMS has designed a final rule that is biased and designed to exclude the types of labs CMS knows are paid higher prices by health insurers than the CLFS.”

Dark Report PAMA Coverage

In fact, Dark Daily’s sister publication, The Dark Report, has published two special expanded issues dedicated entirely to the impact of PAMA lab test market reporting. In part one, The Dark Report gave the clinical laboratory industry its first look at what real lab test claims data and prices show about private payer pricing. The study was conducted by XIFIN, Inc., of San Diego, and was based on hundreds of millions of lab test claims handled by the company on behalf of its lab clients.

For 20 of the top 25 tests listed by CMS, XIFIN’s data showed that the category of independent labs was paid a weighted average of 19.6% less by private health insurers than Medicare fees paid in 2015. By comparison, hospital labs with NPIs (required to report per the PAMA final rule) were paid a weighted average that was 25.6% more by private payers than Medicare.

Because a major financial setback looms for community hospital lab outreach programs, it is imperative that their administrations plan to understand how the coming cuts to Medicare lab test fees will impact their labs.

Analysis of PAMA Final Rule’s Effect on Clinical Laboratories

Two experts with extensive knowledge of hospital laboratory outreach operations and finances have been helping hospital lab managers understand the PAMA market price reporting requirement and how it will erode the financial stability of hospital and health system laboratory outreach programs.

At Chi Solutions, an Accumen company, Kathleen Murphy, PhD, Senior Growth Advisor; and Jeffrey Myers, CPA, Vice President of Consulting, have analyzed the PAMA final rule.

Kathleen Murphy, PhD (above), Senior Growth Advisor with Chi Solutions, Inc., of Ann Arbor, Mich., spoke about PAMA lab test market price reporting at the Executive War College (EWC) in New Orleans last May. Murphy has decades of experience in the management of hospital laboratories and consulting with medical laboratories, hospitals, and health systems. During the EWC session, Murphy and her colleague Jeffery Myers, CPA, Vice President of Consulting at Chi, delivered a detailed analysis of the PAMA rule and showed participants how hospital laboratory outreach programs should model the financial impact that the coming fee cuts to the Medicare clinical laboratory fee schedule (CLFS) will have on their laboratories. Murphy and Myers will be doing a more detailed analysis of the PAMA final rule on December 14, during a special webinar about PAMA and hospital laboratory outreach programs, organized by The Dark Report. (Photo copyright: The Dark Report.)

Kathleen Murphy, PhD (above), Senior Growth Advisor with Chi Solutions, Inc., of Ann Arbor, Mich., spoke about PAMA lab test market price reporting at the Executive War College (EWC) in New Orleans last May. Murphy has decades of experience in the management of hospital laboratories and consulting with medical laboratories, hospitals, and health systems. During the EWC session, Murphy and her colleague Jeffery Myers, CPA, Vice President of Consulting at Chi, delivered a detailed analysis of the PAMA rule and showed participants how hospital laboratory outreach programs should model the financial impact that the coming fee cuts to the Medicare clinical laboratory fee schedule (CLFS) will have on their laboratories. Murphy and Myers will be doing a more detailed analysis of the PAMA final rule on December 14, during a special webinar about PAMA and hospital laboratory outreach programs, organized by The Dark Report. (Photo copyright: The Dark Report.)

At the Executive War College (EWC) in New Orleans last May, they conducted a session that provided critical information on two aspects of PAMA market price reporting:

• First, they broke down the components of the final rule and showed how in 2017 CMS will collect the data, analyze it, and use it to determine the fees for the 2018 clinical laboratory fee schedule.

• Second, they provided hospital laboratory outreach programs with a step-by-step approach to modeling the financial impact that lower Medicare prices will have on their laboratories. Murphy and Myers showed how labs can model their existing mix of tests and prices to predict the magnitude of lost revenue that will occur from Medicare lab test fee cuts in 2018.

How to Register for This Critical Webinar

For lab executives, hospital laboratory outreach managers, and their billing/financial teams, Murphy and Myers will update and expand on this critical information during a special webinar that takes place later this week on Wednesday, December 14, 2016, at 1:00 PM Eastern Time.

The webinar, “CMS Prepares to Cut Medicare Fees: Smart Steps Labs and Hospital Outreach Programs Can Take to Anticipate Lost Revenue, Protect Market Share, and Sustain Physician Satisfaction,” is produced by The Dark Report.

The topics to be discussed during this webinar include essential information about commonly-overlooked aspects of the PAMA final rule that will have significant ongoing influence on the ability of hospital outreach laboratories to maintain fiscal solvency.

Murphy and Myers will walk participants through PAMA phase-in reduction examples, spotlighting the impact they will have on Medicare spending for clinical lab services and their estimated impact on providers.

Most importantly, Murphy and Myers will provide examples of how clinical labs should model the financial impact of the coming PAMA lab test fee cuts, mapped against their specific mix of tests, volume, and proportion of Medicare patients. Strategies you can launch to mitigate margin loss at your lab will also be discussed.

To register for this important webinar, use this link (or copy and paste this URL into your browser: https://ddaily.wpengine.com/audio-conferences/webinar-cms-prepares-to-cut-medicare-fees-smart-steps-labs-and-hospital-outreach-programs-can-take-to-anticipate-lost-revenue-protect-market-share-and-sustain-physician-satisfaction-1214).

In conclusion, every independent clinical laboratory, and every hospital/health system laboratory outreach program, should understand the specific financial threat represented by the PAMA final rule for private-payer lab test price reporting. In just 13 months, the cash flows of every laboratory serving Medicare patients will decline by a substantial sum. As documented by the OIG, CMS officials expect to cut Medicare payments to labs by $400 million during 2018—and that’s just the first year of what will be additional fee cuts in the following years. Thus, it is prudent for every medical laboratory manager to take timely action to understand the final rule and prepare his or her clinical laboratory for the reduced revenue that will result from these Medicare lab test fee cuts.

—Michael McBride

Related Information:

For information and to register for the webinar: “CMS Prepares to Cut Medicare Fees: Smart Steps Labs and Hospital Outreach Programs Can Take to Anticipate Lost Revenue, Protect Market Share, and Sustain Physician Satisfaction

Part One of The Dark Report’s Special Coverage of PAMA Market Pricing, November 7, 2016, with Real Market Price Data for Four Sectors of Clinical Laboratory Industry

Part Two of The Dark Report’s Special Coverage of PAMA Market Pricing, November 28, 2016

Medicare Payments for Clinical Diagnostic Laboratory Tests in 2015: Year 2 of Baseline Data

CMS Issues PAMA Final Rule That Aims to Cut Medicare’s Clinical Laboratory Test Price Schedule Sharply Beginning in 2018

New Federal Law Has Potential to Financially Devastate Local Clinical Laboratories, While Favoring Larger National Medical Labs

Executive War College May 2-3, 2017

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