Analysis shows new rule requires data gathering effort that favors larger medical laboratories and thus threatens community labs that serve smaller towns and rural areas

When The Centers for Medicare and Medicaid Services (CMS) issued their Final Rule for lab test market price reporting under the Protecting Access to Medicare Act of 2014 (PAMA) last month, it put the clinical laboratory industry on a path that will have significant financial consequences for all labs, whether large or small. Some experts believe this will be the most disruptive event to the medical laboratory industry in the past 30 years.

By now, the story is well known among pathologists and clinical laboratory directors. That story comes from CMS, which issued the Medicare Clinical Diagnostic Laboratory Tests Payment System Final Rule—AKA the Clinical Laboratory Fee Schedule (CLFS)—that directly affects clinical labs. Under this Final Rule, published in the Federal Register, June 17, 2016, “laboratories and physician offices are required to report private payer rate and volume data if they have more than $12,500 in Medicare revenues from laboratory services on the CLFS and they receive more than 50% of their Medicare revenues from laboratory and physician services during a data collection period. Laboratories will collect private payer data from January 1, 2016 through June 30, 2016 and report it to CMS by March 31, 2017.

“The first data reporting period (that is, the period during which data from the collection period will be submitted to CMS) will be from January 1, 2017, through March 31, 2017. All subsequent data collection and reporting periods for CDLTs [Clinical Diagnostic Laboratory Tests], except for ADLTs [Advanced Diagnostic Laboratory Tests], will follow this same data collection and reporting schedule, every three years. Reporting of private payer rates for ADLTs will occur on the same schedule except it will be on an annual basis,” states the Final Rule.

Table 3 (above) illustrates the final data collection and reporting periods and the CLFS rate year for which the data will be used for CDLTs; Table 4 illustrates the final data collection and reporting period for a new ADLT; and Table 5 illustrates the final data collection and reporting periods for new ADLTs after the new ADLT initial period. (Graphic and captions copyright: The Federal Register.)

Table 3 (above) illustrates the final data collection and reporting periods and the CLFS rate year for which the data will be used for CDLTs; Table 4 illustrates the final data collection and reporting period for a new ADLT; and Table 5 illustrates the final data collection and reporting periods for new ADLTs after the new ADLT initial period. (Graphic and captions copyright: The Federal Register.)

Beginning on Jan. 1, 2017, labs will report those payment rates to CMS and that data will become the basis for what CMS calls “market-based price data” for the Medicare Part B Clinical Laboratory Fee Schedule. The new rates will be effective on Jan. 1, 2018.

Related Past Events That Still Affect Clinical Laboratories

But for clinical laboratories, there are at least two important events or backstories to consider beyond the widely-reported basics of the PAMA Final Rule. The first event goes back to 2003 when Congress passed the Medicare Modernization Act (MMA) of 2003, which called for a competitive bidding demonstration program for clinical laboratories.

In 2008, CMS attempted to implement that competitive bidding demonstration program in Southern California, but was blocked in that effort when a federal judge ruled in favor of several clinical laboratories that had filed suit to challenge the competitive demonstration project. (See The Dark Report, “April 4 Fed Court Ruling Opened Door to Injunction,” April 14, 2008.)

Ever since that setback, CMS officials have sought a way to enact drastic cuts in what it pays for clinical laboratory testing, as was reported by Dark Daily. Now, finally, CMS has unveiled a plan to do just that.

The second event in this ongoing saga—and the latest impetus for CMS’ efforts to cut clinical lab rates—came in 2013, when the Office of Inspector General (OIG) published an analysis of what Medicare spent on clinical lab tests in 2010. Titled, “Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings,” the analysis showed that CMS could have saved about 20% if it paid the lowest price for 20 tests that state Medicaid programs and the Federal Employee Health Benefits Program (FEHB) pay. (See The Dark Report, “OIG Tells CMS It Could Save $910 Million on Lab Test Costs,” June 17, 2013.)

In a report she wrote in June about the PAMA Final Rule, Amanda Murphy, an analyst for William Blair & Company LLC, noted that officials at CMS have assumed that Medicare pays 20% more than private payers pay and that the final rule is expected to save $390 million in 2018, or about 5.6% of the $7 billion that CMS pays for clinical lab tests annually. Over 10 years, CMS expects savings from the PAMA market price reporting rule to be $3.93 billion.

Community Laboratories Big Losers Under Final Rule

Pathologists and clinical laboratory executives need to know about this background to the final rule on lab test market price reporting in order to understand why some experts predict that implementation of Section 216 of the PAMA law is expected to significantly disrupt the status quo in the clinical laboratory marketplace. Simply said, the new rule will cause some labs to be winners and some labs to become losers. Among the winners will be the nation’s largest clinical laboratories and the losers will include the nation’s already-dwindling number of community labs.

Critics of the new market price reporting rule point out that CMS has crafted an approach that does not meet the language Congress wrote into PAMA. That language requires the federal agency to determine the market prices private health plans are paying for clinical lab tests and use that data to set prices for the Medicare Part B clinical laboratory fee schedule (CLFS).

As covered in detail by The Dark Report (TDR) in its latest issue (See The Dark Report, “PAMA Final Rule a Threat to Community Lab Survival,” July 5, 2016.), the rule does not require all clinical labs to report what private insurers pay them because the final rule sets a minimum level of Medicare lab revenue at $12,500. Based on this level of revenue, CMS estimates that about 95% of all physician office laboratories, and about half of independent laboratories, will not need to report private payer prices. The new rule also exempts many hospital labs performing outreach and outpatient testing from reporting their market price data. Hospital labs are generally paid higher prices by private health plans.

The exclusion of market price data from these large numbers of smaller labs, which are typically paid more by private health insurers, will have consequences. Experts who have studied the language of the final rule point out that CMS will thus be collecting market price data only from labs that typically handle larger volumes of specimens (thus creating Economies of Scale). These labs use the lower costs generated by economies of scale to negotiate deeply-discounted lab test prices in exchange for exclusive contracts with private health insurers as a way to exclude competing labs from having access to those patients.

Thus, CMS will be gathering price data that has an inherent bias—a bias that puts smaller community labs at a significant financial disadvantage. They lack the specimen volume required to achieve economies of scale and the resulting lower costs of operation. When CMS cuts the Medicare fee schedule beginning in 2018, the resulting loss of revenue will put the nation’s community labs under extreme financial pressure. Typically, the proportion of Medicare patients served by these labs represents 40% to 60% or more of their total specimen volume, so any reduction in the prices paid to these labs by Medicare will erode the financial stability of community laboratories throughout the United States.

The result is many community clinical laboratories may be forced to close or sell to other larger clinical labs. “The rule’s approach supports the interests of the largest publicly traded lab companies,” stated Julie S. Allen, in an interview with The Dark Report. Allen represents the National Independent Laboratory Association (NILA) and is a Senior Vice President of the District Policy Group.

Under the final rule, CMS will collect data from the commercial discounted rates paid to the largest publicly traded labs and that data will skew the numbers that CMS will use to set the new rates. Under Medicare, those labs have the largest test volume, Allen explained. “The rule will result in the exclusion of most of the higher private payment rates paid to hospital laboratories,” Allen added. “By excluding private payment data from hospital labs, CMS will set the new Medicare Part B rates at levels that do not reflect the costs of providing testing in the community laboratory setting that often are the only local laboratories serving Medicare patients in their coverage areas.”

Under the final rule, Allen expects many community laboratories will struggle and may be forced to sell to larger lab companies or go out business. “What is unfortunate is that Medicare beneficiaries across communities are at risk of losing access to the local lab testing services they have relied on for years,” said explained.

As a result, NILA is considering the possibility of a legal challenge to the rule under federal administrative law, and also will press members of Congress to require CMS to change the final rule, Allen stated.

Dark Daily readers interested in reading the full Allen interview published by our sister publication, The Dark Report, can click here to access that story, or go online with this URL: http://www.darkintelligencegroup.com/the-dark-report/laboratory-billing/pama-final-rule-a-threat-to-community-lab-survival/.

—Joseph Burns

Related Information:

Medicare Program: Medicare Clinical Diagnostic Laboratory Tests Payment System

CMS Holding Off Market-Based Payment for Labs Until 2018; Tweaks Criteria for Labs Reporting Pricing

Long-awaited CMS Final Rule Updates Clinical Lab Tests Payments

CMS Finalizes Lab Fee Schedule Changes: 5 Key Takeaways

PAMA Regulations

Overview of CMS-1621-F Medicare Clinical Diagnostic Laboratory Test Payment System Final Rule (Slide Presentation)

FAQ: CMS 1621 F Medicare Program–Medicare Clinical Diagnostic Laboratory Tests Payment System Final Rule (Frequently Asked Questions)

Feds to Destroy Bid Documents for Medicare’s Clinical Laboratory Competitive Bidding Demonstration Project in San Diego

Fed Court Ruling Opened Door to Injunction

PAMA Final Rule a Threat to Community Lab Survival

OIG Tells CMS It Could Save $910 Million on Lab Test Costs

New Threat to Community Lab Survival: CMS Clinical Lab Fee Schedule Cuts