In vitro diagnostic manufacturers and medical distributors share concerns, along with other types of medical labs in nation’s small cities and hinterlands that include rural hospital labs and physician office labs (POLs) because, along with financial erosion, there is the potential of reduced access by Medicare beneficiaries to clinical lab tests where they live
SAN ANTONIO, TEXAS—Owners and managers of community and regional independent lab companies and community laboratories gathered here last week at a lab conference to assess what many believe is a bleak future. That’s because, in less than 11 months, medical laboratories across the United States will be dealing with unprecedented price cuts to the Medicare Part B clinical laboratory fee schedule (CLFS) and how those price cuts erode the financial stability of these essential labs, often the only local medical laboratory serving smaller communities and rural areas throughout the nation.
The number one financial threat of concern to these community and regional lab owners is how the Protecting Access to Medicare Act (PAMA) rule for private-payer market-price reporting will be used by the Centers for Medicare and Medicaid Services (CMS) to make fee cuts—effective on January 1, 2018—that will be financially devastating to the nation’s small and mid-sized community and regional labs, rural hospitals, some individual and group physician practices, and community hospitals—while causing increased market concentration that benefits the nation’s two dominant publicly-traded lab companies.
According to CMS statements, and confirmed by the Office of the Inspector General (OIG), the coming fee cuts are estimated to reduce 2018 payments to clinical labs by $400 million, just during 2018 (total Part B lab test payments were $7 billion in 2015). CMS also says that the fee cuts will total approximately $5.4 billion over 10 years—an amount that is more than twice what Congress projected when it passed the PAMA law in 2014.
NILA’s Clinical Lab Owners Fear Financial Disaster with Significant Consequences for the Medicare Program
During the 2017 Lab Leaders Forum and Mid-Winter Meeting of the National Independent Laboratory Association (NILA) last week, the number one topic was the negative financial impact of the PAMA Medicare Part B price cuts. It was also a reason why there was record attendance at this year’s event in San Antonio, with more community and regional labs in attendance than ever before.
“There is a real danger that Medicare beneficiaries, as well as other patients, living in rural areas, small towns, and mid-sized communities across the nation are going to lose access to clinical lab testing if these Medicare price cuts happen in 2018,” stated Mark Birenbaum, PhD, Executive Director of NILA, which is based in St. Louis, Missouri. “It is simple economics.”
Medicare Price Cuts of 10% Could Financially Ruin Labs with 3% Profit Margins
“Throughout the nation, there are community labs that are often the only local source of clinical lab testing in the towns where they are located,” he continued, in an interview with Dark Daily. “Within NILA’s membership are a number of community labs companies for which Medicare patients make up between 35% and 60% of the total patients they serve each year. Many of these community labs, with modest revenues of $2 million to $8 million, typically operate on profit margins of just 3% to 4%.
“It is important to understand this fact,” explained Birenbaum. “Because, if Medicare officials cut prices on the highest volume tests by 10% in 2018 and an additional 10% in 2019—as allowed by the PAMA statute—these community labs will go from a small annual profit to an immediate and significant loss. As that happens the likely outcome will be either that the lab goes out of business, or it sells itself, possibly to one of the nation’s two multi-billion-dollar lab companies.”
Would LabCorp, Quest Diagnostics, Gain Market Share?
Financial analysts who study the clinical laboratory industry have written that, because of these Medicare Part B price cuts, as community and regional labs are financially strangled, the PAMA statute will allow Laboratory Corporation of America (LH:NYSE) or Quest Diagnostics Incorporated (DGX:NYSE) to step in and buy these community labs at bargain-basement prices or just wait for them to go out of business. Some analysts believe that this will further concentrate market share in the hands of these two lab companies in ways that help them offset the negative drag on revenue that the same Medicare price cuts have on their total business, since analysts believe that Medicare claims make up only about 15% of the largest lab’s respective annual revenue.
Hospitals are another type of health provider believed to be at financial risk from the expected cuts in Medicare Part B lab test prices coming in 2018. In particular, as the Medicare fee cuts take effect, smaller hospitals and rural hospitals will experience significant loss of revenue from the outreach lab tests for Medicare beneficiaries and the anticipated cuts commercial carriers will make after Medicare readjusts its rates.
One CEO of a 25-bed rural hospital in New Hampshire, in discussing why outreach lab testing revenue is crucial to her hospital, told our sister publication, The Dark Report, that, “The funds generated by performing these [outreach] lab tests are used to support the cost of providing laboratory services to all patients 24/7, including stat lab testing for emergency patients and inpatients. These funds also help support other services in the hospital where losses are typically incurred, such as the emergency room and obstetric programs.”
Just 5% of Clinical Labs Required to Report Data
There have been significant criticisms of CMS and the final rule for PAMA private-payer market-price reporting. Numerous experts point out that CMS is requiring just 5% of the nation’s labs (12,547) to report the prices they are paid by private health insurance plans (because they represent 69% of Medicare payments for lab tests during 2015).
Some experts believe they know why CMS has excluded the other 95% of clinical labs (248,977, including all but a handful of the nation’s 5,000 hospital labs) from reporting their private payer prices. These labs represent 31% of Medicare Part B lab test payments—still a significant proportion of the total annual spending that CMS is deliberately excluding from the data it will use to meet the requirements of the PAMA statute in setting Medicare Part B lab test prices.
These experts point out that smaller labs have a higher cost-per-test compared to big labs (because they test smaller volumes of specimens). For that reason, private health plans pay them higher prices, and insurers have a rational reason to pay higher prices to these local labs than the big national labs. These smaller community labs, physician office labs, and rural hospital labs, are often the only local source of clinical lab tests for patients living in those communities and for serving more complex patients, including those that reside in skilled nursing facilities or are homebound. Health insurers want local access for these patients and thus pay these labs higher prices.
CMS officials seem to ignore this rational economic fact. They also seem to be deliberately creating a substantial downward bias in lab test pricing by designing a rate review system that excludes most hospital outreach labs from reporting the prices they are paid in an effort to purposefully exclude higher payment rates, knowing commercial carriers typically pay rates that are at least on par with current Medicare reimbursement rates, or more. The concern of many pathologists and clinical laboratory administrators is that by designing a reporting system that will be dominated by test reports from national labs that drive the most substantial discounts in the market, CMS’ system will result in deep price cuts to Medicare Part B lab test fees that take effect on January 1, 2018. This will severely reduce revenue paid to community labs, physician office labs, and hospital and rural hospital outreach labs, putting them in financial jeopardy.
Readers of Dark Daily who understand the potential disruption to lab testing that can occur, particularly in communities where these smaller labs are the only local source of access for Medicare beneficiaries, should contact their Congressional representatives to educate them about this issue.
In addition, NILA welcomes new labs as members. On behalf of its lab members, it maintains a lobbying and educational effort in Washington, DC, and can provide information that clinical lab professionals can use to educate their elected officials about this important issue.
Finally, assuming that CMS officials do proceed to implement, as of January 1, 2018, the deep price cuts to Medicare Part B clinical laboratory test fees that it has described, it may be haunted by the consequences of its actions in coming years. One goal of the Medicare program is to preserve local access to healthcare services for Medicare beneficiaries.
Thus, if the deep fee cuts to Medicare Part B prices do result in the bankruptcy, failure, and closure of significant numbers of local clinical laboratories—be they community or regional independent labs, physician office labs, or hospital outreach labs—the complaints of Medicare beneficiaries to their elected officials may become a big problem for CMS officials. However, there will be no easy fix if that happens, because once a clinical laboratory is closed in a community, it is nearly impossible to rebuild a comparable lab testing service.
This has been proven numerous times in the United States, as well as any number of countries around the world where the government health system was too aggressive at cutting funding for clinical lab testing services to cut costs. Toronto, Canada, in the early 1990s; Alberta province in Canada in the mid-1990s, and New Zealand during the 2000s, are all examples were cost-cutting was too extreme, too fast. Consequently, there was substantial—frequently unacceptable—disruption in patient care.