Faster than expected transition from fee-for-service healthcare should grab attention of clinical laboratories and anatomic pathology groups who face financial unknowns under new payment systems

Clinical laboratory executives should take note of a key financial fact. The transition from fee-for-service healthcare to value-based reimbursement is occurring at a faster clip than the Department of Health and Human Services (HHS) anticipated last year when federal officials announced a plan to tie 30% of traditional Medicare spending to alternative payments models by the end of 2016.

That means the transition away from fee-for-service payment for medical laboratory tests and other healthcare services is moving ahead of schedule. As evidence, HHS recently announced it reached the 30% target at the start of 2016, nearly a year ahead of the schedule laid out when the Obama Administration outlined a plan to reward healthcare providers based on quality of care rather than the volume of services they provide.

With the January 2016 announcement of 121 new Accountable Care Organizations (ACOs) as well as greater provider participation in other models, HHS estimates it has achieved that goal well ahead of schedule,” the agency said in a March 2016 news release. The 30% milestone represents an estimated 10 million Medicare patients receiving value-based care.

Clinical Laboratories Affected by Shift to Value-based Payments

Fee-for-service reimbursement for lab tests is what underpins today’s financial model for lab test services. For that reason, the faster-than-expected shift to alternative payment models and value-based reimbursement should serve as a wake-up call to pathologists and clinical laboratory executives who soon may find that fee-for-service reimbursement is no longer the primary payment method for anatomic pathology services and medical laboratory tests.

When HHS last year introduced a plan to shift Medicare reimbursements to alternative payment models such as ACOs or bundled payment arrangements, it set a goal of tying 30% of Medicare payments to quality or value by the end of 2016, and reaching 50% by the end of 2018.

HHS points to the Affordable Care Act as the engine for change. The HHS website states that prior to the healthcare legislation being signed into law in 2010, Medicare paid “essentially $0 through alternative payment models.” That percentage increased to approximately 20% by 2014 and surpassed 30% this year. In its statement, HHS noted that the Centers for Medicare & Medicaid Services (CMS) is joined by “dozens of insurance companies, health systems, employers, and organizations” that have also moved toward alternative payment models.

Patrick Conway, MD, MSc, Deputy Administrator for Innovation & Quality and CMS Chief Medical Officer, also credits buy-in from healthcare providers for the agency’s ability to reach the 30% milestone ahead of schedule.

“We reached this goal in partnership with the thousands of providers who collaborated with us in innovation,” Conway noted in the HHS statement. “It’s in our common interest—as patients, providers, businesses, health plans, taxpayers—to build a healthcare delivery system that delivers better care; spends healthcare dollars more wisely; and makes individuals and communities healthier.”

Patrick Conway, MD

Patrick Conway, MD, MSc (above), Deputy Administrator for Innovation & Quality and Centers for Medicare & Medicaid Services Chief Medical Officer, praises healthcare providers for embracing the shift to value-based reimbursement. (Photo copyright: Centers for Medicare and Medicaid Services.)

HHS Expects Continued Growth in Value-based Payment Model

Today, there are 477 Medicare ACOs participating in the Medicare Shared Savings Program (MSSP) and the Pioneer ACO model combined, according to HHS. In 2014, these programs generated a total net savings of $411 million. The agency expects value-based payments will continue to increase this year, with the start of the Comprehensive Care for Joint Replacement Model and the Oncology Care Model.

“Improving the quality and affordability of care for all Americans has always been a pillar of the Affordable Care Act, alongside expanding access to healthcare,” HHS Secretary Sylvia M. Burwell said in the statement. “The law gives us the tools to put patients at the center of their care, improve quality, and help make care more affordable over the long term.”

HHS’s estimates were confirmed by the independent Centers for Medicare & Medicaid Services Office of the Actuary, which multiplied the number of Medicare beneficiaries in alternative payment models by the expected cost of care, then compared that figure to projected Medicare fee-for-service spending. As of January 2016, CMS estimates roughly $117 billion out of a projected $380 billion Medicare payments are tied to alternative payment models.

These developments are portents of major financial changes for the entire clinical laboratory industry. Under a payment system dominated by fee-for-service reimbursement, more specimen volume increases a lab’s profit margins because economies of scale cause a decline in average-cost-per-test and each additional lab test brings in a fee-for-service payment. Healthcare’s transition to value-based reimbursement—led by the Medicare program—introduces a major element of doubt in what type of medical laboratory business model will be best as a growing proportion of every lab’s reimbursement comes from bundled payments, fixed per-member per-month payments, and capitated payments.

—Andrea Downing Peck

Related Information:

HHS Reaches Goal of Tying 30 Percent of Medicare Payments to Quality Ahead of Schedule

Better, Smarter, Healthier: In Historic Announcement, HHS Sets Clear Goals and Timeline for Shifting Medicare Reimbursements from Volume to Value

HHS: As of January 2016, 30 Percent of Medicare Payments Now Tied to Quality, Goal Reached Ahead of Schedule

Center for Medicare and Medicaid Innovation’s Methodology and Calculations for the 2016 Estimate of Fee-for-Service Payments to Alternative Payment Models

Pathologists and Clinical Lab Executives Take Note: Medicare Has New Goals and Deadlines for Transitioning from Fee-For-Service Healthcare Models to Value-Based Reimbursement

American Hospital Association Says Medicare’s Value-Based Purchasing Could Put Hospital Revenue at Risk

New CMS Pilot Intends to Test Viability of a Universal Bundled-Payment Model for Inpatient Care