“Protecting Access to Medicare Act of 2014” requires most medical laboratories to report market data and allows Medicare officials cut prices of Part B lab tests beginning in 2017
NEW ORLEANS, LA—No single development in the clinical laboratory industry grabbed more attention last week at the Executive War College than news that a new federal law gives Medicare officials the ability to reduce prices of individual medical laboratory tests by as much as 75% between 2017 and 2022.
This law is titled the “Protecting Access to Medicare Act of 2014” (PAMA). Congress passed this legislation to patch the Sustainable Growth Rate (SGR) formula until April 2015.
Few Clinical Lab Managers Aware of New Law’s Details
It was just four weeks ago, on April 1, that President Obama signed the bill into law. That is one reason why many attendees at the 19th Annual Executive War College on Laboratory and Pathology Management were unaware of its contents.
“This new federal law is the single biggest change to the clinical laboratory industry since enactment of CLIA in 1988,” observed Robert L. Michel, in his keynote address. He is Editor-In-Chief of The Dark Report and Founder of the Executive War College.
Potential for Radical Disruption to Clinical Lab Testing Industry
“The significant thing about this legislation is its potential to trigger the most radical disruption to the clinical lab testing marketplace in four decades!” declared Michel. “There are at least six sections of PAMA that change how Medicare program officials are to develop billing codes, establish coverage guidelines, and determine prices for Part B Clinical Laboratory Test Fees.”
Michel called attention to two specific areas of the PAMA legislation that he believes will be highly disruptive to the clinical laboratory testing industry. One section of PAMA defines how the Centers for Medicare and Medicaid Services (CMS) is to gather market data from clinical laboratories, starting in 2016. The other section of PAMA limits how deeply CMS can cut the price of a single lab test in each of the six years from 2017 to 2022.”
Medicare Officials Could Cut Lab Test Prices By as Much as 55%
This section of PAMA constrains Medicare officials from dropping the price for any single clinical laboratory test by more than these amounts for each year:
- 10% in 2017
- 10% in 2018
- 10% in 2019
- 15% in 2020
- 15% in 2021
- 15% in 2022
Were CMS to implement price reductions of this amount on a single test in each of the six years, the six price cuts that cumulatively represent 75%, would cut the price of a lab test by 55%, compared to the base year. It is known that CMS wants to reset prices for the 20 highest-volume tests that represent more than half of what is spent annually on Medicare Part B Clinical Laboratory Test Fees (CLFS).
Another heavy burden that will fall on applicable clinical labs is the requirement that, starting January 1, 2016, they must report the market data that CMS will to use to determine CLFS prices. Failure to report this data can result in a penalty to the clinical laboratory of as much as $10,000 per day per unreported test.
Clinical Labs Will Find it Tough to Collect Market Data
During his opening presentation at the Executive War College, Michel discussed the details of this section of the new law. “Few clinical laboratory organizations have the capability to easily gather the market data specified by PAMA,” he observed. “The typical clinical lab may perform between 400 and 800 different assays.
“It will require substantial manpower for a lab to identify every private payer that paid a claim for each type of lab test, not to mention also collecting the information about the volume of tests and the prices paid by every payer for every type of test,” he continued. “The burden this law places on hospital labs and community labs is so huge that some lab industry associations have already declared that it will be impossible for many labs to fulfill this section of the new law.”
As to the law’s section governing yearly cuts to CLFS prices for specific tests, Michel believes that labs need to be wary as to how Medicare officials use the market data to cut lab test prices. “Remember that, in June 2013, the Office of the Inspector General (OIG) delivered a report to CMS dealing with how the agency prices clinical laboratory tests,” explained Michel. “Essentially, this report looked at 20 clinical lab tests that represented 47% of the volume of Part B CLFS claims in 2010 and 56% of the money Medicare paid for CLFS claims that year.
OIG Advised Medicare That It Could Save $910 Million Annually
“The OIG used methodology that has been challenged by lab industry associations. It determined that Medicare could save $910 million annually if it paid a price equal to the lowest price paid for that test by each state’s Medicaid program,” he continued. “It is easy for an outside observer to take these facts and conclude that the language in PAMA that addressed maximum price cuts during the years 2017 through 2022 was included in the law because CMS intends to aggressively reduce prices for these 20 high-volume tests. Should this become reality, it will wreak financial havoc among the nation’s community labs and hospital/health system labs.”
Michel presented one example to illustrate the potential of this law to erode the finances of the nation’s community medical laboratories. CPT 82025 is for “Complete Blood Count with automated differential white blood cell count.” In the OIG report, the agency said that, during 2010, Medicare paid $353 million for this test, which represented 7.2% of the total “Medicare Allowed” payments that year. The OIG noted that the “2011 Medicare National Limitation Amount per test” for CPT 82025 was $10.94.
Assume a 75% Reduction in Price of a Clinical Laboratory Test
Michel took that base amount and assumed that Medicare officials would reduce the price by the maximum percent allowed by PAMA during the years 2017-2022. The estimated reductions penciled out as follows:
- Base Year: $10.94
- 2017 10% cut: $9.85
- 2018 10% cut: $8.61
- 2019 10% cut: $7.97
- 2020 15% cut: $6.77
- 2021 15% cut: $5.75
- 2022 15% cut: $4.89
This assumption produces a 75% reduction in the price Medicare would pay to labs for a high-volume clinical laboratory test. Assuming that Medicare was to do the same with the other 19 high-volume lab tests identified by the OIG in its June 2013 report, the resulting loss of revenue would push many local lab companies to sell, file bankruptcy, or close their doors.
Fewer Medical Labs Available to Serve Nursing Home Patients
Several attendees in the audience at the Executive War College pointed out that labs that service nursing homes and skilled nursing facilities would be hardest hit. As they shut down, it would leave nursing home patients without access to lab testing in those communities, since most of the nation’s public lab companies refuse to provide lab testing services to nursing homes because they already consider Medicare reimbursement inadequate.
Another concern that was expressed during a panel discussion about PAMA and other developments within Washington, DC, was the language in PAMA that exempts a lab from reporting market data involving capitated contracts. There was speculation that this language might motivate the national laboratory companies, prior to January 1, 2016, to renegotiate existing contracts where they are paid deeply discounted fee-for-service prices for routine high-volume tests and convert such payment to capitation.
Were this to happen, these labs would not be required to report those deeply discounted prices—and the very high volumes of tests provided under these contracts—to CMS. Missing that data, CMS might then set a higher price for these tests than would have resulted if it had all the capitated price and volume data. Ironically, such a situation would mean that the largest national labs would thereby be paid more for Medicare tests, even as they extend much cheaper pricing for the same high-volume lab tests to larger health insurance plans.
Community Labs Face Serious Financial Threat from New Law
As the examples above make clear, clinical laboratories in every community face the grave threat of reduced income from Medicare Part B lab testing as the federal government implements different sections of PAMA. If CMS aggressively slashes the prices of the top 20 CLFS tests by volume from 2017 forward, the resulting financial carnage suffered by community laboratories and hospital laboratory outreach programs will cause many to go out of business.
Should such events come to pass, the irony is that it will be the national lab companies that survive to pick over the bones of these failed labs, thus increasing their market share. Such an outcome would frustrate the intent of those elected officials in Congress that wanted PAMA to be a bill that would curb the profitability of the national lab companies, which is fueled by their strategy of giving health insurers deeply-discounted (and often below marginal cost) lab test prices, while using Medicare Part B CLFS reimbursement to offset the losses from those managed care contracts.