CEO SUMMARY: Following passage of the Protecting Access to Medicare Act of 2014, officials at PeaceHealth and PeaceHealth Laboratories began to model the financial effect this law would have on this long-established hospital lab outreach program. Based on projections of a 20% cut in revenue during the first two to three years of the Medicare Part B fee cuts that will take place starting in 2018, the health system decided to sell its lab outreach program to Quest Diagnostics.
FOR TWO YEARS, officials at PeaceHealth considered how to get the most value from their extensive clinical laboratory operations in the Pacific Northwest.
Those discussions began in 2014 after the U.S. Congress passed the Protecting Access to Medicare Act of 2014 (PAMA). It was clear that PAMA would have a significant effect on Medicare payments for clinical laboratory tests.
But how significant was not apparent until the federal Centers for Medicare and Medicaid Services published the draft rule to implement the private payer market price reporting section of the law in 2015, followed by the publication of the final rule last year. After reviewing the final rule, clinical labs began to forecast how the rule would affect lab payments.
Consultants to the clinical laboratory industry predict that the PAMA private payer market price reporting rule will result in steep cuts in payment for lab tests, cuts of as much as 20% off current reimbursement levels. THE DARK REPORT published an analysis from XIFIN Inc., a company in San Diego that provides revenue cycle management to more than 200 clinical lab organizations. In this analysis, XIFIN determined that the independent lab companies in its client portfolio were paid a weighted average of 19.6% less than what private payers paid for Medicare Part B fees for 20 of the highest-volume tests.
Sale of Lab announced
These projections, as well as statements by CMS officials that the market price reporting rule would generate fee cuts of $400 million in 2018 and $5.4 billion over 10 years, were significant reasons PeaceHealth announced last week that it would sell Peacehealth Laboratories—its successful laboratory outreach program— to Quest Diagnostics Incorporated.
“Absolutely, PAMA was part of our thinking,” declared PeaceHealth Laboratories President Ran Whitehead in an interview with THE DARK REPORT. “It wasn’t the only criteria, but it was a significant part of our discussions.
“As we began to look at the resources we would need to acquire the additional lab equipment, diagnostic technology, and informatics solutions required to support the population health management needs of our parent health system, we began to consider the need for a partner for our clinical lab business,” he said.
Deep Cuts on the horizon
“Our estimate was that we faced a significant drop in the reimbursement rates for laboratory tests, beginning in 2018,” Whitehead commented. “Our first thought was to see if we could partner with a lab company to help get us through this change over the next few years. We wanted to keep PeaceHealth Laboratories as a clinical service resource for our hospitals and the physicians and patients we serve, many of which are in very rural areas of the Pacific Northwest.
“To fulfill the mission of PeaceHealth, our outreach lab operates patient service centers that are in rural locations,” he added. “As an example, for our operations in Alaska, we must fly specimens on aircraft and sometimes float planes. All of this takes resources.
“The trouble is that we’re in an environment where the future reimbursement for clinical lab tests is in question,” observed Whitehead. “Most lab people across the country believe they will see some significant cuts in Medicare payments for lab tests in the first two to three years of PAMA. Those cuts will start on Jan. 1, 2018, just 10 months from now.
Balancing Costs and Quality
“We share some of the common thinking in the lab industry that payments could go down by 20%,” he explained. “Of course, the specific amount depends on your lab’s existing fee schedule, payer mix, and your current reimbursements for lab tests.
“Some labs will be affected more than others,” explained Whitehead. “Here at PeaceHealth Laboratories, our best projections indicated that we would experience about a 20% reduction in revenue just in the first two to three years of the PAMA Medicare fee cuts that will begin next year.
How CMS’ Final Rule Is Biased, Will Collect Only Lowest Prices
LAST SEPTEMBER, A REPORT WAS ISSUED by the Office of the Inspector General (OIG) that described what the federal Centers for Medicare and Medicaid Services was doing to implement the PAMA private payer market price reporting rule.
The OIG noted that just 5% of the nation’s labs were paid 79% of the total amount of Medicare Part B lab test payments in 2015. In the final rule CMS issued, labs required to report were identified by the OIG as follows:
1,398 of 3,211 independent labs (includes hospital labs with NPI numbers); excludes 56.5% of independent labs from reporting.
11,149 of 235,928 physician office labs; excludes 95.3% of POLs from reporting.
0 of 6,994 hospital labs; excludes 100% of hospital labs without an NPI number from reporting.
The exclusion of large numbers of community labs, POLs, and hospital labs from reporting the prices private health insurers pay means that CMS will not be getting data from those labs in the United States that are known to get higher prices from private payers.
Private payers understand that these labs have smaller volumes, and thus higher costs. But payers need these POLs, community labs, and hospital labs to be in their provider networks in order to provide access for their beneficiaries.
By excluding these labs from reporting the higher prices they are paid by private health insurers, CMS has gamed the system to ensure the incoming market price data is mostly made up of the lowest lab test prices insurers pay to the nation’s highest-volume labs. In this manner, CMS believes the data it collects will support deeper cuts to Medicare Part B lab test price cuts.
Sailing to Uncharted Waters
“There is no way smaller labs and hospital lab outreach programs have a profit mar- gin sufficient to absorb a 20% reduction in lab test fees,” he continued. “Not everyone’s fee schedule is tied to the Medicare fee schedule, but many labs like ours are paid either off the Medicare fee schedule or their insurance contracts pay some percentage of that fee schedule.
“The net effect is that these PAMA Medicare Part B fee cuts will have a sizable financial impact on most everyone, particularly those hospital outreach labs serving rural communities and that means small to mid-size laboratories such as ours,” he said. “These price cuts probably will not have such a significant effect on the big players.
“PeaceHealth Laboratories runs about 8 million lab tests annually and that puts us somewhere between a mid size and large lab,” he commented. “We’re certainly not in the same category as Quest Diagnostics, LabCorp, Mayo, or ARUP. We’re probably in the next tier down from that group of the largest labs.
“Like all labs, we have certain fixed costs and if we hadn’t done this arrangement with Quest, we would be forced to consider changing our service level offerings when these reimbursement declines start next year,” Whitehead said. “We’ve already done what we can to improve our operating efficiency. All of our labs are integrated on one IT platform, and we have common instrumentation.
“That’s what got us through the first wave of cuts that Medicare put in place about five years ago, when CMS cut fees by about 5% per year in three or four consecutive years,” he added. “We adjusted to that. But now, when you model the financial consequences of Medicare Part B fee cuts of 20% in two to three years, that’s a whole different ballgame—especially after we’ve already done everything we can to make our laboratories more efficient.
“Our hospital lab outreach program just doesn’t have the scale required to maintain top-flight equipment, technology, and IT prowess,” observed Whitehead. “Those are significant capital investments. You don’t need to be a CPA to see that the Medicare fee cuts that will happen in just 10 months make it impossible for labs like ours to keep the doors open, let alone have the capital to make needed investments.
“When we looked at our options, that led to questions such as, is this something we can do on our own? Or does this environment require that we partner with someone to make sure at least the communities we serve continue to have lab services?” he asked.
Steep Capital requirements
“Like all labs, we have to refresh our technology platforms and lab instruments every so often,” noted Whitehead. “That is an expensive proposition. We need to regularly acquire new technology, such as the ability to do molecular testing.
“To do that requires both a capital infusion and the need to hire people who have a specific level of expertise,” he explained. “When we added it all up, we asked, how are we going to pay for that? How is our hospital laboratory outreach program going to get a return on that investment when it faces such huge reductions in reimbursement? It simply did not make sense.
a partner Search Begins
“If you can’t do it yourself, then you have to look for partners,” he noted. “For two years, we did an exhaustive search to find the right partner. That search resulted in our agreement with Quest.
“So now Quest Diagnostics will need to answer those same questions that we asked,” Whitehead continued. “Quest will bring resources and expertise in areas that would have required investment by our lab. It provides the management of the labs and the supplies, equipment, and service. But PeaceHealth still owns those labs and the employees who work in our hospital labs remain our employees.
“Quest Diagnostics can profit from any margin they can get by charging a certain rate for each inpatient test,” he said. “It will get our reference test referrals and it will own our lab outreach business. It can thus leverage its economies of scale by folding our outreach test volume into its existing lab infrastructure. Those outreach lab tests will no longer come to PeaceHealth Labs.
“The question we faced in considering this sale was whether we had built in enough performance guarantees so that Quest Diagnostics can be successful in the communities and rural areas we currently serve,” Whitehead explained. “We want Quest to succeed because these are our patients it will serve.
“Any partnership or affiliation like this is a two-way street,” he added. “That is why we worked hard to ensure that the agreement includes requirements that our quality and service remain at the levels that we’ve achieved over the last several decades. Quality goals are built into the contract.
“That’s part of what took us almost two years to work out in this agreement,” he concluded. “Before we ever got into contract negotiations, there was much discussion at the board level of PeaceHealth about defining the criteria for success when developing a partnership for our health system’s lab testing needs. This was no overnight discussion. It is a process that took the better part of two years.”
Contact Ran Whitehead at 541-349-8440 or RWhitehead@peacehealthlabs.org.
Cuts From Final PAMA Rule Seen as Forcing Big Changes
LAB EXECUTIVES HAVE SPENT MANY hours over the past year or more talking with members of the U.S. Congress about how the rules to implement the Protecting Access to Medicare Act of 2014 will affect clinical lab- oratories adversely. Those discussions continue even now.
“Over the last couple of years, I’ve spent a considerable amount of time talking with our congressional delegation in DC and others on Capitol Hill about the impact of PAMA and, in particular, the regulations that CMS put out,” stated Ran Whitehead, President of PeaceHealth Laboratories.
“The problem is that the private payer market price reporting rule that CMS wrote excludes a vast number of smaller labs and hospital labs from reporting their private payer prices to CMS,” he said. “CMS crafted the final rule in such a way that only larger labs—those that have lower costs and are paid less by private insurers—will be reporting. Thus, the data CMS collects will not show the higher prices that insurers pay to smaller labs across the nation.
“The Medicare Part B fee cuts that CMS already says are coming will have a negative financial impact on small, medium, and semi-large laboratories like ours,” added Whitehead. “This is the message we have to deliver to our officials in Congress.
“That message is that PAMA will adversely affect both Medicare beneficiaries’ access to care and jobs in the lab business, particularly in smaller towns and rural communities like the ones our lab serves,” he explained. “It’s important to educate our elected officials why this train needs to get on a different track.
“That is why lab leaders continue to speak to members of Congress because they want to hear from us about how these regulations will affect care to Medicare beneficiaries, along with jobs in their home states,” he concluded.