Why Small Labs and Even Hospitals Are at Risk from PAMA Cuts

Could PAMA’s Medicare price cuts kill off the nation’s smallest—but vital—clinical labs?

CEO SUMMARY: Clinical lab executives and experts who have studied the final rule for PAMA lab test market price reporting are seriously concerned that the design of this rule may put many of the nation’s smallest, but still essential, clinical labs at great risk of financial distress, if not outright failure. In this exclusive analysis, THE DARK REPORT shows why excluding the reporting of the higher prices private insurers pay to clinical labs who get 31% of Part B fees could eventually cause many labs to go out of business.

IN JUST FOUR WEEKS, Medicare officials will begin accepting private payer lab test price data from those labs required to report under the PAMA final rule to implement the Protecting Access to Medicare Act of 2014. Some lab administrators expect that implementing PAMA could be the single most financially-disruptive event to hit the clinical lab industry in three decades.

As was widely reported on these pages and by many lab industry professional societies and associations, officials at the federal Centers for Medicare & Medicaid Services have stated on multiple occasions that the agency’s study of private payer lab test price data will result in price cuts to the Medicare Part B fees. CMS estimates of $5.4 billion in savings over the first 10 years of those price cuts have been reported.

The estimate of $5.4 billion in savings shows that the agency may be going beyond the intent of Congress when it passed PAMA two years ago, according to critics of how CMS is implementing the law’s market price reporting requirement. When PAMA was signed into law, the Congressional Budget Office (CBO) scored this part of the bill as projected to deliver $2.4 billion in savings over 10 years.

These critics are troubled by the fact CMS now projects savings that are more than double the original CBO estimate of savings expected over 10 years. They point out that, since CMS has not yet seen and analyzed the private payer price data, its prediction that costs for lab testing will decrease Medicare lab test spending by $5.4 billion demonstrates that the federal agencymay not be making a good faith effort to execute the language of PAMA. That’s because its target is to cut lab test fees by an amount that is more than double the savings that was budgeted by Congress when the bill was scored and passed.

Bias in report Methods?

Some lab industry experts argue that CMS structured the final rule to exclude classes of labs known to get higher prices from health insurers. CMS arranged the final rule so that the majority of the private payers’ price data that labs report will consist of the much lower prices that health insurers pay to the nation’s largest commercial labs in exchange for exclusive network status that excludes smaller lab competitors, the critics assert.

CMS established requirements that guaranteed that the majority of private payer price data will come from those clinical laboratories that get the lowest prices from private payers, the critics argue. But these labs also perform the highest volume of tests and thus have lower costs.

At the same time, because of the types of clinical laboratories excluded from the final rule, the private payer price data won’t be reported from labs that represent 31% of the total payments paid out annually under Medicare Part B. These types of labs are known to get higher prices from private insurers.

one Third of Data excluded

The Office of Inspector General confirms this fact in its report, Medicare Payments for Clinical Diagnostic Laboratory Tests in 2015: Year 2 of Baseline Data, issued in September. OIG wrote, “…we estimate using data from 2015 that 5% of labs (12,547 labs) will be required to report their private payer data to CMS. CMS will use data reported by these labs to set new payment rates for lab tests. These labs accounted for 69% of Medicare payments for lab tests in 2015. The other 95% of all labs (248,977) accounted for the remaining 31% of Medicare payments in 2015.”

The OIG’s findings are significant because they show that the price data the nation’s largest lab companies report is the result of having extended deeply-discounted lab test prices to major insurers in exchange for exclusive or near-exclusive network status. Those labs will make up the largest proportion of the data submitted to CMS starting in January.

By excluding such data, CMS is putting some of the nation’s clinical labs at risk of significant erosion in their financial condition. Specifically, small labs (often the only independent labs serving nursing homes in their regions), community hospitals, and rural hospitals will take a financial hit that may put them out of business.

Why pay higher prices?

Further, private health insurers pay these higher prices for important reasons. First, they are often the only labs (or hospitals) that provide beneficiaries with access to lab tests in their communities and rural areas.

Second, private payers recognize that these labs have greater costs because of their much lower lab test volume. Thus, private insurers understand that a higher lab test price is necessary for these labs to remain in business and provide lab testing services to the private payers’ patients in these communities.

Third, if these smaller lab test providers are the only source for lab testing and they go out of business, private health insurers recognize that it is highly unlikely that the nation’s largest independent labs would step in to serve these communities.

There is some irony in this situation. Currently, the nation’s largest labs do not serve these rural areas because it’s not feasible financially, given the mix of prices that private insurers and Medicare pay. Thus, lower Medicare Part B lab test fees would make it even more difficult for bigger labs to fill the vacuum left after the existing, smaller labs stop serving these communities.

There Is Long History of Medicare Officials Taking Steps to Cut Part B Lab Test Prices

GIVEN THE SEVERAL STATEMENTS of the estimated savings of $5.4 billion to come from cuts to the Medicare Part B clinical laboratory fee schedule from officials of the Centers for Medicare & Medicaid Services, there should be no surprise when CMS finally publishes the lower fees late in 2017 that will become effective on Jan. 1, 2017. Assuming that CMS does succeed in implementing deep price cuts to the CLFS, it will be the culmination of a price-cutting effort that began as long as 35 years ago. It was in the early 1980s that certain Medicare officials began to publicly discuss the use of competitive bidding as a way to cut clinical lab test fees.

Competitive Bidding Model

CMS (then known as the Health Care Financing Administration, or HCFA) engaged outside contractors to develop a model for conducting competitive bidding. In 1987 and again in 1989, Abt & Associates of Cambridge, Massachusetts, did this type of work for CMS.

Efforts continued. THE DARK REPORT wrote, “During 1996-97, Research Triangle Institute (RTI) completed a contract with HCFA to produce a detailed plan for a laboratory competitive bidding demonstration project. RTI published the results of this work in the form of a paper titled Medicare’s Demonstration of Competitive Bidding for Clinical Laboratory Services: What It Means for Clinical Laboratories. This paper appeared in Clinical Chemistry (44:8, 1728- 1734 [1998]).

Nothing came of these efforts. For CMS, it was an idea that refused to die. One Congress after another Congress was given a recommendation by Medicare officials to authorize the federal agency to proceed with a competitive bidding project involving clinical laboratory tests. That was true throughout the 1990s and into the 2000s.

The big change happened in 2003. That was when Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. This authorized CMS to organize and conduct demonstration projects for the competitive bidding of clinical laboratory services.

CMS again engaged RTI and, by 2007, it announced a demonstration project for competitive bidding of lab testing for the San Diego-San Marcos Metropolitan Statistical Area. Only a lawsuit in a federal court with several laboratories as plaintiffs stopped this competitive bidding project in 2009. (See TDRs, Aug. 14, 2006; Dec. 31, 2007; Jan. 21, 2008; March 3, 2008.)

Did that kill the competitive bidding idea? No! In the spring of 2012, a study authored by experts at RTI was published in the Medicare & Medicaid Research Review (MMRR, 2012: Volume 2, Number 2). The study was titled The National Market for Medicare Clinical Laboratory Testing: Implications for Payment Reform.In their abstract, the authors stated, “national competitive bidding for non-patient laboratory tests could result in cost savings for Medicare.”

Studies of Lab prices

Officials at CMS next engaged the Office of the Inspector General (OIG) to further study the prices of clinical lab tests. In 2013, the OIG issued: Comparing Clinical Laboratory Test Payment Rates: Medicare Could Achieve Substantial Savings. Using a subjective methodology, the authors concluded that CMS could save $910 million annually if it could lower Part B lab test fees to the prices of 20 high-volume tests as paid by state Medicaid programs.

As documented above, administrators at CMS have shown bulldog tenacity for 35 years in their attempts to slash Part B lab test prices. The PAMA final rule may be the fulfillment of this long-standing wish.

Important data published in THE DARK REPORT’S special coverage of PAMA lab test price reporting shows why it matters that hospital labs and smaller inde- pendent labs submit their data. That analysis was based on the data that labs will report to CMS, based on several hundred million lab test claims that XIFIN, Inc., of San Diego, processed for its almost 200 clinical laboratory clients.

The XIFIN data shows evidence of the bias that CMS is accused of building into the PAMA final rule. As we reported, XIFIN calculated that for 20 of the lab tests for which CMS pays the most money, private payer payments were above or below Medicare’s 2016 fees by the following percentage, on average, for the following four categories of labs:

  • Independent labs were paid 19.6% less.
  • Hospital labs with NPIs were paid 25.6% more.
  • Molecular and genetic testing labs were paid 27.3% more.
  • Pain management and toxicology labs were paid 50.4% more.

Concerns about PAMA rule

This analysis supports the comments of CMS’ critics about how and why CMS wrote the final rule for market price reporting. XIFIN’s analysis of the private payer price data its clients will submit to CMS demonstrates that private health insurers regularly pay significantly higher prices than the Medicare program pays to every sector of the lab industry except one: the commercial lab sector dominated by Laboratory Corporation of America and Quest Diagnostics Incorporated.

Small and Rural Hospitals Also at Risk from Fee Cuts

FOR COMMUNITY HOSPITALS, PARTICULARLY THOSE IN RURAL AREAS, revenue from outpatient and outreach laboratory testing often sustains these hospitals’ finances. Therefore, the expected cuts to Medicare Part B clinical laboratory test fees will be a severe financial hardship for many of these hospitals.

Congress and healthcare policymakers do not realize how important even small volumes of outreach lab testing can be to smaller or rural hospitals. In 2012, Michelle McEwen, FACHE, President and CEO of 25-bed Speare Memorial Hospital in Plymouth, N.H., told THE DARK REPORT, “The funds generated by performing these [outpatient] 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.”

There has not been much discussion of how the price cuts from PAMA lab test market reporting will affect the nation’s smaller community hospitals and rural hospitals. It could be that the CEOs and administrators of these hospitals are unaware that CMS is preparing to implement significant cuts to Medicare Part B lab test fees in 2018.

Thus, if Congress intended for Part B lab test fees to be reset based on what private health insurers pay to all clinical labs, whether they are independent, hospital, molecular and genetic, toxicology and pain management, or physician office labs, then CMS apparently is failing to meet Congress’ intention, as specified in PAMA.

Given that it takes years and substantial capital to rebuild clinical laboratory capacity after it disappears from a community, it would be wise for lawmakers, Medicare officials, and laboratory industry leaders to reconsider all the potential consequences of implementing the final rule for PAMA market price reporting as it is written.

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