10% PAMA Fee Cut Would Lower Medicare Pay to Laboratories by $400 Million

New OIG report provides clues as to how cuts to CLFS prices will reduce payments to clinical labs

CEO SUMMARY: Just eight weeks remain before certain clinical laboratories must begin submitting private payer lab test price data to the federal Centers for Medicare & Medicaid Services. A new report by the Office of the Inspector General makes it possible to estimate how CMS may implement fee cuts in 2018. THE DARK REPORT’s calculations show that a 10% cut to the top 25 tests identified by the OIG would produce a $400 million fee cut in 2018. Successive yearly cuts could bring that to $1.2 billion by 2020.

PROBABLY NO SINGLE FACTOR has the potential to be as financially disruptive to the clinical laboratory industry as the impending repricing of the Medicare Part B clinical laboratory fee schedule (CLFS).

Blame it on the Protecting Access to Medicare Act of 2014. One of the six sections of that law dealing with clinical laboratory matters mandates that the federal Centers for Medicare & Medicaid Services gathers lab test market price data from certain clinical labs and uses the data to establish new prices for the CLFS.

Thus, a significant repricing of the CLFS is just 14 months away. As of Jan. 1, 2018, expectations are that CMS will institute deep cuts to the prices of the clinical lab tests which cost it the greatest amount of money.

This expectation of lower prices is based on the statements CMS officials have made and reports released by CMS and the OIG. For more than 30 years, Medicare officials have pushed to drive down the prices of the clinical laboratory fee schedule.

For these reasons, the popular wisdom is that CMS will accept the market price data from those labs required to report, then set significantly lower prices for the 2018 CLFS. How much lower? Under PAMA, CMS cannot lower the price of individual tests by more than 10% in the years 2018, 2019, and 2020. PAMA then allows price cuts of a maximum 15% in 2021, 2022, and 2023.

These price cuts will bite deeply into the operating margins of all of the nation’s clinical laboratories. CMS and OIG have made it clear that the price-cutting will focus on the 25 lab tests on the CLFS that represent 59% of Medicare’s spending in this category for last year.

In its report, Medicare Payments for Clinical Diagnostic Laboratory Tests in 2015: Year 2 of Baseline Data, the OIG stated that Medicare Part B payments for lab tests totaled $7.0 billion in 2015. Of that amount, $4.1 billion—or 59%—of that spending went to the top 25 tests listed in the OIG’s report.

These numbers allow THE DARK REPORT to estimate the financial impact that fee cuts imposed in 2018 will have across the clinical lab industry. Assume that Medicare uses the market price data to justify implementing a 10% cut in each of the fees for the top 25 tests for 2018.

That would mean all the nation’s labs will be paid about $400 million less in 2018, compared with payments from prior years. Assume that Medicare implements a 10% fee cut in each of three consecutive years. By 2020, such a cut would mean that all the nation’s labs would be paid $1.2 billion less per year than the baseline year of 2017, before the fee cuts commenced!

Look at this in another way. In its report, the OIG said that 1% of labs (which would be 2,921 of the 29,211 labs the OIG considers the relevant universe) collected 25% of the 2015 Medicare payments for the top 25 tests, or $1 billion.

Labs paid $250 Million Less

Therefore, in 2018, these labs would get $250 million less for the same volume of tests that year. By 2020, these labs would be paid $750 million per year less than what they were paid in 2015, based on information in the OIG report.

This is a huge amount of money to remove from the cash flow of the nation’s laboratories. And remember, this analysis is based on the top 25 tests that the OIG said represents 59% of CLFS spending in 2015. CMS is expected to enact similar cuts to other tests on the CLFS. Thus, in 2018, the nation’s clinical laboratories would probably see an overall reduction in Medicare Part B revenue greater than the $400 million example presented above.

Which labs survive and which labs go out of business if this scenario plays out in the coming years? The two biggest lab companies, Laboratory Corporation of America and Quest Diagnostics Incorporated, should survive, with one caveat.

For two decades, LabCorp and Quest Diagnostics have given national health insurers deeply-discounted lab test prices in exchange for managed care contracts that exclude competitors. Financial analysts have observed that, because these prices are near or below marginal costs to perform these tests, the two blood brothers lose money on this segment of their test business. But they offset these losses on managed care contracts with the revenue from Medicare Part B fee-for-service payments, among other sources.

Upset Financial Balance?

Could the expected cuts in Medicare lab test fees upset this financial balance? If so, it would require these two lab companies to renegotiate higher rates for their biggest managed care contracts. These are issues that will be resolved over time.

Meanwhile, what about the other segments of the clinical laboratory industry? How would consecutive cuts of 10% in the fees for the top 25 lab tests on the CLFS affect their financial stability?

For the nation’s hospital laboratories, these cuts would trigger a major assessment of whether the hospitals want to continue providing lab testing services to office-based physicians in their communities.

This testing is beneficial for many reasons, such as these: local physicians get their testing services from local labs, turnaround times are faster, and the hospital labs can often provide office-based physicians with a complete record of their patients’ lab test data. That’s because the hospital lab did all the testing in inpatient, outpatient, and outreach settings. These are clinically useful features that the two blood brothers cannot easily match. Also, as the integration of clinical care moves ahead, physicians will want access to a single lab that has all the lab test data on their patients.

In Implementing PAMA, Is CMS Following the Letter of the Law and the Intent of Congress?

AFTER THE DRAFT RULE for PAMA lab test price market reporting was posted in September 2015, by the federal Centers for Medicare & Medicaid Services, there was much consternation in some quarters of the clinical laboratory industry.

Language in the Protecting Access to Medicare Act of 2014 directs CMS to collect private health insurer prices for clinical laboratory tests from the labs that received these payments. CMS will then use that data to reset prices on the Part B clinical lab fee schedule.

However, as pathologists, lab administrators, and their legal and business advisors read the language in the draft rule CMS published, they recognized major problems. One problem was—and remains—the biggest issue. Critics of the draft rule pointed out that, as written, CMS will not get an accurate picture of the average price all insurers— large or small—pay to all labs, ranging from physician office labs to independent labs and hospital outreach labs.

The critics next pointed out that, because of how CMS excluded a large number of labs from reporting, the agency will base its pricing decisions on a biased sample of pricing data.

They also noted that the data sets would be dominated by the large national laboratories that perform a substantial proportion of Medicare Part B lab test volume. The proposed rule excluded many higher-cost labs from the reporting requirement. For example, hospital laboratories, which are generally paid more by private insurers for their services, would have been excluded from submitting market price data to CMS.

This criticism was not successfully addressed when CMS issued the final rule on June 17, 2016. Many types and sizes of laboratories were excluded from the reporting requirement. Since that date, lab professionals have repeatedly pointed out that, by excluding these labs with higher-priced tests from reporting, CMS would be working with a biased set of data.

These same lab professionals and their associates have reported to CMS and to members of Congress that, by starting with a biased set of data, CMS will then end up with an analysis that does not accurately reflect what the private health insurer market pays for clinical laboratory tests. Moreover, they argue that, as written, the final rule is not consistent with the language of the PAMA statute, nor does it fulfill the intent of Congress when the law was drafted and passed.

Upset Financial Balance?

There is now credible evidence to back up these criticisms about the bias that is built into the final rule on PAMA market price reporting. On pages 12-23 of this special issue, THE DARK REPORT presents an analysis of private payer pricing that was developed by XIFIN, Inc., of San Diego, from the actual private payer data its lab clients will report to CMS starting Jan. 1, 2017.

XIFIN analyzed data from four sectors of lab testing. It determined that private payers pay significantly more for clinical laboratory testing than the current Medicare clinical laboratory fee schedule pays in all categories but one.

It calculated a weighted average price paid by private payers for these four lab sec- tors compared to Medicare fees as follows:

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

This analysis may give the lab industry a useful tool to go back to Congress and show lawmakers how and why the planned implementation of market price reporting has flaws that need to be corrected.

But yearly cuts to the Medicare fees of the top 25 lab tests that these hospital labs perform on their patients would cripple many community hospital lab outreach programs for a simple reason. These hospital labs use their lab equipment to test outreach specimens in the evening, after testing for inpatients ends and when only stat testing is done.

Although hospital labs don’t have the economies of scale and lower average cost-per-test of LabCorp and Quest, by using their lab equipment in the evenings, these labs have margins from the outreach business that are sufficient to sustain the cost of lab-to-doctor’s office interfaces and the courier services needed to serve these clients.

Nursing homes

Also, nearly all hospital labs with an outreach program serve nursing homes in their regions. The outreach revenue from lab testing is essential to cover the hospital lab’s costs to send phlebotomists and couriers to these sites, where nearly all the patients are Medicare beneficiaries.

Where hospitals truly benefit is that the added outreach volume, run on the evening shift, contributes to improved patient care in two ways. First, the added outreach volume helps the hospital lower its overall average cost-per-test for all testing, including the inpatient testing.

Second, the added outreach volume enables those labs to set up and run tests in-house that they would otherwise refer to outside labs. That benefits patient care because it means the lab can deliver faster results for tests run on inpatients. All ofthese elements benefit Medicare patients, including hospital inpatients, patients served in physicians’ offices, and patients in nursing homes.

There is another category of clinical laboratories that will rapidly go to the chopping block if the expected cuts happen to the Medicare CLFS. These are the nation’s community laboratories.

Community Labs are Small

These labs are generally located in smaller communities or on the rural/suburban fringe of larger metros. Community labs provide much testing for Medicare beneficiaries because they are willing to provide lab testing services to nursing homes, SNFs, and rehab centers that public lab companies abandoned as unprofitable clients in the 1990s.

Medicare beneficiaries make up as much as 60% of their total patient mix. (By contrast, LabCorp and Quest Diagnostics report that about 15% to 20% of their total testing is done for Medicare patients, very few of whom are in nursing homes).

Community labs are typically very small operations and have profit margins of 3% to 5%. Clearly, this class of clinical labs will be extremely vulnerable to Medicare cuts to the CLFS. Drop Medicare fees by 10% on a community lab that has 60% Medicare patients and a 3% profit margin, and that lab will be forced to close or go into bankruptcy. As that happens, Medicare patients in these communities lose access to the only local laboratories that may have served them for decades.

These are basic insights about why the downward repricing of the CLFS has the potential to wreak financial havoc across key sectors of the clinical laboratory industry. The problem for Congress and CMS rests on a simple fact: once an established lab disappears from a community, it cannot be easily replaced. For these reasons, lawmakers and CMS should act carefully before they destroy local labs that are assets to their communities.

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