CMS Releases Draft of PAMA Market Price Rule

Proposed CLFS would result in substantial cuts in lab test prices starting in January 2017

CEO SUMMARY: CMS’ proposed rule details how it will collect private market data, then use that data to establish prices for the Medicare Part B Clinical Laboratory Fee Schedule beginning in 2017. The proposed rule will limit data reporting to less than half of independent labs, a minority of hospital labs, and only a small percentage of physician office labs. Community labs fear that CMS will issue potentially lower payment rates that could cause smaller labs to stop serving Medicare patients or go out of business.

LATE ON  FRIDAY, SEPTEMBER  25, Medicare officials published a proposed rule to implement the much- anticipated section of the Protecting Access to Medicare Act of 2014 (PAMA) that requires CMS to collect private market data on lab test prices and use that data to set prices on the Medicare Part B Clinical Laboratory Fee Schedule (CLFS) beginning January 2017.

PAMA was passed quickly to avert a significant cut in Medicare physician payments due to the sustainable growth rate formula known as SGR. President Obama signed it into law on April 1, 2014, following quick votes by the House and Senate. This meant that the lab industry had little time to study the language of the bill and address all the potential consequences. (See TDR, April 7, 2014.)

What has caused the most concern is the section of the law that requires CMS to gather market price data on lab tests and the associated test volume tied to those prices from some of the laboratories in the market during 2016, then use that data to identify the median and set prices for the CLFS that will become effective on January 1, 2017.

Once they learned about the mandatory market price reporting requirement in PAMA and how the data would be assessed, many pathologists and lab administrators were seriously concerned that the data collection and reporting system would ultimately result in a new fee schedule tied to the private sector rates that the two largest national labs, Quest Diagnostics Incorporated  and  Laboratory Corporation of America, set. For years, these labs have negotiated discounts that allow them to establish sole-source contracts with private payers.

Also, pathologists and lab directors worried that other independent labs, much smaller in size from the national labs, would ultimately suffer under this price reassessment model because the large national labs would report lower prices, particularly for the routine tests they run every day simply because they have much higher volume and thus can charge much less than what smaller independent labs can charge.

Broader Market Assessment

Critics charge that, unless the so-called market assessment process under PAMA includes the broader laboratory market—hospital and physician-owned laboratories—any assessment would be skewed toward the very low prices the largest national laboratories offer private payers.

Quest Diagnostics and LabCorp collected about $1.23 billion of the $6.7 billion that Medicare paid for clinical lab tests under Medicare Part B in 2006, according to estimates GenomeWeb published. The $1.23 billion represents about 18% of the total that Medicare spent on lab tests that year.

If hospital and physician office laboratories are excluded from these totals however, Quest’s and LabCorp’s percentage of Medicare Part B laboratory revenue increases dramatically to more than 50%, according to estimates from the National Independent Laboratory Association.

When CMS issued the proposed rule it needs to implement PAMA, it outlined a timetable to stay on-track for having laboratories report rates and volumes in January 2016. The release of the rule comes three months after the law’s statutory deadline to have a final rule in place by the end of June 2015.

When the law passed, the Congressional Budget Office estimated that the new payment system would save $2.5 billion over 10 years. However, the proposed regulation states that CMS estimates it will save $5.14 billion over 10 years. It is unclear how CMS arrived at this estimate, but the concern is that CMS may be using data from the federal Office of Inspector General, which found, during 2010, that Medicare paid 18% to 30% more than state Medicaid programs paid for some lab tests. (See TDR, June 17, 2013.)

Last year, Congress wrote sections of PAMA as a response to earlier statements CMS made that it intended to modernize the CLFS. Now, following the release of the proposed rules for private market pricing, many in the lab industry see the potential for harm that some feared when the language in the PAMA law was made public in 2014. More specifically, many community and regional laboratories believe they will experience significant financial harm should the private market price rule be implemented as currently written.

For example, the definition of which laboratories would need to report payment rates to CMS (called applicable laboratories) is one of the biggest issues of concern. PAMA defines an applicable lab as one that gets more than 50% of its Medicare revenue from the CLFS or the physician fee schedule.

Many Labs Excluded

 This definition excludes hospital inpatient and outpatient laboratories from reporting since they are paid under the DRG system and under a bundled outpatient payment system, respectively. The law was not clear about hospital outreach laboratories, but following the law’s passage, statements from Senate Finance Committee Chairman Orrin Hatch (R-Utah) made clear that he intended some hospital laboratories to be included.

However, the proposed rules released by CMS do not call for including any hospital laboratories in the reporting process. The proposed rule also sets up a “low expenditure” threshold to exempt from reporting any laboratory that makes $25,000 or less from Medicare in the first six-month reporting period in 2016 or one that makes less than $50,000 from Medicare in subsequent 12-month reporting periods. This threshold largely eliminates reporting by physician-owned laboratories that perform a significant proportion of the nation’s lab tests.

Inadequate Timeline

Technically, here’s what happened when CMS released its proposed rule under Section 216 of PAMA to establish a new fee schedule. On September 25, the federal Centers for Medicare & Medicaid Services released a proposed rule under Section 216 of PAMA that establishes a new payment methodology for determining the Medicare Clinical Laboratory Fee Schedule. It was published in the Federal Register on October 1, and sets a deadline of November 24 for public comments.

The proposal says that, as of January 1, 2017, the CLFS payment rate will be derived from a volume-weighted median of private payer rates for lab services, stated Charles Dunham IV, of  Epstein BeckerGreen. “To calculate the CLFS rate, PAMA requires an ‘applicable laboratory’ to report ‘applicable information’ for a ‘data reporting period’ to CMS,” he wrote.

The proposed rule defines these terms and sets a schedule for collecting and reporting payment information. Experts told THE  DARK  REPORT  that these definitions and schedules are problematic. The proposed rule also defines a new category of assays, called advanced diagnostic laboratory tests (ADLTs), and the proposed definition for ADLTs is problematic as well, lab experts said. (See story on ADLTs in the next issue of THE DARK REPORT.)

Fundamentally Flawed Law

“The law itself is fundamentally flawed, as it requires CMS to determine a weighted median of all the test rates and volumes reported by labs in order to set new payment rates,” stated Mark Birenbaum, PhD, administrator of the  National Independent Laboratory Association. “Clearly, the largest players in the laboratory market—the two national publicly-traded laboratories—will drive the test volumes and their rates will dominate CMS’ evaluation.”

The  American Clinical Laboratory Association, which represents larger laboratories, also has serious concerns about the definition of applicable labs. ACLA stated that the proposal conflicts with the law and with Congress’ intent to establish a market-based payment system because the definition of applicable labs would exclude many laboratories from the data-collection and reporting requirements.

Blood Brothers Favored

Experts outside the clinical laboratory industry agreed. GenomeWeb  reported that opinion in a note to investors, Michael Cherny, managing director of Evercore Group LLC, said the proposal favors the two largest national labs, Quest Diagnostics and LabCorp. By limiting the number of hospital labs reporting, the proposal helps independent labs, and the largest of those independent labs are in a much better position to absorb any price cuts that result from CMS’ new, lower rates, he added.

Birenbaum agreed, saying, “The expressed purpose of the law was to establish private market-based rates within Medicare. How can this be a market assessment if only one segment of the lab test market is evaluated and that segment is skewed toward the largest players?

“From what NILA’s seen so far, the goal is not to modernize the fee schedule; rather, CMS appears to be setting up a sys- tem that threatens to make inappropriate adjustments to Medicare rates in a manner that benefits the two largest publicly traded laboratories at the expense of community and regional laboratories,” he explained. “This regulation threatens access to laboratory services for Medicare beneficiaries, who rely on laboratory tests to guide their care and treatment, particularly those living in rural and underserved communities, as well as nursing homes.”

Access by Medicare Patients

“NILA never supported the law and now is working to ensure that the regulations do not force community and regional laboratories out of Medicare or perhaps out of business,” he declared. “If community labs leave the Medicare program, then only the large labs would be left. This would negatively affect market competition and the access patients have to Medicare laboratory services.”

Under the proposal, laboratory reporting would begin January 1, 2016, and end March 31, 2016. However, what further complicates the issue is that comments on the proposal are not due until November 24 of this year. That means a final rule may not be ready by January 1, 2016. Without a final rule, laboratories question how they could comply with a reporting process set to begin on that date.

In the proposal, CMS envisions evaluating the reported data and finalizing new rates by November 2016. It would then make the new Part B Clinical Laboratory Fee Schedule effective on January 1, 2017. Should that happen, it would leave labs with just a few short months to make business adjustments before the new prices are implemented. Lab experts watching these developments generally believe that CMS will use this process to cut lab test prices.

Big Question for Labs: Is CMS Timeline Realistic to Assess Market Prices and Set CLFS Rates?

AMONG THE MANY QUESTIONS  that clinical lab directors and pathologists have about the proposed rule to revise the way labs are paid is how will labs and the federal Centers for Medicare & Medicare Services accomplish all the necessary steps in the timeline defined by the proposed rule.

“How can CMS require labs to start sub- mitting payment data on January 1, when there will be no final rule?” asked Julie Khani, Senior Vice President for the American Clinical Laboratory Association. “With no final rule, it is impossible for any lab to know whether or not it is an ‘applicable lab’ and thus required to report its market prices.

“And, there is no final rule to tell the labs what specific applicable data they need to pro- vide or what format to use when submitting that data,” she continued. “What CMS is requesting from the lab industry is impossible for labs to deliver at this point.

“Under PAMA, CMS was required to issue final regulations by June 2015, yet the agency was unable to issue the proposed rule by then,” noted Khani. “Laboratories should not have to meet unrealistic deadlines to make up for CMS missing its statutory deadlines.

“With the current timeline, it is impossible for CMS to meet statutory requirements for issuing a new rule and implementing that rule,” noted Khani. “CMS has just now issued a proposed rule to implement PAMA and comments are due before the end of next month. Given the time required for this process, CMS will not be able to issue the final rule this year.

“If the final rule is not issued b y the end of this year—and the data collection period begins January 1, 2016, and ends on March 31, 2016—how does that give labs enough time to comply?” asked Khani.

“There are many other questions that labs need to answer to comply with the proposed rule,” she added. “How do labs know precisely what data to report? There are unanswered questions about payments under appeal, partial payments, and many other issues. We will work closely with our members and other stakeholders to make sure that CMS implements PAMA in a manner that is consistent with congres- sional intent and with the statute.”

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