CEO SUMMARY: In five months, Medicare officials will implement a new Part B clinical laboratory fee schedule based on private payer lab price data submitted by certain medical laboratories required to report that data. At this year’s Executive War College, the CEO of XIFIN, Inc., reported on her company’s analysis of the payer price data its lab clients submitted, along with a discussion about the flaws in the PAMA final rule. The analysis shows why hospital lab price data is essential to an accurate market price study.
SIGNIFICANT CHANGES ARE COMING to Medicare Part B clinical laboratory payment rates as the federal Centers for Medicare and Medicaid Services prepares to implement, on Jan. 1, market-based pricing under the Protecting Access to Medicare Act (PAMA) of 2014.
“Labs should be aware that the Medicare program’s effort to implement a market-based pricing system will come just before many lab companies will be required to change their systems for recognizing revenue to meet the requirements of the Financial Accounting Standards Board’s Rule 606–Revenue Recognition Standard,” stated Lâle White. “It may turn out that Medicare’s market-based pricing system may not be based on market rates after all.”
White, is the Founder and CEO of XIFIN, Inc., a company that optimizes laboratory billing, collection, and revenue cycle management services. She made these comments while speaking at the Executive War College in May. White explained that what private health insurers pay for laboratory tests has declined steadily for many years. That fact—plus the changes to Medicare lab test fees coming under PAMA—will require all labs to be more disciplined in how they manage their billing and collections.
“While the payment environment is already challenging, CMS is implementing PAMA, which, for labs, means there is a real need for financial discipline,” advised White. “Now that CMS is doing its market-based exercise on pricing, we need to ask: Will the clinical lab industry actually get a market-based pricing system? And, will labs have the financial discipline required to do the reporting for market-based pricing accurately?
“Early this year, the industry acknowledged the challenges in collecting and reporting this information by requesting a delay, and CMS acknowledged those challenges by giving our industry a 60-day delay,” she explained.
CMS plans to implement the PAMA market-based pricing on Jan. 1, 2018, and originally required labs to report private payer prices by March 31, 2017.
After labs had trouble using CMS’ data reporting system, CMS delayed the reporting deadline until May 30, 2017. The date for CMS to implement market-based pricing is unchanged. (See TDR, April 3, 2017.)
Incomplete Data Submitted
“Part of the reason for that delay is because the number of labs that submitted data through March 30 was much lower than CMS anticipated, and the level of information labs delivered was also much less than CMS anticipated,” White commented. “This tells us that, despite all the discussion about how medical labs are using big data and data analytics, our systems are not prepared to do the reporting needed for this complex data-collection and reporting exercise.
“For the clinical laboratory industry, this is not the first time we’ve encountered a market-based pricing scenario and it comes at a difficult time,” she said. “There will be changes in FASB’s rules for revenue recognition, and those changes may affect how labs capture, retain and analyze reimbursement data.
“Right after PAMA prices go into effect next year, publicly-held companies that operate clinical labs will be subject to a new set of accounting rules,” White explained. “Then, in the following year, 2019, private companies will have to comply with rules that require even more stringent analysis of our revenue-recognition methodology.
“The rules will affect how we determine contractual allowance, the granularity to measure payer and payer-plan performance, as well as collectability for primary, secondary, and tertiary payers including patient responsibility,” she said. “All of these changes will happen immediately after the PAMA lab price cuts go into effect at the beginning of 2018.
“Consider the problems labs have had in preparing for PAMA,” White added. “Labs had so much trouble that they asked for an extension in the timeline for the PAMA process itself and this request came after laboratories had two years to pull the PAMA data together. Clearly, labs have had trouble analyzing and recording the data.
“Some of these issues with which labs are struggling have to do with the complexity of the reimbursement environment itself,” she said. “But in an age when we have standard transactions and all payers must use a standard explanation of benefits and electronic remittance advices in their reporting and adjudication of claims, it’s far easier to accumulate this data than it was in the past.
“Yet, outdated and inadequate financial systems in healthcare and the laboratory sector lack the capacity to precisely capture, retain, and account for every external data element and internal user action associated with full claims adjudication,” she added. “At the same time, retroactive CMS guidance on data reporting requirements did not allow the industry time to adopt new systems and processes that facilitate accurate reporting. Without this level of accounting granularity and auditability, it has been impossible for many labs to produce accurate and complete PAMA reporting.
Is CMS Gaming The System?
“So, that’s the environment in which labs are operating,” she explained. “Now, as an industry, we need to address the question of whether CMS is gaming the system to ensure that there will be a cut to the Part B clinical laboratory fee schedule
“I say that because it appears that CMS excluded almost all of the hospital labs from contributing data,” explained White. “Then, after acknowledging that hospital labs had to contribute some data, CMS limited the participation of hospital labs to only those that have an NPI [National Provider Identifier].
“In other words, did CMS use the NPI requirement to eliminate a large portion of the hospital market from reporting its private payer lab price data?” she asked.
Concerns About Hospitals
“If you look at the laboratory industry in general, you’ll see that hospitals perform more than half of the laboratory tests done in the United States,” White explained. “Half of the total number of tests are for inpatients and the other half is for outreach and outpatients. There are approximately 5,000 hospitals in the United States, and about 80% of them provide outreach services.
“Thus a large population of hospital facilities are part of the clinical lab market,” she said. “Therefore, excluding this market is fairly detrimental to the process of collecting private payer lab test prices as described in the PAMA statute.
“Essentially, hospitals are more likely to affect a market-based payment program than independent labs, because many hospital contracts are negotiated as a percentage of a billed amount,” White explained.
“Meanwhile, independent labs represent about 34% of all laboratories,” she added. “The larger labs make up about 30% to 50% of the pie and the rest are smaller, esoteric, and specialty labs.
“If we were to look at test volume by facilities and all labs participated, hospital outreach would represent about 44% of the data, while the biggest lab companies would be about 28%, and the rest of the independent labs would make up about 28% of the test volume,” she said.
“Data that XIFIN has collected over the years show that, when using a weighted average, private payer prices paid to the big labs are almost 45% below the current Medicare Part B clinical lab fee schedule,” she said.
“By comparison, the weighted average of the prices private payers pay to the entire remainder of the clinical lab industry is about 8% greater than current Medicare Part B lab prices,” White continued. “The prices private insurers pay to hospital laboratory outreach—meaning those with and without an NPI—is an even more dramatic difference. The weighted average of hospital lab outreach prices is about a 32% increase to the existing Medicare Part B clinical lab fee schedule.
“Therefore, what we would actually see if every clinical laboratory participated in submitting their private health insurer price data is about a 3.8% increase over the existing Medicare fee schedule,” she noted.
“But, what if we don’t get a full participation level among hospital labs in the CMS study,” she asked. “We focus on these labs because they really move the needle.
“At 100% participation—and including the private payer price data from independent labs—we would get a 3.8% increase over the existing Medicare Part B clinical laboratory fee schedule,” she explained. “At 75%, we see a decrease of 1.7%. At 50% the decrease rises to 7%, and at a 25% rate of participation among hospital labs, we see a decrease of 13%. If there’s only 10% participation, Part B lab prices would decrease about 16% from current levels.
“These numbers show the importance of how private payer price reporting is done and which labs participate in the actual reporting of PAMA data,” she explained. “This is why the ACLA, NILA, and other lab associations have told CMS that the dataset that’s being provided is insufficient to provide a true market value of lab test prices. We need greater participation to achieve a true market-based price.
“For labs, this means the data capture of private payer prices is absolutely critical,” she said. “Labs need to consolidate multiple payments when there are partial payments on a test and still be able to report an accurate allowable. When payers get multiple units of a single CPT code, the adjudication process is faulty, causing payers to report the wrong number of units coming back on the explanation of benefits. This has to be reconciled.
‘Weighted Median’ Versus ‘Weighted Average’: Each Has Different Consequence in Price-setting
THERE ARE VALID CRITICISMS OF THE FINAL RULE that the federal Centers for Medicare and Medicaid Services published to implement the private payer market price reporting requirement of the Protecting Access to Medicare Act (PAMA).
One of those criticisms is that CMS is using a weighed median calculation to analyze the private payer market prices that labs reported earlier this year. In her presentation at this year’s Executive War College, Lâle White, CEO of XIFIN, Inc., pointed out that the weighted median calculation is not suited for financial analysis. Rather, she noted, the weighted median is better suited for Quality Control and removing outliers. Using XIFIN’s data from hundreds of millions of lab test claims her company handles each year for more than 200 labs, she showed the difference in weighted median versus weighted average for two different clinical laboratory tests.
Allowables in Focus
“Also, labs need to identify claims that are still in process because only fully-paid claims are subject to reporting,” stated White. “That means that appeals, redeterminations, and corrected claims all have to be taken into consideration. Labs must process the contractual allowance accurately and note that—when payers actually pay for claims and do recoupments and adjustments—they often do not recalculate the allowable.
“In addition, labs need to identify the primary payer even if submitting a claim with a primary and a secondary payer,” she added. “Sometimes the payer comes back with a different primary payer, which alters the allowable. Labs have to be aware of that and know what the actual allowable is.
“To do this well and accurately, labs needed to review their data for a fairly significant period of time,” said White. “When a lab doesn’t review its private payer price data over time, it could easily report that data inaccurately. That could prove expensive, because the penalties associated with under-reporting, over-reporting, and not reporting can be $10,000 per day.
“For all of these reasons, there are lessons from this PAMA exercise,” she said. “First, we learned that if the billed amount equals the allowable amount, your fee schedule is probably off, and your lab is under-billing. We’ve learned that when payers pay below the contracted fee schedule, we need to identify that and talk to the payer about correcting their reimbursement files.
“We also learned that we should not negotiate contracts that are a percentage of Medicare,” continued White. “And, the retention of source documents, meaning the documents that support the electronic invoices labs submit and the remittances that are returned, are essential for audit purposes. Also, labs need to optimize electronic transactions because manual payment posting and processing is fraught with errors.
“One other lesson is that the audit process is one of the most critical elements in PAMA reporting,” she advised. “Having the reporting structure in place that allows your lab to audit easily and be able to produce the documentation for audits will be critical because private Medicare auditors are incentivized to find errors.”
Contact Lâle White at 858-436-2908 and firstname.lastname@example.org.