How CMS ‘Mismanaged’ Pricing of Molecular Tests

Critic says actions by CMS and its contractors are harming smaller labs that run molecular tests

CEO SUMMARY: CMS and its contractors had ample opportunity to implement a new reimbursement system but failed to act in a timely manner, stated an expert familiar with the problem. The result is that laboratories, particularly those that have one or two proprietary molecular tests, are being harmed needlessly, he said. Without regular payments for molecular test claims, some smaller lab testing organizations may end up in such deep financial holes that they cannot recover, even when back claims are paid.

WHY HAVE THE FEDERAL GOVERNMENT’S efforts to revise molecular test payments failed this year? The answer, according to a former federal health policy official, is simple: bureaucratic mismanagement.

That’s the opinion of Scott Gottlieb, M.D., a former senior policy advisor for the federal Centers for Medicare & Medicaid Services (CMS) and a Clinical Assistant Professor of Medicine at New York University School of Medicine. Gottlieb made these comments in his column for Forbes Magazine titled: “Medicare Has Stopped Paying Bills for Medical Diagnostic Tests. Patients Will Feel the Effects.” Forbes published this column on April 1.

In his Forbes column, Gottlieb wrote about how CMS has mismanaged the introduction of a new lab test reimbursement system. In so doing, it is harming diagnostic laboratories, particularly those running only one or two molecular tests.

Gottlieb then explained how CMS and Medicare contractors have not paid labs for molecular tests since January 1, 2013, and that this failure has nothing to do with automatic budget cuts under the sequester that Congress and President Obama agreed to last year.

Gottlieb can speak knowledgeably on this subject because he has worked on both sides of the table. Currently, he is a practicing physician of internal medicine and a board member for two lab companies. In past years, Gottlieb served in various positions at the Food & Drug Administration.

A Positive Reaction

When his comments were published, experts in clinical laboratory reimbursement generally hailed the article for explaining the problems to a wide audience. “Bravo to Dr. Gottlieb for so clearly describing the issue and its effect, and for pointing out the MoPath repricing not only affects labs, it also impacts patients,” said Lâle White, Executive Chairman and CEO of XIFIN, Inc., a company that specializes in revenue cycle management for diagnostic laboratories. (See all of White’s comments on this situation here.)

In an interview with THE DARK REPORT, Gottlieb described the disruption this situation is causing to a large number of clinical laboratory organizations. “Labs are getting squeezed, particularly those labs that have maybe one or two proprietary tests that they’re billing under some new codes that aren’t getting reimbursed yet,” explained Gottlieb.

“The problem for these labs is they can’t bridge themselves—meaning to obtain a short term or bridge loan,” he continued. “A big laboratory company, like Quest Diagnostics or LabCorp, can bridge itself. But those labs that perform a limited menu of molecular tests and need a six-month loan, might not be able to do so.

“The issue is that all of this was entirely unnecessary,” Gottlieb said of the problems CMS created. “Whatever you want to argue about the reimbursement scheme under code stacking, CMS had ample time to get a new reimbursement structure in place for the molecular tests that had been billed using code stacks.”

As a member of the board of directors of both Combimatrix, Inc., and American Laboratory Partners, Gottlieb fully understands how the clinical laboratory industry works. Yet, like most observers, he has only anecdotal evidence as to how that lack of payment for molecular tests is hurting labs.

Uncertainty for Small Labs

“Those labs that have only a few molecular tests may be unprofitable,” he noted. “But now they face increased financial instability because they have no revenue as well. That also has some venture capital companies worried about their investments in diagnostics.

“If a professional investor has invested in unprofitable diagnostic testing companies that haven’t had any revenue for three months, how does he or she make that up?” asked Gottlieb. “That investor would need to tap his/her venture capital syndicate or get a bridge loan if one is available.

“But the cost of capital is exceedingly high,” continued Gottlieb. “Even if those lab testing companies continue to be going concerns, they have no capacity to invest in new technology right now.

“Almost every venture firm has at least one of the molecular diagnostic companies in its portfolio that is experiencing this problem,” he said. “However, what investor would make a new investment in this environment? There’s too much uncertainty and that uncertainty probably will not be resolved for a while. If there is no certain date for when these billing issues will be settled, that could be the worst possible outcome because it creates more uncertainty.

No Tolerance for No Payment

“To a certain degree, the market for investments in diagnostic testing companies can tolerate reduced reimbursement,’ stated Gottlieb. “But the market can’t tolerate the fact that these companies are not getting paid at all!”

While CMS played a significant role in creating these problems, commercial health plans also contributed—as did clinical labs themselves, to a degree. That’s because use of stack codes made it difficult for public and private payers to know exactly what type of molecular test they being asked to pay for.

“Some laboratories were more adept than others at gaming the code-stacking process,” Gottlieb conceded. “But it’s hard to be sympathetic to the payers who complained that they didn’t have any transparency about what they were paying for. They certainly had enough leverage to demand more information from labs and yet they didn’t do that. Instead, commercial payers sat on their hands waiting for CMS to implement a new reimbursement scheme. Now they’ll piggyback on what CMS does.”

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