CEO SUMMARY: On September 25, CMS took a long overdue step to issue a proposed rule on how medical laboratories are to report private market prices for lab tests to the Medicare program during 2016. The proposed rule provides insights as to how CMS envisions pricing new tests and advanced diagnostic tests in the coming years. From most sectors of the lab industry, the response to the proposed rule was generally unfavorable and reflected significant concern. Some believe this proposed rule will cause some labs to go out of business.
RELEASE OF THE PROPOSED RULE by the federal Centers for Medicare & Medicaid Services to establish a new payment methodology for setting the Part B Clinical Laboratory Fee Schedule has clinical laboratories questioning the wisdom of the proposal.
In the proposal, many issues concern clinical labs. For example, what is the definition of an ‘applicable laboratory’ that must report what it receives in payment from private health insurers. Also, what is the definition of ‘applicable information’ in the proposed rule, meaning what pricing data must labs report to CMS?
Short Timeframe for Action
Other issues include the short time CMS has allotted for labs to review the proposal and then the short time frame CMS has built in for issuing the final rule before it is implemented on January 1, 2016.
A particular concern about the inadequate time frame was described by Julie Khani, Senior Vice President at the American Clinical Laboratory Association.
That concern involves how much time CMS has to collect the payment data in the first quarter of 2016 and then analyze the data in time to set payment rates to begin on January 1, 2017, she said.
But all of these questions are secondary to the much more important issue. “With implementation of this proposed rule as written, CMS is fundamentally changing how it pays clinical laboratories based on a market assessment that is not, in fact, an assessment of the entire clinical laboratory market,” stated Julie Scott Allen, Senior Vice President, District Policy Group, Drinker Biddle & Reath LLP, who represents the National Independent Laboratory Association.
“Because of the way CMS has written the proposed rule, it is a misnomer to characterize it as a ‘full market assessment’ that fulfills the language of the PAMA statute,” she said. “NILA has always said that CMS would not be performing a market assessment if it was evaluating test rates and volume dominated by the biggest players in the market.
Having the biggest players overwhelm that review is not a fair assessment of how the market is pricing lab testing services.
“CMS went further in making it less of a market assessment by finding ways to exclude hospitals and most physician-operated laboratories that perform laboratory tests,” added Allen. “The intent in the law was to assess the overall market. Obviously, when it comes to laboratory testing, the overall market is not just independent labs.
A Tilted Playing Field
“PAMA is written in a way that already favors the nation’s largest lab companies by establishing a system that threatens to minimize their competition’s place in the market,” she continued. “Yet again, CMS is tilting the playing field, collecting and reassessing the fee schedule with rates that will be dominated by Laboratory Corporation of America and Quest Diagnostics Incorporated. Smaller community and regional labs cannot absorb those feared price reductions without dire financial consequences.
“Indeed, CMS makes exactly this point when it says in its proposal that the rule will have a significant impact on a substantial number of small laboratory businesses,” Allen explained. “CMS defines these labs as having revenue of $15 million or less in a year for independent laboratories and $11 million or less for physician-owned labs.
“The proposed rule will have a substantial impact even with a reporting exception for laboratories that perform less than $50,000 in Medicare services in a 12-month period,” she said. “Of greater significance, the law and the resulting regulations do nothing to address the impact implementation and its associated fee reductions will have on small lab businesses or the patients they serve.
“Another big problem with the data assessment process CMS details in the law is that most small and regional labs are shut out of many private insurer contracts because so many payers make sole-source arrangements with Quest Diagnostics and LabCorp,” she continued. “These two labs have such huge volume that they offer private payers low fees that would not cover the cost of services for smaller labs.
“So, how is it appropriate to rewrite the clinical laboratory fee schedule based primarily on market data dominated by those fees?” she asked. “Assume that PAMA results in significant reductions in reimbursement for the tests physicians rely on to manage the chronic care needs of Medicare beneficiaries. Should this happen, only the largest national lab companies could absorb those cuts. Few other labs, particularly small community labs, could take those cuts and financially survive.
“Does Congress and CMS want only two lab companies to serve Medicare beneficiaries?” asked Allen. “What would that mean for Medicare prices over the longer term? I assure you, those prices will rise.
“There is a primary reason PAMA works for the business model of LabCorp and Quest Diagnostics,” she said. “Because these two multi-billion dollar lab companies offer larger test menus, they can absorb more price cuts, since they can make up the losses on those tests with higher-priced tests.”
Other Issues of Concern
In the proposed rule issued by CMS, there are other important issues of concern to pathologists and lab administrators. “In addition to setting the parameters for private-payer volume reporting, the rule also addresses other provisions of PAMA, including new coding and payment for tests deemed to be advanced diagnostic tests and for other new tests,” explained Allen.
“Congress wrote PAMA as a way to expedite payment for some new tests while allowing labs to be paid the sticker price—at least initially—for advanced diagnostic tests. Later those prices would be adjusted,” she noted. “In the proposed rule, however, CMS threw a couple of curve balls.
The agency put some additional criteria around which tests can be deemed advanced diagnostics,” stated Allen. “This criteria will do nothing to help make the crosswalking and gapfilling program any better or more transparent.
An Unwelcome Development
“Therefore, it could be that the large independent labs and those that advocated for passage of this law don’t love this proposal either because perhaps it doesn’t give them what they thought they would get from PAMA,” mused Allen.
“Moreover, let’s not forget who endorsed PAMA in 2014 and who gave rave reviews to the law,” she said. “Now that high praise will be a challenge because policymakers will say, ‘Well, you endorsed the law at the time it was enacted. This law had your blessing.’
“But PAMA never had NILA’s blessing,” Allen added. “In fact, NILA was vocal in its opposition when this law was forced through as a way to patch the sustainable growth rate.
“Is the promise that PAMA is better than what CMS would have done to lab test prices without it really true?” she asked. “When PAMA was passed, some in the lab industry praised the law because it was scored as saving only $2.5 billion in Part B lab test spending over 10 years, which they claimed was a significantly smaller cut than the lab community would have faced.
$5 Billion in CLFS Fee Cuts
“But now CMS anticipates the savings from the proposed rule [the result of lower lab test prices] will be closer to $5 billion over 10 years,” she added. “In effect, CMS proposes to take an ax to clinical lab fees. This is not a surgical approach of judicious cuts here and there. Instead, this is a proposal to make deep and severe cuts in Medicare laboratory payment rates.”
There is another way to look at the problem the clinical laboratory industry faces. CMS is proposing cuts of $5 billion over 10 years, or an average of $500 million per year for those 10 years. It is known that LabCorp and Quest Diagnostics represent about 18% of Medicare Part B payments. Thus, the two blood brothers stand to lose $90 million annually from these proposed cuts.
That means the remainder of the clinical lab profession will absorb about $410 mil- lion per year in reduced Part B fees. Further, the OIG report of June 2013 identified just 20 high volume tests as representing 47% of volume and 56% of CLFS dollars (totaling $2.72 billion). These are precisely the same tests that make up the major test volume at smaller labs and community labs. Thus, in proportionate terms, Medicare fee cuts to these 20 lab tests will have a much greater financial impact on these labs than they will have on the two blood brothers.
PAMA Was Alternative to CMS Lab Fee Cut Plans
WHILE ACKNOWLEDGING that there is much work to be done during the comment period for the proposed rule CMS issued, the American Clinical Laboratory Association pointed out that “it is important to be mindful of the severe cuts that PAMA prevented” by the passage of PAMA.
“In addition to creating a new reimbursement framework, PAMA also includes several important protections for laborato- ries,” said Julie K hani, Senior Vice President at ACLA. “First, the legislation repealed the ability of CMS to slash lab reimbursement based on technological changes.
“That authority placed no limitations on the number of codes—or on the severity of the cuts—that CMS could make to the CLFS,” noted Khani. “Second, PAMA includes a cap of 10% annually on cuts to any codes for the first three years. While that would still allow for significant reduc- tions, those cuts pale in comparison to what we would have experienced under the CMS technical authority policy.”