Legal Briefs Explain Problems with PAMA Implementation

Deep Cuts to Medicare Lab Fees Have Consequences

CEO SUMMARY: Several developments have moved the case forward since December when the American Clinical Laboratory Association filed suit in federal court against the Department of Health and Human Services. Inrecent weeks, ACLA filed for summary judgment; HHS responded with its own request for summary judgment; and most recently ACLA filed its rebuttal to the HHS. In addition, several lab associations filed amicus briefs in support of theACLA as did the National Association for the Supportof Long Term Care.

IS THERE REASON TO BE OPTIMISTIC about the prospects of the clinical laboratory industry prevailing in a federal lawsuit challenging how Medicare officials conducted a market study of private payer lab test prices, then used that data to enact deep price cuts to the 2018 Medicare Part B Clinical Laboratory Fee Schedule?

In the lawsuit filed Dec. 11 in the U.S. District Court for the District of Columbia, the plaintiff, the American Clinical Laboratory Association (ACLA) sued the federal Department of Health and Human Services (HHS). ACLA charged that the agency failed to comply with the requirements of the Protecting Access to Medicare Act of 2014 (PAMA) when it set the 2018 Clinical Laboratory Fee Schedule (CLFS). In a 32-page filing, ACLA charged that HHS disregarded the requirement in PAMA that all applicable laboratories report relevant market-rate data private health insurers paid to clinical laboratories.

THE DARK REPORT has provided extensive coverage of the lawsuit’s key issues, including analysis from legal experts about the strengths and weaknesses of each party to the suit. (See TDRs, Jan. 2 and Mar. 5, 2018.)

This intelligence briefing updates developments in the lawsuit. In February, ACLA filed a motion seeking summaryjudgment in the case. Several lab and healthcare associations filed briefs with the court in support of ACLA and its request for a summary judgment.

Last month, attorneys for HHS responded to that motion and filed a cross-motion seeking a summary judgment in the government’s favor.

Early this month, ACLA filed its response to HHS, refuting the government’s defense and reiterating its arguments for a summary judgment (or ruling without trial) to continue requesting a summary judgment in its favor.

In the following analysis and commentary, THE DARK REPORT presents some of the major points made in the amicus curiae briefs filed in support of ACLA by other lab and healthcare associations. Also included are several of the significant statements made by HHS and ACLA in the documents as each tries to win a summary judgment in its favor.

Useful Information

Understanding the issues in these filings will be useful to pathologists and lab executives for two reasons. First, it will help them understand the key arguments each side is presenting in court. Second, it will be useful for lab managers seeking to educate elected officials about the negative consequences such deep Medicare fee cuts are having, such as causing labs to lose money and go out of business and Medicare patients in many communities and rural areas to lose access to quality lab testing.

During recent months, four organizations filed amicus curiae (or friend of the court) briefs in support of ACLA’s motion for summary judgment:

American Association of Bioanalysts (AAB)

Advanced Medical Technology Association (ADvaMed)

College of American Pathologists (CAP)

National Association for the Support of Long Term Care (NASL)

Clinical labs already feel the effects of PAMA because the federal Centers for Medicare and Medicaid Services (CMS) used the rules implemented under PAMA to set the 2018 Clinical Laboratory Fee Schedule rates. Those rates are much lower than CMS estimated and have caused at least one lab to close and others to cut back on services. Still others are considering making cuts in services, the amicus briefs show.

CMS predicted that under PAMA, its payments to laboratories would decrease by $390 million in 2018, but because the methods CMS used to collect the market-rate data under PAMA were so flawed, reimbursement decreased by $670 million this year, the amicus briefs show.

This amount is about 10% of the $6.8 billion that Medicare paid under Part B for lab tests in 2016, according to the Office of Inspector General’s report, “HHS OIG Data Brief Medicare Payments for Clinical Diagnostic Laboratory Tests in 2016: Year 3 of Baseline Data.”

Under PAMA Section 216, CMS was required to modernize how it pays clinical labs under the CLFS. To do so, CMS required labs to report what they received in payment from private payers for laboratory tests and the corresponding test volume. Those rates were the basis for the 2018 CLFS.

It is notable that the National Association for the Support of Long Term Care submitted an amicus brief in support of ACLA. Nursing homes and skilled nursing facilities (SNFs) are intense users of clinical laboratory testing services.

It is widely-recognized within the clinical laboratory industry that long-term care facilities must constantly have a significant number of medical laboratory tests performed on their patients.

In its brief, NASL said the 2018 Medicare Clinical Laboratory Fee Schedule would cause harm that is “particularly acute and devastating for labs serving nursing homes.”

Clinical laboratories serving nursing homes provide critical support to particularly vulnerable patients. In addition, the service model labs use to support nursing home patients is unique because labs require specially-trained employees to travel to patients’ bedsides daily or several days each week to draw blood samples and collect other specimens. These patients typically suffer from multiple diseases, meaning their physicians have a pressing need for such tests in order to assess patients’ conditions frequently and immediately, the brief said.

Under PAMA, CMS can cut what it pays clinical labs as much as 10% below the prior year’s rates for 2018, 2019, and 2020, the association said. “Laboratories that serve nursing home patients would simply be unable to sustain such drastic rate reductions. By 2019—when the cuts would reach a cumulative total of 20%—it would not be profitable for most of these laboratories to stay in business,” the brief said.

“If most, if not all, of the specialized laboratories serving this distinct nursing home market were driven out of business, the nursing home population would not be able to satisfy its unique needs for on-site service and prompt test results,” stated NASL.

Laboratories serving nursing homes typically are small companies with annual revenues that are much less than those labs that serve patients in other settings, it added. What’s more, large labs do not serve this population.

In 2015, the two largest national laboratory companies furnished less than 4% of lab services to the nursing home market, it said. “In many geographic areas, nursing homes are served by only a single specialized laboratory, which may be a local independent laboratory or, in a few areas, a hospital laboratory providing these services at a loss,” the brief added.

These labs rely on Medicare payments because they have no alternative revenue base to offset the adverse financial effects of Medicare rate cuts. “On any given day, 78% of individuals receiving care in a skilled nursing care center rely on Medicare or Medicaid to pay for their care,” the brief said. In addition, most patients in nursing homes are dually eligible for Medicaid (which pays for their room and board and nursing care) and Medicare (which pays for their physician services, laboratory tests, hospitalization, rehabilitation therapy, and other services).

“This pattern [of patient coverage by both Medicare and Medicaid] is entirely different than the pattern for hospital and physician services, in which private insurance is the majority payer, and can to a certain extent offset adverse effects from Medicare rate cuts,” the brief said.

In its amicus brief, the Advanced Medical Device Technology Association repeated ACLA’s claim that, when implementing PAMA, CMS made significant errors in how it collected the data it used to revise how it paid clinical laboratories and explained how CMS made those errors.

AdvaMed has about 300 member companies that develop medical devices, diagnostic tools, and health information systems. In the AdvaMed brief, attorneys argued that Medicare officials made two significant errors. One involved how CMS defined labs that needed to report private payer rate data. The other was the inadequate time CMS allowed labs to collect the data.

CMS defined each lab that needed to report as an “applicable laboratory,” by saying that such a lab would bill Medicare under its National Provider Identification (NPI) number and would receive at least $12,500 of its Medicare revenue from the CLFS, AdvaMed said.

This definition excluded hospital outreach laboratories and physician office laboratories, AdvaMed wrote. These labs generally lack separate NPIs, and most POLs do not get at least $12,500 of their Medicare revenue from the CLFS, the brief said.

In what CMS pays under the CLFS, hospital outreach laboratories get 26%, and POLs get about 18%, the brief explained. “Taken together, these exclusions render the data significantly incomplete and potentially not representative,” it added.

“CMS admitted in its executive summary that payment rates were established using data from only 1,942 laboratories,” AdvaMed wrote. This figure is lower than the 12,000 labs the OIG estimated in 2016 would be the basis for new payment rates and is less than 1% of the 235,928 labs nationwide.

“Indeed, despite hospital outreach laboratories receiving 26% of the CLFS payments in 2016, only 21 hospital laboratories, representing 1% of the total reported test volume, reported payment rate data in 2017,” the brief said.

When debating the PAMA legislation in 2014, Congress agreed that its purpose was to ensure that seniors’ access to quality health care was not jeopardized. Yet, ACLA argued in its suit that HHS Secretary Alex M. Azar defeated this purpose by rejecting the statutory definition of the term “applicable laboratory.” In so doing, PAMA will “jeopardize the aged and disabled by reducing or eliminating their access to laboratory services,” the ACLA lawsuit said.

In its amicus brief, the College of American Pathologists also addressed how CMS defined the term “applicable laboratory.” CMS redefined applicable laboratory as a lab plus any other operating units under the same NPI, thus guaranteeing that laboratories functioning within larger healthcare institutions would be excluded from reporting data, CAP said.

“The effect is to leave independent laboratories as the predominant reporting entities,” it added.

‘A Fraction of the Data’

Thus, the rule captured only a fraction of the needed payment data. “Indeed, in the first round of reporting, fewer than 2,000 laboratories reported as ‘applicable laboratories.’ This is approximately 3% of the more than 61,000 laboratories that Medicare Part B reimbursed in 2015,” CAP wrote. By reducing the number of reporting laboratories, HHS excluded those labs that get higher reimbursement rates, harming all laboratories, it explained.

“The effect of this exclusion is far-reaching. According to 2017 data, hospital laboratories account for 48.2% of laboratory market share by test volume, while independent laboratories account for 29.5%. (Quest Diagnostics independently accounts for 9.8% and LabCorp 6.7%),” CAP wrote.

21 Hospitals Reported

As other briefs noted, only 21 hospital laboratories defined themselves as applicable laboratories under the secretary’s definition, the CAP brief said. The result was that 1% of the reported test volume came from hospital laboratories while independent laboratories reported 90% of the test volume during the first reporting period, and physician office laboratories reported 7.5% of test volume, CAP added. The data the rule generates will therefore predominantly reflect the market for independent laboratory tests, said CAP.

The Effect of Skewed Data

“The impact of this skewed data reporting on the resulting reimbursement rates is profound,” CAP explained. “Laboratories have different cost structures based on the types of services they offer and the institutional settings in which they operate. In particular, hospital laboratories have different cost structures than large national independent laboratory chains that are able to benefit from economies of scale and accept lower third-party payer reimbursement rates.”

As lab directors and pathologists know, private payers recognize these differences in costs and rates. It is why health insurers reimburse many hospital laboratories at higher rates than they pay competing independent laboratories, it added.

If these arguments fail, Medicare patients will be harmed, the briefs explained. The patients most at risk are those with fewer choices of providers, and where providers are most susceptible to dramatic swings in payment rates, they said. (See TDR, March 5, 2018.)

Among patients who are most at risk are those in nursing homes and other long-term care settings, those who live in rural areas, and those who are homebound, the American Association of Bioanalysts said in its brief, adding that one laboratory serving nursing homes has already closed and others are reducing or eliminating services because of the Medicare price cuts.

Even before Congress passed PAMA, there was little economic incentive for labs to serve the nursing home population. Serving this market now will become more difficult, AAB argued.

To support its arguments, the AAB brief includes a declaration from Annette Iacono, Vice-President of Brookside Clinical Laboratory in Aston, Pa. Brookside has 86 employees and 90% of its business is derived from serving patients in long-term care facilities, particularly nursing homes, Iacono said. Last year, Brookside performed approximately 598,817 clinical lab tests for residents at 90 nursing homes. The lab gets 85% of its revenue from Medicare, parts A and B.

In addition to serving nursing homes, Brookside has, until recently, sent phlebotomists to homebound patients. But, Iacono wrote, “We have already had to make the decision that we cannot afford to continue making home visits to homebound patients, and have started notifying our physicians.”

Brookside is one of a few laboratories in an approximately 100-mile radius that serve long-term care facilities. Large independent laboratories typically find the labor costs are too high, profit margins are too low, and facilities tend to be too scattered, particularly in rural areas, for them to serve nursing homes, she added.

HHS Says ACLA Lacks Legal Standing to Challenge Fees Under PAMA Law

IN A COURT FILING, the federal Department of Health and Human Services (HHS) argued that the American Clinical Laboratory Association lacks legal standing to challenge HHS over the 2018 Clinical Laboratory Fee Schedule.

On March 23, HHS filed its answer to ACLA’s request for a summary (or quick-resolution) judgment in ACLA’s favor by arguing that the court, in fact, should reject ACLA’s arguments and rule in HHS’ favor. HHS criticized ACLA’s arguments regarding how HHS defined the term “applicable laboratories” when it was collecting rate-payment data.

HHS said ACLA’s lawsuit “… seeks to enjoin the new fee schedule through a circuitous challenge to the agency’s rule-making.” The question of how HHS defined the term “applicable laboratories” is at the heart of ACLA’s lawsuit.

“Plaintiff further avers that the definition of ‘applicable laboratories’ caused an insufficient number of hospital laboratories to report their data to the agency,” HHS said. “These hospitals purportedly charge more for CDLTs than do other kinds of laboratories, and plaintiff argues that the absence of hospital laboratory data caused the new fee schedule to be lower than it otherwise would have been.”

In its filing, HHS said, the ACLA’s challenge fails for three reasons. “First, the statute expressly bars any judicial challenge to the ‘establishment of payment amounts’ in the new fee schedule,” HHS argued. “Plaintiff’s suit is a direct attack on the Medicare payment amounts established here, and is therefore barred.

“Second, plaintiff lacks standing because it fails to show that the agency’s definition of ‘applicable laboratory’ caused any economic injuries,” HHS argued. “Rather, the court is left to speculate as to both the actual cause of any lowered Medicare payments, and whether the sought relief would redress those purported injuries.

“Third, plaintiff has failed to present to the agency a concrete claim for reimbursement and exhaust all administrative remedies, as required for a challenge arising out of the Medicare statute,” HHS said. “For each of these reasons, the court should dismiss plaintiff’s claims.”

‘Claims Fail on the Merits’

Then, HHS argued that the ACLA’s “claims fail on the merits” when ACLA challenged how HHS interpreted the PAMA statute. “However, the agency logically defined ‘applicable laboratory,’ in part, as a laboratory that actually receives Medicare revenues by billing under its own National Provider Identifier (NPI) number,” HHS argued. “This definition is in lockstep with the statutory directive, which states that an ‘applicable laboratory’ must be one that receives certain Medicare ‘revenues.’”

Also, HHS added, “Plaintiff offers no workable alternative definition, let alone one clearly superior to that in the agency’s Final Rule. Plaintiff thus provides no plausible basis for the court to find the agency’s actions unreasonable, or arbitrary and capricious, and as a consequence this court should enter judgment for defendant.”


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