New Federal Law Changes How CMS Sets Lab Prices

CMS and entire laboratory industry to embark on a complex, untried new pricing methodology

CEO SUMMARY: CMS wanted more power to cut the prices it pays for clinical lab testing. A significant part of the lab industry wanted more transparency and consistency in how CMS established coverage guidelines and prices for new lab tests. Congress appears to have attempted to craft a law intended to support both objectives. Now, only the passage of time will reveal whether the new law enacted last week turns out to be something that works for patients, labs, and the Medicare program.

EVERY LABORATORY THAT IS PAID under the Medicare Part B Clinical Laboratory Fee Schedule (CLFS) will need to understand the ramifications of the new rules CMS will use to establish prices for clinical laboratory tests.

Passage of a law last week to patch the Sustainable Growth Rate (SGR) formula that was set to expire on March 31, 2014, gave Congress the opportunity to include language to address several other healthcare-related issues. For example, it delayed the implementation of ICD-10 for one year.

The new law is titled: H.R. 4302: Protecting Access to Medicare Act of 2014. What will interest lab executives is “Section 216: Improving Medicare Policies for Clinical Diagnostic Laboratory Tests.” This is the portion of the law that includes a dramatic and radical rewriting of the process CMS will use when establishing coverage guidelines and prices for tests on the CLFS.

There are two reasons why Congress included a rewrite of the process for establishing clinical lab test fees in this new law. First, Congress needed to find money to pay for the extension of the SGR formula. Lawmakers estimated that the new rules for pricing lab tests on the Medicare CLFS will reduce the money paid to labs by $2.4 billion.

Second, there was a belief on the Hill that the Medicare program was overpaying for clinical laboratory tests compared to private health insurance plans pay. Two pieces of evidence were seen to support this belief by some officials.

Cheap Lab Test Prices

One piece of evidence is the substantial profits announced each quarter by the two biggest national laboratory companies—along with the knowledge that, for many high-volume tests, these two companies regularly charge below-marginal- cost prices to the national health insurance companies.

The second piece of evidence was a report issued by the OIG in June 2013. It was titled: “Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings.” Based on its methodology, the OIG wrote that “In 2011, Medicare paid between 18% and 30% more than other insurers for 20 high-volume and/or high- expenditure lab tests. Medicare could have saved $910 million, or 38%, on these lab tests if it had paid providers at the lowest established rate in each geographic area.” (See TDR, June 17, 2013.)

 Unhappiness in Congress

Several sources have told THE DARK REPORT that, among some members of Congress, there was anger that certain lab companies were reporting substantial profits, even as these same companies were charging private insurers substantially less for lab tests than they charged the Medicare program.

These sources believe that this animus toward the large lab companies by certain members of Congress played a role in how the language of this law was crafted. If this is true, the entire clinical laboratory industry is about to pay for the business behavior of just a handful of big commercial lab companies.

Another aspect to the language in H.R. 4302 is that it attempts to fix a number of issues with clinical laboratory testing that are considered to be problematic by different lab industry sectors and by Medicare program officials. The language of the law that is intended to fix these issues means this law is probably going to produce mixed reactions from labs that see themselves benefiting while other laboratories consider these changes to be a step backward.

New CMS Pricing Method

As one example, CMS will not be allowed to simply rework lab prices as it intended according to a new rule it published in its 2014 Medicare physician fee update. Under that rule, starting in 2015, CMS was going to review all the lab tests on the CLFS with the goal of lowering prices for tests, based on its determination that technology and automation had lowered the cost of performing those tests.

Instead, H.R. 4302 directs CMS to gather market data from labs and, beginning in 2017, it is to use the market data to establish new lab test fees. This is one element of the new law that will produce headaches for Medicare officials and lab managers alike. It is likely to become a point of contention between the lab industry and its government regulator.

In its interpretation of the law’s language, attorneys at Bass, Berry & Sims PLC in Nashville, Tennessee, wrote that, on the requirement that labs must report private payer pricing: “By June 30, 2015, CMS must publish regulations requiring applicable clinical laboratories to report the payment rate paid by each private payer, including Medicare Advantage and Medicaid managed care plans, along with the applicable volume for each payer.”

Hospital Labs Won’t Report

The lawyers noted that “hospital laboratories, to the extent they receive the majority of their reimbursement through the outpatient prospective payment system (OPPS), will not be required to report private payer data, but physician-office laboratories will be required to report the data.”

Reporting begins January 1, 2016, and is due every three years thereafter. Bass, Berry & Sims further wrote that “the reporting excludes capitated payment arrangements, but is inclusive of all discounts, rebates, coupons, price concessions or any other types of discounts. CMS may impose civil monetary penalties for failure to report or to report accurately of up to $10,000 per day.”

Criticisms about this requirement of the law have already surfaced. For example, it is pointed out that few lab organizations have the capability to identify what every payer reimburses for each type of lab test. A typical laboratory may be performing 400 to 800 tests in-house and may be billing dozens of payers. That makes this reporting requirement a sizable burden for every lab, regardless of size.

Second, if a lab does not have to report capitated payment arrangements to CMS, what is to prevent the national labs and the national health insurance corporations from rewriting existing contracts between now and Jan 1, 2016, to convert much of the high-volume lab tests from fee-for-service payment to capitated payment?

Loophole Favors Large Labs

If this happened, CMS would not have data on the very lab companies that are using below-marginal-cost pricing to win exclusive private payer contracts. As well, this loophole would allow the national labs to continue the very pricing practices that angered certain members of Congress. At the same time, the market data that shows their deeply-discounted prices would not be incorporated into CMS’ decisions on how to price these tests.

That could mean the prices CMS established for the CLFS would be higher than they would be otherwise. This would benefit the national labs because they would continue to bill Medicare for these tests and be paid at the higher rate—although their costs to perform these tests are lower than the costs of local and regional labs.

All of this is a separate consequence to the expectation that pricing lab tests based on market data will result in much lower prices on the CLFS. If there is any doubt on that point, one has only to read the limits Congress placed on how rapidly CMS can reduce the CLFS price for a lab test from one year to the next.

Attorneys at Bass, Berry & Sims analyzed this section of the law and wrote: “Beginning January 1, 2017, Medicare payment rates for clinical laboratory services will be based on the private payer rates reported during the previous year. The Medicare rate will be the median payment rate, weighted based on volume, of the private payer payment rates [market data] reported in the previous reporting period for each code.”

How much can CMS reduce a price for a lab test? “For calendar years 2017 through 2019, any reduction in payment rates based on the new reported medians shall be limited to 10%,” wrote the Bass, Berry & Sims team, “and for calendar years 2020 through 2022, any reduction is limited to 15%. The new payment rates will not be subject to budget neutrality adjustment, geographic adjustments, or annual updates, and will apply until the year following the end of the last reporting period. The payment rates will apply to hospital laboratories if the laboratory is not reimbursed under the OPPS.”

The law’s language allows CMS to cut the price of a single lab test by 30% in the 2017-2019 time period and 45% during the years 2020-2022.

In their analysis of the downstream impact of the new law, some veteran lab executives predict that a wave of small lab closures, bankruptcies, and mergers should be expected after these CMS price cuts kick in during the coming years.

Pathologists and lab administrators should be under no misconception on this issue. CMS will take the 20 to 30 highest volume tests and will drive down the price it pays for these tests in a progressive fashion, starting in 2017.

Since local labs do not have the same specimen volume as the national lab companies, this will be financially-devastating to them. Routine testing is their bread and butter. They don’t generate many higher- priced reference and esoteric specimens that could offset the revenue losses from lower prices on the routine work.

In their analysis of the downstream impact of the new law, some veteran lab executives predict that a wave of small lab closures, bankruptcies, and mergers should be expected after these CMS price cuts kick in during the coming years. They also point out that, ironically, as this happens, it will be the two national labs that will benefit, as they will be in a position to pick up those specimens and, with their lower testing costs, probably make a modest profit on those specimens.

Guidelines for New Tests

In a separate area of interest to the laboratory industry, the new law establishes policies to address the problems with developing coverage guidelines and pricing for new tests.

Advocates of this bill within the lab industry point out that it establishes procedures that are more transparent and predictable, both for the lab company introducing the new test and for Medicare officials who must set prices for it.

The attorneys at Bass, Berry & Sims interpreted this section of the new law as follows: “Advanced Diagnostic Laboratory Tests. By January 1, 2016, CMS must assign HCPCS billing codes to all existing advanced diagnostic laboratory tests, which are tests approved or cleared by the FDA that are available from only a single laboratory and analyze multiple biomarkers of DNA, RNA, or proteins to yield a patient-specific result.

Financial Devastation

“For new advanced diagnostic laboratory tests, the initial payment rates will be based on the ‘list price’ of the offering laboratory,” they commented. “Thereafter, the payment rates will be based on the market data reported; however, if the price based on the market data exceeds 130% of the list price, CMS may recoup the excess from the offering laboratory.”

This new federal law will have far- reaching consequences. Ultimately, it will be patients who pay the true price should Medicare’s price-cutting initiatives cause the nation’s network for local and regional labs to disappear in coming years.

What Will Revenue Impact Be for Clinical Laboratories?

WITH PASSAGE of H.R. 4302: Protecting Access to Medicare Act of 2014, all clinical laboratories in the United States face an uncertain financial future, particularly if Medicare patients make up a significant portion of their specimen volume and revenue.

Language in the new law defines how CMS officials can assess existing laboratory tests using market data, and then, in the years 2017 through 2022, cut prices for specific lab tests by 75% or more.

One way to estimate the financial impact of the new law is to use data provided in the 2013 OIG report titled “Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings.”

The OIG studied 20 specific lab tests on the Medicare Part B Clinical Laboratory Fee Schedule (CLFS). In 2010, these tests were 47% of the volume and 56% of the expenditures for CLFS lab tests reimbursed by Medicare. That means they made up about $3.7 billion of the $8.3 billion Medicare spent on CLFS tests during 2010.

In its summary, the OIG said that, if the Medicare program paid comparable rates for these 20 lab tests as did selected state Medicaid programs, the Medicare program could have saved $910 million (or 38%).

Assume that, in the years between 2017 and 2022, CMS were to reduce the prices it pays for these 20 high-volume lab tests by 38%, as indicated in the OIG study. That would be $910 million less in annual revenue flowing to all labs in the United States.

For the two largest national labs, the calculations are interesting. Assume that about 15% of their business is Medicare and they do a total of $12.5 billion in yearly revenue. That means Medicare revenue for them both would total about $1.9 billion per year (which also represents approximately 22.9% of what Medicare paid out for CLFS in 2010). A 38% fee cut would reduce their combined income by $722 million per year.

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