CEO SUMMARY: Newly-released data indicates that Medicare officials are falling far short of their goal to decrease the total amount of money spent annually on Part B clinical laboratory tests. That is one finding by the federal Office of the Inspector General in its report of Medicare lab test spending during 2019. Despite deep cuts to the prices for many high-volume tests, the OIG found that Part B lab test spending totaled $7.68 billion in 2019, which is an increase of $93 million, or 12.1% from 2018. More genetic test claims helped increase total spending.
EARLIER THIS MONTH, THE FEDERAL OFFICE OF INSPECTOR GENERAL (OIG) finally issued its report on Medicare Part B clinical laboratory spending for 2019. The OIG’s findings are unwelcome news for both the Medicare program and the clinical laboratory industry.
For Medicare officials, the bad news is that, yes, the deep price cuts to many high-volume, highly-automated lab tests did reduce spending for those tests. But sizeable increases in spending for molecular and genetic tests caused overall spending for Medicare Part B clinical lab tests to increase to $7.68 billion in 2019, an increase of $93 million or 12.1%, compared to 2018.
For the clinical laboratory industry, the bad news is that officials at the federal Centers for Medicare and Medicaid Services (CMS) are failing in their goal to reduce total spending on Part B clinical lab tests from one year to the next. Thus, CMS officials will be motivated to look for additional fee cuts to the prices the Medicare program pays for clinical lab tests.
The OIG’s report is titled, “Despite Savings on Many Lab Tests in 2019, Total Medicare Spending Increased Slightly Because of Increased Utilization for Certain High-Priced Tests.” This annual report is mandated by the Protecting Access to Medicare Act (PAMA) of 2014.
This year’s OIG report was not as comprehensive as its earlier annual reports on Medicare CLFS spending. These reports analyze how each year’s PAMA fee cuts (which are based on CMS’ market study of the prices paid by private health insurers for lab tests) have influenced CLFS spending for that year.
The OIG’s annual report on Medicare spending for lab tests is useful in two ways. First, it provides details about what Medicare spends each year on clinical laboratory testing—details that were not easily accessible in the years before the OIG began publishing this report.
Second, the data and commentary in the OIG’s annual report is one of the few places where federal officials publicly comment on events and trends in spending by the Medicare program for clinical laboratory tests.
Despite Cuts, More Spending
The 2019 spending report revealed that, although the PAMA fee cuts on high-volume, routine tests did reduce Medicare spending for those tests, overall spending rose by 12.1% in 2019 because some high-priced genetic and molecular tests drove up overall spending. On those tests, PAMA had no effect, the OIG reported.
“Because this group of [molecular and genetic] tests had relatively high payment rates, the increased spending for this group overtook the savings achieved by the PAMA rate reductions in 2019,” the report noted. The report was dated December 2020 and was released on Dec. 18.
High-Priced Tests a Factor
“In the second year  of the new payment system, reduced payment rates for many lab tests resulted in savings for the Medicare program,” the Inspector General wrote. “However, total Medicare spending increased slightly because of increased utilization and spending on certain high-priced tests, such as genetic tests.”
The report showed that—despite payment rate reductions on 73% of lab tests on Medicare’s Clinical Laboratory Fee Schedule (CLFS)—Medicare Part B spending jumped by 12.1% between 2018 and 2019, for a total of $7.68 billion.
A 12.1% rise in spending is significant. This could be a bad sign for clinical laboratories in the coming year if it leads Medicare administrators to scrutinize more closely what the agency spends on high-priced genetic tests and advanced diagnostic laboratory tests (ADLTs). In particular, the OIG cited two tests that could get more attention in the coming year.
In the report, the OIG explained that what Medicare spent on the top 25 tests increased slightly in 2019 over what the agency spent in 2018. The analysis of spending on these tests showed two trends:
• “First, 17 of the top 25 tests had payment rate reductions required under PAMA,” the OIG said, adding, “For this group, overall Medicare spending decreased in 2019 compared to 2018.”
• Second, payment rates for the remaining eight tests among the top 25 did not change in 2019, and overall Medicare spending for this group increased compared with spending in 2018 because the nation’s clinical labs submitted more claims of these tests, the OIG reported.
PAMA Law’s Mandates
When Congress passed PAMA in 2014, the law changed the way Medicare pays for lab tests by requiring CMS to conduct a market study of lab test prices paid by commercial health insurers. CMS then used that data to set market-based prices for the Medicare Part B CLFS. Congress also required the OIG to report annually on what effect, if any, the law is having on Medicare Part B spending for clinical lab tests.
In addition, the law requires the OIG to review the top 25 tests based on Medicare spending and report on that analysis each year. Under PAMA, CMS is allowed to cut the price of a lab test by no more than 10% in each of the first three years (2018, 2019, and 2020) and by no more than 15% in each of the next three years. (Because of the COVID-19 pandemic, fee cuts scheduled for Jan. 1, 2020, were delayed by one year.)
“Prior to PAMA, the OIG found that Medicare was paying significantly more than other [private] payers for many lab tests,” the inspector general noted.
In the report, the OIG said, “Our analysis of Medicare Part B spending on lab tests demonstrates that—as expected—the payment rate adjustments required by PAMA achieved savings for some lab tests that had payment rate reductions in 2019.” But this statement obscures the fact that Medicare spending for lab tests continued to rise. (See exhibit 1 in sidebar below.)
Medicare’s overall spend on clinical lab tests continues to increase—despite the price cuts—because of rising expenditures for genetic tests. “Medicare spending on genetic tests reached $1.36 billion in 2019, an increase of about $390 million from 2018,” the report showed. The report does not say this, but $390 million is 29% of $1.36 billion. (See exhibit 2 in sidebar below.)
“Medicare paid for about 2.22 million units of genetic tests in 2019, up from about 1.76 million units in 2018,” the report showed. That spending for genetic tests came in three categories:
• Molecular pathology,
• Multianalyte algorithmic assays (MAAAs), and,
• Genomic sequencing procedures.
Exhibits that show Medicare spending for these three categories were included in the OIG report. These exhibits are reproduced in the sidebar on page 17.
The Top 25 Tests
Another factor contributing to increased Medicare spending on lab tests 2019 was the effect the top 25 tests had on total spending. “Medicare spent $4.64 billion on the top 25 tests in 2019, up from $4.57 billion in 2018,” the OIG noted. While payment rates were cut for 17 of the top 25 tests, rates were not cut in 2019 for the remaining eight tests in the top 25. For all but one of the 17 tests, the rates Medicare paid in 2019 dropped by 10%, as PAMA prescribed.
“Because of these rate changes, total spending for the group of 17 tests decreased by $175 million in 2019, illustrating that—as expected—the lab payment rate changes required by PAMA achieved savings for some lab tests,” the OIG commented. “Notably, savings for some of these tests occurred despite increased utilization in 2019 compared with 2018.”
One example presented in the OIG was for the comprehensive blood chemistry (CBC) test. The OIG wrote that Medicare spending for this test dropped by about $45 million in 2019, despite an increase in utilization of about 500,000 such tests.
Unchanged Payment Rates
For Medicare, spending on the 17 tests was mostly good news, but spending on the remaining eight tests in the top 25 told a different story. “For the group of eight tests with payment rates that did not change, total spending increased in 2019,” noted the OIG.
For six of those eight tests, payment rates did not change from 2018 to 2019 because they had already reached the rate that PAMA required under the law’s volume-weighted median calculations from lab-reported data. “The volume-weighted median is calculated by taking the median value of all private payer rates, weighted by test volume,” the report explained. Among those six tests, four were drug assays and two were genetic tests.
Before Congress passed PAMA in 2014, the OIG said its research and other reports showed that Medicare was paying significantly more than private payers for many lab tests. “In the coming years, payment rate reductions for many lab tests that are on the CLFS are expected to result in further savings for the Medicare program,” the OIG predicted without providing any support for this contention.
Reductions to Test Prices
However, not all tests on the CLFS had payment rate reductions in 2019. This occurred for one of two reasons:
1. Tests with payment rates that had already reached the rate required by PAMA did not require further reductions, or
2. Tests that were new to the CLFS as of 2018 were not affected by the 2019 rate reductions required by PAMA.
In the report, the OIG noted that COVID-19 may affect spending for clinical lab tests. “Looking ahead, we anticipate that Medicare spending for lab tests in 2020 will be significantly affected by the COVID-19 pandemic, especially diagnostic testing for the novel coronavirus and other respiratory illnesses,” the report noted.
“OIG has a body of oversight activities underway regarding COVID-19-related lab testing. Additionally, OIG will continue to monitor the effect of the PAMA changes on Medicare spending.”
Since it launched in 1995, The Dark Report has closely watched the officials in charge of the Medicare program as they regularly and repeatedly proposed different ways to rein in spending for Medicare Part B clinical laboratory tests.
These efforts started in the early 1980s, when the federal agency managing the Medicare Program was called the Health Care Financial Administration (HCFA). That name was changed in 2001 to the Centers for Medicare and Medicaid Services (CMS).
Studies to Reduce Spending
As early as 1981, HCFA was spending money on consultants to study the Part B Clinical Laboratory Fee Schedule and identify different methods to reduce spending. In 1988, Congress cut lab fees significantly, but, as an offset to labs, dropped the requirement that labs collect a 20% copayment from Medicare beneficiaries.
In the 1990s, HCFA issued several reports and published studies advocating competitive bidding for lab testing. Eventually, Congress authorized a demonstration project. CMS attempted to launch its first demonstration project in 2008 in San Diego County, Calif. Several labs filed a lawsuit in federal court and successfully stopped that demonstration project for competitive bidding of lab tests.
Then, a few years later in 2014, language was included in the PAMA statute mandating CMS to conduct a market study of the prices paid by private payers for lab tests and to use this data to set prices on the CLFS.