PAMA Final Rule a Threat To Community Lab Survival

Excluding small lab payments means CMS may set lower rates that favor only larger labs

CEO SUMMARY: Will implementation of the final PAMA private payment rate reporting rule for labs put smaller, community labs at financial risk? Yes, says the National Independent Laboratory Association (NILA). By deliberately setting a standard to exclude private payer payment data from hospital outpatient and outreach labs that receive payments off the CLFS, CMS will base its new fee schedule primarily on the data the biggest labs provide, a NILA representative said.

MANY COMMUNITY CLINICAL laboratories may be forced to close or sell to other larger clinical labs under the final rule for market price reporting that the federal Centers for Medicare & Medicaid Services issued June 17. CMS will use the rule to set new, lower payment rates for clinical laboratory tests.

“The rule’s approach supports the interests of the largest publicly traded lab companies,” stated Julie S. Allen, who represents the National Independent Laboratory Association (NILA) and is Vice President of the District Policy Group. “It does so because CMS will collect data from the commercial discounted rates paid to the largest publicly-traded labs. This data will dominate since those labs generate the biggest volume of Medicare Part B lab testing.

“The rule will result in the exclusion of most of the higher private payment rates currently paid to hospital laboratories,” added Allen. “By excluding private payment data from hospital labs, CMS will set the new Medicare Part B rates at levels that do not reflect the costs of providing testing in the community laboratory setting that often are the only local laboratories serving Medicare patients in their coverage areas.

“From NILA’s perspective, we see very little improvement from what CMS outlined in the PAMA proposed rule,” she says. “That is why we view the final rule as being significantly damaging.

Slow Death for Some Labs?

“How is this final rule any better than proposing to cut lab test payments on an arbitrary basis based on technology, which CMS proposed in 2013?” Allen asked. “For those who espouse support for the PAMA rule, I’d love an explanation on how PAMA is any different than what labs would have faced under a competitive bidding model?

“This final rule is just as bad as these other approaches to cutting Medicare Part B lab test payments,” she continued. “It’s just a slower death for community laboratories instead of an immediate death. What is unfortunate is that Medicare beneficiaries in many communities are at risk of losing access to the local lab testing services they have relied on for years.

“For these and other reasons, NILA is considering a legal challenge to the rule under federal administrative law and will press members of Congress to require CMS to change the final rule,” she said.

Organizations that represent large clinical laboratory companies have praised CMS’ decision to delay the implementation of the new clinical lab rates as a victory for laboratories. That’s in part because laboratories complained last fall that they would not have time to collect the data CMS needs to set the rates nor would they have time to implement the new rates.

“But a delay in implementation was inevitable anyway, and the one-year delay CMS provided is still insufficient,” explained Allen. “Under the terms of the regulation, labs actually have less than six months to collect and report the data.

Fair Market Evaluation

“The delay is secondary to the more important fact that CMS did not address the concerns that NILA presented after CMS issued the proposed PAMA rule last fall,” Allen said. “The primary issue for NILA is that CMS is not proposing to conduct a fair market evaluation.

“Instead CMS is establishing a biased and deliberately-skewed market evaluation that is based on the portion of the lab test market with the lowest payment rates,” she said.

“CMS opted to define what it calls ‘applicable labs’—meaning those that have to report what private payers pay for labs tests—in such a way that the data from the largest publicly-traded laboratories will dominate the calculations, and data from the highest-paying sector of the market will be excluded,” she explains.

“If the key to doing a fair market examination is to ensure that all segments of the laboratory market are represented in a statistically relevant way, then it doesn’t make sense to exclude hospital laboratories,” she argued. “Yet, CMS has succeeded in ensuring that the majority of hospital laboratories will be exempt from reporting by setting a definition for ‘applicable laboratories’ that CMS knows will not capture hospital laboratories.

‘Applicable Labs’ Definition

“CMS defines ‘applicable laboratories’ as those that have an NPI number and that receive 50% or more of their Medicare revenue from either the CLFS or the PFS,” Allen explained. “In the proposed rule, CMS said it would use the tax identification number (TIN) as the standard to identify laboratories that would not participate. At that time, CMS argued that different entities may own many laboratories, so CMS should examine that 50% threshold across an entity’s Medicare revenue.

“But the PAMA statute is clear that the standard for the 50% threshold is 50% in laboratory revenue, not 50% of the entity’s revenue,” she said. “Therefore, it’s inappropriate and in violation of the statute to examine the 50% threshold based on comparing laboratory Medicare revenue against all of an entity’s other sources of Medicare revenue.

CMS Formula for Pricing

“Doing it that way deliberately minimizes the laboratory’s revenue,” Allen added. “The statute is clear: CMS should examine the 50% threshold for laboratory revenue, not the entity’s (meaning the hospital’s) revenue.

“The point is that if you use the NPI as the applicable factor, you have to determine if each laboratory has its own NPI,” Allen commented. “CMS has no idea how many hospital outreach laboratories have their own NPI, nevermind whether a statistically relevant number of hospitals do.

“In all of the documentation from CMS, including fact sheets, press releases, and the rule itself, CMS officials clearly outline statistics in terms of the percentage of physician-owned and independent laboratories they expect to capture based on the formula they’ve set forward,” she explained. “But nowhere do they give a percentage of hospital laboratories captured from this formula.

By Failing to Analyze All Segments of Lab Market, Test Price Reporting Results Will Skew in CMS’ Favor

FOR THE FEDERAL CENTERS FOR MEDICARE AND MEDICAID SERVICES, the fairest way to analyze the clinical laboratory testing marketplace is to include all segments of the market.

Doing so is difficult, however, because some segments are too small to provide meaningful data and others are difficult to analyze because of the way CMS bundles payments for tests in those segments.

The next best method is to include all the relevant segments of the market, suggested Julie S. Allen, a Vice President with the District Policy Group who represents the National Independent Laboratory Association (NILA).

“The Protecting Access to Medicare Act requires that laboratories report what private insurers pay for their laboratory tests in the volume associated for each of those rates,” she explained. “In a pie chart of the laboratory market examining Medicare test volume, you could eliminate the segments of the pie that represent hospitals and physicians. But then you’d be left with only that piece of pie that represents the independent laboratory test market.

“Within that piece of the pie, we know that two companies dominate the test volume in the independent laboratory marketplace,” Allen noted. “Those two companies are Laboratory Corporation of America and Quest Diagnostics Incorporated. Together, they provide over 52% of Medicare’s independent laboratory test market.

“We know that LabCorp and Quest arrange for sole-source contracts with private payers by grossly discounting rates for traditional testing,” she explained. “That discounting is used to capture market share by excluding competitors.

“In CMS’ market analysis, these discounted rates for Clinical Diagnostic Laboratory Tests (CDLTs) will be reported to CMS at high volume,” she says. “That’s the biggest factor driving what prices CMS will set for most CDLTs. By eliminating most of the hospital laboratory data, CMS has taken higher-priced private payer rates out of the equation, thus allowing the lowest reimbursement rates to dominate the data and, therefore, also dominate the new Medicare price calculation.

“That skews the data results to the lowest levels,” Allen continued. “And because CMS significantly favors lowering the clinical laboratory fee schedule (CLFS), many have asked if CMS’ market analysis was designed deliberately to skew the results in this way. And many believe the answer is, ‘yes,’ to achieve the goal of securing savings in Medicare by paying labs much less than now.

“The end result is that CMS officials are describing the market analysis as if they were painting a picture of the whole market,” she explained. “But it’s not the whole market. It’s only part of the market—the part with the lowest private payer rates.

Potential Legal Challenges

“For these reasons, NILA is examining every angle to address this regulation,” she says. “There are potential legal challenges and legislative angles to pursue. Among the legal areas we are investigating is whether CMS’ market analysis deliberately violates the statute.

“Also it’s set up so that laboratories cannot possibly comply by Jan. 1, 2017, to report the data from private health insurers,” she added. “CMS’ rule is absent any details on which codes laboratories will report on, and laboratories don’t know where or how they will report their data.

“Also the final PAMA rule doesn’t provide any information on what data collection and reporting systems laboratories must comply with,” Allen concluded. “In addition, we don’t have a timetable from CMS on when to expect the subregulatory guidance that laboratories will need to collect and report this information.”

“Another issue CMS officials make clear in the final rule is they believe it was not Congress’ intent to include private payer data from hospital laboratories, but they received many comments from Congress and others to the contrary,” Allen said.

“CMS focuses the bulk of its discussion in the rule about hospital laboratories on the point that they do not believe the statute meant to include hospital inpatient or outpatient laboratories,” she added. “CMS officials agree that hospital outreach laboratory data will be included, and if an outreach laboratory does not currently have an NPI, it can request one.

Time Required to Obtain NPI

“So that begs the question: If CMS is rushing to put a data gathering and reporting system into place, can a hospital outreach laboratory request an NPI in time for the first reporting period, which begins Jan. 1, 2017?” Allen asked. “And, if a hospital outreach laboratory requests an NPI, could that laboratory have the NPI applied retroactively to the 2016 data the laboratory is required to report?

“How does a laboratory get an NPI after July 1, 2016, but somehow link that NPI to the payment data it already collected from Jan. 1 to June 30, 2016? The answer is—and CMS officials know this—hospitals that would like to get a separate NPI for the purposes of reporting data to CMS for the first reporting cycle are unable to do so, and if they did, it wouldn’t matter because the NPI cannot be applied retroactively to the claims data.

“Hospital inpatient laboratories are excluded under the PAMA statute because inpatient laboratory tests are paid under a DRG model, not under the Part B Clinical Laboratory Fee Schedule or the Physician Fee Schedule,” Allen concluded. “Outpatient tests are paid primarily under a bundle, but sometimes not. But hospital outreach tests are paid under the CLFS or PFS as non-hospital patient tests.”

Contact Julie S. Allen at 202-230-5126 or

PAMA Itself Has Issues that Divide Labs

ACROSS THE NATION, clinical lab executives and pathologists must now pay attention to the final PAMA private payment rate reporting rule that CMS published on June 17.

For some, their lab will be required to report market price data to CMS. And other labs must prepare for the negative financial consequences of lower Medicare Part B clinical laboratory test prices, beginning on Jan. 1, 2018, just 18 months from now.

The PAMA law has the potential to bring about the greatest realignment in the clinical laboratory testing market seen since the emergence of big, multi-regional public lab companies in the 1970s. PAMA will do this in several ways. One way is how the law defines the ground rules for CMS to establish new Part B clinical laboratory test fees.

For example, what is not being discussed about the final rule CMS published is the fact that lab tests paid under capitation are excluded. That exclusion is written into the PAMA law. Thus, CMS will not collect the highly-discounted capitated pricing data the private payers enjoy from larger national lab companies.

Therefore, if the original goal of Congress was to conduct a fair and accurate survey of what private payers pay for lab tests (and use that data to reset Part B CLFS fees), then why was this language excluding capitated pricing put in the PAMA law? Which class of labs benefits from this price reporting exemption?


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