PAMA Final Rule Issued, CMS Plans to Cut Rates by 5.6%

New Medicare rates take effect Jan. 1, 2018, after labs report price data from private insurers

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CEO SUMMARY: CMS issued its final rule for implementing the laboratory payment reform included in the Protecting Access to Medicare Act of 2014 (PAMA) on June 17. All labs will see significant reductions to the Medicare Part B Clinical Laboratory Fee Schedule that becomes effective on Jan. 1, 2018. That same section of PAMA requires certain labs that perform clinical lab tests to report to CMS what private insurers pay them for laboratory tests. CMS will use the rates from private payers to calculate Medicare payment rates.

IT’S NOW OFFICIAL! Jan. 1, 2017, is the date that the federal Centers for Medicare & Medicaid Services will require certain clinical laboratories to report what private insurers pay labs for diagnostic tests. Then CMS will use that market price data to set prices for the Medicare Part B Clinical Laboratory Fee Schedule, beginning on Jan. 1, 2018.

The new rates will be set according to the final rule to implement a section of the Protecting Access to Medicare Act of 2014 (PAMA). (See TDR, April 7, 2014.) The CMS final rule also includes language to address payment for advanced diagnostic laboratory tests (ADLTs), as required by PAMA.

However, there is little mystery about the size of the cuts in clinical laboratory test prices that Medicare officials expect to result from market price reporting. During the first year (2018), savings to CMS of $390 million are expected.

That represents significant fee cuts from the $7 billion that CMS currently pays for clinical laboratory tests each year. For the first 10 years, savings from the PAMA private payer rebasing are expected to be $3.93 billion, according to CMS.

From the start, the laboratory test payment reform section of the PAMA legislation, which was crafted to generate savings as an offset for the spending needed to temporarily patch the Medicare physician pay formula, has been unpopular with the National Independent Laboratory Association.

There are several reasons clinical lab professionals are concerned with the new PAMA reimbursement system. Small laboratories, in particular, see implementation of this mandate as a financial hammer blow that will cause them to sell or shut their doors. This is equally true of those independent labs that primarily serve Medicare patients in nursing homes and similar care settings.

How to Collect Price Data

Another criticism is that few labs are equipped to determine how much each health insurance plan has paid the lab for each type of lab test during a calendar year. Thus, many labs consider the data gathering to be a huge burden on all labs—whether large or small. The cost and the staff resources required to produce this information will be immense.

The third major criticism of the PAMA market price reporting requirement, as originally written, is that it will not give CMS an accurate picture of the true average price all insurers—big or little—pay to all labs, ranging from physician office labs to independent labs and hospital outreach labs. Thus, critics said, CMS will base its pricing decisions on a biased sample of pricing data, data dominated by the large national laboratories that perform a substantial proportion of Medicare Part B lab test volume.

The proposed rule excluded many higher-cost labs from the reporting requirement. For example, hospital laboratory outreach programs, which are generally paid more by private insurers for their services, would have been excluded from submitting market price data to CMS.

CMS Knows Much Already

THE DARK REPORT observes that CMS officials understand this fact about hospital laboratory outreach programs. Even without specific market price data from different sizes and types of medical laboratories, CMS understands generally which categories of labs are being paid higher reimbursement from private payers.

For this reason, critics of the agency’s PAMA rulemaking argue that CMS is gaming the system to generate larger cuts to laboratory payments and greater savings for Medicare. However, in comments it published in the Federal Register, CMS included statements about the final rule that it believes rebuts this criticism.

As defined in the final rule issued on June 17, clinical labs that get at least $12,500 in Medicare revenue from laboratory services paid under the clinical laboratory fee schedule and more than 50% of Medicare revenue from laboratory or physician services will report their private payer rates for test services performed.

This provision requires laboratories performing clinical laboratory tests to report what each private insurer pays them for each type of lab test, along with the volume of tests the insurer covered. Medicare will use the rates from private insurers to calculate Medicare payment rates for laboratory tests paid under the clinical laboratory fee schedule (CLFS) beginning Jan. 1, 2018.

OIG: CMS Pays Too Much

As noted earlier, the rule is expected to save $390 million in 2018 and $3.93 billion over 10 years. Writing for clients of William Blair & Co., Analyst Amanda Murphy said CMS’ savings estimates are based on the broad assumption that Medicare pays 20% more than private payers pay.

This 20% figure came from a 2013 study by the federal Department of Health and Human Services (HHS) Office of Inspector General that published an analysis of what Medicare spent in 2010 on clinical lab tests. The OIG analysis showed that CMS could have saved about 20% if it paid the lowest price for 20 tests that the state Medicaid programs and Federal Employee Health Benefits Plans (FEHBPs) paid for in 2010. (See TDR, June 17, 2013.)

Highly efficient labs will likely benefit from the final rule, Murphy reported. Labs with the lowest cost structure will be best positioned to succeed under PAMA and may benefit by acquiring smaller labs that could struggle financially, she wrote. In addition, Murphy believes the final rule will be favorable for smaller labs that offer proprietary assays because private payers pay more for these tests.

Final PAMA Rule Defines which Labs Must Report, Provides Basic Timeline, But Lacks Specifics

BY PUBLISHING THE FINAL RULE for implementing laboratory payment reform that is part of the PAMA law in the Federal Register, CMS has initiated a process that will have profound effect on the entire clinical laboratory industry.

The final rule describes the laboratories that must report their market price data for lab tests and provides some, but not all, details about the reporting process. Here are some key elements of the final rule:

  • “Applicable laboratory” will bill Medicare Part B under its own National Provider Identifier (NPI); in a data collection period, it receives more than 50% of its Medicare revenue, which includes fee-for-service payments under Medicare Parts A and B, Medicare Advantage payments under Medicare Part C, prescription drug payments under Medicare Part D, and any associated Medicare beneficiary deductible or coinsurance for services furnished during the data collection period from one or a combination of several sources.
  • “Applicable information” to be reported is the payment rate that was paid to the laboratory by each private payer for each CDLT and the volume of such tests for each such payer for the data collection period.
  • Payment rate reported by a laboratory must reflect all discounts, rebates, coupons, and other price concessions.

Per the PAMA statute, tests reimbursed by capitated pricing are excluded from reporting.

  • Where an applicable laboratory has more than one payment rate for the same payer for the same test, or more than one payment rate for different payers for the same test, each such payment rate and the volume for the test at each such rate must be reported.
  • “Private payer” is defined as a health insurance issuer and a group health plan (as such terms are defined in section 2791 of the Public Health Service Act), a Medicare Advantage plan under Medicare Part C, or a Medicaid managed care organization.
  • In cases where the Secretary determines that an applicable laboratory has failed to report, or made a misrepresentation or omission in reporting, applicable information under section 1834A(a) of the Act for a CDLT … The Secretary may apply a CMP in an amount of up to $10,000 per day for each failure to report or each such misrepresentation or omission.

CMS stated that this final rule incorporated public input. “We received approximately 1,300 public comments from individuals, healthcare providers, corporations, government agencies, trade associations, and major laboratory organizations,” it said.

Alan Mertz, president of the American Clinical Laboratory Association, said that ACLA applauded the change in the implementation date from Jan. 1, 2017, to Jan. 1, 2018. He said ACLA and others had requested the delay.

The National Independent Laboratory Association (NILA), however, had requested a two-year delay to allow for activities that support laboratory compliance with a new reporting system.

Continuing with his comments, Mertz said, “While none of us in the lab community want to see cuts, the establishment of a market-based system for determining Medicare reimbursement for laboratory services was clearly preferable to the alternatives we faced in 2014—immediate unlimited cuts to payment rates by CMS through its technological changes authority and immediate across-the-board reductions to the CLFS by Congress.”

Some Improvement by CMS

ACLA also commented on how CMS defines labs that will report private insurance payment data in the final rule. “On the issue of which labs this rule affects, this is an area that CMS made some improvement over what was in the proposed rule,” he said.

“In the proposed rule CMS suggested the labs that would need to report market price data would be determined by their tax ID numbers,” added Mertz. “That meant very few hospital labs would report because it’s the rare hospital lab that has its own tax ID number.

“ACLA asked CMS to change from the taxpayer ID number to the CLIA number so that the lab would look at just Medicare revenue,” continued Mertz. “That would have included virtually all hospital labs that met the volume threshold.

“Instead, CMS moved from taxpayer ID numbers to the National Provider Identifier (NPI),” he noted. “That means more outreach hospital labs will report than in the proposed rule. However, we don’t know how many more at this time.”

Excluded from Reporting

Not all labs will be required to report what private insurers pay them because the final rule sets the minimum level of Medicare lab revenue at $12,500. CMS estimates that about 95% of all physician office laboratories and about half of independent laboratories will not need to report private payer prices.

Under the rule, laboratories required to report will collect private payer data from Jan. 1, 2016, through June 30, 2016. These labs must submit that data to CMS in the first three months of 2017.

“The problem with this timeline is there are still too many unknowns,” stated Julie Scott Allen, vice president of the District Policy Group and representing NILA.

Using the data labs report, CMS will calculate new Medicare rates based on the weighted median of private payer rates for each test by early November 2017 and the new rates will be effective on Jan. 1, 2018. Again, Allen cautioned, CMS has not explained how it will calculate the weighted median private payer rates.

The final rule differs from the proposed rule that CMS issued last fall in that CMS moved the implementation date from Jan. 1, 2017, to Jan. 1, 2018. CMS said this move allows labs time to develop the data systems needed to collect, review, and verify payment data from private payers.

Do Labs Have Enough Time?

“However, the new implementation date simply reflects the agency’s delinquency in issuing a final rule one year beyond the statutory deadline,” Allen said. “It is not the delay requested by laboratories for additional time to implement the new payment collection and reporting requirements.”

Moving the implementation date allows CMS to validate the data and test the systems it will use for labs to report the data. The added time also gives CMS a chance to do end-to-end testing of its data-collection systems, CMS said.

In the final rule that CMS published, it also addressed Advanced Diagnostic Laboratory Tests (ADLTs). This section of the rule will be analyzed in an upcoming issue of THE DARK REPORT.

Contact Amanda Murphy 312-364-8951 or; Alan Mertz at 202-637-9466 or; Julie S. Allen at 202-230-5126 or


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