CEO Offers Lab Strategies for a Post-PAMA World

It’s not just PAMA price cuts to Medicare fees, but narrow networks, pre-authorization, and more

CEO SUMMARY: With so many market forces working against the economic interests of clinical laboratories, it is essential that all labs develop appropriate strategies designed to sustain the quality of laboratory testing services and the financial integrity of the laboratory organization. In this intelligence briefing, XIFIN, Inc.’s CEO, Lâle White, explains five strategies that are common to many of the nation’s most successful clinical laboratory organizations.

WHAT LAB STRATEGIES might be best for 2019 and beyond, given the many challenges clinical laboratories confront today?

In a presentation last fall to members of the California Clinical Laboratory Association, Lâle White, Chairman and CEO of XIFIN Inc., a company that seeks to enhance lab revenue, outlined five strategies to boost revenue and contain costs. Labs used some of these strategies effectively in 2018 and so they are worthy of consideration again this year, White commented. She recommended that labs adopt these five strategies as follows:

  • Recognize that private payers have followed Medicare’s lead in making deep cuts in what they pay for tests;
  • Know your lab’s direct and incremental costs-per-test in order to negotiate from strength;
  • Cut costs and boost collections;
  • Diversify testing menus; and,
  • Report accurate PAMA data.

White’s recommended strategies are based on her company’s unique access to market intelligence. XIFIN provides revenue cycle management services to more than 200 labs, many of them the largest lab companies in the nation. Her company has electronic interfaces with nearly every health plan in the nation and handles more than 200 million lab test claims annually. This volume of data allows the XIFIN team to watch which lab strategies are most successful and those strategies that have failed.

A Strategy for Every Lab

Informed by these insights, White offered a strategy every lab should put in place if it has not done so already. She suggested that pathologists and lab directors change the way they think about their role in healthcare. To do that, labs need to understand what health insurers want from lab testing. Health insurers no longer want just lab test results, she explained.

“Payers want actionable analytical data and they want full and complete explanations about what that data means and how they can use it to manage patient care and their quality ratings,” stated White.

As 2019 begins, labs now have one year’s worth of experience operating under the lower payments that the federal Centers for Medicare and Medicaid Services (CMS) put in place under PAMA. Those price reductions total about 10% of what labs got paid for those same tests in 2016. While the first of three installments of a double-digit cut in payment is concerning, it may be more worrisome to know that commercial payers have followed CMS’ lead, White commented.

“At XIFIN, our datasets over the last year show that commercial insurers are following suit as far as accelerating cutting what they pay for lab testing to the full three-year Medicare decrease,” White said. “In many cases, we’ve seen commercial payers tying their fees to the 2017 Clinical Laboratory Fee Schedule and creating their own reimbursement strategies.

“For as long as the published Medicare CLFS has existed—about 34 years—payers have modeled their lab reimbursement contract pricing after the Medicare fees with little regard for market pricing represented by actual billed fees,” she added. True market pricing has existed only for out-of-network services, for hospitals negotiating ancillary services on a ‘percentage of billed’ basis, and for new assays not listed on the CLFS.

Private Payer Price Cuts

“But payer price cuts from the major commercial payers in 2018 have not come all at once, but rather as contracts expire or as new contracts are negotiated,” she added. “So, these private payer price cuts —which account for price erosion in the commercial market in 2018—will have a much bigger impact in future years as they are annualized and as the new and expiring contract negotiations continue.

“Among independent labs, this reduction has resulted in about a 2.9% erosion of private payer pricing in 2018 over the previous year,” continued White. “In the hospital market, there was about a 3.5% erosion of private payer pricing in 2018 versus 2017. Our datasets show these payment trends to be predominantly coming from Aetna, Cigna, the Blues, and UnitedHealthcare.

“In 2018, many labs that are not in network with these payers either negotiated contracts at rates 20% to 25% below Medicare rates or got paid at rates lower than what they got the previous year,” noted White. “That means private payers are taking the entire three years of Medicare PAMA price cuts as quickly as they can. This is a very bad trend for labs.”

While Medicare and private payers are cutting deeply into what they pay for laboratory testing, some labs have nevertheless found ways to succeed in an era of lower payments, White explained.

How to Negotiate with Payers

“For me, the most successful labs are those that have analyzed their costs per test, then negotiated pricing with payers on a CPT-code-by-CPT-code basis on some subset of their tests,” White said. “Not all insurers are willing to change what they pay for all tests, but they will entertain a thoughtful discussion on what they pay for 20 to 25 or 30 tests.

“Therefore, labs should consider this negotiation strategy,” she added. “To implement this strategy, lab directors must look at both their direct and indirect cost structure for each test. Then, when negotiating with payers, the lab needs to explain how reimbursement rates must reflect the actual value of each test. Lab test prices cannot simply be set on something arbitrary, such as the Medicare fee schedule.

“Take the example of many labs that weren’t in-network, but contracted withMultiPlan, a company in New York that deals with many insurers at once,” White added. “In some regions, MultiPlan cut its rates by almost 50%, which is quite significant.” MultiPlan contracts with more than 700 healthcare payers and uses data and analytics to manage the costs of care.

“Also, don’t overlook the fact that, even as these price changes ripple through the market, more than 50% of beneficiaries now have high-deductible health insurance plans (HDHPs),” warned White. “That means increases in out-of-pocket charges, making it harder for labs to collect from these patients. The lab industry has about a 30% bad-debt rate related to patients who fail to pay their copayments or deductibles.

“From a pricing perspective, labs need to take all of these factors into account,” she continued. “It is important for labs to explain these factors when negotiating with payers about per-test costs.”

In This PAMA Reporting Cycle, Labs Face Increased Pressure to Report Accurate Data

REPORTING ACCURATE DATA under the Protecting Access to Medicare Act of 2014 (PAMA) is much more important this year than it was two years ago, said Lâle White, Chairman and CEO of XIFIN Inc.

Labs that fail to report the data the Medicare program requires or that fail to report accurate data could face fines of as much as $10,000 per day, White warned. Submitting accurate data is important for another reason: Not all labs submitted data under PAMA in 2017 and many labs that did submit data also had some inaccuracies in their reporting.

The failure to collect data from the majority of labs and the high rate of inaccuracies were two reasons why Medicare’s Clinical Laboratory Fee Schedule saw dramatic cuts to Medicare, with fees decreasing to the 10% cap for each of three years, she said.

To comply with PAMA’s Section 216, in the first data collection period, labs needed to collect data on what private insurers paid for lab tests between Jan. 1 and June 30, 2016, and report that 2016 payment data in the first quarter of 2017.

But not all labs participated in the data-collection and reporting efforts in 2016-17, in part because the federal Centers for Medicare and Medicaid Services (CMS) gave labs instructions that were late and extremely complex and in part because of CMS’ narrow definition of the term “applicable lab.”

Among those labs that did not submit payment data were hospital outreach labs that did not have a lab NPI and as a result did not qualify as an “applicable lab,” a failing that was one of many reasons CMS set payment rates 10% lower in 2018 with subsequent 10% cuts in both 2019 and 2020, White said.

As of this month, the second data-collection period has begun, and White warns all labs to gather and report the requisite data this time, particularly hospital outreach labs. “The payment data from hospital labs will provide CMS with a much richer dataset than the agency got in the first data-collection period,” she said. “That’s why all labs, and particularly outreach labs, need to be prepared to collect the data this time.”

Being well prepared will mean having the staff in place to ensure that the data labs submit is accurate, she advised. Last time, while CMS had the ability to fine labs that submitted incorrect data, the agency chose not to issue such fines. This time, however, fines are more likely, she added.

Because few lab directors thought CMS would impose any penalties the first time, many labs didn’t report any payment data. “But in the next data collection period, there’s a greater likelihood of penalties coming into play,” White said. “Therefore, compliance and accuracy are that much more important this time.”

As examples of the inaccuracies in the data, White said, “The CMS data-set showed some labs reported getting as little as 1¢ in payment for some tests while others reported getting paid $99,000-plus for some tests. Clearly, someone didn’t review the data because these are enormous errors that should have been flagged as obvious mistakes.

“The most common mistakes occurred because people didn’t know how to calculate the allowed amounts properly, or the billing system algorithms didn’t calculate allowables accurately,” White explained. “Also, labs didn’t correct unit errors made by insurers on the electronic remittance advice reports, such as when an insurer actually paid for 10 units but reported it as one unit.”

Cost-Reduction Strategy

White’s next strategy is cost reduction. “Given the challenging financial environment, the first and foremost strategy that labs can implement is to reduce operational expenses wherever possible,” White recommended. “We’ve seen some labs cut staff and services in the first year and prepare for additional cuts for 2019 when the next installment of CLFS reductions will come into play. These staffing cuts have included phlebotomy stations, customer service personnel, and billing and administrative staff.

“As an industry, we also must find ways to boost collections,” she added. “Some labs lose 5% to 20% of potential payments from payers and patients due to the clerical cost of collecting those funds.

“This is a strategy that requires labs to optimize their business processes and analytics capabilities, while developing policies that are more effective in helping patients pay their bills,” stated White.

“It is also important for your lab to incorporate additional workflow automation and standardized collection processes designed to boost collected revenue,” she said. “After all, that 5% to 20% lost to denials or copayments and deductibles is too much money to write off.”

White’s next strategy reflects how XIFIN’s most successful clients have responded to price cuts. “Expanding specialty testing is one way to offset any decline in revenue,” she noted. “It is why we see labs moving from full-menu commodity testing to disease-oriented specialization.

“Labs of tomorrow understand that they are not just providers of lab results, but rather providers of actionable data as medical professionals,” she added. “They have to be part of the solution for improving patient outcomes at lower cost. That requires the ability to analyze ordering patterns for patient diagnoses and providing feedback to physicians regarding the optimization of their lab orders, while also offering a higher level of physician engagement by providing actionable feedback when results are reported.

“We have already seen a decline in the number of labs doing commodity testing that does not provide sufficient reimbursement to maintain margins without enormous scale,” White commented. “At the same time, we’re seeing those labs and newer labs entering the market with specialized testing menus.

“When clinical labs focus on precision medicine and start to do more specialty testing, they also start to specialize in certain disease states—such as cardiovascular testing, genetic testing, and oncology testing,” stated White. “We see a considerable amount of this kind of specialization and we believe it’s required to ensure that a lab’s margins are adequate to support ongoing financial stability. In addition, specializing in disease states also amplifies the role of the lab in improving quality and outcomes at lower cost.”

Nation Will Lose Rural Labs

To that point, labs cannot continue to operate with margins that are too low, White explained, citing rural labs as an example. “We expect to see a decline in rural labs—especially those with high Medicare or Medicaid populations—because the Medicare fee cuts are causing their margins to fall below break-even. When labs close, Medicare beneficiaries and physicians in many communities will have much less access to quality lab testing.”

Contact Lâle White at 858-436-2908 or lwhite@xifin.com.

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