CMS’ Proposed Lab Rules May Not Fly with Congress

In Washington today, elected officials want control over cost cuts due to budget pressures

CEO SUMMARY: Many clinical lab administrators have noticed the new activism at the federal Centers for Medicare Medicaid Services (CMS) when it comes to control of establishing prices for clinical laboratory tests. In this exclusive interview, two long-time advocates for the National Independent Laboratory Association discuss several of the issues associated with the three proposed Medicare rules that CMS intends to use to more directly set lab test prices.

IN MANY WAYS, MEDICARE OFFICIALS have become more activist in their approach to managing clinical laboratory testing and establishing prices for individual tests.

This increased activism was most obvious in the three proposed rules that the federal Centers for Medicare & Medicaid Services (CMS) published in July. Each proposal, if enacted, can be expected to substantially reduce what the Medicare program pays for clinical laboratory tests in coming years. (See related articles here.)

In turn, these three proposals must be understood in the context of several federal studies made public over the past 18 months. In response to these studies, the three proposals announced by CMS in July would enact:

A) significant cuts to pathology services (via the Physician Fee Schedule–PFS);

B) bundling for laboratory services in hospitals (via the Outpatient Prospective Payment System–OPPS); and,

C) reassessing payment rates under the Clinical Laboratory Fee Schedule– CLFS.

To help lab administrators and pathologists understand why CMS officials have become more assertive in their efforts to control the prices of clinical lab testing, THE DARK REPORT turned to two individuals who regularly have conversations with members of Congress and their staffs, administration officials, and officials at CMS.

For a number of years, Julie Scott Allen, Government Relations Director, and Erin Will Morton, Senior Government Relations Manager, for Drinker Biddle & Reath LLP, in Washington, D.C., have represented the National Independent Laboratory Association (NILA). They have helped independent lab owners who are members of NILA educate lawmakers and agency officials about the impact these decisions have on community labs.

What Medicare Should Pay

Allen and Morton have important insights about how the thinking of lawmakers and government administrators has evolved in recent years. This information can help lab professionals better respond to the events now unfolding in Washington.

The first point that Allen and Morton made is that every health program is being scrutinized based on costs—laboratories included. They noted that the thinking within CMS as it pertains to clinical laboratory test fee schedules has evolved. They believe that the agency wants to assert a greater level of control over how Medicare reimbursement for clinical laboratory tests are established.

More Control Over Lab Fees

“This desire to have more control over clinical lab test fees is based on the ability that CMS has to set prices in other areas of the Medicare program,” explained Morton. “When you look at how CMS works, it has greater control over the physician fee schedule (PFS) and the hospital inpatient and outpatient payment schedules (IPPS/OPPS). For these fee schedules, CMS uses formulas to set rates.

“That is not true for the Clinical Laboratory Fee Schedule,” she continued. “The agency does not have such a formula for clinical lab reimbursement rates.

“What we have heard in our discussions with members of Congress and their staff on the hill,” stated Allen, “is that officials from CMS have been making a lot of statements about their frustration over not having any control over what Medicare pays for laboratory services and how such payment rates are derived.”

Take the observations of Allen and Morton at face value and THE DARK REPORT can argue that a series of actions taken by CMS over the past 24 months can be interpreted to be consistent with the agency’s desire to claim it has the authority to establish clinical laboratory test prices with some degree of independence from Congress.

“For a while, we have suspected that CMS wanted greater control over lab rates but its officials have struggled with both how to do it and whether they have the legal authority to do it,” explained Allen. “We now have studies being produced by agencies like the U.S. Office of Inspector General (OIG) that we believe make inaccurate comparisons between what Medicare pays for laboratory tests versus other payers.”

“Adding to that frustration is the legal question about whether CMS has the ability to set rates for clinical laboratory tests,” interjected Morton. “For years, this question about statutory authority was mentioned in the reports from the Office of Inspector General and others who said CMS does not have the authority to set rates for clinical laboratory tests.”

In fact, CMS has been criticized on exactly this point after it published its three proposed rules in July, each designed to allow it more control over set- ting the prices for clinical laboratory testing. Critics ask, “Does the agency have the authority to administer these aspects of the Medicare program as it proposes?”

Another Twist in the Story

There is another fascinating twist in the story about CMS’ efforts to assert itself more aggressively into the price-setting process for clinical laboratory testing. By taking these steps, CMS may be challenging a power that Congress has reserved for itself. That could set off a fight that involves both politics and who keeps the economic power in these matters.

To further complicate things, the sequester and issues associated with the debt ceiling limit have Congress on high alert for opportunities to cut costs in every possible way as part of its own budgeting process. This includes the Medicare program and the fees for clinical laboratory testing—which brings the CMS proposals into conflict with the needs of Congress, at least in this regard.

In their analysis, Allen and Morton have factored in the issues associated with the federal budget and how cuts are made in one area to offset increased spending in other areas. Morton explained that the three proposals introduced by CMS in July came just as Congress was talking about conducting negotiations over increasing the debt ceiling.

That means Congress will be looking for savings from all providers, including, once again, clinical labs. “The hill is looking for savings that it can put into its package of changes designed to revise the sustainable growth rate (SGR),” noted Morton. “Yet each of the three proposals announced by CMS in July essentially takes these savings away from Congress.”

Two Approaches to Spending

There are two approaches to cutting spending, Allen explained. One is political and one is philosophical. “On the political front, there is the battle of the offsets,” she stated. “The obvious example involves the sustainable growth rate (SGR), when lab spending gets cut as part of the overall spending cuts Congress needs to offset the funding for the SGR fix.

“For political reasons, Congress wants flexibility to cut spending on lab tests when money is needed for the debt ceiling, SGR, or entitlement reform,” added Allen. “But on the philosophical side, some in Congress believe Medicare should never pay more than what the private sector pays for lab tests.

“The question over what goes into the actual cost of laboratory testing services is complicated, yet CMS and Congress seem to be seeking simplistic answers,” noted Allen. “To compare Medicare spending to private sector spending is not an apples-to-apples comparison.”

“The challenge in discussing all of these issues in Washington is explaining clearly what truly goes into the cost of providing each type of lab testing service,” explained Morton. “For example, the cost of labor and transport have all gone up.

Delivering More Care

“Our healthcare system is also delivering more care to an older population with chronic health issues,” she said. “These issues affect costs for all providers, including labs. Elected officials and policymakers need to be educated about these costs.

“At the same time, it is essential that these decision makers understand two points,” concluded Morton. “The first point is how proper utilization of laboratory testing contributes to lower costs within the Medicare program. The second point is what will happen if labs were no longer available to provide these services.”

Medicare Program’s Three Proposals to Control Lab Test Prices Are Challenge for Lab Industry

EACH OF THE THREE PROPOSED RULES published in July by the federal Centers for Medicare & Medicaid Services (CMS) represents a serious threat to existing patient access to lab testing and the financial stability of clinical laboratory organizations across the entire United States.

However, it will not be simple for the lab industry to educate government officials and members of Congress about the negative impact these proposed rules can have. That’s the opinion of two experienced advocates representing the National Independent Clinical Laboratory Association (NILA) and employed by Drinker Biddle & Reath LLP, in Washington, D.C.

Challenge Facing Labs

Julie Scott Allen, Government Relations Director, and Erin Will Morton, Senior Government Relations Manager, described the challenge now facing the lab industry and its professional associations. “The problem with having three different proposed cuts from CMS—each of which is significant—is they become complicated for all of us to talk about with elected officials and policymakers,” stated Morton.

“Changes are proposed in three different Medicare fee schedules and each change affects a different segment of the clinical laboratory industry,” she added. “It is a problem that no one is looking at these cuts collectively and how they could have an effect at unraveling a well-performing medical laboratory testing infrastructure in the United States.”

“With these three proposals, CMS is effectively changing the market in how lab testing services are delivered,” noted Allen. “Yet, prior to issuing these proposed rules—which are on track to possibly be finalized this fall—CMS did not engage stakeholders, ranging from members of Congress to clinical lab associations, patients, and sectors of healthcare that will be affected by the downstream consequences of these proposed rules.

“Policymakers tend to look for easy answers, meaning they sometimes look at profit margins and other metrics to evaluate the success of the industry,” Allen continued. “Washington sometimes has a spreadsheet mentality that has nothing to do with fundamentally addressing policy reforms to improve healthcare delivery and address long-term cost concerns. For example, Congress is more interested in finding short term ‘pay-fors’ or offsets to achieve financial goals and labs have suffered in recent years as a result.”

“These are just some of the issues that make the latest proposals so frustrating,” concluded Morton. “This new effort from CMS has great significance and consequence. But there was no discussion with the community prior to the announcement of these proposed new rules.”

What’s at Stake with Three CMS Proposed Rules

TWO THINGS MAKE IT DIFFICULT for the lab industry to respond to the three proposed rules published by the federal Centers for Medicare & Medicaid Services (CMS) in July that address lab testing.

First, each proposed rule deals with a different schedule of fees within the Medicare program. A different process is used to develop coverage and reimbursement guidelines for each of the three fee schedules.

Second, a different sector of laboratory medicine is directly affected under each proposed rule. Thus, when educating lawmakers and their staffs about the consequences of each of the three rules, it can become quite complicated. It also makes it tougher for a single coalition of medical laboratory interests to speak with one voice about the three proposed rules.

The three payment schedules involved in the three proposed rules are:

  • Clinical Laboratory Fee Schedule (CLFS)–This Part B schedule is well-known to most clinical labs. CMS estimates that it will review prices for 1,250 clinical lab tests.
  • Hospital Outpatient Prospective Payment System (OPPS)–involves bundling clinical laboratory payments.
  • Physician Fee Schedule (PFS)–for pathology services, would limit pathology payments when they are higher in nonhospital settings than the payment for in-hospital settings.



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