CMS Proposes Yet More Cuts for 2014, Beyond

Medicare unveiled three proposals that will result in lower payments for lab tests

CEO SUMMARY: In July, CMS proposed rules to cut payments under the Hospital Outpatient Prospective Payment System, the Physician Fee Schedule, and the Clinical Laboratory Fee Schedule. Under each program, the proposed payment cuts could have a significant and negative effect on the amount of payments that laboratories receive from Medicare. Two of the proposals may go into effect on January 1, 2014, and the other proposal won’t become effective until 2015 at the earliest.

YET AGAIN, MEDICARE OFFICIALS are proposing new rules with the goal of further reducing what the federal health program pays for clinical laboratory tests and anatomic pathology services. These rules may become effective on January 1, 2014.

First news of this development came on July 6, when the federal Centers for Medicare & Medicaid Services (CMS) announced its 2014 Medicare Physician Fee Update. Each summer, CMS uses this vehicle to propose specific changes in how it will administer the Medicare program for the coming years.

The bad financial news for the pathology profession and the clinical laboratory industry can be found in the proposed rules that would change the following three Medicare payment systems:

  • Physician Fee Schedule (PFS)
  • Clinical Laboratory Fee Schedule (CLFS)
  • Hospital Outpatient Prospective Payment System (OPPS)

The payment cuts under each of these programs could be significant, but are only proposed. The comment period ended Friday, September 6. CMS must now consider the comments it received from clinical lab administrators, pathologists, and their representatives. The final rules will likely be issued in November.

For an explanation of these changes and how they might affect clinical laboratories, THE DARK REPORT interviewed Paul Radensky, M.D., J.D., a partner in the law firm of McDermott Will & Emery LLP in Washington, D.C. He has analyzed the proposed changes.

No Consideration of Value

“In July, CMS published three proposals in the Federal Register,” stated Radensky. “Each proposed rule is based on faulty assumptions and none of the proposals involves a consideration of the value of the information that results from lab tests.

“What’s been overlooked in each of these proposals is the importance of considering what a prudent actor would pay for the value of the information that is generated from these laboratory and pathology tests,” he observed. “Nothing in these proposed rules reflects that CMS is considering the value of the information to patients and physicians.

“In the first proposal, CMS would limit payments for non-facility based services under the Physician Fee Schedule to the amount paid when the service is performed in the facility setting,” explained Radensky. “CMS estimates that this proposal will reduce payments to laboratories by approximately 25% starting January 1.

CMS To Review 1,250 Tests

“The second proposal involves conducting a systematic examination of payment amounts for tests on the Clinical Laboratory Fee Schedule that have undergone ‘technological changes’ affecting the price of the test,” he said. “In this process, CMS will review 1,250 of the most common clinical laboratory tests over five years. The review will begin in 2014 for rates effective in 2015.

“The third proposal involves bundling clinical laboratory payments into the Hospital Outpatient Prospective Payment System,” he added. “This would start on January 1, 2014.”

Relative to the PFS, the first proposal would cap payments based on the hospital Outpatient Prospective Payment System. Radensky explained the details. “CMS said that, in cases where a physician pathology payment for a service provided in non-hospital settings is higher than the same service provided in hospital settings, it would reduce that payment in the non-hospital setting to the same level as the hospital setting,” he noted.

“In some ways, this may not appear unreasonable,” Radensky observed. “Any purchaser would argue that—when the same item found in two stores is cheaper in one than it is in the other—he or she should buy the cheaper one if all other factors are equal. “

But applying the same logic to physician pathology testing services—whether in a hospital or non-hospital setting— assumes that the data that determine payment rates for testing in the hospital out-patient setting is more accurate than the data that determine rates for the non-hospital setting,” stated Radensky. “Many organizations inside and outside of CMS have said that CMS should not assume that payments under the OPPS represent the actual cost of the service delivered.

“Under the OPPS, hospital labs know that, overall, payments are part of a zero sum game in which they may lose money on some tests and make it up on other tests so that they can break even overall,” he continued. “But with this proposed rule, CMS is picking out the items in the lowest-paid settings and saying these are the ideal prices.

“For CMS to view costs in this way is simplistic,” said Radensky. “That’s because costs in the OPPS come from hospital charges for individual services and cost reports that reflect the costs of laboratory services in the hospital as a whole.

“But these data do not represent the actual costs of individual services, since every charge reflects a mark up from costs and CMS is making the assumption that everything gets marked up uniformly,” he added. “Thus, if one item is marked up four times, then the approach proposed by CMS assumes that everything is marked up four times. But that’s not true.

Calculating Overhead Costs

“Take the example of overhead costs added to every medication dispensed in a pharmacy,” continued Radensky. “If the pharmacy adds $5 to every pill it dispenses, then a 10¢ aspirin will cost $5.10 and a $100 medication will cost $105,” he stated. “Thus, the items with the lowest cost generally have the highest mark-up and higher-cost items have a lower mark-up.

“This principal is equally true in the lab,” he said. “Therefore, for CMS to assume that each laboratory test has a uniform mark up is incorrect. This point has been discussed many times before with CMS.

“It will be a major problem if CMS makes this incorrect assumption and it results in a reduction in payment for laboratory testing services,” Radensky noted. “It is possible that the reduction in fees for outpatient clinical laboratory test services could be as much as 25% lower than what Medicare currently pays. For individual tests, cuts in excess of 50%, 60%, or even 70% may occur.”

Radensky saw a similar problem with the second proposal that involves the Clinical Laboratory Fee Schedule. “CMS says it intends to do a systematic five-year examination of payments for about 1,250 clinical laboratory tests under the CLFS,” he stated. “CMS said it wants to identify those tests that have undergone ‘technological changes’ that affect the resources required for a laboratory to perform these tests.”

Increased Test Utilization

In an article it published on the changes, McDermott Will & Emery wrote: “The reason for this proposal is that CMS has seen increased use of point-of-care testing, genetic and genomic testing, and laboratory-developed tests (LDTs). CMS defines a technological change as any change to the tools, machines, supplies, labor, instruments, skills, techniques and devices that results in changes to the resources required to perform the test, the types of personnel required to perform the test or the volume, frequency, and site of service of the testing.”

“There are several problems with this second proposal,” Radensky said. “First, unlike payments to physicians and payments for inpatients, the CLFS is not a resource-based fee schedule. This is significant, because charges—not costs—are the basis for existing prices on the CLFS.

“Historically, the CLFS has been charge based,” he continued. “In its proposal, CMS is not clear on how it would adjust fees on the basis of costs.

“Further, there is very little detail in the second proposed rule about how it will identify tests covered by the CLFS for review,” observed Radensky. “CMS said it will start with the oldest tests or the highest-volume tests. But what steps will CMS then take to identify specific technological changes that have changed how laboratories perform each of these assays?

Faulty Logic

“What makes this CMS proposal troubling,” he continued, “is that there appears to be an assumption that—whenever a lab system or analyzer is simpler to operate—it can be automatically concluded the test is now cheaper and so labs using the automated system should be paid less. But, again, this is faulty logic.

“The lab industry has two major concerns about this second proposed rule,” he explained “First, it takes a considerable amount of research and development costs to design and manufacture a point-of-care (POC) testing system. Thus, maybe there is less lab labor to run these POC tests, but the supply costs may be higher.

“Second — and of equal significance — is the heavy regulatory burden that must be met by every lab test manufacturer and by clinical laboratories as well,” added Radensky. “The cost of obtaining regulatory clearance to bring an assay to market, and keep it compliant, is built into the supply cost of the POC test. Once again, we have an incorrect assumption that it’s cheaper to develop a test that takes fewer people to produce a result.

Equally Troubling Problem

“Should CMS look only at the unit cost for a laboratory to perform a lab test result, there will be an equally troubling problem,” he stated. “Under this approach, there will be no innovation because no one is calculating the cost of the innovation. Assume a company invests $10 million to develop and validate a test and the cost to perform the test runs $100 per test.

“Were CMS to pay only the $100 cost for performance of this test, how can a company recover the $10 million it invested in development costs?” he asked. “Many in the clinical laboratory and medical device industries have voiced this specific objection many times.”

Under the third proposal, CMS wants to bundle clinical laboratory payments into the Hospital Outpatient Prospective Payment System (OPPS). This would become effective on January 1, 2014.

“It appears that CMS is looking to have more global payment in the outpatient setting just as it does on the inpatient side with DRGs,” commented Radensky.

“The problem is that the outpatient prospective payment system is not designed like the inpatient DRG system, where CMS has developed appropriate groupings over the past 30 years,” he noted. “The OPPS is a fee-schedule system designed to pay for procedures. It’s not a diagnosis or patient-encounter based system.

Labs Could Face Problems

“The concern with this proposal is the hospital will get an increase in payment but labs could face problems because the hospital may no longer want to run all tests that patients may need,” noted Radensky. “Hospitals may suggest patients get some tests outside of the hospital in order to control costs. Then hospitals might not have a record of those tests. Alternatively, the patient might not bother to get those tests because doing so outside of the hospital may be more costly or time consuming or both for the patient.

“With Medicare no longer paying the hospital lab directly for these outpatient tests, the result for hospital-based laboratories will be fewer tests for these patients and a new way to account for payment for these tests,” stated Radensky. “Either way, this proposal could result in a loss of revenue and a drop in sample testing volume in hospital- based clinical laboratories.”

ACLA’s Comments to CMS Document Past Lab Cuts

WHEN IT MADE ITS COMMENTS to the federal Centers for Medicare & Medicaid American Clinical Laboratory Association (ACLA) pointed out many problems with the design of the three proposed rules the agency published in July.

Notably, ACLA reminded CMS that it is overlooking the fact that Medicare reimbursement for clinical laboratory testing services has failed to keep pace with infla- tion, reaching back as far as 1984.

On this point, ACLA wrote that “CMS makes a cursory mention of adjustments based on changes in the CPI-U, productivity adjustments, and ‘adjustments required by statute.’ These adjustments have not been insignificant and should not be dismissed lightly. Taken together, these have been substantial payment adjustments— almost uniformly downward — for the [laboratory testing] services that ACLA’s members provide.” ACLA then noted the following:

  • In at least 19 of the years from 1984 through 2011, laboratories received no fee increase or did not receive the full amount of the Consumer Price Increase (CPI) increase that the statute otherwise would have required. In a few years, the fees actually decreased.
  • There also have been seven reductions in the National Limitation Amounts (“NLAs”) for laboratory services. The net result is that a laboratory test that was reimbursed in 1984 at $10.00 was reimbursed at $8.71 in 2011, a 13% downward adjustment before inflation.
  • A provision in the health reform law applied a 1.75% annual downward adjustment for laboratory tests on the CLFS for each of the years 2011 through 2015.
  • A law passed in 2012 called for a 2% rebasing of the CLFS in 2013.


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