Reacting to PAMA Cuts, Lab Works with Payers

Two-prong strategy with private health insurers helps Health Network Laboratories avoid more cuts

CEO SUMMARY: Before Medicare’s lab test price cuts went into effect last year, Health Network Laboratories began discussions with private health insurers and nursing home clients about the possibility of renegotiating their contracts. In these discussions, HNL promoted the value it delivers to health insurers in terms of fast turnaround times, lab-test utilization management, and data that health insurers and nursing homes can use to manage patient care effectively.

ONE WORRY KEEPING MANY CLINICAL LABORATORY DIRECTORS awake at night is whether health insurers will follow Medicare’s lead by cutting the prices they pay for clinical laboratory tests, which Medicare began doing last year.

Under the Protecting Access to Medicare Act of 2014, the federal Centers for Medicare and Medicaid Services (CMS) cut what it pays labs for 1,300 lab tests by 10% last year and 10% again this year. Next year, another 10% cut is scheduled. The next three years of cuts will begin in 2021, but those cuts may be even deeper. From 2021 through 2023, CMS can slash what it pays for lab tests by 15% per year.

In conversations with his private payers, Dean Hoppes, MBA, the Chief Financial and Administrative Officer for Health Network Laboratories (HNL) in Allentown, Pa., learned that payers are aware of the cuts Medicare has made and plans to make. He’s also found that many payers are willing to work with HNL to ease the financial effects—to some extent, he said.

To mitigate the significant financial impact of CMS’ cuts in lab test payments, HNL implemented a two-pronged strategy. The first prong of the strategy is to work even closer with its health plans to explain the value the lab delivers, particularly in terms of helping insurers to improve patient care.

The second prong involves reaching out to its nursing home clients to establish new contracting arrangements. These agreements are crafted to recognize how Medicare price cuts alter the economics of providing lab testing services to the nursing home’s Medicare and Medicaid patients.

Regional Laboratory

HNL is the exclusive lab provider for the Lehigh Valley Health Network (LVHN), which is one of the largest health systems in Pennsylvania. Based in Allentown, LVHN has nine hospitals, numerous community health centers, lab, imaging, and urgent care facilities, more than 1,340 primary care and specialty physicians, pharmacies, and home health services.

About 60% of HNL’s revenue comes from LVHN and the balance is generated from the lab’s outreach program. The lab has contracts with all major health insurers, including national companies such as Aetna and UnitedHealthcare, and regional insurers such as Highmark, Capital Blue Cross, and Independence Blue Cross.

“All our payers are aware of PAMA,” Hoppes explained. “But I think they’re aware of it for the wrong reason. The payers are watching to see how labs react to these Medicare cuts, and they’re considering whether they should enact similar price cuts.

“Private health insurers commonly used a percentage of Medicare fees when setting lab test prices for their contracts with us,” he commented. “Therefore, they see PAMA as an opportunity to further reduce what they pay for lab tests.

“That’s a development that is unwelcome across the entire clinical laboratory industry,” noted Hoppes. “If that happens, we say internally that it will put us in a ‘death spiral.’” To avoid falling into this spiral, HNL took two actions. First, it implemented the previously mentioned two-prong strategy of renegotiating contracts with private payers and nursing homes. Second, it embarked on a program of process improvement to realize continuous cost improvement.

“To drive continuous cost improvement, our lab is becoming more efficient and effective at what we do every day,” Hoppes said. “We felt the effects of the 10% reduction from Medicare last year and need to prepare for the second round of price cuts this year. As a result, our laboratory has seen a reduction in the non-LVHN-related revenue, which is our outreach revenue.

“To date, our total revenue has declined by more than 2% due to the CMS cuts,” he added. “However, we have increased our operating margin performance by driving out more costs through operating efficiencies and automation in our lab, without impacting our employees. We’ve been able to accommodate volume growth with limited increases in staff.

“Medicare is a large payer of ours and represents about 35% of our lab’s total payer mix,” he said. “HNL has a handful of small health plans that are tied to the current Medicare fee schedule. We knew we needed to speak with them when the deep PAMA cuts in Medicare lab test payments were announced.

“So, we renegotiated existing payer contracts with the goal of shifting the payment basis away from a fixed percentage of the Medicare fee schedule,” stated Hoppes. “Originally we wanted to move to a contract price schedule that is fixed and based on the Medicare schedule of lab test prices that Medicare used in 2017.

Separate Fee Schedule

“But we quickly determined that the best solution was to simply create a separate fee schedule that is not linked to Medicare in any way,” he continued. “Several payers accepted that solution. Other payers did not, and instead agreed to use the fixed Medicare lab test fee schedule based on rates paid in 2017, which was one year before the PAMA reductions.

“Not all payers accepted HNL’s proposal to use the 2017 fee schedule, but a significant number of the larger payers did agree,” added Hoppes. “We still are progressing in conversations to move all of the payers to a fixed fee schedule. We were successful in these negotiations because those payers agreed that it would not be fair to assume that their lab providers should take a 30% reduction from every payer over the next three years.”

HNL’s experience in these negotiations has insights for other labs seeking strategies to cope with the Medicare fee cuts. “Of course, our private payers wanted to follow CMS’ lead and cut lab test payments by 10% each year for three years,” he commented.

“That’s why we took the time to help payers understand the problems the PAMA lab test price cuts would cause,” noted Hoppes. “At the same time, we also showed the payers ways that our lab could help them improve patient care.

“It certainly helped payer negotiations that Health Network Laboratories is well known in the region, and it’s owned by three not-for-profit health systems,” explained Hoppes. “That means our lab has a different mission and has different values than the large, for-profit publicly-traded labs. We have a vested interest in the communities that we serve.

“Another factor in our favor is that payers know the value of having data from our lab to support the continuum of care. HNL provides uniform test results from inpatient, outpatient, and outreach settings for individual patients,” Hoppes commented. “Most payers today look at cost-per-patient encounter, rather than just the cost-per-lab test, as they did in the past.

Recognize Added Value

“This is why demonstrating how our clinical laboratory has a positive influence on the cost-per-patient encounter is an important part of these negotiations,” he said. “In our conversations with payers, we emphasize that HNL encourages payers to recognize there is added value when comparing the cost-per-patient encounter to the cost-per-lab test.

“We explain that the cost of lab tests in hospitals is about 2% to 3% of the total cost of delivering care. That’s a small portion of total costs,” he stated. “But we all know that it drives 70% to 80% of the clinical decisions that doctors make for patients.

“Most payers are open to that argument, but when they’re not, we bring in the fact that we’re part of the LVHN network and remind them of the benefit of having a large health system such as LVHN on their side,” Hoppes said. “We also emphasize to them that we have fast turnaround times and that we provide lab test utilization management for all LVHN providers.”

HNL has been successful in winning concessions from most of its payers. Having said that, HNL recognizes that it is only into the second year of a six-year process in which Medicare will cut prices each year through 2023. “Because we are in the midst of the six-year process of price cuts coming under PAMA we need to continue these discussions with private health insurers,” he concluded.

HNL Lab Offers Nursing Homes Fixed Prices

LABS OFTEN SEE THE SEVEREST EFFECTS of the PAMA price cuts most frequently when serving nursing homes and long-term care facilities.

“When we saw that PAMA was coming, we went to all 100 of our nursing homes to explain that we needed to have a fixed-price contract,” said Dean Hoppes, MBA, the CFO for Health Network Laboratories (HNL). “We said we could not tie our rates into 100% of Medicare, because if we did that we would have a 30% reduction in payment under PAMA after three years.

“We can’t afford to provide lab services to these clients if we did that. They were amenable to our arguments,” he noted. “Also, we worked with nursing homes to alter the services that we deliver to them. For example, instead of having a phlebotomist go there five days a week, we may send a phlebotomist there three days a week.

“Another strategy was an a-la-carte menu for nursing homes and LTC facilities,” he explained. “We tell them if they want a phlebotomist there five days a week, there will be a fixed fee for that service. This fee helps both the nursing homes and HNL understand what services are important services and what frequency is truly required.”

The PAMA price cuts have caused some labs in the region serving nursing homes to close. “When other labs left the nursing home business, that created opportunities for us, either fortunately or unfortunately,” Hoppes added. “Last year we unexpectedly received calls requesting our service. Everyone benefits because we service those facilities with our existing phlebotomists and lab staff.”

Contact Dean Hoppes at 484-425-8151 or


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