SUMMARY:
On Jan. 1, 2018, CMS will flip 50 years of rate-setting precedent on its head and start paying for clinical laboratory fee services using the weighted median of all private payer rates. Heretofore, CMS has been the rate setter with other payers electing to reimburse at more or less Medicare’s publicly available price list, depending on the provider’s value to the network. As with other efforts to upend financing of the U.S. health care system, things are not going smoothly. Due to the combined effects of technology breakdowns, retroactive data collection and policy decisions by CMS, the lab industry is calling into question the integrity and accuracy of the data used to calculate the weighted median prices.
However, for niche labs and large reference labs like LH and DGX, the impact of a flawed implementation is not likely to be great. Independent community, hospital and physicians labs may see more downside depending on the types of tests they frequently administer.
Don't look for a delay. CMS is moving forward with implementation and holding a public meeting to tie up some loose ends on Sept. 25th.
PAMA'S ROCKY ROLL-OUT
On Monday, the comment period ended for the rule titled Revisions to Payment Policies Under Physician Fee Schedule and Other Revisions to Part B for CY 2018; Medicare Shared Savings Program Requirements; and Medicare Diabetes Prevention Program. In that rule, CMS sought comment on its implementation of the new payment system for lab tests known by the shorthand, PAMA. The industry used that opportunity to express their concerns and ask for relief.
The major issues around implementation of the new fee schedule are:
- The data collection period- Jan. 1, 2016 – July 1, 2016, was announced in June 2016, thus establishing a retrospective data collection period which created some inherent challenges including-
- Billing systems in which private payer data are housed at most laboratories are not aligned with the required reporting to CMS. Manual and semi-automated over-rides have been required calling into question the integrity of the data.
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Private payers do not uniformly pay for the individual tests; some make a single bundled payment for a group of tests especially in panels, forcing labs to manually pro-rate payment amounts before submission to CMS.
- Technology difficulties at CMS made it difficult for many labs to upload data.
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CMS’s inability to respond to Help Desk calls and emailed inquiries further frustrated submission attempts.
- CMS’s issuance of sub-regulatory guidance that was late and ambiguous suggests there will be some collection and reporting inconsistencies across different types of labs.
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Many labs – particularly small ones – are unaware of the change in law and will simply not report their data.
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The data associated with tests performed by a single lab – like EXAS’ Cologuard ® test – are generally thought to be accurate and reliable.
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Most important, CMS regulatory decisions that resulted in excluding about 95 percent of laboratories including most of those located in physician offices and hospitals means the new CLFS will mostly reflect the prices paid to the two largest independent laboratories, LH and DGX.
The lab industry and the companies individually have requested another implementation delay – until January 2019.
IF THINGS Continue to GO POORLY
If CMS does not agree to another delay – and we believe they will not - it is possible to evaluate the limit down for the most frequently administered tests paid for by Medicare.
Of the $7B Medicare spent in 2015 on clinical laboratory tests, about $4.1B is used to pay for just 25 tests:
(Note: CMS eliminated G-codes for drug testing in CY 2016 and replaced them with codes organized based on number of drugs tested. This change will affect comparisons between CY 2015 and CY 2017 utilization data)
Over half of the $7B was paid to independent labs like LH and DGX even though they only account for a little more than 1 percent of laboratories receiving Medicare payments. Meanwhile – and the source of some of the industry’s angst – hospital labs account for only 2.8 percent of labs but almost 25 percent of Medicare payments:
PAMA limited reporting of private payer rates to laboratories that received a majority of its revenues from Medicare. Furthermore, the statute permitted CMS to establish a threshold below which labs would not be required to report. By regulation, CMS set that level at $12,500. As a result of these statutory and regulatory decisions, about 5 percent of all labs will be reporting data, and thus determining Medicare payments in CY 2018.
Given the rocky roll-out of PAMA, the industry is concerned that many labs will not report their data and if they do, it will not be accurate. Fortunately Congress anticipated this and other problems and limited the reduction in rates for CY 2018 through 2023. In CY 2018, the CLFS rate will be determined by the weighted median of private payer rates (including commercial insurers, Medicare Advantage and Medicaid Managed Care organizations) and subject to a 10 percent downside limit.
Congress did not limit any upside change that might occur as a result of implementing a new rate setting system. That decision is particularly important in the context of PAMA’s effect of eliminating all regional differences in lab rates. Since the 1980s, CMS has permitted Medicare Administrative Contractors to set rates for lab services provided in their respective geographical regions.
The resulting regional disparities can be stark. In 2015, HCPCS 80048: blood test, basic group of chemicals, was reimbursed at $7.80 in Washington, DC but $10.39 in Illinois. No provider was paid the national rate, known as the National Limitation Amount, of $11.51.
PAMA regulations established that the 10 percent downside limit will be applied in CY 2018 to the CY 2017 National Limitation Amount. HCPCS 80048 has a CY 2017 NLA of $11.60. However, the average Medicare allowed amount will be about $9.80 in CY 2017, after accounting for all the varied MAC payment rates. In CY 2018, assuming the worst case scenario under PAMA, the payment rate can drop from $11.60 to $10.44. The new CY 2018 reimbursement rate will then be about 6.6 percent higher than it was in CY 2017.
Assuming the worst case scenario where the 10 percent downside limit kicks in – meaning private payer rates are substantially below CY 2017 CLFS levels - Medicare reimbursement is expected to rise for several frequently administered tests:
- 80053 - Blood test, comprehensive group of blood chemicals – 16.4 percent
- 80061- Blood test, lipids (cholesterol and triglycerides) – 14.1 percent
- 80048 - Blood test, basic group of blood chemicals – 6.6 percent
These three tests represent 81.6 million of 474 million tests billed and $971 million of $7B reimbursed in CY 2015. The increased reimbursement for these tests will exert an influence on total Medicare spend such that we expect payments for the top 25 tests to decline just 3.4 percent if the 10 percent downside limit is activated.
DELAY NOT LIKELY
As we mentioned, we do not believe that CMS will accede to the industry’s request for delay.
When it comes to administrative reporting, less is more these days. ACLA and other trade groups have made a big deal out of the fact that only 5 percent of labs will have to report data. According to the OIG, about 1,398 of 3,211 independent laboratories -which includes hospital outreach labs- will report data to CMS under PAMA. Only 11,149 out of 235,928 of physician office labs will submit information to determine the new fee schedule. No hospital laboratories are expected to report data. (Hospital outreach labs are classified as Independent Labs by the OIG.)
However, of the $7B Medicare payments made annually, $3.8B is accounted for by independent labs. Physician offices and hospital labs account for $1.4B and $1.7B, respectively. Independent labs like LH and DGX account for 69 percent of all Medicare payments but only 5 percent of all reporting labs.
The problem with the industry’s argument is that CMS considers less administrative burden a good thing especially if they are still able to account for a significant share of Medicare payments in their reporting requirements. Furthermore, all federal departments are under an executive order to limit regulatory burdens to the extent possible. Expanded reporting suggested by the industry contradicts the directive from the White House.
Saving money is the point. Left unsaid by the lab industry and an even less compelling argument for CMS is that hospital and physician office labs are generally reimbursed by commercial payers at a higher rate than independent labs. The Congressional Budget Office estimated that the change in the Medicare rate calculation would save $2.5B over 10 years. CMS subsequently estimated the savings at $3.9B for the same period. In passing PAMA, Congress intended to save the taxpayers some money, among other things.
Further complicating the industry’s advocacy is that two of CMS’s overlords, the OIG and Congress, through their adviser, MedPAC, have weighed in. The OIG has concluded that excluding payment rate data from most physician labs and some hospital labs will have no effect on the weighted median calculation. MedPAC in their comment letter on the proposed rule expressly stated that CMS should not delay implementation.
Ummm…whose idea was this? What is more, PAMA’s clinical lab fee schedule provisions were designed by the lab industry – mostly to address problems niche labs like MYGN were having with their Medicare Administrative Contractors’ local reimbursement decisions. That PAMA is, in part, an industry bill was mentioned more than once at annual CLFS meetings by panel members and CMS employees.
At the annual CLFS meeting in August, CMS staff did make time for comments on PAMA, then, without much sense of urgency, agreed to convene a subgroup meeting on the major issues.
WHAT IS NEXT?
We anticipate that CMS will release the new schedule any day now. We also anticipate that there will be a few problems. The CLFS program at CMS has a long history of glitches and errors. Problems are most likely to occur with pricing tests that are performed infrequently by smaller labs. By all accounts the large independent labs were able to submit their data accurately so the most frequently administered tests – 25 tests accounting for 58 percent of Medicare spending – should be accurately priced.
In releasing the new schedule, we do anticipate that CMS will acknowledge the problems with implementation and suggest some mitigation. The AMA, CMS’s de facto partner in managing the CLFS, offered some recommendations at the annual meeting in August:
- Release the fee schedule as planned in September.
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Accompany the fee schedule with data on the number, type and geographical location of the labs reporting.
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Issue an Interim Final Rule setting forth a procedure to validate the data, identify discrepancies and make adjustments if necessary.
The AMA’s recommended course of action seems the most likely path CMS will take, all things considered.
CMS could use the Sept 25 Advisory Panel public meeting - announced last week - to discuss these AMA recommendations. The meeting's purpose is to deliberate about codes for which CMS received no data but anything within the Panel's responsibilities could be discussed.
We will tune into the meeting on the 25th and update you on any significant changes in direction.
Call with questions. We are always here to help.
Emily Evans
Managing Director
Health Policy
@HedgeyeEEvans
