CMS and MedPAC Guidelines and Trends

PAMA’s Impact on Laboratory Margins

August 1, 2017 9:52 am

The Centers for Medicare & Medicaid Services (CMS) soon will implement its new clinical laboratory fee schedule (CLFS) as part of the Protecting Access to Medicare Act, (PAMA) which mandates the use of private health plan lab test prices to determine a new Medicare Part B clinical laboratory fee schedule, beginning on Jan. 1, 2018.

CMS will use private health plan prices to calculate a new weighted median rate for clinical diagnostic laboratory tests, and the agency estimates cutting Medicare payments by $400 million during 2018. Payment rates for most tests will be phased in on a three-year cycle, with payment rate changes capped at no more than 10 percent per year between 2018 and 2020, and no more than 15 percent per year between 2021 and 2023.

For hospital and health system labs, PAMA will substantially reduce Medicare payment for the highest-volume diagnostic laboratory tests—a move that will have a significant impact on laboratory margins. By one industry estimate, a 10 percent cut in the CLFS could result in a 3 to 4 percent drop in laboratory profit margins. PAMA also may cause other rates to change over time because many health plans and state Medicaid programs base their payment levels on Medicare rates.

Data Reporting: Higher-Paid Hospitals and Health Systems Excluded

Any laboratory that was required to report private health plan data to CMS (for the reporting period ended May 31, 2017) must receive at least 50 percent of its Medicare revenue under the CLFS, the physician fee schedule (PFS), or the new section 1834A of the Social Security Act; must receive more than $12,500 of its Medicare revenue from the CLFS in a year; and must bill Medicare Part B under its own national provider identifier (NPI) number.

However, most hospital-based labs do not have NPI numbers of their own, billing for their services using their hospitals’ NPIs. Some hospital outreach labs were able to report data to CMS, but most did not meet the criteria required to do so, potentially skewing the pricing data that will be used by the entire lab market. The end result is that the largest independent laboratories—which already have pricing that is much lower than hospital-based laboratories, and which in some cases have private health plan contracts based on a percentage of the Medicare CLFS—will drive the rates that are used for CMS’s new fee schedule, and the rest of the laboratory market will have to conform to the price cuts. Industry experts are speculating that CMS may have purposely excluded higher-paid hospital and health system labs to secure more savings for Medicare and that, as such, the new CLFS rates under PAMA will never accurately reflect the lab market.

What Lab Claims Analysis Shows

Findings of a recent detailed analysis of private health plan market prices reported to CMS for 20 of the top high-volume lab tests indicate  the following financial impacts on four clinical lab sectors:

  • Independent labs are paid a weighted average price that is 19.6 percent less by private health plans than what Medicare pays.
  • Hospital labs with NPIs are paid 25.6 percent more by private health plans than what Medicare pays.
  • Pure molecular and genetic testing labs are paid 27.3 percent more by private health plans for the top molecular tests than what Medicare pays.
  • Pure pain management and toxicology labs are paid 50.4 percent more for the top drug tests than what Medicare pays.

As evidenced by the data from the analysis, when Medicare begins using private health plan market prices, hospital labs should prepare for significantly lower payment rates for their Medicare populations. Larger labs may be able to make up for lower Medicare payment rates by providing a higher testing volume, but smaller labs will have to assess their ability to provide testing services on a case-by-case basis. 

What Happens Next?

In early September, CMS will publish its preliminary CLFS rates for 2018. The public will have approximately 30 days to submit comments. In early November, CMS will announce the final rates on its website.

As the PAMA schedule moves forward, resulting price cuts and payment pressures will amplify the significance of good financial discipline within the lab. A comprehensive revenue cycle management system will be critical to ensuring financial viability. Labs should analyze their financial data to understand what they are being paid and their average payment per test, and expand their working knowledge about test costs and payments across all health plans and government payers to develop strategies for sustaining their business.

An understanding of the relationship between test costs and reimbursements is critical to price setting strategies for lab tests and procedures, as well as understanding and improving operating margin, and negotiating successful third party health plan contracts. Now is the time to begin evaluating lab performance and pricing in preparation for the changes coming in 2018. 

Lâle White is CEO of XIFIN, Inc., San Diego.


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