LabOratory: The Protecting Access to Medicare Act (PAMA) - Reduced Payments to Laboratories in 2018

The Protecting Access to Medicare Act (PAMA) includes the most extensive reform of the Medicare Clinical Laboratory Fee Schedule (CLFS) since it was established in 1984. Signed into law on April 1, 2014, PAMA was intended to introduce market-based pricing to the Medicare CLFS.  PAMA was passed after it was discovered by the Health and Human Services’ Office of Inspector General (OIG) that Medicare paid significantly more for clinical laboratory tests than commercial payers, and in some cases, Medicaid.

 

Under PAMA, CMS required all “applicable laboratories” to report their private payer rates on a test-by-test basis along with associated test volumes if they met the following thresholds over a 6-month period from January 1, 2016 through June 30, 2016:

  • Have more than $12,500 in Medicare revenues from laboratory services on the CLFS; and
  • Receive more than 50 percent of their Medicare revenues from laboratory and physician services during a data collection period.

 

The data had to be reported to CMS by March 31, 2017, and if the laboratories did not report the data, they would be subject to severe penalties and fines.  However, CMS did extend the reporting deadline to May 30, 2017.

 

CMS used this data to calculate weighted medians for each CLFS billing code, which then become the new Medicare payment rates. These rates apply to all Part B Medicare fee for service claims. A cap structure spreads the impact of large cuts out over a period of years. The new weighted median fee structure went into effect January 1, 2018. These rates are valid for every entity that bills Medicare Part B for tests on the CLFS. Market rate data collection repeats every three years. 

 

The New PAMA Paradigm

 

Before PAMA:

  • Payment rates were based on lab charges in 1984-1985, adjusted annually for inflation
  • Fifty-seven local fee schedules
  • Same pricing schedule for all categories of lab testing 

 

After implementation of PAMA (January, 2018):

  • Payment rates for tests will be based on private payer rates, updated every three years
  • Single national fee schedule
  • Adds a new category of lab tests—advanced diagnostic laboratory tests (ADLTs)—with a different pricing schedule

 

Additionally, the practice of bundling tests into panels for payment is eliminated and the new rates  apply to each individual test based on the individual median private payer rates for those tests.

 

Problems with the survey

 

The data reporting process used for the 2018 fee schedule has drawn ire throughout the industry, and is the basis for a lawsuit filed by the American Clinical Laboratory Association (ACLA) in December 2017, which has yet to be resolved.   The lawsuit charges that CMS ignored congressional intent and instituted a flawed data reporting process. While this case is still pending, it did not prevent the 2018 fee schedule from going into effect on January 1, 2018. 

The ACLA complaint asks the court to set aside the regulations and order CMS go back to the drawing board to conduct a more truly market-based reporting process.

 

FOUR FUNDAMENTAL ISSUES UNDERMINE THE PAMA PROCESS:

 

  1. The narrow definition of applicable labs that excluded nearly all hospital laboratories, which represent almost half of the laboratory industry. With hospitals almost universally excluded, reported pricing skewed lower than actual market pricing. For many reasons, hospital lab rates are generally higher than those at independent labs. Without these rates represented in the mix, the market analysis mandated by Congress became compromised.
  2. The decision to impose a retrospective data collection period through rulemaking did not allow labs to make arrangements to collect data accurately or in totality.
  3. Legislated requirement to use weighted median methodology to calculate price averages, instead of a mean average, which skews collected data to the highest volume rather than averaging all prices paid.
  4. Lack of a clear and transparent mechanism to determine the quality of submitted data.

 

All “applicable” laboratories were required to report under PAMA, starting January 1, 2017, for a retrospective period. In 2015, the OIG projected that about 5% of US labs would be required to report under this definition, or an estimated 12,437 labs. However, this 5 % represents 69% of all Medicare payments made to labs.  

 

ONLY 0.7% OF US LABS SUBMITTED DATA:

Category

Total Labs

No. Required to Report

No. Actually Reported

% Reported

Independent Labs

3,211 

1,398

658

20.5%

POLs

235,928

11,928

1,106

0.5%

Hospital Labs

6,994

0

21

0.3%

Total

246,133

12,547

1,785

0.7%

 

PAMA Overview  

  • ALL Part B Medicare fee for service lab billings are subject to pricing determined by PAMA, even if the laboratory was not required to participate in the reporting effort. This includes the 99% of hospital outreach and physician office laboratories that did not report under PAMA. 
  • CMS now estimates the new fee schedule prices will save Medicare Part B $670M in 2018 alone, nearly double the original OIG estimate of $390M in fee cuts. 
  • While CLFS prices were cut nearly 30% overall, yearly caps are in place for each test, leading to a potential total cut of 75% across six years for those tests that yielded market rates greatly below the 2017 CLFS rates. 
  1. 2018 - 2020: Cap at 10% from the prior year 
  2. 2021 - 2023: Cap at 15% from the prior year Reported PAMA data is skewed lower than actual market rates.
  • 10% of codes on the CLFS will increase.

 

Exceptions to the PAMA CLFS Price Cuts

  • Advanced Diagnostic Laboratory Tests (ADLT) 

PAMA created this new category of lab tests.  Tests that meet the ADLT criteria will have separate pricing that requires reporting of payer reimbursements annually. 

To be considered an ADLT, a test must be performed by a single laboratory and either:

  • Be approved by the FDA, or
  • Be a test that:
  • Evaluates a patient’s DNA, RNA, or proteins
  • Provides new clinical diagnostic information that cannot be obtained from any other diagnostic test(s)
  • Uses a unique algorithm that predicts the chance of a patient developing a condition or responding to a treatment.

New ADLTs will be paid the actual list charge for the first 3 quarters after being introduced. After the initial period is over, payment for a new ADLT will be based on the weighted median private payer rate, like all other tests on the fee schedule.

  • Molecular and Genetic tests that are not ADLT’s are also seeing increases in reimbursements because private payers were paying these tests at a significantly higher rate than Medicare was in 2017.
  • Automated Test Panels (ATP): ATP’s are when certain laboratories will run multiple chemistry tests on a single sample and then “stack” the billing codes to Medicare. This may allow larger laboratories with automated equipment to group certain tests together to increase their reimbursements. CMS may stop this at some point but as of now this is allowed and a change in current billing practices and result in increases for some laboratories.

 

The Expected Impact of PAMA

 

With clinical laboratories facing Medicare cuts of up to 30% over the next 3 years under the new CMS fee schedule, the laboratories most likely to survive the cuts are those that are operationally efficient, financially fit, and strategically diversified, according to experts. As labs now see the 2018 rates reflected in their books, the real effects of the Protecting Access to Medicare Act (PAMA) is coming into sharp relief.

Small to Medium sized Laboratories serving Large Medicare Populations

Laboratories that have not maximized their efficiencies are going to face a rough road ahead. “There’s going to be a lot of pain,” said Dennis Weissman, president of Dennis Weissman and Associates in Washington, D.C.  Hardest hit will be laboratories that serve nursing homes and receive the bulk of their laboratory testing payment from Medicare and Medicaid, he added, noting that many of these labs will not survive.

PAMA’s reimbursement cuts are considered by industry experts to have potentially devastating effects, particularly for small- to mid-size community and regional labs, physician’s office labs, and rural and community hospitals. The National Independent Laboratory Association (NILA) reports that some of its community lab members have a large Medicare population (up to 60%) with profit margins of only 3% to 4%. Thus, a 10% cut in income for 60% of their patient testing will no longer be profitable, and future reductions will only make the situation more grim.  Small and rural hospital labs that depend heavily on income from outreach testing for Medicare patients may also feel the PAMA cuts more deeply.

 

Aculabs, which performs testing for more than 320 skilled nursing and assisted living facilities in Maryland, Delaware, New Jersey, and Pennsylvania, estimates that its total revenue will be cut by 30% over the next 3 years. CEO Peter Gudaitis has warned that the cuts are not sustainable and could force the company out of business. “As laboratories exit this market segment, skilled nursing facilities will be forced to transport elderly and often frail patients to nearby, more expensive hospitals for lab testing—a logistical nightmare which will create a host of challenges, jeopardize timely access to laboratory results, and ultimately cost more,” Gudaitis said after the 2018 payment rates were announced.

 

For physician office laboratories (POLs), the new rates are something of a mixed bag. A few of the most commonly performed waived tests, such as HbA1c (CPT 83037) and specimen cultures (CPT 87084), will actually get increases in the next 3 years, while many other high-volume tests, such as complete blood counts (CPT 85025), will see a decrease in Medicare payment.

“I believe some POLs will attempt to offset their revenue loss in lab testing by offering more customized test profiles that Medicare will be paying on an individual test basis in 2018,” Dennis Weissman said. Medicare announced last year that tests bundled into automated testing profiles would be paid individually beginning January 1. As always, the tests must be medically necessary, and CMS will be carefully monitoring claims to ensure proper utilization.

 

Strategies for Surviving with PAMA

 

The laboratories most likely to survive the cuts are those that are operationally efficient, financially fit, and strategically diversified,

 

Operationally, process improvements can lead to significant cost savings that may help offset the PAMA cuts, said Suzanne Carasso, director of business solutions consulting at ARUP Laboratories. “Labs need to take a hard look at themselves,” she advised. “Does your lab have the right equipment, is it performing the right tests, are you staffed appropriately, is there redundancy in the system?” Another way a laboratory can strengthen its position is to diversify its testing menu and expand specialty testing capabilities. These tests overall have demonstrated resiliency in their pricing, and can serve to offset the higher price cuts seen in many of the routine clinical tests. 

 

A key requirement for all laboratories is a financial system in place that a) enables accurate data capture both to satisfy PAMA reporting needs and b) enables optimized management of the laboratory business, including negotiating contracts, billing the correct amount, and ultimately, collection of monies owed.  In fact, laboratories fail to collect between 5-20% of their revenues simply due to their billing systems’ deficiencies. A strong financially-grounded system will not only deliver the detail needed for PAMA reporting, but will also automate and optimize billing for maximum reimbursement and efficiency. Capturing revenues that are left on the table is a laboratory’s best defense against 10% per year cuts to Medicare. 

 

Finally, it is imperative to upgrade financial systems sooner rather than later because the next PAMA reporting period is nearly upon us. Labs need to prepare now, by aggressively reviewing all their contract pricing for adequacy and working to ensure they are getting paid at the right price.


Irwin Z. Rothenberg, MBA, MS, M.T. (ASCP)

Technical Writer/ Quality Advisor, COLA Resources, Inc.