Proposed 2018 Medicare payment rates for clinical diagnostic laboratory tests, calculated under the Protecting Access to Medicare Act (PAMA), have drawn anger from labs that process the tests and others.

The Centers for Medicare & Medicaid Services (CMS) said the proposed rates would save about $670 million in Part B program payments for clinical lab fee schedule (CLFS) tests in Fiscal Year 2018, roughly a 10% reduction from the approximately $7 billion paid each year by the agency. CMS had projected a $390 million savings in FY2018, rising to $3.93 billion over 10 years.

CMS’ proposed rates would take effect January 1, 2018. The agency is soliciting public comment through October 23, with final rates set to be published in November.

According to CMS, approximately 75% of tests, will see rate reductions from 2017—with 58% of those having the decreases phased in because the agency has set a 10% per-year cap on reductions from 2018 to 2020.

Molecular tests generally showed smaller declines, though the rate for CPT code 81341 (TRB gene rearrangement direct probe) would collapse from $68.02 this year to $0.01 for 2018. Some tests showed rate increases:

• CPT code 81450, covering tests for hematological malignancies, which rose by $106.59, or 16.3%, to $648.40.

• CPT code 81519, covering Genomic Health’s Oncotype DX for breast cancer, which rose by $429.64 or 12.48%, to $3,873.

However, the rate for CPT code 81445—targeted next-generation sequencing (NGS) analysis panels of five to 50 genes—dropped $4.19, or 0.7%, from $602.10 this year to $597.91 in 2018.

Why the decrease?

“I think there could be at least a couple reasons,” said Roger D. Klein, M.D., J.D., principal of an eponymous consulting firm and chair of the Association for Molecular Pathology’s Professional Relations Committee. “First, the really large labs may simply have lower costs, making them and their pricing more competitive relative to CMS’ prices.  Second, it may be that private payers continue to believe that there is typically little usefulness or benefit from the multianalyte solid tumor NGS sequencing, and therefore they are very restrained when it comes to reimbursement.”

“Unfortunately, the PAMA rates may change the industry composition, thereby propagating these downward trends.”

Losses Forecast for Labs

Lâle White, Executive Chairman and CEO of XIFIN, a healthcare information technology company based in San Diego, told Clinical OMICs that CMS’ preliminary rates were skewed for most tests below their true market value because:

• They were calculated at a weighted median cost instead of a weighted average cost

• Just about one-third (34%) of the lab market was represented, and hospital labs were underrepresented—CMS promulgated guidelines for PAMA implementation that defined “applicable labs” as those hospital labs that have their own NPI numbers; most do not.

• The top two commercial labs, Quest Diagnostics and LabCorp, accounted for about 80% of the volume of tests used to calculate the rates.

“You’re going to end up picking their price even though there are another 20 to 30% of labs that have submitted at much higher prices that could have boosted the average,” White said.

LabCorp and Quest both criticized CMS’ proposed rates. “The result is proposed rates that will negatively impact Medicare beneficiaries, restrict access to necessary and life-saving lab testing, and stifle innovation in the research and development of new diagnostic tools,” LabCorp Chairman and CEO David P. King said.

Added Steve Rusckowski, Quest’s chairman, president and CEO: “We are deeply disappointed that CMS has issued draft 2018 Medicare payment rates that are not market-based and derived from flawed market data collection that excluded key components of the lab market.”

White said CMS’ preliminary rates would negatively impact smaller labs, especially those that serve rural communities, lower-income communities, and senior citizens, such as nursing-home labs.

“For labs serving the population that is either elderly or in lower income groups on Medicaid, these labs are specifically going to take a full 10% hit in year one and subsequent years,” White said. “It is absolutely going to put them in the red in terms of their profit margins.”

Those margins are below 10% for most smaller independent labs—as low as 5% or less for some rural labs, White said: “They already have very low margins to begin with. This is just really going to put them in a very bad position.”

Many smaller labs, she predicted, can expect to face payment cuts with private payers as well, which often hold the labs to take-it-or-leave-it contracts tied to Medicare fees.

Further Consolidation

The challenges the 2018 rates pose for smaller and rural laboratories would create further consolidation, White said. That consolidation would differ from what the industry has traditionally seen, where labs offering esoteric or proprietary tests get absorbed into corporate giants. Where such consolidation has been among nationally-focused labs, smaller labs focus on serving communities and niche populations.

White said XIFIN supports the American Clinical Laboratory Association (ACLA)’s call to delay implementation of the 2018 rates until CMS and stakeholders can move toward a market-based payment solution.

The proposed rates, if adopted, “will devastate many of our members and create severe disruptions in access to laboratory services, particularly for the most vulnerable Medicare beneficiaries,” Julie Khani, president of ACLA, said in a statement.

Not so, countered the Coalition for 21^st Century Medicine (C21), whose more than two dozen members include diagnostics developers, clinical labs, researchers, physicians, venture capitalists, and patient advocacy groups: “C21 believes the PAMA system will establish transparent, predictable and market-based pricing for laboratory tests.”

White said essentials of a market-based approach include:

• Basing rates on weighted average rather than weighted median (would require legislative change)

• Prospective rather than retrospective data collection, allowing labs to arrange to collect data accurately and in totality.

• Changing the definition of applicable labs to all labs, including all hospital labs that perform fee-for-service testing on CLFS services, and all physician office labs. Hospital and physician labs accounted for only 8.5% of the reported lab volume used by CMS to calculate its rates, according to Quest.

However, Klein questioned whether more reporting by hospital and physician labs would lead to higher rates.

“Because the environment has become so competitive and so many hospital payments are bundled, I am skeptical that hospital reporting would impact the weighted median much.  Most hospitals would likely have been unable to meet these highly granular reporting requirements in any event,” Dr. Klein said, as would most physician labs.

Those labs were hamstrung, White said, by CMS setting the data collection period for the first half of 2016, though the agency’s rules didn’t come out till months later. By then, the labs didn’t have the ability to retrieve data needed for submission to CMS—namely electronic data often discarded after it is posted into their billing systems.

“They probably would have kept that data because that’s where they would have had to go to be able to provide the detail level that CMS needed,” White said. “Many hospitals labs would have had a hard time getting this data had they been included in the applicable lab definition, because sometimes they post in bulk, and not at the detail level.”