Action Needed to Avoid the Impact of Medicare Payment Reductions on the Laboratory Industry

With Medicare spending for clinical laboratory services totaling $9.7 billion and $7.0 billion in 2013 and 2014, respectively, it is not surprising that the federal government has identified this area as a prime cost reduction target. The Protecting Access to Medicare Act of 2014 (PAMA) represents the most disruptive change to laboratory payments in decades because the current laboratory payment rates, which are based on 1984 cost data (updated sometimes for inflation), will be replaced with market-based rates, defined as the calculated weighted median private payer rate for each test. The new rates will begin on Jan. 1, 2017, with large rate reductions phased in over several years. These reductions have the potential to substantially affect hospital operating revenue.

The focus on reducing Medicare payments for laboratory services was prompted by findings of a June 2013 U.S. Department of Health and Human Services (HHS) report, which determined that Medicare could have saved $910 million, or 38 percent, in 2011 on the top 20 high-volume and/or high-expenditure laboratory tests had it been afforded the lowest payment rate in the region. Legislation was subsequently passed as part of the ACA to establish laboratory payment based on regional market rates.

Beginning Jan. 1, 2016, applicable laboratories will be required to report data on private payer rates for each test. CMS will calculate a weighted median private payer rate for each test, which will determine the new rate for tests paid on the Medicare Clinical Laboratory Fee Schedule (CLFS). It appears that most hospital laboratories will be excluded from the applicable laboratory reporting group due to one of the proposed revenue tests for applicable laboratories (i.e., more than 50 percent of the entity’s total Medicare revenues must come from the Physician Schedule or CLFS). Such exclusion is likely to have a negative impact on the median rates, because hospital-based laboratories historically have been compensated more favorably than independent clinical laboratories. However, the deeply discounted rates that large commercial laboratories agreed to will bolster the push for significant reductions in clinical laboratory payment.

As noted above, the median payment rates calculated under PAMA will go into effect Jan. 1, 2017, and will continue through 2022. Payment reductions will total as much as 10 percent per test from 2017 through 2019 and 15 percent from 2020 through 2022. CMS estimates that reductions to the CLFS will total $5.14 billion from 2017 through 2026. The consequences of these actions, summarized in the exhibit below, will be considerable, making it incumbent on health system leaders to understand and quantify the potential losses for their organizations.

*Excerpt above taken from “Revenue Risk and Price Transparency in Hospital-Based Laboratories” in HFM Magazine, November 2015 edition.

What can you do? Time is of the essence! Review the proposed rule.  Respond to CMS and your state’s senators and representatives asserting that hospital laboratories (both outreach and outpatient services) should be included in the reporting group to accurately reflect private payer rates.  To exclude hospital organizations will unfairly penalize the hospital industry where the cost structure is typically higher than that of the large independent clinical laboratories.

Comment using the file code “CMS-1621-P” by November 24th using the information below or linked herein (page 1 in the bottom left of the proposed rule):

Download additional information to facilitate comments here!

Let’s all work together to make a difference!

Jeffrey Myers, CFO and VP, Financial Services
Chi Solutions, Inc.

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