We all know that there has been a minor slip in net revenue per test for clinical laboratories over the last couple of years. This is nothing new—it is consistent with a story of declining reimbursements in healthcare.Under the proposed Protecting Access to Medicare Actof 2014 (PAMA) rule, hospital laboratory reimbursement for outpatients and outreach could be reduced by 42 percent in 2017. What is new is that under the proposed Protecting Access to Medicare Actof 2014 (PAMA) rule, hospital laboratory reimbursement for outpatients and outreach could be reduced by 42 percent in 2017.
At $19.79 per test on average based on our Fourteenth Comprehensive Laboratory Outreach Survey, hospitals are paid 36 percent more than Quest and LabCorp at $14.65 and $14.52, respectively. Many know that hospitals are currently reimbursed on a different, higher fee schedule than independent laboratories based on the assumption that hospitals have a higher cost of operations. This favorable reimbursement for hospitals is not founded nor is it likely sustainable. Deep discounts given by Quest and LabCorp to private payers in order to secure exclusive agreements have eroded fees over time. The market is now upside down. The U.S. government, once considered the lowest payer, has become the highest payer. CMS finally figured this out and is looking for ways to reduce costs by moving towards paying all laboratories a market-based average of private payers under PAMA (Jeffrey H. Myers, “Revenue and Price Transparency in Hospital-Based Laboratories,” HFM Magazine: November 2015).
Conceptually, we support the concept of a market-based approach to fees, thereby creating a more level playing field. It’s the process that is flawed. Hospital laboratories are excluded from submitting data to determine market rates, as are more than 50 percent of independent laboratories and 90 percent of physician office laboratories (POLs). Data will be heavily weighted (50 percent) from the largest five laboratories. And do we think it is a coincidence that these very laboratories are the ones that have engaged in heavy discounting?
If hospitals have to move to this standardized fee schedule for all clinical laboratories, the impact will be much deeper. Take that 6 percent, add another 36 percent that hospitals are currently paid above independent laboratories, and you have a whopping 42 percent.Laboratory Economics (October 2015) estimates that the difference between private payer and Medicare rates for independent laboratories is approximately 6.4 percent. According to CMS, the proposed rule could result in $360 million in savings for Medicare in 2017 and over $5 billion during the next decade. If the proposed rule prevails, rate cuts of 6.7 percent are estimated for 2017, followed by another 5 percent in 2018 and a final cut of 1 percent in 2019. Keep in mind that these comparisons are to the clinical laboratory fee schedule for independent laboratories. If hospitals have to move to this standardized fee schedule for all clinical laboratories, the impact will be much deeper. Take that 6 percent, add another 36 percent that hospitals are currently paid above independent laboratories, and you have a whopping 42 percent.
At this writing, it is unclear whether the proposed rule will be implemented as written or in the desired timeframe. CMS has not met is own timeline for specifications on how to submit data. There is a veritable backlash in the industry about skewed data collection. National laboratories are appealing to hospitals and smaller laboratories to overwhelm CMS and the legislative branch with unfavorable comments during the November 2015 comment period. Therein lies the irony: the large national laboratories need their competitors to bail them out from their anti-competitive practices of aggressive discounting.
What will be the impact of PAMA on hospitals? Those that have built substantial outpatient/outreach businesses based on favorable hospital rates may be forced to sell to the very laboratories that created the problem (Quest and LabCorp). The larger the business, the more difficult it will be to sustain a 36 percent or greater drop in revenue for Medicare patients. Medicare typically represents about 35 to 40 percent of the payer mix for hospital outpatients/outreach. Outreach programs that currently bill under the independent laboratory fee schedule will experience, at worst, a modest decrease that is easily sustainable. They will, however, still feel the impact of reduced outpatient reimbursement. Laboratories that already have a competitive offering on price will be well positioned for a gain in market share as competitors such as outreach programs billing hospital rates, small independents, and POLs exit the market.
Hospital-based laboratories must become politically active to ward off or mitigate this threat. Write to your representatives and senators, and submit comments directly to CMS through this linkbefore November 24. Tell them that PAMA is anti-competitive for hospitals. It will reduce jobs in the local community. It will decrease both service and quality, and it will benefit Wall Street over Main Street.
If you have questions about how PAMA will impact your laboratory in light of the proposed PAMA rule, please contact us at email@example.com.
Kathleen A. Murphy, PhD
Chief Executive Officer
Chi Solutions Inc.