The government’s demand for reams of data from clinical labs is meant to help curb the cost of Medicare reimbursement for diagnostic testing. But it threatens to overwhelm the industry. Here’s what labs should know when trading big data for big bucks.
An enormous change is looming rapidly in the $54 billion medical diagnostics laboratory industry that is part of the overall national trend toward accountable care in healthcare reform. This change will place extraordinarily difficult technological and business process transformation demands on the industry. Here’s what’s happening.
Historically, Medicare has offered some of the highest reimbursement rates for clinical diagnostic laboratory services in the industry. Medicare’s payment rates for lab tests, established in 1984, were based on the prevailing charges for tests in each Medicare carrier jurisdiction at the time. Since then, those payments could be revised only via legislated uniform percentage adjustments to all rates. As a result, Medicare now pays between 18 percent and 30 percent more than private payers for some tests, according to a report by the U.S. Department of Health & Human Services Office of the Inspector General.
In a bill signed by President Obama on April 1, 2014, Congress presented plans that, among many other regulatory changes, outlined a new approach to paying for laboratory testing. The Protecting Access to Medicare Act (“PAMA”) introduced a process that the Centers for Medicare & Medicaid Services (“CMS”) will use to set the federal fee schedule for clinical diagnostic laboratory reimbursement. These payments now will be based on a weighted median of the private payer rates paid to applicable diagnostic labs in the previous year. As proposed, beginning in 2017 CMS will update pricing annually for a newly defined category of advanced tests and every three years for all other clinical diagnostic lab tests.
PAMA is intended to introduce a market-based payment system that will bring – and keep – the individual payment rates that the federal government pays for diagnostics in line with those paid by the private sector. This will have a significant impact on a huge industry. Diagnostic laboratory services generate $54 billion in annual revenues for the thousands of laboratories (independent firms, as well as those that operate within doctors’ offices and hospital systems) currently operating in this highly fragmented and competitive industry. The revised approach to lab payments will result in “sweeping changes in laboratory medicine for decades,” according to the American Association of Clinical Chemistry.
Upon implementation, these labs, which have seen slower growth in recent years, likely will see many of the rates paid by Medicare decline. In fact, CMS projects more than $5 billion in savings over the first decade. This will force labs to look for ways to reduce their own costs or identify additional revenue streams.
More urgently, in order for CMS to set these new payment schedules, clinical labs must deliver an unprecedented amount of additional data on the payments they received from private payers during the July 1-December 31, 2015, period for hundreds of individual diagnostic tests. Although the submission date has been delayed pending the final regulations, labs will have to submit these data to CMS or face penalties of as much as $10,000 per day for failure to report their rates, or misreport their data.
A Very Imperfect Present
These federal reporting requirements present an immediate challenge for labs – and, unfortunately, one that cannot be remedied by developing technologies alone. Laboratories face a number of obstacles in delivering these data to regulators. Many clinical labs do not have access to their payment data in a centralized data warehouse that would allow them to provide the price reporting the government now is mandating. Some of these laboratories have grown through acquisition and, as a result, may have several different financial systems in place for multiple labs or geographic regions, making rolling up reports for CMS a technical and operational nightmare.
While this systems issue might be addressed with new technology – given a reasonable amount of time, investment and planning – there’s an even greater hurdle to delivering the discrete payment and volume information for each diagnostic test that CMS can use to calculate an average. Many third-party payers make their payments for diagnostic tests at an encounter level, a single payment for multiple tests given within a single patient visit, rather than by individual test. This obscures the amount paid for each test and the test-by-test volumes CMS needs (and now wants) to calculate per-test averages. Figuring out how to unpack that encounter payment and volume data is enormously complex, and diagnostic labs have little leverage to change the way third parties pay them.
What’s more, the government has not finalized the data reporting requirements. Although CMS has indicated that a private payer rate should include cost-sharing amounts, it is unclear if a test that is part of a patient’s annual deductible ought to be reported to CMS as a total reimbursement for diagnostic services. In fact, CMS has yet to specify the form and manner for laboratories to report this information.i
It’s not unusual for the implementation of these kinds of regulations to be delayed. However, laboratories cannot afford to wait to figure out how to deliver the payment data that will be necessary to provide to the federal government. Clinical diagnostic labs that do not currently have a centralized data warehouse may not have the time to set it up in advance of the data collection deadline. Even though those labs that do have a centralized data warehouse may be collecting payment data from insurance providers at an encounter level, that does not help with gathering the test-by-test reimbursement information that will satisfy the CMS requirements. Labs must immediately begin to put technology and processes in place to work around these issues.
Getting at the Truth
To provide this volume and price information for all payers and every test in the short time frame established by the government, laboratories will have to analyze the data they currently possess to come up with a reasonable approximation for the previous year. And they will have to create processes to validate that information before delivering it to CMS. With the appropriate approvals from CMS, and the legal and compliance group within a clinical diagnostic lab, there are a number of avenues that clinical diagnostic labs can pursue to deliver the required payment and volume data to CMS during this first reporting period.
Labs that have fee schedules in place for individual diagnostic tests as part of their contract with third-party payers could use the prices on those fee schedules as a proxy for actual payment data. If a lab is confident that the third-party fee schedules are complete, and do not include volume or other types of discounting, these agreed-upon prices can be a reasonable place to begin.
In addition, claims that involve only one test can enable labs to identify the exact individual reimbursement for a test for a specific payer. While it often is the case that multiple diagnostic tests are run during the same patient encounter, by isolating only those cases with one test, the lab can get better visibility into how much was paid. With this price information, however, the lab must figure out how to calculate the total volume by looking at other claims that include the same test even if the test was part of a patient encounter in which multiple tests were performed.
Labs also must determine how or if patient deductible data are captured within a payment. If CMS does not allow the exclusion of claim payments that have been reduced by patient cost-sharing amounts, labs may need to allocate patient payments to the appropriate tests. Including the patient cost-sharing amount will ensure that the commercial payment amounts submitted to CMS are not artificially lower.
Finally, labs should develop processes to verify the resulting payment and volume data they plan to submit to CMS. Quality control and data validation are critical, as there are penalties not only for failure to produce these data but also for information that turns out to be incorrect or misleading. Because clinical diagnostic laboratories may have to get at much of this information indirectly (using fee schedules, looking at subsets of tests performed or paid for, or allocating cost-sharing amounts), they will need to test the resulting data against some other contemporaneous information about diagnostic payments and volumes. Business reports that include revenue and test volumes associated with commercial payers may be one good source of validation.
A Difficult Road Ahead
In order to set this stage for compliance in delivering this new information to CMS, clinical diagnostic laboratories can begin by answering nine questions:
One: Are there any technical hurdles and issues – such as disparate billing and payment systems that will make collecting or reporting these data difficult – that can be addressed in a timely fashion?
Two: Does the lab have a central data repository or warehouse – used across all labs – from which all claim payment information can be accessed?
Three: Do the financial systems capture payments at a Current Procedural Terminology (“CPT”) code or encounter level?
Four: Can a patient’s copay or coinsurance accurately be applied to the appropriate encounter, and can the cost-sharing payment be applied to the correct CPT?
Five: Can the lab identify credits, adjustments and/or re-bills (for rejected or corrected claims) that could affect or nullify the payments?
Six: Is a plan in place to consolidate payment information from different business units, or various systems, into a single data submission?
Seven: Does the lab have an up-to-date customer master file in order to identify all commercial payers for diagnostic laboratory tests? If not, what steps would be required to create one? And if there is a master file, does it include historical data as far back as July 1, 2015, and does it allow the lab to distinguish between commercial payers and physician practices?
Eight: Does the customer master file allow the lab to isolate capitated payments (fees paid per member per month) from fee-for-service payments?
Nine: Does the lab have the ability to isolate every private payer for the data collection time period?
The next set of questions clinical diagnostic labs must ask themselves concerns the controls they can put in place to verify the data they will be reporting to CMS:
One: Are there business reports or other sources of contemporaneous payment and volume data the lab can use to reconcile and validate the payment and volume it is trying to estimate?
Two: Is there documentation that confirms that a fee schedule is an accurate proxy for private payer payments?
Three: What current business processes ensure that a fee schedule can be aligned with individual customers?
Four: What kinds of technology advances or business processes can the lab initiate in the short term (and for the longer term as well) to operate effectively in this changed environment?
Clearly, laboratories should attempt to consolidate discrete billing systems into a single data warehouse. This will not be easy. In the long run, however, it will make the process of reporting data according to the new CMS rules less onerous.
Labs also will need to allocate encounter-based payments to individual tests, enabling real-time comparisons of encounter payments to fee schedules in order to identify the costs and payments of individual tests. Furthermore, labs will have to isolate patient copayments and coinsurance from the individual test payments.
The challenge confronting the diagnostic laboratory testing industry is significant. It will cause a measure of disruption, but advance planning can mitigate some negative impacts and even establish a strong foundation for the industry’s future growth.