Laboratory-based diagnostic testing is an integral part of patient-centered health care and represents approximately 1.4 percent of Medicare spending annually. In 2014, Medicare paid approximately $4 billion for clinical laboratory tests and used a payment methodology that was set by the Clinical Laboratory Fee Schedule (CLFS).1

In an effort to modernize the payment system for clinical diagnostic laboratory tests, Congress included a section in the Protecting Access to Medicare Act of 2014 (PAMA)2 that drastically revised the way that all clinical laboratories would be reimbursed on the CLFS under Medicare Part B, regardless of the laboratory’s size, location, setting, or throughput. The Centers for Medicare and Medicaid Services (CMS) was tasked with establishing CLFS rates at an amount equal to the weighted median of private payor rates for a particular test and with phasing in any price reductions over the first six years of the revised payment system in three-year increments. The only exception is for tests that have been newly designated under the law as Advanced Diagnostic Laboratory Tests, which are narrowly defined and are to be assessed annually until a broader market for the test is established. The Congressional Budget Office (CBO) initially scored PAMA to cut Medicare spending by $100 million in the first year of the new rates and by $2.5 billion over 10 years.

In a final regulation that was released in June 2016, CMS required that “applicable laboratories” report their final payments from every private payor for each diagnostic test and the corresponding volume of tests that were performed from January 1, 2016, to June 30, 2016. Laboratories were required to submit data to CMS by May 2017, and CMS released its proposed payment rates in September. Through these proposed rates, laboratories learned that—if implemented—CMS would be cutting reimbursements by $670 million in 2018, a reduction of 21.9 percent from 2017, and by $3.6 billion over only three years—a far greater reduction than the 10-year projection from CBO or the Office of Management and Budget during the issuance of the final regulation.

Many factors may have contributed to the difference between the final rule’s projected cuts and the actual proposed CLFS reimbursement rates. The PAMA statute defines an “applicable laboratory” as one that receives a majority of its Medicare revenues from the CLFS or Physician Fee Schedule (PFS) and gives CMS discretion to establish a low test volume threshold or low economic threshold.3 Despite this fairly broad directive, the greatest source of critique seems to come from the narrow first prong of CMS’ definition of an “applicable laboratory,” which is one that (i) submits claims for reimbursement under its own National Provider Identifier (NPI), (ii) meets the Clinical Laboratory Improvement Amendments’ (CLIA) definition of a laboratory, and (iii) receives at least 50 percent of its revenues from CLFS- or PFS-payable services, of which at least $12,500 was received during the reporting period.4 Laboratories that submit Medicare claims under a hospital’s NPI would not meet the first prong. Accordingly, the 248 million laboratory tests that CMS reviewed during the reporting period were only 0.7 percent of the laboratory market and represented only 1,942 laboratories. This included certified data from only 21 of the nation’s hospitals, and there are an estimated 7,000 hospitals in the U.S. The HHS Office of the Inspector General anticipated that significantly more “applicable laboratories” would submit data than the number of actual reporting laboratories. In the end, 90 percent of the test volume data was reported by independent laboratories, 7.5 percent of data came from physician office laboratories, and 1 percent of data was reported by hospital laboratories.

Although the first-year rate cuts are steep, PAMA includes a graduated rollout of reduced diagnostic laboratory test reimbursement rates, as required by statute. For the three years (2018–2020) following the first reporting period, rates cannot be cut for a particular test by more than 10 percent each year. For the three years (2021–2023) following the second reporting period, rates can be cut by up to 15 percent each year.5 For example, if a clinical diagnostic test had been reimbursed at $100 by Medicare in 2017 but the collected data demonstrated a weighted median of $50 was paid by private payors per test, the revised payment for the first three years would be graduated as follows:

The proposed rates, if finalized as published, will apply to all laboratories that are paid on the CLFS, not just those that were required to report data. The revised Medicare rates are expected to have a domino effect that will result in a reduction in Medicaid fee schedule rates, Medicare Managed Care and Medicaid Managed Care rates, and private payor rates.

Arguably, the exclusion of hospital laboratories from the reported data is contrary to Congress’ intent in passing PAMA and has been the subject of numerous Congressional letters sent to CMS over the last two years. Furthermore, Senators Orrin Hatch (R-UT), Chairman of the Senate Finance Committee, and Richard Burr (R-NC) stated in a Congressional colloquy that “… all sectors of the laboratory market should be represented in the reporting system, including independent clinical laboratories and hospital outreach laboratories …”6 and that “commercial payment rates to all sectors of the lab market should be represented … .”7 Congress has not commented further on the proposed rates but we anticipate that CMS has received numerous comments from public and private stakeholders that criticize the data collection process, and that request revised payment rates that reflect a broader representation of the laboratory market and address significant errors in the laboratory pricing data that was collected. In the weeks leading up to the October 23, 2017, close of the comment period, a letter from 22 national organizations (including laboratories, hospitals, medical colleges, physicians, public health and others) was issued to CMS Administrator Seema Verma that requested the implementation of the revised CLFS be suspended while stakeholders worked with CMS and Congress to address data integrity concerns and opportunities to obtain additional data that adequately represents all segments of the laboratory market.

CMS is currently reviewing submitted comments; finalized CLFS rates, unless Congress or CMS intervenes, are expected to be released in November and go into effect on January 1, 2018. We will continue to monitor this subject closely and will report any developments.