On October 1, 2015, CMS published the long-awaited proposed rule to establish a new methodology for determining Medicare payment rates for lab tests paid under the Medicare Clinical Laboratory Fee Schedule (CLFS). Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA) required CMS to revise the method by which payment rates for tests paid under the CLFS were calculated, and to base them on rates paid by private payers, as reported by “applicable laboratories.” Comments on the proposed rule will be accepted until November 24th.

For the initial year of the new payment system, CMS proposes to require labs to collect private payer data from July 1, 2015 through December 31, 2015 and report them to CMS by March 31, 2016. CMS will then use these data to develop payment rates that would be effective beginning January 1, 2017. In subsequent years, the data collection period would be an entire calendar year, and labs would have until March 31st of the following year to report the data to CMS. CMS will use the reported payment information to calculate a weighted median, and this will be the Medicare payment rate until completion of the next cycle. Rates established under this new system will not be subject to geographic adjustment, annual updates or other adjustments, and there is no administrative or judicial review of the payment rates established under this new methodology. For most clinical diagnostic lab tests (CDLTs), labs must report payment information every three years, but the reporting and payment requirements differ for “advanced diagnostic laboratory tests” (ADLTs), as discussed below.

Who is Subject to Reporting

PAMA established certain parameters but did not clearly define which labs would be “applicable laboratories” required to report private payer data. CMS is proposing to require reporting by entities at the Taxpayer Identification Number (TIN) level rather than by National Provider Identifier (NPI), and to define “applicable laboratory” in such a way that it would exclude most hospital labs or other health care providers that don’t receive over 50% of their total Medicare revenues under the CLFS or Physician Fee Schedule (PFS). They would not be required to report their lab test payment rates, even for testing that is paid under the CLFS and provided to non-hospital patients. CMS also is proposing to exclude low volume labs, defined as those receiving less than $50,000 of their annual Medicare revenues from the CLFS (the threshold is $25,000 during the initial 2015 reporting period). CMS believes that under these definitions, the physicians and labs that would be required to report payment information account for 96 percent of CLFS spending on physician office labs and more than 99 percent of CLFS spending on independent labs.

What Must Be Reported

CMS is proposing to require clinical labs subject to the reporting requirement to report each private payer rate, the volume of each test performed at each rate, and the specific HCPCS code associated with the test. “Private payer” would be defined as a health insurance issuer, a group health plan, a Medicare Advantage plan, or a Medicaid managed care plan. If a private payer pays a lab at more than one rate for the same test (e.g., under a volume discount arrangement), the lab must report the rate paid for each test at each rate. The amount to be reported is after all discounts or other price concessions are applied, and is to be inclusive of all patient cost sharing amounts. Labs are not required to report information on tests for which payment is made on a capitated basis.

The President, CEO or CFO (or designee) must sign a certification statement that the data submitted are accurate, complete and truthful. If the Secretary determines that a lab has failed to report payment data as required, or has made a misrepresentation or omission in reporting, the lab may be subject to a civil monetary penalty of up to $10,000 per day for each failure to report or each omission or misrepresentation.

As noted in the proposed rule, there are a number of parallels between the proposed requirements for clinical labs to report payment rates and the government reporting requirements currently in effect regarding drug price reporting. CMS is proposing to adopt standards for lab reporting that are similar to those already in place for drugs. Hogan Lovells has extensive experience advising clients on CMS drug sales and price reporting requirements and we have experts available to work with clients in setting up systems to comply with CMS's new requirements for clinical labs.

Advanced Diagnostic Laboratory Tests

PAMA established different rules for tests classified as ADLTs. CMS proposes to define an ADLT as a clinical lab test covered under Part B that is marketed and performed only by a single laboratory and not sold for use by a lab other than the lab that designed it or a successor owner of that laboratory and that is either (1) a molecular pathology analysis of multiple biomarkers of DNA or RNA, that when combined with an algorithm yields a patient-specific result that predicts the probability the patient will develop a certain condition or respond to a particular therapy and provides new clinical diagnostic information that can’t be obtained from other tests or combinations of tests, and it may include other assays; or (2) is cleared or approved by FDA. Labs would have to apply for ADLT status, and CMS intends to issue subregulatory guidance regarding this process. Unlike most clinical diagnostic lab tests, which are on a three year reporting cycle, labs must report payment information on ADLTs annually.

Payment for New Lab Tests

For new clinical lab tests (other than “new ADLTs”) paid under the CLFS, reimbursement rates will continue to be set initially using the current cross-walking and gap-filling methodologies outlined in existing regulations for new lab tests, and Medicare rates will subsequently be adjusted based on the private payer rates reported by the labs.

For “new ADLTs,” defined as those ADLTs for which payment hasn’t been made under the CLFS prior to January 1, 2017, payment will be at the actual list charge for the test during the first three full calendar quarters after the test is first performed. After this initial period, payment will be at the weighted median of private payer rates, calculated under the same methodology as for other tests, but if the actual list charge for a new ADLT that was paid initially is more than 130% of the weighted median later established for the test, CMS will recoup the entire amount of the difference between the list charge and the weighted median.

If CMS doesn’t, for various reasons, receive payment information for any lab test provided to a Medicare beneficiary, they propose to establish payment using crosswalking or gapfilling.

Phase-in of New Payment Rates

For the period 2017 to 2022, reductions in payment rates for tests, based on the weighted median of private payer rates reported, will be phased in. Rates for existing lab tests can’t be reduced by more than 10% per year in 2017 through 2019, and no more than 15% in 2020 through 2022.

Additional Provisions

PAMA also required that coverage policies issued by a Medicare Administrative Contractor (MAC) on or after January 1, 2015 for clinical diagnostic lab tests must be issued in accordance with the process for Local Coverage Decisions (LCDs), which is set forth in the Medicare Program Integrity Manual. PAMA also required that the processes governing the appeal and review of lab LCDs must be consistent with existing CMS rules at 42 CFR Part 426.

PAMA also gave CMS the discretion to designate one to four MACs to either establish LCDs for clinical lab tests or both establish LCDs and process Medicare claims for lab tests. CMS is not exercising this option at this time but is seeking input from stakeholders on the pros and cons of this possible consolidation of the MACs handling lab coverage policy and claims processing

Comments on the proposed rule are due November 24th. If you have any questions about this proposed rule, please contact one of the lawyers listed in this alert, or the Hogan Lovells lawyer with whom you normally work.