On November 27, 2013, Centers for Medicare & Medicaid Services posted the final 2014 Medicare physician fee schedule and, in it, announced plans to change how and how much Medicare pays for clinical diagnostic laboratory services under the clinical laboratory fee schedule.

Since 1984, Medicare has paid for most clinical diagnostic laboratory services based on the clinical laboratory fee schedule (CLFS).  The CLFS methodology sets Medicare payment rates at the lesser of the amount charged, the fee schedule amount in the state or local geographic area in which the service was performed, or the national limitation amount.

With the exception of modest inflation adjustments, payment rates set under the CLFS do not change.  The Centers for Medicare & Medicaid Services (CMS) has established a reconsideration process, whereby the agency can review and adjust newly priced codes; this process does not include an adjustment mechanism for existing codes.  As a result, Medicare payments under the CLFS are, essentially, locked in place and unable to adjust based on changes to the cost of the test.

These limits constraining CMS’s ability to revisit and revise laboratory service payments have troubled the agency, Congress and the Medicare Payment Advisory Commission for years and led all three, at various times, to recommend and pursue various changes that afford the agency more flexibility.

In the final 2014 physician fee schedule (PFS), CMS announced a bold step toward exerting more discretion.  CMS announced a process whereby it will systematically examine payment amounts under the CLFS.  This examination would seek to identify codes that had undergone technological changes affecting the price of the test.  CMS cites the increased use of point-of-care testing, genetic and genomic testing, and laboratory-developed tests as examples of instances in which technological change may have created a disconnect between the current market value for the test and the Medicare payment rate and as the rationale for developing and finalizing this process.

CMS’s final policy continues to define a technological change as: any change to the tools, machines, supplies, labor, instruments, skills, techniques and devices that result in changes to the resources required to perform the test; the types of personnel required to perform the test; and/or the volume, frequency and site of service of the testing.

CMS’s final policy does not address the impact of any nontechnology-based costs, such as intellectual property costs, that can substantially add to the overall costs of certain newer tests and which are generally not accounted for in CLFS payment rates.

Under the new process, CMS will review all CLFS codes during a five-year period (beginning with the oldest codes), review a portion of the total codes each year and make appropriate adjustments.  CMS intends to use data from any source in order to determine the accurate cost for laboratory services.

In a change from their proposal, CMS will allow public nomination of codes for evaluation at any time, as opposed to only after the initial five-year review of all codes is completed.  The public may nominate codes for review by providing CMS an explanation of the changes in technology affecting the cost of the service and by providing relevant cost information to support the nomination.  This will allow the public more immediate participation in the update process; however, CMS will require public nominations to include cost information.  This could have the effect of limiting the population from whom nominations can be submitted to only the laboratories most closely associated with either producing or performing the tests. 

CMS rejected comments calling for a process that mirrored the negotiated rulemaking process and those calling for the creation of an expert advisory panel.  CMS believes that the level of transparency and public input associated with the formal PFS annual rulemaking process would serve the same purpose as other processes, without the time-consuming and resource-intensive requirements.

The first review period will begin prior to the July, 2014, publication of the 2015 PFS notice of proposed rulemaking (NPRM).  CMS will spend the early part of 2014 identifying which codes should be included in this first phase of adjustments, evaluating those codes and determining appropriate payment adjustments.  CMS will publish its list of codes subject to payment adjustment, along with a discussion of the impact of changes to technology and the proposed payment adjustment in the 2015 PFS NPRM.  CMS will solicit comments on the codes proposed for adjustment as well as solicit additional codes for adjustment in a subsequent year.  CMS will finalize payment adjustments in the 2015 PFS final rule, in early November, 2014.  Final payment adjustments will be effective beginning January 1, 2015.

In 2015 and subsequent years,  the cycle will repeat, with the addition of the codes nominated in the previous year’s cycle for which CMS believes that information warrants price adjustment.

CMS did not elaborate on the process it will use to evaluate codes for possible adjustment nor did it indicate its intention to perform the evaluation in-house or to outsource the evaluation.  CMS also did not indicate whether it would allow subsequent reconsideration of price adjustments using a process similar to the existing reconsideration process for newly priced codes.

Interested stakeholders should review CMS’ final rule in the broader context of the evolving reimbursement landscape for clinical laboratory services.