On April 1, 2014, President Barack Obama signed the “Protecting Access to Medicare Act of 2014” (H.R. 4302) revamping the diagnostic clinical laboratory reimbursement system to tie Medicare payment rates to private market rates beginning in 2017. The new legislation will eliminate significant reductions in payment that would have otherwise occurred in coming years under changes imposed by the Centers for Medicare and Medicaid Services (CMS) in the 2014 Physician Fee Schedule (which would have permitted CMS to adjust prices annually based on “technological change”) and provisions of the Affordable Care Act requiring repeated annual reductions in payments for laboratory services. HR 4302 is generally perceived as better than the alternatives, which many in the laboratory industry viewed as creating an uncertain, ungated system that was expected to result in rapid, draconian cuts in payments for laboratory services that threatened to drive many companies out of business.
New Payment Methodology
Under new Section 1834A of the Social Security Act, for Medicare tests, “applicable laboratories” must report to CMS certain private market data related to payment rates and test volume in a given data reporting period (as defined by CMS), beginning on January 1, 2016 and continuing every three years thereafter (except for “advanced diagnostic laboratory tests” where data must be reported annually). “Applicable laboratories” are those where more than 50% of the entity’s Medicare revenue comes from payments under either the Medicare Clinical Laboratory Fee Schedule (CLFS), the Medicare Physician Fee Schedule (PFS), or new Section 1834A. Accordingly, most entities that operate as dedicated laboratories will be subject to the new reporting requirement.
CMS will then take the private market data and develop “weighted median” prices for each laboratory test, calculated by arraying the distribution of all payment rates reported for the period for each test weighted by volume for each payor and each laboratory. These prices will become the new payment rates for most tests beginning in 2017 (adjusted subsequently based on new data collection periods). No administrative or judicial review of payment rates is permitted under the law.
HR 4302 describes special rules for payment of new laboratory tests, defined as those tests for which a new or substantially revised HCPCS code is issued on or after April 1, 2014. During the transition period from April 1, 2014 to December 31, 2016, payment for most new laboratory tests will generally be subject to the crosswalking and gapfilling processes under existing CMS regulations regarding new clinical laboratory tests, subject to input from a newly-established Advisory Panel. CMS must also provide an explanation for the payment rates it determines under these methods. This provision may alleviate concerns that surfaced during the molecular pathology gapfill pricing process last year, where many stakeholders perceived a lack of transparency with respect to CMS’ payment decisions.
For “advanced diagnostic laboratory tests,” defined as single-source laboratory tests that either analyze multiple biomarkers using unique algorithmic analysis or are cleared or approved by the Food and Drug Administration (FDA), companies will be rewarded for their innovator status by being paid at “actual list charge” for the initial three quarters beginning in 2017, before becoming subject to market-based pricing. “Actual list charge” is defined as “the publicly available rate on the first day at which the test is available for purchase by a private payor.” These initial payments may be subject to recoupment of the difference if the Secretary later finds that the initial payment amount was greater than 130% of the payment amount for the test established using the new weighted median market-based methodology. Laboratories must begin reporting data on advanced diagnostic laboratory tests in accord with the law’s requirements by the last day of the second quarter.
Finally, to avoid sudden, significant payment reductions for existing tests, HR 4302 includes a phase-in: for the years 2017-2019, reductions in payments to laboratories for a given test may not exceed 10% per year, and for the years 2020-2022 reductions may not exceed 15% per year.
The Reporting Requirement
Applicable laboratories must begin to report private payor data for each test furnished that is payable by Medicare during the period defined by CMS beginning January 1, 2016. Reportable payment rate data excludes capitated rates, but includes all discounts, rebates, coupons, and other price concessions (like those described under the Average Sales Price methodology for drugs and biologics set forth at SSA, Sec. 1847A(c)(3)), as well as multiple payment rates for the same test or payor. “Private payors” include health insurance issuers and group health plans, Medicare Advantage plans and Medicaid managed care organizations. The new law also attempts to protect the confidentiality of the laboratories, the data and the payors involved in the reporting process.
Importantly, under HR 4302, an officer of the laboratory must certify the accuracy and completeness of the information reported. Civil Money Penalties of up to $10,000 per day may apply for each failure to report or each such misrepresentation or omission in reporting.
By June 30, 2015, the Secretary must use the rulemaking process to promulgate parameters for data collection.
HR 4302 also permits the Secretary to adopt temporary HCPCS codes for new advanced diagnostic laboratory tests (generally effective for no more than 2 years), and to assign, by January 1, 2016, unique HCPCS codes (and publicly report payment rates) for existing tests paid for by Medicare that lack unique codes. Laboratories/Manufacturers may also request a unique identifier for an advanced diagnostic laboratory test or FDA approved laboratory test for tracking and monitoring purposes. It is unclear how these provisions interact with existing processes for code development managed by the American Medical Association.
Finally, HR 4302 permits CMS to designate up to four Medicare Administrative Contractors (MACs) to administer the new payment system. Presumably, Palmetto GBA will be selected, given its recent experience with pricing of molecular pathology tests. MACs are also required to abide by the existing Local Coverage Determination process when issuing coverage decisions effective January 1, 2015. Finally, the law establishes a special Advisory Panel and requires the GAO and OIG to engage in certain studies of the law’s implementation and impact.
Laboratories, diagnostic companies and pharmaceutical and device manufacturers wishing to review CMS’ proposed rules or to submit comments to CMS, or needing advice with respect to this new reporting requirement or payment system, should consult a Sidley attorney.