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Labs Recalibrate To New Normal Under Pama Prices

As of January 1st of this year, the rate-setting scheme for nation-wide payment rates from the Centers for Medicare & Medicaid Services (CMS) has been rejiggered in an attempt at allowing CMS to benefit from the type of rate contracting that private payers have long been able to do. While CMS has historically set rates for laboratory tests, with private payers then typically using that price as a starting point for negotiation, the new system, as established by the Protecting Access to Medicare Act of 2014 (PAMA), flips the roles of the two, and instead uses the private-payer rates to set Medicare pricing. PAMA is one attempt to cut CMS in on the action and allow it to benefit from free-market based negotiations that private payers do as a natural course of business. 

Despite the four-year lead time from the passage of PAMA to implementation of the rule (which was even one year later than it was supposed to be, by statute), there were still surprises once the final rates were released, and perhaps more importantly, leaves questions about what the new status quo could and/or should be with respect to the elaborate choreography of rate setting, negotiating, and contracting. 

Under PAMA, labs are required to report to CMS the private payer rates they pay for particular tests. CMS then determines a weighted median amount by test in order to set the new prices. This is not a one-time submission – labs will be required to continue submitting payment data in future years. However, rates cannot be reduced by more than 10% each year for the first few years, and no more than a 15% reduction in the following few years, as a means of setting a floor on pricing expectations to protect labs. CMS has by and large been excluded from negotiating with manufacturers of all kinds on cost, and instead has had to accept list prices across the board.

One of the biggest criticisms around the implementation of PAMA is the criteria used to determine exactly which labs are meant to submit their data to CMS. One estimate has only 34% of the lab market represented, with two major labs representing 80% of the volume used to calculate the rates[1]. Labs are required to report their data if over 50% of their revenues are from Medicare, though, with a bit of handwaving, manages to leave hospital-based labs out of those required to report. Once the hospital lab costs are taken altogether with all other costs of the hospital, including lucrative inpatient stays for privately insured patients, they end up falling under that 50% threshold. It has been suspected hospital labs have been paid somewhat higher than commercial labs (the Quest Diagnostics and LabCorp’s of the world), so leaving hospital labs out of the mix has a downward effect on the median price calculation.

It is also worth noting PAMA regulations do come with some teeth: steep monetary fines can be levied against any lab that is required to report but does not. Though because criticism has more been around erroneously leaving some labs out rather than incorrectly bringing too many labs into the fold, it is not likely these types of fines will often come into play. There is a minimum expenditure threshold for labs of $12,500 of Medicare revenues from the clinical lab fee schedule (CLFS) as well, and so probably correctly does not include those outlier labs with low overall total Medicare payment dollars. The CLFS is the nationally set standard for what Medicare will pay for outpatient clinical lab services.

All of these changes work out to pretty significant dollars – CMS pays about $7bn per year for clinical lab tests. In fiscal year 2018, CMS expects savings close to $400m dollars, and up to $1.7bn and $3.9bn in savings over the next 5 and 10 years, respectively[2]. The top 20 codes with the greatest reductions in payment rates all saw cuts greater than 59%, with one code payment rate even cut 99.99%.

Still, some tests saw significant increases in their payment rates. The top 20 largest increases for certain codes range from a 150% increase all the way up to a 750% increase (looking at you, “urine screen for bacteria”!)[3].

There are still some implications to PAMA that have fully yet to be felt. Notably, the Medicare CLFS rates were often seen as the starting point for contracting negotiations between labs and payers, and likely arriving at a lower rate than the CLFS fee schedule for private payers – i.e., payment rates defined broadly as a 20% haircut from CLFS rates. Large private payers like the Blue Cross Blue Shield plans have been known to recalibrate their negotiated rates every 3-5 years off the CLFS.  But if private payers are looking for a discounted rate off the CLFS fee schedule, and then labs subsequently submit those rates to CMS for the PAMA recalibration of CLFS rates, it quickly becomes a race to the bottom in terms of dollars flowing to labs.

The American Clinical Laboratory Association (ACLA), a large trade group representing labs, has even gone so far to file a lawsuit challenging the PAMA reimbursement rates[4]. As of the time of writing, this suit is still ongoing and has yet to be resolved or a judgement issued. The intricate choreography of negotiating and rate setting between private payers, labs, and CMS will also clearly need to be re-thought. This early on, nothing is probably yet off the table, and does open some opportunity for new and creative schemes to come into play in an arena where we and others will continue to watch.