PAMA and bundled payments force labs to feel a reimbursement shift

Laboratories are beginning to feel the effects of healthcare’s shift from fee-for-service (FFS) to value-based reimbursement systems. New payment models are focused on patient outcomes and eliminating the misaligned FFS incentives that can lead to overutilization. Healthcare’s new mission is to simultaneously reduce costs and improve care. Labs are a part of this goal.

Labs are a crucial part of diagnostics in the overall healthcare picture. Traditionally, labs have been revenue centers, but in the new healthcare model, lab testing will be considered an expense that is part of the cost of delivering care. We are beginning to see this unfold in new reimbursement models, such as bundled payments. Another looming element of this transition is the H.R. 4302—Protecting Access to Medicare Act of 2014 (PAMA), which labs have been awaiting with trepidation because it signals the beginning of big changes in reimbursement.

Even before PAMA, in 2014 the Centers for Medicare & Medicaid Services (CMS) began bundling payments for hospital outpatient visits. These bundled payments include lab testing, with the exception of molecular pathology tests. Tests are reimbursed according to the Hospital Outpatient Prospective Payment System (OPPS), and are billed by the hospital rather than the lab. Of course, when testing takes place outside of the bundled cases, reimbursements still depend on the Clinical Laboratory Fee Schedule (CLFS). This puts the onus on hospitals to develop budgets within this complex framework.

CMS also has implemented the Bundled Payments for Care Improvement (BPCI) initiative, which bundles payments across a continuum of care. The idea is to incentivize better care coordination. The BPCI initiative was developed by the CMS Medicaid Innovation, which was put in place by the Affordable Care Act to begin to pilot some of the value-based payment models. As of January of this year, the BPCI initiative has 1,574 participants.

On the heels of these bundled payment initiatives rests PAMA. Many labs took a proactive stance by voicing their opinions to improve the law. Originally, CMS was expected to release the final rule on June 30, 2015. Instead, a proposed rule was released on September 25, 2015. Subsequently, more than 1,300 comments were sent in, many from laboratories expressing concern about the impact of the proposed reimbursement cuts and the definition of applicable labs (those required to report their data). These final comments ended on November 24, 2015.

With CMS missing the initial rule release date and with (as of April 1, 2016) no sign of an official format for labs to begin reporting their payer reimbursements and testing volumes, the proposed effective date of January 1, 2017, for reimbursement cuts is highly unlikely.

The history of PAMA

PAMA was responsible for repealing the 24 percent Sustainable Growth Rate (SGR) cut and delaying ICD-10 implementation. Additionally, Section 216 of PAMA, entitled “Improving Policies for Clinical Laboratory Tests,” is a plan to begin basing Medicare reimbursements for clinical lab tests on private sector payment rates. The Congressional Budget Office estimated that these changes to the CLFS will reduce Medicare spending by $2.5 billion between 2014 and 2024, though this timeline is already beginning to shift.

Under the PAMA law, applicable labs must report their test volumes and private payer rates (for each test on the CLFS) to CMS. CMS plans to use this data to establish new Medicare payment rates based on the weighted median payments for private payers. If the newly calculated reimbursement rate is dramatically lower than the current rate, the decrease will be phased in over a six-year period. In the original rule, the maximum reduction for years 2017 through 2019 was listed as 10 percent of the previous year’s rate and 15 percent for years 2020 through 2022, equating to a potential total of a 75 percent decrease across six years.

The first reporting period was intended to be from July 1, 2015, through December 31, 2015, due to CMS by March 31, 2016. However, as there is no final rule, this did not happen, nor has any new reporting period been announced. Industry experts posit that the lack of a final ruling will likely delay the January 2017 start date to 2018.

The biggest controversy, which led to 1,300 comments, developed after the law was refined and only certain applicable labs were designated as being required to submit their payer rates. Only independent labs and physician office labs (POLs) that receive more than $50,000 per year from Medicare were required to report payer reimbursements, while hospital labs and smaller labs (< $50,000 from Medicare) were considered exempt. Most hospital labs fell under the exemption as well because the law states that 50 percent of the entity’s total Medicare revenue must come from the Physician Fee Schedule (PFS) or the CLFS. This means that most large hospitals, about 50 percent of independent labs, and 90 percent of POLs were exempt. In the original wording, about half of the data used to create the new fee schedule would come from the largest five laboratories (mainly LabCorp and Quest), who typically have largely discounted pricing.

While we do not know for certain, industry experts report that CMS is likely to respond to the outpouring of comments and make changes to the definition of an applicable lab to include hospital laboratories in the calculations so that the new payment rates will more accurately reflect the market. While price transparency and the concept of a market-based approach to fee setting are good concepts, it is widely agreed upon by the laboratory industry that the methodology the CMS originally planned to use to set future CLFS pricing was severely flawed.

PAMA and the future

Many labs are already feeling the transition in healthcare from FFS payments to value-based payments and are transitioning from profit centers to cost centers. The $2.5 billion cuts in lab reimbursement spell a significant change in lab payments. Not only will many labs have to adjust to reporting volumes and reimbursements; they’ll also need to prepare for the long-term reimbursement changes as they see less revenue for the same volume of tests. While we do not know exactly what the future holds, it is time for lab leaders to think differently, plan ahead, and make sure they understand PAMA’s full financial impact on their laboratory.

In order to face legislative changes like PAMA, laboratorians must refocus their efforts and find additional ways to demonstrate their value. The laboratory is central in supporting disease management and treatment, so it certainly will not go away. Rather, a shift in testing volumes, menus, and locations, and an expansion of the laboratorians’ role are predicted for the future. While the lab is not the problem in rising healthcare costs, it can be a huge part of the solution.

Kim Futrell, MT(ASCP), serves as Products Marketing Manager for Orchard Software Corporation.