Looming regulations and FDA oversight mean an uncertain reimbursement climate in 2016

April 20, 2016

Laboratories continue to face numerous and unrelenting challenges driven by government and regulatory forces that leave many wondering how or if to move forward. Here are some of the major issues currently impacting the future of lab reimbursement.

Medicare reimbursement revision

On September 25, 2015, The Centers for Medicare & Medicaid Services (CMS) published a proposed rule to the Protecting Access to Medicare Act of 2014 (PAMA) that will substantially revise the Medicare reimbursement methodology for clinical diagnostic laboratory tests based on private sector payment rates to be phased in over a six-year period commencing in 2017.

Under these reforms, applicable clinical laboratories are to begin reporting private payor reimbursement rates along with associated test volumes for each test on the clinical laboratory fee schedule (CLFS) that the laboratory performs. The current definition of an applicable lab required to report includes independent and physician office labs that receive more than $50,000 per year in Medicare revenues. However, the current proposal would eliminate most hospital laboratories, which most agree would unfavorably skew the final rates and be less reflective of the true market.

New rates for the CLFS would be determined using a weighted median from this private payor data. CMS proposes to apply different reporting and payment requirements for advanced diagnostic laboratory tests (ADLTs). The maximum reduction allowed to current payment rates for years 2017 through 2019 is 10 percent of the previous year’s rate, and 15 percent of the previous year’s rate for years 2020 through 2022, to achieve parity with private payor rates.

Under PAMA, applicable laboratories may be subject to civil monetary penalties of up to $10,000 per day for each failure to report or reporting error by Current Procedural Terminology (CPT) code.

Under the proposed rule, applicable laboratories were required to collect private payor data from July 1, 2015, to December 31, 2015, and to report the information to CMS by March 31, 2016, with new rates going into effect on January 1, 2017, and continuing through 2022. However, following the commentary period that ended in November 2015, as of this writing CMS has yet to publish a final rule or announce an official delay on PAMA, leaving the industry with no confirmation on who is required to report, what they are required to report, and how to do it.

The FDA’s evolving role in LDTs

Laboratory-developed tests (LDTs), many of which are genetic and genomic-based tests, are essential to the continued development of personalized medicine and patient-centered care. As practitioners have increasingly adopted the use of diagnostic tests to guide patient treatment decisions, concerns about the management and safety of LDTs have emerged.

The Food and Drug Administration (FDA) has proposed enforcing what it believes is its right to regulate these tests. It plans to introduce new regulatory requirements to include registration, adverse event reporting, and 510K/premarket review over the course of the next decade under a risk-based framework consistent with the FDA’s approach for medical devices. The FDA has historically exercised “enforcement discretion” over LDTs, and oversight has been through CMS under the Clinical Laboratory Improvement Amendments (CLIA).

The FDA issued a draft guidance last year and has announced its intention to issue a finalized guidance sometime in 2016. The Association of Molecular Pathology and others have challenged the FDA regarding examples it provided in a recent report outlining evidence supporting FDA oversight of LDTs. The American Medical Association, the American Clinical Laboratory Association, and numerous industry professionals and organizations support modernizing the oversight framework for LDTs and services through reform of the CLIA versus involvement from the FDA. Many believe that any increased oversight must be done through rule making, rather than guidance, and Congress has conducted hearings on this issue.

The FDA estimates that half of the LDTs on the market would be classified as low-risk under the agency’s proposed framework. The FDA’s initial focus will be on reviewing LDTs with the same intended use as an FDA-approved or cleared companion diagnostic or Class III medical device, and certain LDTs for determining the safety or efficacy of blood or blood products.

Commercial payor challenges

On the commercial payor side, documentation is becoming more and more critical, and front-end requests for additional information to process claims are increasing. Back-end medical necessity audits are also increasing, with recoupment requests based on medical necessity being seen as much as 12 to 18 months after payments are remitted.

Five of the most common commercial payor claim issues include:

  1. Services billed with no medical necessity documentation to support the claim;
  2. Documentation for a service by a health professional deemed insufficient;
  3. Services provided to a patient deemed experimental or investigational;
  4. Claims for services coded incorrectly and/or claims that include NOC (Not Otherwise Classified) codes; and
  5. Patient shares of cost not handled in a compliant manner.

While much progress has been made in molecular diagnostics and genetic testing, lack of consistent payor policy and adequate reimbursement is impeding availability of these innovative tests. Payors are increasingly reimbursing only for tests that they believe can clearly demonstrate “clinical utility” and improved outcomes.

While there are still considerable upfront investments in studies to demonstrate the clinical value of genetic tests, the continually raising bar is occurring during a time of decreasing reimbursement and pricing turmoil in the laboratory industry. This is creating an environment of unrest and uncertainty just as precision medicine initiatives are gaining national attention.

As addressed in the Personalized Medicine Coalition’s report, “The Future of Coverage and Payment for Personalized Medicine Diagnostics”(http://www.personalizedmedicinecoalition.org/Userfiles/PMC-Corporate/file/pmc_the_future_coverage_payment_personalized_medicine_diagnostics.pdf), it is crucial that payor reimbursement be adequate enough to allow innovators and investors to recover the cost of development, and continue to develop a pipeline of innovative tests requiring substantial risk-based clinical research.

Importance of financial management systems

These new regulations, and particularly PAMA, will impose a significant burden on clinical laboratories, requiring an investment in resources to track, collect, and report private payor payment rates and implement the necessary financial management and compliance systems. Labs should take advantage of every opportunity to ensure that they will be able to aggregate and report their data now, while the final rules are pending.

It will be imperative to capture the necessary reporting information either through a billing system that properly accounts for allowable costs on paid claims, or directly from the electronic remittance advice. Lab leaders should review 2015 data to ensure accuracy of payments prior to reporting. To comply with deadlines, systems must routinely capture and retain historical payment detail and flag payments inconsistent with contract provisions. Data points will need to be refined when final instructions are released.

At a minimum, systems must be able to capture: 1) date of service; 2) date paid; 3) payor type; 4) number of tests for each procedure code; 5) amount allowed and paid by insurer plus patient share of cost; 6) contractual rates, including volume and other discounts; and 7) aggregate data in timely buckets (e.g., 7/1/15–12/31/15).

To support the increased specificity and comprehensiveness of the ICD-10 code set, it will be critical for providers to capture detailed documentation in patient charts in order to avoid potential claims denials and the risk of fines from audits going forward.

Laboratories should continue to monitor updates and guidance from CMS on reporting details while preparing for data gathering and implementation, and watch for final rules from the FDA this year.

Bundled payments

Medicare continues to press forward with alternative reimbursement models such as accountable care and bundled payments, with plans to move 30 percent of non-managed care spending into contracts by the end of 2016, and 50 percent by 2018. It was recently announced that the 30 percent target benchmark has already been reached for 2016. CMS also recently introduced its Oncology Care Model, which incentivizes cancer providers to reduce hospital and pharmacy costs.

Some healthcare institutions are beginning to develop their own bundled programs with payors, which requires a very detailed understanding of the cost drivers for particular diagnoses and episodes of care. While there is much discussion about the rising costs of pharmaceuticals and drug waste, estimated to be as much as 50 percent, little voice is being given thus far to the role that lab diagnostics can play in alleviating this waste.

As providers continue to move toward alternative payment models with the dual goal of reducing costs and improving patient outcomes through patient-centered and personalized, genetically-guided care, lab diagnostics will become increasingly critical to these initiatives as a means to manage downstream costs and ensure the best possible treatment and patient-specific outcomes.

Rina Wolf, serves as Vice President of Commercialization Strategies, Consulting & Industry Affairs for San Diego-based XIFIN, Inc., developers of a health economics optimization platform to streamline diagnostic and business decision-making.