Medicare laboratory payment reform threatens to eliminate market competition

July 20, 2014

The world changed substantially for regional and community clinical laboratories on April 1, 2014. The President signed into law “The Protecting Access to Medicare Act of 2014,” containing the most significant Medicare payment reform of clinical laboratory services since creation of the Part B Clinical Laboratory Fee Schedule (CLFS). The laboratory payment changes were passed without any congressional hearings on the issue, after little-to-no dialogue with congressional committee members, and without any study or evaluation. In many ways, this type of fast and immediate payment reform is unprecedented, as such reforms are typically deliberated extensively and prompted by a MedPAC evaluation or some other major study. 

The new law requires clinical laboratories that receive a majority of their Medicare revenues from either the Clinical Laboratory Fee Schedule (CLFS) or the Physician Fee Schedule (PFS) to report to the Centers for Medicare and Medicaid Services (CMS) all of their non-capitated private payer rates and the volume for every laboratory test currently on the CLFS, beginning in 2016. In 2017, CMS will determine the weighted median of the reported rates and use those rates to adjust the Medicare payment rates under the Part B Clinical Laboratory Fee Schedule (CLFS). New rates will be phased in, with cuts not exceeding 10% per CPT/HCPCS code in years 2017-2019 and not exceeding 15% in years 2020-2022. In the end, any individual test code could see reductions up to 75% over a period of six years.

The National Independent Laboratory Association (NILA) is gravely concerned that the law is a backhanded way to shrink competition and reduce the number of regional and community laboratories. As written, this law is not the market-based reform it was purported to be by the few officials who were involved in its crafting. Market-based reform would examine true pricing and payment in the overall laboratory market and determine whether fees are at a market level. It would seek to understand the differences in pricing and where and who offers rate schedules that are substantially lower than the cost of providing services, and it would seek to address those variances. It would look at cost variations in the market and not blame higher costs at regional/community laboratories on inefficiency, but rather understand the reasons for those cost variations—what it means to serve rural communities and niche service sites like nursing homes, home health, and homebound patients. 

National commercial contract rates and their difference from government insurance fee schedules have actually been the focus of substantial lawsuits and settlements over the last several years. Such cases have looked at how national laboratory players set rates with commercial carriers at levels substantially below the cost of providing laboratory services in an effort to gain market share over the competition. These rates are found to be discounted to levels below Medicare, and they do not reflect the true market cost of providing services. Indeed, just a few years ago, the Senate Finance and Judiciary Committees began an investigation into these types of practices, reviewing the commercial rates negotiated by the largest national laboratories in comparison to Medicare rates. NILA has a hard time understanding how Congress could now quietly move a proposal to law that allows the contracted rates that were the subject of such an investigation to potentially drive Medicare prices for the entire laboratory market going forward. 

If Congress had truly intended to initiate market-based reform, it would have required CMS to look at the cost of lab-to-lab reference testing and compare those charges to Medicare reimbursement rates. Legislators would have considered the implications for access to laboratory testing services in the absence of a competitive market that includes community-based laboratories and addressed access concerns. Congress would have considered where the growth is within Medicare spending, not designed a system that could target the highest-volume routine tests for cuts. NILA would argue that high volume should be acquainted with high value within Medicare. At a low cost to Medicare, the frequently administered tests direct patient care and decision making by clinicians every day. Instead, high-volume routine testing is falsely painted by some as a target for cuts. The fact is that Medicare spending on routine testing has been flat over the last several years. The growth in spending is within the new molecular testing market and within some other niche testing areas.

While opposed to the mandatory reporting and structure of the reporting outlined by the law, NILA is also very troubled that the law could provide a loophole for some labs to not be required to report. Indeed, under the law, many hospital laboratories may not have to report their private payer rates and volumes. This exclusion would drastically skew downward the data submitted to CMS on payment rates—rates that hospital, national, and regional/community laboratories will ultimately be subjected to following CMS’s assessment.

In stark contrast to tests under the CLFS, the new law attempts to establish a more transparent process for pricing new tests, allowing for temporary HCPCS codes, requiring CMS to follow the Local Coverage Determination (LCD) process, and creating a federal advisory panel with laboratory stakeholders and others to provide input to CMS. The law also establishes a new statutory definition for tests deemed to be “advanced diagnostics.” These are tests that are performed by a single laboratory and can be MAAA tests and tests that are not approved by the FDA. For advanced diagnostics, reporting of private payer rates will be an annual process, with Medicare paying the lab’s list price for the first nine months.

In contrast to the associations that represent the largest national laboratories and the diagnostic manufacturers, NILA has been outspoken in its opposition to the new law. NILA believes the new system as designed will do nothing more than eliminate laboratory competition, which couldn’t be worse for the Medicare program. If Medicare is left with a duopoly in laboratory testing services, for example, it will ultimately see no savings, and beneficiary access to testing will be limited. Lawmakers should instead be focused on ensuring Medicare is paying for the right test at the right time and institute a system that guides clinicians on appropriate test ordering. NILA has crafted a proposal to move in that direction and recognize community and regional laboratories for the services they provide. This would be a far better approach than what laboratories are now subjected to under this new law.

NILA and others must now communicate with CMS about how the agency plans to interpret the new law, and NILA will work hard to ensure there is a strong voice for community and regional laboratories in the regulatory process. But with the threat of cuts to some individual CPT test codes on the order of 75% over six years, regional and community laboratories must push Congress and CMS to consider better options for true market reform and to ensure competition exists within the laboratory market going forward. We have until 2017 to make our voices heard. 

Mark Birenbaum, PhD, is the administrator of the National Independent Laboratory Association (NILA), a trade association for regional and community laboratories that focuses on business/management issues facing laboratories. Julie Scott Allen is a Senior Vice President at the District Policy Group within the national law firm  Drinker Biddle & Reath, representing the National Independent Laboratory Association.