Sustaining the business of laboratory testing beyond PAMA and reimbursement cuts

Jan. 25, 2018

With the implementation of the Protecting Access to Medicare Act (PAMA), clinical laboratories big and small are poised to experience the most significant reduction in reimbursement in decades. Much controversy has surrounded how the Centers for Medicare and Medicaid Services (CMS) developed the criteria to identify the “applicable” laboratories that ultimately submitted the private payer data for laboratory testing. More than 90 percent of the private payer reimbursement data came from independent laboratories and reflect the lower reimbursement payments negotiated by the independent lab. Hospitals accounted for only one percent of the data, and physician office labs (POLs) submitted 7.5 percent of the data. The new National Limitation Amounts (NLA) in the 2018 Clinical Laboratory Fee Schedule (CLFS) reflect an average 35 percent decrease in reimbursement for most tests, and the reductions phase in at a 10 percent cap per year for 2018 through 2020, followed by a 15 percent cap per year for 2021 through 2023, or until Medicare payments equal the NLA, whichever occurs first.

CMS has moved forward with the planned PAMA laboratory testing reimbursement reductions even though labs and associations submitted more than 6,000 comments, many of them urging CMS to delay implementation and reassess the data collection process. The American Clinical Laboratory Association (ACLA) also filed a lawsuit against the U.S. Dept. of Health and Human Services (HHS) requesting an injunction to withdraw or suspend implementation of PAMA while the data collection is reassessed. Regardless of when the reductions take effect, however, the clinical laboratory industry needs to continue delivering test results that drive medical decisions and improve patient outcomes with progressively less reimbursement. This is a significant challenge, considering that PAMA is but one of a number of CMS and private payer programs that aim to reduce healthcare costs. But it is one that labs can meet.

An important first step in managing reimbursement cuts, whether from PAMA or other payer programs, is to view the laboratory as a business—a commercial operation providing cost-effective healthcare through quality diagnostic results that drive medical decisions. The next step is to work toward achieving the following three key business goals that are critical for any lab’s success: reducing cost, maximizing revenue, and increasing volume.

Reducing cost

Top areas for labs to focus on for cost-reduction strategies include operational efficiency, reagent efficiency, and test utilization stewardship. The most common strategies for reducing cost through operational efficiency include implementing automation, leveraging informatics capabilities, and standardizing procedures. In doing those things, labs can better deploy valuable labor resources to focus on key growth opportunities such as providing new testing services or growing outreach.

An often overlooked area for cost reduction in the lab is reagent efficiency. Labs can leverage their suppliers’ analytic capabilities to mine data from instruments and/or middleware to generate an analysis that provides detailed breakouts on how reagents are utilized, calibrations, quality control, repeats, and troubleshooting. The data should also provide insights on testing volumes, which can be leveraged to eliminate reagent waste for low-volume assays, improve inventory management of both reagents and consumables, and eliminate excess QC testing.

The test volume information can also be leveraged to kick-start a lab test utilization program to further cut costs by reducing or eliminating unnecessary testing while ensuring that clinically relevant testing is performed. Key aspects of such a program tied to cost reduction include standardizing test ordering practices and formularies, eliminating obsolete tests from formularies, monitoring for duplicate test orders, and leveraging reflex testing capabilities to run tests only when indicated.

Maximizing revenue

Labs need to obtain the maximum reimbursement payments for the patient testing they perform. A number of factors may contribute to reduced reimbursement or payment denials for a lab, so it’s worth the effort for labs to perform an assessment of the revenue cycle management process. Top areas to consider include the following:

  • Appropriate use of pertinent and clinically relevant Current Procedural Terminology (CPT) codes
  • Appropriate use of modifiers for specific CPT codes
  • Appropriate use of International Statistical Classification of Diseases and Related Health Problems, 10th revision (ICD-10) diagnostic codes
  • Individual payer rules governing reimbursement
  • Payer denials due to clerical errors or multiple orders (and why a lab test utilization program also helps with maximizing revenue).

Increasing volume

Why would a lab consider increasing its testing volume if reimbursement payments are being reduced? Multiple reasons exist for going after incremental volume in outpatient and outreach testing.

  • The incremental volume provides economies of scale for the lab that can drive down cost. For hospital labs, this might mean establishing outreach testing services or expanding existing services.
  • The lab may be in an ideal position to bring in new technology such as molecular testing, which provides a new revenue stream with higher reimbursement payments.
  • Sending out certain tests might appear to be a quick way for a hospital lab to reduce costs. However, it’s important to consider the impact on the lab’s testing volume (economies of scale) and on value-based healthcare metrics, including ER wait times, length of stay, and readmission rates. The penalties for missing these metrics will likely outweigh the cost-savings achieved by the lab through send-outs, not to mention the effect on patient and clinician satisfaction rates.

Substantial reimbursement reductions are the new normal for the laboratory industry. PAMA is only one of a number of government and private payer programs that aim to reduce healthcare costs. If clinical laboratories take a proactive approach in reducing cost, maximizing revenue, and increasing volume, they can overcome the effects of declining reimbursement, maintain their financial stability, and continue to provide valuable and essential diagnostic results across the continuum of care.

Liana F. Romero, PhD, MBA, MT(ASCP), serves as Senior Director, US Strategic Marketing and Clinical Affairs, Laboratory Diagnostics, for Siemens Healthineers. In her position, Dr. Romero is focused on connecting lab capabilities with hospital administration to navigate and thrive in the dynamic environment driven by healthcare reform, incentive programs, quality measurements, evolving reimbursement models, and hospital consolidation. She has more than 30 years’ experience in the laboratory diagnostics field.

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