The federal law comes with significant cuts to Medicare testing fees, but labs that take steps now will be better able to meet the challenge.
By Christine Tobias
Laboratory executives today face an array of pressures on their labs’ profitability. Advances in genomic science and technology, payor scrutiny of lab services’ economic and clinical value, and increased patient-consumer engagement require a sharper focus on quality, innovation, and value than in years past.
Some lab leaders believe they are up to the challenge. They claim to have a good understanding of their market’s needs, and they believe in their vision to deliver higher value. Others are less confident, but express a general optimism that they will adapt to these trends, as they have to others in the past.
For individuals who are preparing to deal with the pressures of the Protecting Access to Medicare Act of 2014 (PAMA), however, responses have sometimes been vague or tentative, if not panicked. Too many lab executives haven’t yet figured out how to get ahead of PAMA.
That’s a bad sign, both for the laboratory community and for its patients.
PAMA is the first reform of the Medicare clinical laboratory fee schedule (CLFS) since its implementation in 1984.1 Congress enacted the law with the aim of safeguarding Medicare beneficiaries’ access to necessary health services, including clinical laboratory testing.
The problem for the lab sector lies in the implementation of the law. The law stipulates that CLFS sets the rates for lab services by taking a market-based approach. However, in actual practice, the rules set forth by the Centers for Medicare and Medicaid Services (CMS) exclude analysis of the rates for services provided by the vast majority of hospital and physician office labs. The rate of payments for independent labs are consequently over-indexed in the analysis.
To put this problem in perspective, the College of American Pathologists (CAP), the leading accrediting body for the diagnostic information services sector, notes that fewer than 2,000 out of 61,000 laboratories were included as ‘applicable laboratories’ under CMS rules. The list included just 21 hospital-based laboratories. As CAP states, “by filtering out data from hospital laboratories and including data predominately from independent laboratories, the HHS all but ensured that laboratories would receive lower Medicare reimbursement for clinical laboratory tests . . . because independent laboratories generally receive lower rates due to economies of scale and purchasing power.” 2
The result of this flawed approach is that PAMA has become the single most financially disruptive event to hit the lab sector in about three decades. Lab payment rates calculated under PAMA went into effect in January 2018 and were estimated to save CMS $670 million that year—a 10% discount to the $7 billion the agency spends annually on lab tests. Over a 3-year period beginning in January 2018, CLFS fees for most tests provided on behalf of the nation’s more than 57 million Medicare beneficiaries are expected to decline by approximately 30%.3
Considering the size and national breadth of the Medicare population, most labs in the United States can expect to experience adverse financial effects resulting from the implementation of PAMA. Moreover, many state Medicaid agencies base their reimbursements for lab services on the Medicare schedule. Some state Medicaid programs have made additional cuts to the fees for clinical laboratory tests, resulting in ‘cuts on top of cuts.4
As of January 1, 2019, laboratories also have new data collection requirements under PAMA, adding even more complexity to the administrative burdens of the sector (see “Data Collection under PAMA”).
PAMA and Patient Impact
Ironically, Medicare beneficiaries are generally high utilizers of lab services. Approximately three in four Americans aged 65 years and older have multiple chronic conditions.5 And, as every lab administrator knows, lab tests are used to screen for, diagnose, and monitor a wide range of chronic conditions, including chronic kidney disease, diabetes, and heart disease.
According to the American Clinical Laboratory Association, PAMA’s reimbursement pressure could short-circuit the lab sector’s ability to serve patients. Laboratories that are struggling to perform at a competitive level—in terms of either patient offerings or lab revenues—may be forced to consider consolidation with another laboratory or even bankruptcy, which could leave some poor or rural communities out in the cold.6 Equally frightening, such sector restructuring could occur very quickly, coinciding with the current transition of the massive Baby Boomer generation out of the workforce and onto Medicare rolls.
Diagnostic information services are foundational to healthcare. Such services account for 2% to 3% of total healthcare costs but inform the vast majority of clinical decisions. At a time when advances in science and technology afford promising new tests to guide care for cancer, heart disease, and other diseases, the lab sector faces unprecedented strain from a well-intentioned government process gone awry.
Most Healthcare Executives Don’t Know about PAMA
There is no question that PAMA is fundamentally disruptive to the diagnostic information services sector. It may also result in adverse downstream consequences for patient care. Despite such threats, research suggests that many healthcare executives are not familiar with the law or its likely business impact.
According to a survey commissioned by Quest Diagnostics, nearly 80% of hospital executives report that they are not at all familiar, or only somewhat familiar, with PAMA and its impact on hospitals.7 Such unfamiliarity with the law is a surprising finding, considering that the first round of CLFS rate cuts had already occurred several months before the Quest survey, conducted in July 2018. Notably, 59% of the survey respondents also reported that their institution is feeling pressure from government payors such as Medicare, so it is possible such individuals vaguely recognize the financial effects of PAMA implementation, without having any awareness of the actual law.
Quest surveyed healthcare executives via an e-mail questionnaire sent to more than 27,600 individuals. Respondents occupied a variety of roles in their organizations, including senior management (29%), operations management (16%), financial management (15%), clinical management (15%), and lab administration (4%).
About 62% of respondents to the survey said they are also facing lab test reimbursement challenges from commercial payors. The survey also revealed that:
- Only 4% of the respondents indicated that their health system is actively making changes to their lab strategy as a result of PAMA.
- Nearly a fifth of the respondents (19%) reported that the law is causing them to begin rethinking their organization’s lab strategy.
- Almost a quarter of the respondents (24%) indicated that the law isn’t spurring any change to their overall lab strategy.
- More than half of the respondents (54%) reported to researchers that they are unsure about how the law is affecting their organization’s lab strategy, if at all.
It would appear that very few members of hospital management teams either within or outside the laboratory are aware of PAMA, have an understanding of its probable effects on their operations, or are taking steps to address the changing circumstances brought about by PAMA regulations.
A bright spot in the survey findings is that those hospital executives whose institutions maintain outreach lab businesses are far more likely than other executives to know about PAMA. This makes sense, since Medicare’s CLFS does not apply to inpatient hospital testing, but rather to testing performed by a hospital lab on nonpatient specimens—that is, specimens drawn at physicians’ offices or patient service centers. An outreach lab business typically uses a laboratory operated by a hospital to serve patients who are being seen by physicians outside inpatient or outpatient settings.
By comparison to that finding, 50% of executives at organizations that don’t have an outreach lab business indicated that their institution is not facing any reimbursement pressure on lab tests.
The Quest survey did not evaluate responses from executives at independent labs. It is likely that such individuals have a better grasp of PAMA, and a better plan for dealing with the effects of implementing PAMA regulations. Still, among a group of providers that serve a wide swath of Medicare beneficiaries and other US patients, the survey reveals troubling gaps in preparedness.
Institutions with an outreach lab business that haven’t already begun to feel the effects of PAMA should consider themselves fortunate. Now is the time to make sure that all healthcare executives are fully educated about PAMA, so that they can mobilize a plan for dealing with the effects of PAMA when they begin to be felt (see “Planning for PAMA”).
Run the Numbers
Many laboratory executives have an astonishing grasp of every facet of their lab—except, perhaps, their line-item financials. In some ways, this is not surprising: health systems often consolidate a laboratory’s financial performance with the performance of other operations listed in the organization’s profit and loss statements. Moreover, laboratorians are apt to be more passionate about patients than about financial statements.
Still, lab executives who understand trends in capital expenditures, operating margins, revenue, test volume, and other basic financial data will be better prepared to anticipate the effects of PAMA and other payment cuts, and to implement mitigating measures well in advance.
According to the Quest survey, 20% of healthcare executives are unaware of their outreach lab’s performance—once again showing that labs may not be as top-of-mind for executives as they should be, considering their revenue potential and influence over decisions relating to the delivery of patient care. In answers to the survey, 52% of respondents indicated that they are unsure about the law’s impact on their health system’s outreach lab revenues.
While a broad range exists, hospital margins are increasingly razor-thin. In 2017, median operating margins among not-for-profit hospitals were 1.6%—an all-time low.8 Double-digit decreases in reimbursement from the CLFS—even for a small Medicare population—can easily push such low margins into the red.
Once the near- and long-term effects of PAMA on a lab’s financial performance are understood, laboratory management should seek to address some key issues, including the following.
- Most labs will need to consider how to lower their costs far enough to absorb the payment cuts resulting from PAMA, while maintaining the high levels of service, innovation, and quality expected by the lab’s physician- and patient-clients.
- Labs will need to ensure that they have sufficient capital to purchase state-of-the-art equipment, to attract and retain expert personnel and associated in-lab staff, and to provide a robust clinical test menu.
- There will also be pressure for labs to find the funding and expertise needed to support the high-tech connectivity and data analytics infrastructure that are essential for seamlessly integrating data across outreach, inpatient, and other settings, as well as for meeting patient expectations of a digitized consumer experience.
- Finally, in light of mounting cost pressures, labs may need to consider whether divesting an outreach business would free up capital and better enable the institution to focus on its core healthcare mission.
While not every organization should turn to a specialist provider for lab optimization, outsourcing arrangements or outright sale of an outreach lab can alleviate reimbursement pressures through better cost management combined with improvements in quality and service. The experience of Quest Diagnostics in working with more than a hundred hospitals and health systems suggests that outsourcing, outreach sale, and joint venture arrangements can often reward an institution with improved quality, patient access, and cost efficiencies (see “Making New Arrangements”).
The disruptive effects of PAMA on the clinical laboratory community are destined to increase over time. Laboratory executives should take the time to understand the law, educate and collaborate with other decisionmakers, and develop a business plan based on a robust financial analysis. Lab leaders who are clear-eyed about the challenges ahead will be better able to rise and meet those challenges.
Christine Tobias is executive director of operations at Quest Diagnostics and serves as CEO for one of the company’s joint ventures with a large integrated hospital system. For further information, contact CLP chief editor Steve Halasey via [email protected].
The American Clinical Laboratory Association has made available an online tool that enables laboratorians to contact their members of Congress with views about implementation of the Protecting Access to Medicare Act of 2014 (PAMA). To access the tool, visit www.acla.com/take-action.
- Setting Medicare Payment Rates for Clinical Diagnostic Laboratory Tests: Strategies To Ensure Data Quality [online]. Washington, DC: Department of Health and Human Services, Office of the Inspector General, 2018. Available at: https://oig.hhs.gov/oei/reports/oei-09-17-00050.pdf. Accessed February 3, 2019.
- CAP Files Legal Brief Supporting Challenge to Correct Scheme for Setting Medicare Fees for Clinical Laboratory Tests [press release, online]. Northfield, Ill: College of American Pathologists, 2018. Available at: www.cap.org/news/2018/cap-files-legal-brief-supporting-challenge-to-correct-scheme-for-setting-medicare-fees-for-clinical-laboratory-tests. Accessed February 3, 2019.
- Protecting Access to Medicare Act of 2014. PL 113–93.
- Khani J. Patient Care Is Put to the Test as Clinical Laboratory Services Are Hit with a One-Two Punch in Rate Cuts [online]. The Hill. March 3, 2018. Available at: https://thehill.com/blogs/congress-blog/healthcare/376887-patient-care-is-put-to-the-test-as-clinical-laboratory Accessed February 2, 2019.
- Gerteis J, Izrael D, Deitz D, et al. Multiple Chronic Conditions Chartbook: 2010 Medical Expenditure Panel Survey Data. AHRQ publication no. Q14-0038. Rockville, Md: Agency for Healthcare Research and Quality, 2014. Available at: www.ahrq.gov/sites/default/files/wysiwyg/professionals/prevention-chronic-care/decision/mcc/mccchartbook.pdf. Accessed February 25, 2019.
- Key Issues and Facts on PAMA Reforms and Laboratory Services [fact sheet, online]. Washington, DC: American Clinical Laboratory Association, 2018. Available at: www.acla.com/wp-content/uploads/2018/05/pama-facts-one-pager.pdf. Accessed February 25, 2019.
- PAMA is Here, and Most Hospital Leaders Are Unaware of Its Impact [white paper, online]. Detroit: Modern Healthcare Custom Media, 2018. Available at: www.modernhealthcare.com/assets/pdf/ch1180771128.pdf. Accessed February 24, 2019.
- US NFP and Public Hospitals’ Annual Medians Show Expense Growth Topping Revenues for Second Year [press release, online]. New York City: Moody’s Investors Service, 2018. Available at: www.moodys.com/research/moodys-us-nfp-public-hospitals-annual-medians-show-expense-growth–pbm_1139331. Accessed February 13, 2019.
- Stop Medicare Lab Cuts: HHS Is Putting Seniors’ Health at Risk by Reducing Access to Vital Lab Tests [online]. Washington, DC: American Clinical Laboratory Association, 2019. Available at: www.acla.com/pama. Accessed February 13, 2019.