Payor pricing will provide basis for future Medicare rates

Interview by Steve Halasey

In the middle of June, the Centers for Medicare and Medicaid Services (CMS) issued its final rule implementing section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA), and requiring laboratories that perform clinical diagnostic laboratory tests to report the amounts paid by private insurers.1 Medicare will use reported private insurer rates to calculate its payment rates for tests paid under CMS’s clinical laboratory fee schedule (CLFS) beginning January 1, 2018.

Under the revised CLFS, payment rates for most tests will be updated every 3 years to reflect market rates paid by private payors. But for a new category of tests—advanced diagnostic laboratory tests (ADLTs)—pricing will be updated every year.

To find out more about PAMAs final implementing regulations and how they will affect clinical labs, CLP recently spoke with Rina Wolf, MHA, vice president for commercialization strategies, consulting, and industry affairs at Xifin Inc, San Diego, a provider of health economics optimization services to the clinical laboratory community.

CLP: Under CMS’s final PAMA regulations, what criteria define an applicable clinical laboratory that will be required to report?

Rina Wolf, MHA, Xifin.

Rina Wolf, MHA, Xifin.

Rina Wolf, MHA: Following the final PAMA regulations, an “applicable clinical laboratory” must first issue at least 50% of its billings to CMS according to the agency’s clinical laboratory fee schedule (CLFS) or physician fee schedule. And second, the lab must bill at least $12,500 in CLFS revenue for each year. So, for example, a physician office laboratory (POL) might perform and bill for $12,500 worth of in-house laboratory services during a year but, as I interpret the final rules, the POL would not be considered an applicable lab unless that $12,500 represented at least half of all its billings submitted to CMS. The rules are still somewhat fresh, but at this time thats how we’re interpreting them on the question of what constitutes an applicable lab.

In the final rules, the biggest change we’ve seen is in how hospital outreach laboratories are defined as reporting entities. Hospital outreach laboratories that satisfy the other criteria will be required to report independently only if they have their own, specific national provider identifier (NPI). We’re still working to figure out what percentage of hospital outreach laboratories have their own NPI numbers, but it is likely that CMS had this information when making this decision.

Hospital outreach laboratories are at a disadvantage if they have to go through a hospital system for their administrative functions. Hospital systems are historically poor at billing, especially for laboratory charges, and some hospital systems dont have the ability to register a tested individual as a nonpatient. But it’s really important for a hospital to have a system that can identify and bill those nonpatients. If a tested individual is registered in a hospital system as either an inpatient or outpatient, any testing involving that patient could easily fall under bundled payment requirements, under either the date of inpatient service or of services provided under the outpatient prospective payment system (OPPS).

CLP: Consolidation among hospitals and other healthcare provider entities, including physician groups, has raised questions about the organizational structure and licensing of labs belonging to consolidating entities. Will the PAMA reporting requirements have any influence over labs that must decide whether to integrate or maintain separate licensing?

Wolf: I would think that would be a consideration. But another trend were seeing is that more and more hospitals are turning to large laboratories such as Quest or LabCorp, and encouraging them either to take over the management of the hospital’s laboratory operations or to buy those operations outright. Last year, for example, HCA North Texas entered into an agreement for Med Fusion to provide local reference lab testing services. And more recently, HealthOne, an HCA system in Denver, turned over management of its clinical labs to Quest. We don’t yet know how these changes are going to affect PAMA reporting.

It is pretty much a given that hospital laboratories garner more favorable payment rates from commercial payors than other labs receive. That’s why, when the PAMA rules were being formulated, there was such a call to arms to come up with a means of including more hospital laboratories. But how much the final rules may have increased the percentage of hospital labs—and how that increase might affect payment rates, on a percentage basis—we dont know.

CLP: CMS has indicated that the PAMA reporting requirements will not apply to about 95% of all physician office laboratories and about half of all independent laboratories. With so many labs excluded, will the final sampling provide enough data to permit calculation of representative market prices?

Wolf: For physician office labs that percentage doesnt surprise me, because of the requirement that half of their Medicare billing has to be for laboratory services. It makes sense that the number of POLs excluded from the requirements would be very high. For independent laboratories, however, that percentage seems to me to be rather large. A lab would have to be pretty tiny not to be included under the PAMA criteria.

In any case, I believe there will probably be good representation. Remember, the rules still incorporate a weighted median methodology, so data reported by a very small lab are unlikely to move the needle one way or the other. Even if you considered a large group of small labs, it’s doubtful that their data would be very meaningful when compared to the volumes of Quest, LabCorp, the Mayo Clinic, and other very large laboratory entities.

CLP: What will the applicable labs be required to report? Have these requirements changed in the final version of the rules?

Wolf: The requirements may not have changed, but we have seen some clarification. Basically, the information that labs will be reporting is data about all claims paid during the reporting period, the first of which runs from January 1 through June 30, 2016. So the first period has already come and gone; labs that didnt get their contracts in order for payment before now have essentially missed that boat.

CMS wants labs to include data only for claims that have been fully adjudicated during that period. If a claim has been billed but hasnt been paid, or if a claim is still in an appeals process and the final payment hasnt been received, then that claim will not be considered. It’s not the date of service that’s the critical date, or even the date that the claim was submitted, it’s the date that the absolute final payment is received from the payor.

CMS further clarified that it will be looking at allowed amounts, including whatever amounts the payor deems to be the patient’s share of costs. If the payor pays $100 and determines that the patient is responsible for copayment of an additional $50, then the full paid value of the claim would be considered $150.

CLP: When and how will labs be required to report claims for tests that have been newly added to CMSs clinical lab fee schedule?

Wolf: Let’s say we have a new code that’s effective in 2018, but the relevant reporting period has already come and gone. In that case, as I interpret the rules, the lab would then be required to report claims on that code in 2019, for adjustments to be made during the second round, in 2020.

However, the restriction against incorporating a new code before the next update round would not apply if the lab applies for and is granted status as an advanced diagnostic laboratory test (ADLT).

CLP: In addition to reporting the monetary value of their tests, labs also have to report their volume for each test, is that correct?

Wolf: Yes. That information is important because of the weighted median methodology.

CLP: When will the reporting requirements go into effect?

Wolf: The required dates for reporting have been delayed from those in CMS’s original proposal because the final rule needed to clarify exactly what kinds of labs have to report, what information they are required to report, and how CMS expects the reporting process to work. The agency will require claims data from the first half of this year, even though very little notice was given about that requirement.

On the upside, the data don’t have to be actually reported until the first quarter of 2017. We’re being told that there will be some kind of online portal where companies will submit their data, but at the moment we don’t have any details about how labs will be expected to aggregate their data, or about what the online portal might look like. Exactly how companies will be expected to respond may still be somewhat reliant on how the portal is designed to accept company data.

CLP: Has CMS announced when the portal will be available?

Wolf: No. Obviously, it has to be available by January 1, 2017. Long before that, however, it would be reasonable to have some testing going on, and some information about exactly what the process is going to look like.

CMS holds its annual stakeholders’ meeting on July 18. Last year at this meeting, they referenced the portal, but without any details. It will be interesting to see if they reference it again at this year’s meeting, perhaps with more color.

CLP: The final regulations create special procedures for handling pricing data for a new product category called advanced diagnostic laboratory tests (ADLTs). CMSs language defining ADLTs is somewhat complex. Can you clarify?

Wolf: The final PAMA regulations establish two routes for tests to qualify as ADLTs, and thereby to receive payment at actual list rates for their first 3 calendar quarters after they have received coverage from Medicare.

Both routes begin their definition of an ADLT as a clinical diagnostic laboratory test, covered under Medicare part B, that is offered only by a single laboratory and not sold for use by a laboratory other than the single laboratory that designed the test or a successor owner of that laboratory.

What is different in this final version of the regulations is the statement that an ADLT is a test covered under Medicare part B. Previous versions of the rules said that ADLT status—and thus the 3 calendar quarters used to define the test’s price—started on the day that the test became commercially available. But it’s very rare for a test to receive Medicare coverage, be submitted for payment, and get paid for, all within the first 9 months of its commercial availability. The revisions of the final PAMA regulations make more sense, and begin ADLT status from the time that the test is considered a covered service.

On top of this basic requirement, ADLTs must meet additional criteria in accordance with the route selected. According to the simplest route provided by CMS, an ADLT is any in vitro diagnostic test that has been cleared or approved by FDA. Any test that satisfies this requirement is considered an ADLT, and does not have to meet any other criteria.

The second route provided by CMS requires that a test meet several distinct criteria to qualify as an ADLT:

  • The test must provide an analysis of multiple biomarkers, such as DNA, RNA, or proteins. Labs fought hard for the addition of proteins to this criterion.
  • It must incorporate a unique algorithm.
  • When combined with an empirically derived algorithm, the test must yield a result that predicts the probability that a patient will develop a certain condition or respond to a particular therapy.
  • It must provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests.

CLP: Under the final regulations, how will the reporting of charges for ADLTs work, and how will that information go into establishing the fees that CMS will subsequently pay for those tests?

Wolf: Some labs have requested or obtained CPT codes for their new tests, and have already requested ADLT status. Where CPT codes exist, labs are still using code stacking as the basis of their billing process. We thought that we had price resolution on existing codes last year, but the fees that CMS has proposed for 2017 suggest that we still have some work to do. Once the pricing for existing codes is finalized—creating national price limits that will become effective January 1, 2017—labs will be required to report the pricing of those tests on an annual basis (not every 3 years, as for other tests) beginning in 2017. The tests will then be subject to reductions of up to 10% annually if their aggregate allowed amounts or contracted amounts from commercial payors are less than their CMS rates. All of this applies to tests that exist now and have already obtained Medicare coverage and CPT codes.

Labs that are introducing new tests will need to decide whether their tests qualify as ADLTs, and whether they want to apply for ADLT status. There are advantages to that status, but also some disadvantages. For example, many new tests are billed using not otherwise classified (NOC) codes, especially for commercial payors. If the laboratory doesn’t apply for ADLT status—which would require the lab to get a temporary HCPCS code, at least for the first 2 years—then technically the lab might not have to report under PAMA at all, because NOC-coded tests aren’t reportable.

CLP: Does the lack of reported pricing for certain categories of tests, such as ADLTs, create a potential problem when it comes to calculating market pricing? Similarly, what happens when the costs of testing are not reported separately, but are subsumed within the bundled payments for a defined episode of care?

Wolf: If the cost of a test is bundled with other provider charges—whether because the test was ordered within 14 days of an inpatient or outpatient hospital stay, or is covered under OPPS payments or something like that—the code really doesn’t matter, because the payment will be whatever the payment is for that bundle.

In some circumstances, the MolDx program administered by Palmetto GBA does not accept existing CPT codes—not necessarily for ADLTs, but also for other types of tests. The program is forcing labs to use NOCs, combined with a Z code identifier, even when there are other alternatives.

Similar questions surround coding and payment for urine drug testing. During the first half of 2016 we’ve seen quite a combination of toxicology codes being used, depending on the payor. We have new CPT codes from the American Medical Association, which some commercial payors are accepting. And we have G codes, used for bundled payments, which CMS created and is demanding that labs use.

And to complicate matters even more for presumptive testing, CMS has proposed a link back to CPT codes for 2017. So, even if we get price information for the first half of 2016, when private payors agreed to use G codes, are they going to apply to the presumptive CPT codes for 2018? For the definitive codes, there will be data to report on the G codes as more and more commercial payors began to accept them during the first half of 2016.

CLP: The final PAMA regulations permit CMS to reduce payments in line with market pricing, but limit the percent of reductions that can be imposed in particular years. How will that work?

Wolf: For the first 3-year pricing cycle, from 2018 through 2020, the maximum pricing reduction that can be imposed each year is 10% of the previous year’s rate. But for the second 3-year pricing cycle, from 2021 through 2023, that maximum reduction rises to 15% per year.

CLP: How much of a gap currently exists between the private payor market prices for tests and what CMS is paying? Ultimately, what level of reductions do you expect will be implemented, and how long will it take before the public and private markets reach parity?

Wolf: I do believe that in many cases CMS has been paying quite a bit more than commercial payors, especially for some of the older, more generic type tests. In the past, a typical payor contract was either at the Medicare rate or maybe 10% or 15% below it. Occasionally if the contract was for a newer test, it might have been slightly above the Medicare rate. But those days are gone, and now we are seeing contracts that are below half of what Medicare may be paying. There are contracts out there for 40% of the Medicare rate.

I don’t know how much of an improvement in pricing might be found among hospital outreach labs. I believe there should be an improvement over where the rates would be without their inclusion, but I can’t quantify how much it will be. I would think that there is potential for many tests to get hit at the full level of permitted reductions—but probably not all of them.

CLP: Will the new regulations permit labs to preserve charge value for new and more-sophisticated tests—predominantly molecular diagnostics and next-generations sequencing (NGS) tests, when those begin to be adopted—or will the pricing of those tests rapidly go in the same direction as existing products?

Wolf: As of now, the majority of payors do not have formal coverage policies for sophisticated molecular and sequencing tests. Consequently, the laboratories that perform those tests are typically out-of-network and noncontracted. This means that they can pretty much fight for the price that they want and that they feel is appropriate for commercial payors. If they can win the fight to keep those prices at a reasonable rate with commercial payors, they will be better positioned to keep CMS prices higher.

Right now, CMS’s proposed prices for NGS tests are quite low and problematic. That’s an area where we could see CMS having to increase its prices. Remember, it’s not mandated that the PAMA process always result in price reductions. If laboratories can demonstrate that commercial payors are paying more, CMS would then, theoretically at least, have to raise its prices.

CLP: That would seem an impetus for labs to make sure that they are keeping up with the latest technology.

Wolf: Right. Recognizing that this is easier said than done, what we’ve been saying to our clients is, “If you possibly can, when you negotiate contracts, especially for proprietary tests, negotiate that contract based on a specific dollar amount rather than a percentage of Medicare.” That’s the only way labs are going to have some control over their pricing destiny.

Another thing that’s important to consider is that capitated rates are excluded from the PAMA pricing process. A large laboratory that is positioned to take on the risks associated with capitated rates can protect itself from low pricing for specific code-related tests, because they will be getting a flat rate anyway.

CLP: Now that the final regulations have been published, what should be the first action item for labs that will be required to report their payments?

Wolf: Once a lab has ascertained that it is an applicable laboratory, it’s absolutely imperative that management look at their financial management system and make sure that they can extrapolate and aggregate the data they’re going to need. The 6 months that remain before labs will have to begin reporting is not a very long time to figure out how they will pull together their data—let alone to actually do it. Some laboratories—even some fairly sizable laboratories—are still keeping track of their data on spreadsheets. The very first thing they need to do is to look at their systems and make sure they’re going to be able to manage the process of submitting the required data. Because the rule still includes penalties for labs that fail to comply. CMS has stated that it is going to approach such penalties reasonably, but they’re still in the rule.

CLP: Those are pretty steep penalties, too.

Wolf: Yes. The fines can be as much as $10,000 per instance per day. Systemic changes and upgrades take an enormous amount of time and resources. We’ve been trying to get this message across to laboratories ever since PAMA was signed into law. Hopefully many labs have heeded it. But we’ll see.

Steve Halasey is chief editor of CLP. He can be reached via [email protected].


  1. Medicare program; Medicare clinical diagnostic laboratory tests payment system. 81 Federal Register 121 (June 23, 2016):41036–41101. Available at: Accessed June 28, 2016.