Capitol building

In a bill originally focused on forestalling a steep drop in physician payment, Congress has laid out plans for a completely different approach to paying for laboratory testing that will lead to sweeping changes in laboratory medicine for decades. Signed into law by President Obama on April 1, the law will take the traditional means of pricing tests by the Centers for Medicare and Medicaid Services (CMS) and slowly turn it on its head. Beginning in 2017, Medicare will rely on an average of private payer rates to set Medicare's fee schedule, and give special treatment to single-source proprietary tests. Among the law's many changes are new procedures for coding new tests, a new expert advisory panel on lab reimbursement, and a ban on annual lab fee schedule updates, cuts, and adjustments.

While advocates for physicians, clinical laboratories, and in vitro diagnostics manufacturers all seem to have found aspects of the law to praise as well as to condemn, experts agree that it will set reimbursement on a new course that almost certainly will lead to payment cuts for some tests and increases for others.

"This is the first time that there has been anything substantial done to the clinical laboratory fee schedule since it was created nearly 30 years ago," noted Charles Root, PhD, founder and president of the reimbursement and compliance consulting firm CodeMap. "I think in the long term the new market-based structure will be more transparent and predictable, compared to the current payment system that can seem totally arbitrary. But there is no question that some tests will take a hit."

A Hold on Deep Cuts—For Now

The new law—known as the "doc fix" because it delays a scheduled 24% cut to physician payment—starts off with some good news for labs, according to experts. Most importantly, it forestalls plans CMS announced last year to begin cutting lab payments based on so-called technology changes. These adjustments would likely have meant deep cuts for many tests in 2015, according to Root.

"The law puts the brakes on any draconian cuts that may have been planned," Root said. "Under the technology change proposals, we had anticipated easily 50 percent cuts in a lot of tests."

Uncertainties lie ahead as regulators begin implementing the new law over the next 3 years, but averting the anticipated technology change cuts offers labs a much-needed break, said Rina Wolf, vice president of commercialization strategies, consulting, and industry affairs at XIFIN, a revenue cycle solutions company. "The fact that we will be kept whole on pricing through 2016 will be the first time we will have had any breather from the prospect of cuts in quite a few years—that is a big positive," Wolf said.

In fact, Root is cautiously optimistic that reimbursement for some tests under the new market-based system could even improve. "I think it's possible that some of the market rates will be surprisingly good, but it remains to be seen what the results will be: it's very complex, and a lot will depend on the details of the regulations that are yet to be written. At least it's a process with a reasonable amount of transparency, and within the next few years a definitive pricing system will develop that should be more predictable."

Two Paths for New Tests

Under the new physician payment law signed on April 1 by President Obama, market-based rates will become the norm for both existing and new tests. However, the law also introduced two key pathways for introducing new tests. These provisions could be good news for labs, according to experts. A unique provision in the law for the first time creates a special category for advanced diagnostic tests, defined as a test provided only by a single lab, not sold for use by other labs, and that meets one of three criteria: the test is an analysis of multiple biomarkers of DNA, RNA, or proteins combined with a unique algorithm to yield a single, patient-specific result; the test is cleared or approved by the Food and Drug Administration; or the test meets other similar criteria that the Secretary of Health and Human Services sees fit to create.

These advanced tests for an initial period of 9 months will immediately receive the list price under Medicare. After that point, Medicare will review actual private payer data for the test and recoup any Medicare payments that ran more than 30% over the private payer median. At this point, the 3-year cycle of market-based reporting and rate-setting kicks in.

According to Paul Radensky, MD, JD, a partner with the law firm McDermott, Will & Emery in Washington, D.C., this provision for advanced tests will build upon the work labs already do to get contracts with private payers. “The idea is that if you convince a private payer to agree to a contract, they must feel it’s valuable to their beneficiaries, and the rate would demonstrate that sense of value,” Radensky said. “This will mean that Medicare will reflect at least the value that private payers see.” 

One caveat to the excitement over immediate payment for these advanced tests is the quirks of the definition of “advanced” in the law. “The algorithmic requirement is one that the next-generation sequencing tests would not meet, and that’s where so much of the innovation is being done right now,” noted Rina Wolf, vice president of commercialization strategies, consulting, and industry affairs at XIFIN, a revenue cycle solutions company. “This is a big unanswered question.” In addition, the law does not guarantee that Medicare will cover these tests—only set payment for them if and when they are covered.

For new tests that don’t fit the special advanced diagnostics criteria, the law promises to speed payment and force CMS to make more deliberate decisions on initial rates. The law spells out how CMS must assign codes and use the gapfill process for initial pricing of new tests. It also creates a new advisory board of laboratory medicine experts who must be consulted.

New assays almost certainly will benefit under this provision, emphasized Charles Root, PhD, founder and president of the reimbursement and compliance consulting firm CodeMap. “I think this could be a tremendous boon to new technology, especially for molecular diagnostics. It will avoid big disruptions like we had in 2013 where labs literally went out of business because Medicare had not priced the test,” he said.

Rolling With the Markets

The law leaves many of the details of the new reimbursement scheme up to CMS, which will begin drafting regulations next year for how the law is implemented. This will be one opportunity for labs to participate in the process as the rulemaking and comment periods unfold. But there is no doubt that the market-based system marks a significant departure from what the lab community has come to expect from Medicare's fee schedule. Currently, CMS sets rates for new tests based on its own system of comparing new tests to old, called crosswalking. Once a rate is set for a test, it remains unchanged except for across-the-board updates, such as for inflation—or more recently—cuts by Congress.

Market-based pricing under the new law will reboot both CMS's traditional rate-setting method as well as the yearly cycle of inflation updates. Instead, the system will seek to mathematically mirror the private market based on a continuous, 3-year cycle beginning in 2016. At the beginning of each cycle, labs will report the rate and volume paid by each private payer for each test—excluding capitated payments such as the diagnosis related group system for inpatient care. CMS will then set a rate for each test using the weighted median of private payments. For the initial cycle, this means that CMS will set new, market-based rates on January 1, 2017 based on what private payers paid in 2015.

The looming question is, how low will these new market rates be? Currently, many labs offer significant discounts to private payers, with Medicare rates as only a starting point for negotiations. If going forward Medicare mirrors a highly discounted market—only to have the payers turn around and expect more discounts—the results appear bleak.

"Right now the large national labs already have painfully low pricing with the big payers, and that pricing is going to skew what almost everyone else submits to CMS," said Wolf. "The reasoning behind this law is to position CMS to be the lowest payer. However, if we see adjustments downward on the first cycle of market-based pricing in 2017 for CMS, then commercial payers which have already begun to set contracted rates at half or less of the Medicare rates, will also likely attempt to reduce their rates, causing the next round of submissions to CMS in 2019 to be even lower, unless laboratories get much smarter about contracting before 2016. If not, where will it end?"

Market-based pricing also means a paradigm shift for Medicare that pits the agency's healthcare mission against the profits of payers, commented Roland Valdes Jr., PhD, president of PGXL Laboratories and professor of pathology and laboratory medicine at the University of Louisville. "I think the concept of market-based pricing is somewhat misguided," Valdes said. "The mission of CMS is providing diagnostic and medical services to the population as a non-profit, public entity. On the other hand, commercial payers have almost exclusively a pro-profit motive. Those are two very different approaches to how you manage expenses. Yes, both want to reduce costs. But there is a difference between reducing costs because a private payer wants to make a profit, and CMS reducing costs to make the system more effective and efficient based on enabling healthcare access."

The law does limit how deep market-based rates can cut the current fee schedule for the first 6 years. For 2017–2019, CMS cannot reduce the payment for an individual test more than 10% per year, and for 2020–2022, not more than 15% per year. But for their long term financial health, experts told CLN that laboratories will have to stand up to payers and put an end to business as usual.

From now on, labs will have to embrace a new normal as they look at their negotiations with private payers, according to Paul Radensky, MD, JD, a partner with the law firm of McDermott, Will & Emery in Washington, D.C. "Labs will have to consider carefully before they simply accept rates that are tied to a certain percentage of Medicare," Radensky said. "I think one of the reasons the market-based pricing does not go into effect until 2017 is to give labs some time to factor the law into their discussions with private payers." Radensky worked on the negotiations with Congress over the new law on behalf of several stakeholder groups, including the Coalition for 21st Century Medicine and the Clinical Laboratory Fee Schedule Reform Coalition.

Root agreed. "I think labs will be much more hesitant to accept these heavy discounts with payers once the market value is in place," he said. "However, there still might be some interesting strategizing by the big labs, which will have a large say in how this will play out."

The tests most vulnerable to cuts under the new system will be the top 20 to 50 common, high-volume tests, Root said. For example, some of the immunoassays based on old technology are still paid at about $25 per test under Medicare, but it's widely known that it might only cost the lab $2 to perform them. On the other hand newer, more advanced tests should see more stable pricing, and could even go up, he said (See Box, p. 3).

Big Questions on Law’s Effect on Coverage Policies

The “doc fix” law signed on April 1 by President Obama lays out a new reimbursement framework for clinical laboratory tests, but says little about coverage—which tests Medicare will deem “reasonable and necessary.” However, some language in the law does leave the door open to a long-standing question: could one Medicare administrative contractor’s (MAC) coverage and payment program be nationalized? In particular, many in the diagnostics industry have wondered whether the Centers for Medicare and Medicaid Services (CMS) might not leverage a program created by the contractor Palmetto GBA into a national program. Palmetto’s Molecular Diagnostics Services Program (MolDX) was the first in the nation to systematically evaluate, price, and determine coverage for molecular tests under Medicare. The program still determines the fate of molecular tests in California, Nevada, and Hawaii.

Under the new law, the Secretary of Health and Human Services (HHS) is given authority to designate 1 to 4 administrative contractors, a provision that could upend the current regime of 10 contractors across the country, noted Rina Wolf, vice president of commercialization strategies, consulting, and industry affairs at XIFIN, a revenue cycle solutions company. “A big concern is that this language in the law leaves the door open for the nationalization of the MolDx program that Palmetto has been lobbying for,” she said. “We welcomed the intent of this program to provide much needed clarity to the coverage process, but to date have seen inconsistencies in its application. It’s also unclear how CMS will decide if it is to be only one contractor or more, and what the criteria would be for the selected contractor. That’s a big unanswered question right now.”

A nationalized MolDX program concerns Wolf and others in the industry for several reasons. “We’ve recently seen local coverage determinations for pharmacogenomics and drugs of abuse testing, in which they followed the process, allowed for a comment period, but then absolutely ignored all of the comments that they received,” Wolf said.

In response to such decisions, the law firm Hooper, Lundy and Bookman, PC, in April filed a complaint on behalf of the California Clinical Laboratory Association (CCLA) and a Medicare beneficiary against HHS, charging that MACs continue to develop and apply local coverage determinations that result in policies depriving Medicare beneficiaries of necessary testing services.

“Today, the MACs have a stranglehold on critical, cost-effective innovation,” said attorney Patrick Hooper of Hooper, Lundy & Bookman, who is lead attorney for the plaintiffs in a statement. “Our clients have been forced to bring this lawsuit to bring attention to, and change, the current practice of denying coverage for critically important laboratory services. In addition, the same private insurers who make determinations for Medicare, also make determinations in the private market, so the entire population is affected.”

Some Labs More Vulnerable Than Others

If market-based pricing does push Medicare rates down, the effect on labs could be uneven, depending on the size of the lab and even geography. For example, urban areas could face tougher competition for contracts compared to rural areas, given the higher number of players, Wolf noted.

With a drop in prices expected to hit routine tests hardest, Root believes that smaller labs will do better if they have a diverse menu. "These high-volume tests could easily migrate over to the big labs if the small labs can't afford to do them anymore," Root said. "If that's all the small lab is doing, they're vulnerable. But if they have a fairly broad menu and they're serving specialized clients that don't just want basic metabolic panels and cholesterol tests, they might be okay."

Market-based pricing could also favor independent labs over hospital outreach labs, if indeed CMS includes outreach labs in the definition of an "applicable laboratory" under the law, according to Wolf. "This could really be a good thing for the independent lab industry because hospital laboratories until now have been paid very generously compared to some of the independent labs, and this could even the playing field," she said.

While large, national labs might feel empowered by the law to change the dynamics of their contracts, it's hard to imagine small independent and hospital labs gaining any leverage with private payers, Valdes said. "I can tell you from experience, that when you go to a private payer, they are looking for every conceivable way for not paying for something, no matter how they view the evidence, and I suspect decisions are driven mainly by market share competition," he said. "Especially a small lab like ours, what leverage do we have? I'm very concerned that this will bias lab medicine against small and even medium size laboratories."

The predicted effects on different kinds of labs also played out in the response of the various societies and advocacy organizations that represent the laboratory medicine community, with some praising the law and others highly skeptical of it. The Advanced Medical Technology Association (AdvaMed) said that it "supports provisions in the SGR legislation which will modernize the clinical lab fee schedule and recognize the value of diagnostics to healthcare outcomes." The American Clinical Laboratory Association (ACLA) also voiced support for the law.

In contrast, the National Independent Laboratory Association (NILA), which represents independent community labs, criticized the law, saying in a letter to the chairman of the Senate Finance Committee that the law "continues to build upon a flawed precedent" of cuts to labs that don't improve quality of care for patients or significantly reduce healthcare spending.

AACC leaders also expressed concern. "AACC is concerned about the impact of looming cuts in laboratory reimbursement," said James H. Nichols, PhD, medical director of clinical chemistry at Vanderbilt University Medical Center and chair of AACC's Government and Regulatory Affairs Committee. "We believe that Congress and CMS should assess the overall effect of some of these provisions on hospitals and small laboratories before implementing them. AACC is concerned these payment reductions may force some labs out of business and others to scale back their services, particularly in underserved areas."

Most concerning to NILA and the small labs it represents is the prospect of significant drops in prices to routine tests. Community and regional labs are especially sensitive to price pressures since they often serve vulnerable populations in niche markets that national labs do not, such as nursing homes or homebound patients who require phlebotomists to visit them. This leaves community labs little means to cope with declining reimbursement, noted Julie Allen, senior vice president at the District Policy Group, the lobbying division of Drinker Biddle and Reath and a Washington, D.C. representative for NILA.

"We take issue with this being called market-based reform, because it doesn't fundamentally seek to address some real problems with the way laboratory services are priced, including how national contracts are derived," Allen said. "There are arrangements where large labs have grossly underbid contacts and then turned around and charged Medicare more, which is the subject of significant lawsuits and accusations of fraud. But rather than take any time to consider those issues, Congress made a choice that those rates are going to be what CMS acts on."

While the market-rate scheme will not bring capitated contracts into the equation, it is also a concern that the new law could be interpreted to not include hospital payments. This could significantly skew the data when labs report pricing information to CMS, Allen said, since hospitals are a significant part of the lab market and their rates can vary from independent labs.

Market-based pricing has the potential for uneven consequences for different testing methods as well. In particular, point-of-care testing (POCT) is at risk. If routine tests are sent into a downward spiral, POCT paid under the lab fee schedule looks nearly unsustainable, since POCT is more expensive than the central lab.

"We are very concerned that point-of-care testing could get thrown under the bus in the process because of the technology difference," Root said. "Our strategy with CMS is to convince them to use different codes for point-of-care testing, or for certain essential tests. If they recognize those separately, eventually they get priced separately, and the market will come around."