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Market-based Reimbursement Provisions for Lab Tests in HR 4302 Passes Senate with Industry Backing

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Originally published April 1.

The threat of across-the-board payment cuts for lab tests has spurred the seemingly impossible: consensus within the diagnostics industry around a common purpose.

In a 64-to-35 vote last night, the US Senate passed HR 4302, "Protecting Access to Medicare Act of 2014," which delayed for another year a 24 percent Medicare payment cut for doctors that was slated to take effect this month. The bill, sponsored by Representative Joseph Pitts (R-Penn.), also included a section that will establish a market-based payment system for diagnostics under the Clinical Laboratory Fee Schedule (CLFS). Now headed to the White House for a presidential signature, HR 4302 institutes long-awaited Medicare reimbursement reforms for diagnostic tests and establishes a new payment scheme that industry representatives find more agreeable than the significant reductions hanging over the lab sector.

"I like to think of the diagnostics industry as [having] four parts: the sole-source labs, hospital-based pathologists, large clinical labs, and diagnostic kit manufacturers," said Amy Miller, executive VP of public policy for the Personalized Medicine Coalition, which represents the interests of different stakeholders in the life sciences field. "They're quite varied and they don't always agree, but they seem to on this."

The legislative vote on HR 4302 comes amid a storm of reimbursement changes for the diagnostic industry. While disparate diagnostic industry stakeholders — pathologists, labs, and test manufacturers — have often disagreed on which specific reimbursement proposals to support, they found themselves united in their resolve to thwart impending Medicare and legislative cuts for tests and try to advance a payment system that is more transparent, predictable, and better reflects the fast-evolving molecular testing industry.

"If we looked back over the past three years, the [Centers for Medicare & Medicaid Services'] decisions haven't served the diagnostics industry very well," Miller said. "The [solution proposed] in the bill is likely the result of industry players working together in the face of a more egregious push from CMS."

In the 2014 Physician Fee Schedule Final Rule, CMS had stated that starting next year it would annually review how the technologies underlying certain clinical diagnostics have changed and adjust payment accordingly. This was extremely worrisome for the diagnostics and lab industry, which is used to stable payment levels and unaccustomed to dramatic cuts.

Additionally, Congress was also considering reducing payments to the CLFS to help stave off Medicare Sustainable Growth Rate (SGR) cuts to physician reimbursement. These adjustments would be on top of the 2 percent trimming of the CLFS that Congress had already issued in 2013 to fund a temporary SGR patch, and the 20 percent lab payment reductions instated by the Affordable Care Act.

Faced with the prospect of even deeper payment cuts, the American Clinical Laboratory Association, the Coalition for 21st Century Medicine, AdvaMed, and many other diagnostic and lab industry stakeholders that have often been at loggerheads over policy issues — particularly when it concerns US Food and Drug Administration regulation of lab-developed tests — in this instance worked together and with the Senate Finance Committee and House Energy and Commerce Committee to craft a new, more modern way to pay labs under Medicare.

HR 4302 repeals CMS' plan to review lab test technology and adjust payment starting next year. ACLA views the reimbursement solutions in HR 4302 "as a better alternative to the other things that could have happened, if this legislation is not passed," President Alan Mertz told PGx Reporter. "There would have been across-the-board indiscriminate cuts to the CLFS … and we were also facing the prospect that CMS was going to start adjusting payment for codes next year with no limits on how much they could cut," Mertz said.

The provisions

According to section 216 of HR 4302, starting in 2017 CMS will pay labs according to the weighted median of rates from private payors for tests. Labs will have to begin reporting rates from payors to CMS in 2016. Although the market-based pricing provisions apply to all clinical labs, HR 4302 sets up a new category of advanced diagnostic laboratory tests – defined as a test that gauges multiple markers based on an algorithm or a test approved or cleared by the FDA. An advanced diagnostic must be a single-source test; that is, it has to be sold by the lab that developed it. CMS will update pricing annually for advanced tests. For all other diagnostics, pricing will be updated every three years.

Currently, CMS establishes pricing for new lab tests either through the crosswalk method, which pegs payment to rates for comparable technologies and CPT codes, or through the gapfill method, when no comparable technology exists. Until 2017, CMS' Medicare contractors will continue to use gapfilling and crosswalking methods to establish payment. After the new scheme takes effect, CMS' Medicare Administrative Contractors (MACs) will determine local pricing for new non-advanced lab tests that come to market in between the three-year pricing periods.

"There could be a [significant] time period between the introduction of a new test and the next three-year round of price setting," Bruce Quinn, Medicare policy expert at the law firm Foley Hoag, told PGx Reporter over e-mail. "Just like today, a summer crosswalk/gapfill process will continue to occur. However, rather than setting prices 'forever,' it will set prices up until the next three-year price setting exercise."

The bill instructs CMS to establish an expert panel by 2015 to provide advice about pricing non-advanced diagnostics while they're being paid for through gapfilling or crosswalking. New advanced tests, meanwhile, will be paid at their list price for three quarters, after which payment will reflect market pricing.

"The legislation's goal is not to raise or lower pricing … but to ensure that Medicare prices are consistently pegged to market prices," Quinn said.

CMS will calculate the market-based payment by considering the distribution of all private payor rates weighted by the volume of tests conducted by each lab for each payor. The bill also ensures more foreseeable reductions after the implementation of the payment scheme in 2017. The Medicare payment for a test cannot be reduced more than 10 percent compared to the price in the previous year between 2017 and 2019 or more than 15 percent between 2020 and 2022.

Following the passage of the bill in the Senate, ACLA's Mertz issued a statement noting that the provisions in HR 4302 will "bring predictability in reimbursement over the next several years, provide more transparency, and allow more time for laboratories and other stakeholders to prepare for changes, as well as ensure that Medicare reimbursement for anatomic pathology services will not suffer significant cuts."

A comparison of reimbursement given by private payors and Medicare for 27 tests that accounted for half of Medicare spending in 2011, found that Medicare payments are usually lower than what private payors pay. The survey, conducted last year by data analysis firm Avalere Health, of non-governmental health plans in 450 metropolitan areas in the US found that payor rates were particularly higher than Medicare reimbursement in rural areas and low-volume testing areas.

"When you look at the payment for these tests, [compared to private payors] in most cases Medicare was already getting the lowest price," Mertz said. The provisions in HR 4302 are going enable "a much broader look at how tests are being reimbursed," he added.

Meanwhile, a 2013 report by the Office of the Inspector General concluded that CMS paid more on lab testing services than other government programs — Medicaid and Federal Employees Health Benefits plans — and encouraged CMS to institute legislative changes that would allow it lower spending. In 2011, Medicare paid between 18 and 30 percent more than these other insurers for 20 high-volume and high-expenditure lab tests, the OIG found. "Medicare could have saved $910 million, or 38 percent, on these lab tests if it had paid providers at the lowest established rate in each geographic area," OIG said in the report.

HR 4302 asks the Government Accountability Office to conduct a study on the implementation of the new payment system and submit it to Congress by October 2018. In the study, GAO will explore the impact of the reforms on Medicare beneficiaries' access to tests, whether the information reported by labs reflects market prices, as well as the impact on medical decision making and downstream costs.

Finally, by 2016, CMS has to assign unique Healthcare Common Procedure Coding System (HCPCS) identifiers to advanced diagnostics and tests approved or cleared by FDA, which are currently being reimbursed with a miscellaneous CPT code. HCPCS codes reflect CPT codes assigned by the American Medical Association. However, unique HCPCS codes will enable payors to identify specific brands of tests, track their use, and pay different rates ─ a capability that payors have been requesting for some time and that doesn't broadly exist under the current CPT coding system.

Unsustainable system

In recent years, there have been a slew of changes to the reimbursement system for molecular diagnostics, fostering little agreement within industry players about them. For example, when the AMA issued new analyte-specific CPT codes for molecular tests (i.e. a code for tests that gauge BRCA mutations, another code for tests that gauge KRAS mutations, et cetera) in an effort to provide payors more granularity about what they were reimbursing, the new system didn't satisfy single-source labs developing complex diagnostics and kit manufacturers that wanted to distinguish their brand of test from another lab's. Then, when it came time for CMS to decide which fee schedule to use to determine pricing for the new codes, pathologists felt the codes should be placed under the physician-fee schedule while labs felt they should go in the CLFS.

When CMS instituted the MolDx program ─ through which Medicare contractor Palmetto reviews the analytical and clinical validity of molecular tests in order to establish payment and tracks their use through unique identifiers ─ some industry observers opined that this program is just what is needed and should be nationally rolled out. Meanwhile, the lab industry remains steadfastly against MolDx and has written numerous letters to CMS expressing concern over the program. Then, CMS also managed to unsettle sole-source labs developing multi-analyte, algorithm-based diagnostics (deemed advanced diagnostics under HR 4302), by proposing to use AMA-issued CPT codes for this subset of tests to pay only for the analytes gauged by such tests, but not the underlying algorithms.

Amid these divisive issues, however, the one thing that the lab and diagnostics players agreed on was that the current reimbursement system failed to capture the value diagnostics add to the healthcare system. In pricing the new molecular diagnostics CPT codes issued by the AMA, CMS decided to largely depend on the gapfill process, under which MACs determined the local payment amount for the test for the first year, factoring in charges and discounts, and costs required to perform the test. The second year, CMS determined the payment amount based on the median of these local payment amounts.

Using this system, the final pricing issued by CMS late last year fell below the cost of running many tests, resulting in some businesses having to close their doors or cut staff. The Coalition to Strengthen the Future of Molecular Diagnostics, an interest group representing labs and test developers, estimated that initial gapfill pricing issued by Medicare contractors represented cuts in payment rates of around 20 percent for many tests, and as much as an 80 percent reduction for some diagnostics, compared with 2012 levels. CMS' national payment limit for 2013 and 2014 for molecular diagnostic codes was a slight improvement over initial rates – a median uptick of 6 percent and an average increase of 26 percent compared to earlier proposals, according to one assessment – but still not high enough for many industry players.

Then came the announcement in the 2014 PFS final rule that CMS planned to conduct technological reviews of tests and adjust payment. Regardless of where industry stakeholders had stood previously on various reimbursement issues, no one seemed to like the sound of this proposal. "Without this legislation, we would have been facing an across-the-board cut probably next year," ACLA's Mertz said. "It was very uncertain what CMS was going to do, which codes they were going to pick and how much they were going to cut them. We wouldn't know which codes they would look at until July this year and we'd have 60 days to comment and then [in] January next year payment would have been cut [for certain tests]."

Now, with HR 4302, the lab and diagnostic industry has more time to work with CMS to iron out the details of implementing the new reimbursement scheme. Mertz noted that while HR 4302 sets up a market-based payment system by 2017, what will happen in the transition period, particularly with regard to CMS programs like MolDx, is less clear. CMS by June next year will have to establish through notice-and-comment rulemaking the parameters for what the labs have to report to CMS about payment rates for tests. "A lot of the details of what the private pricing payment information" that labs have to submit "have yet to be worked out," Mertz said. "All we know is CMS will use a weighted median of payment rates."

Beyond this there are many other considerations and factors that go into the pricing calculation, which will undoubtedly be complex. "We will be working with Congress and CMS over the next year and a half on this," he noted. "Then, there is another year and a half before the pricing is set and the adjustments take place. We'll essentially have two years and eight months to work on this and it really doesn't look like we'll have any new across-the-board cuts in the meantime. So, it does provide a lot of certainty and predictability in the next few years."

Finding common ground

Three years ago, various stakeholders led by law firm McDermott Will & Emory began seriously thinking about how to modernize the payment system for molecular diagnostics, a fast growing segment of the testing market. According to a 2012 report from private insurer UnitedHealthcare, it spent $500 million on genetic and diagnostic testing in 2010, 14 percent more per person than in 2008. At the same time, an oft-cited industry statistic is that diagnostics influence 70 percent of healthcare decisions but account for only 2 percent of healthcare spending. One proposal from Paul Radensky and Eric Zimmerman, partners at McDermott Will & Emery who represent the Coalition for 21st Century Medicine, was a market-based pricing model, so-called average reimbursement test pricing, that they felt would better address the technological advancements in the field but also more fairy compensate labs for the value that they contribute to healthcare.

"These ideas have been around for a couple of years, and a lot of the stakeholders got to look at these ideas and think about how to make them work," PMC's Miller said. "So, what we're seeing is a marriage of a number of proposals that have been worked on by different segments of the diagnostics community."

In 2011, there were plans to attach the market-based pricing proposals for lab tests to another bill being authored by the office of Senator Orrin Hatch (R-Utah) with input from personalized medicine advocates. The so-called BETTER Act proposed a business-model-neutral regulatory pathway for IVD products and would have created a new FDA division, called the Center for Advanced Diagnostics Evaluation and Research. But FDA regulation of lab tests is a particularly divisive topic among diagnostics and lab industry players, and placing reimbursement issues in the same legislation likely wouldn't have advanced the cause.

Attaching the market-based lab payment provisions to HR 4302 instead was a better strategy and bolstered their chances of passage. The main aim of the bill is to repeal the 24 percent cut in Medicare reimbursements for physicians slated to take effect on April 1, and to temporarily extend payment for a number of key Medicare programs. "There was strong encouragement in the Senate to get the bill passed," Miller said.

Additionally, all the reimbursement changes and payment reductions that diagnostics developers and labs shouldered in recent years helped focus the industry around a solution more agreeable to them. "We've learned a lot from the gapfill process," Mertz reflected. "A combination of the gapfill [experience], the rulemaking from CMS, and the prospect of more cuts … merely made this the right time to do this," Mertz said.

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