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CMS Holding Off Market-Based Payment for Labs Until 2018; Tweaks Criteria for Labs Reporting Pricing

NEW YORK (GenomeWeb) – Much to the relief of the lab industry, the Centers for Medicare & Medicaid Services has decided to extend the timeline for implementing a new market-based payment system for clinical lab tests by another year.

The Protecting Access to Medicare Act of 2014 — requiring that Medicare payment for a clinical lab test equals the weighted median of private payor rates — was slated to go into effect Jan. 1, 2017. But in issuing its final rule on PAMA last week, CMS said the private payor rate-based fee schedule would be implemented on Jan. 1, 2018.

As the original deadline was approaching, large reference labs such as Quest Diagnostics and Laboratory Corporation of America, industry groups the American Clinical Laboratory Association, the American Hospital Association, the American Medical Association, as well as members of Congress expressed concerns over aspects of CMS' proposed plan, and criticized the agency for failing to meet pre-implementation deadlines and for not providing labs sufficient time to meet new requirements.

"The delay will help to ensure that there is time for accurate data collection and implementation of the new payment system," Wanda Moebius, spokesperson for the medical diagnostics industry group AdvaMedDx, said in a statement. AdvaMedDx was among 1,300 individuals, trade organizations, healthcare providers, and labs that commented on the proposed PAMA rule CMS published last September.

Currently, CMS pays for lab tests "furnished" in a physician's office, by an independent lab, or in some limited cases in a hospital lab under the clinical lab fee schedule (CLFS). The tests are paid the lesser of the billed amount, the local payment rate established by a Medicare contractor, or the national limitation amount that represents a percentage of the median of all the Medicare contractor prices.

For new CLFS tests that may be described by existing CPT codes, pricing is "crosswalked" to the payment amount for that original code. When tests cannot be described by existing codes, pricing is established by "gapfilling," where Medicare contractors establish local payment after factoring in various charges and resources needed to perform testing, and after a year CMS establishes the national limitation amount based on the median of contractors' rates. Private payors typically take CMS' lead in setting pricing for lab tests.

Once implemented, however, PAMA will flip the system to one where Medicare pricing is based on private-payor rates. Although for new and existing tests that don't have the necessary information to calculate a weighted median or private-payor rates, the gapfill and crosswalking methods will still apply.

PAMA's impact on industry depends heavily on how CMS defines key terms, such as "applicable laboratory" and "advanced diagnostic laboratory test." ACLA said it has just begun to review the final rule, but seemed initially encouraged by the definitions of these terms in CMS' final rule.

One of the most controversial aspects in CMS' proposed rule was its definition of "applicable labs," which are the labs that will report private payor rates and the volumes for each test over a period of time. Based on this information, CMS will calculate a weighted median payment amount for each test.

CMS had initially defined "applicable laboratory" as one that receives more than 50 percent of its Medicare revenues under the CLFS or physician fee schedule (PFS). Additionally, labs that have Medicare revenues of less than $50,000 wouldn't qualify as an "applicable laboratory," according to CMS. These criteria were unpopular among industry players that argued it wouldn't reflect test pricing in the actual lab marketplace since it would exclude hospital labs, which compete with independent labs.

In its final rule, CMS explained that the statute supports excluding hospital labs from reporting pricing, since they receive the majority of Medicare revenues not under CLFS or PFS, but under the Hospital Inpatient Prospective Payment System. However, the agency tweaked its criteria to note that an entity with a taxpayer identification number (TIN) will be the "reporting entity" responsible for submitting pricing information for all applicable labs under its aegis, which in turn are defined by national provider identifiers (NPI).

"We are retaining the 'majority of Medicare revenues' threshold" — that an entity must receive more than 50 percent of Medicare revenues from CLFS or PFS — "but it will be applied to the NPI-level entity, rather than the TIN-level entity," CMS said in its final rule. Moreover, TIN-level reporting entities can only submit data from applicable labs that net at least $12,500 in Medicare revenues from the CLFS during a data collection period.

AdvaMedDx noted that CMS' definition of applicable laboratories will now include hospital outreach labs with a separate NPI. "We are encouraged by this change and hope that it will provide for more accurate rates based on the full spectrum of laboratory providers," Moebius said in a statement.

Hospital outreach labs test patients who aren't admitted as inpatients or registered as outpatients, and according to CMS these types of entities are distinguishable from hospital laboratories because they are "enrolled in Medicare separately from the hospital of which they are a part" and may be treated as independent labs.

Bruce Quinn, an expert on Medicare policy and senior director at FaegreBD Consulting, wrote on his blog that industry players generally believe hospital outreach labs have received somewhat higher rates than larger commercial labs and their inclusion as applicable labs may raise the median CMS lab fee schedules under PAMA. However, he noted that it may be confusing for hospitals to report pricing from its outreach labs. "This will not always leave a simple calculation unless a hospital has firewalled the entire management, revenue, and cost structure of the 'outreach lab' from other aspects of the hospital so that its NPI and CLIA certificate truly represent a standalone entity for accounting purposes," he wrote.

CMS' final rule also included critical clarifications with regard to so-called advanced diagnostic laboratory tests (ADLTs). Within PAMA, ADLTs are a new category of tests that use a unique algorithm to asses a panel of DNA, RNA, or protein markers, or a US Food and Drug Administration-approved or -cleared test. In practical terms, ADLTs refer to tests, such as Genomic Health's Oncotype DX, which are developed and performed at a single lab.

CMS had interpreted in its proposed rule that a molecular pathology analysis of multiple DNA or RNA biomarkers would qualify as ADLTs. "In response to public comments, we are removing the requirement that the test be a molecular pathology analysis and permitting protein-only based tests to also qualify for ADLT status," the agency said in its final rule.

CMS had also proposed that ADLTs "must provide new clinical diagnostic information that cannot be obtained from any other existing test on the market or combination of tests." Commenters to the proposed rule had objected this would stifle competition, but in its final rule, the agency seems to be sticking with this language. Any new test that improves on an existing ADLT, may not fall into this category of testing, but would still be paid under the private payor rate based fee schedule as a clinical lab test, the agency noted.

In the new payment system, pricing for clinical lab tests will be reported every three years, while pricing for ADLTs will be reported every year. For new ADLTs, payment is based on the list price for the first three quarters and then a weighted median of private payor rates every year after. In its final rule, CMS explained that when an entity meets the definition of an applicable lab but doesn't meet the $12,500 revenue limit, it can still report pricing for advanced diagnostic laboratory tests it offers, though not for all other clinical lab tests. 

CMS is also going ahead with its plan to use G codes under the Healthcare Common Procedure Coding System to identify ADLTs and new FDA-cleared or approved lab tests for up to two years until permanent codes can be issued.

CMS finalized that all data collection periods will be six months long, from Jan. 1 through June 30, and subsequently, applicable data for tests (other than ADLTs) would be reported between Jan. 1 and March 31. The data collection period for a new ADLT will start on the first day of the first full calendar quarter after either a Medicare coverage determination is made or CMS deems ADLT status.

In a regulatory impact analysis, the agency said the final rule was "economically significant," since it could have an annual effect on the economy of $100 million or more. The agency noted that its final rule stands to significantly impact many small businesses, estimating that more than 90 percent of medical labs are small businesses with yearly revenues of less than $32.5 million.

One of the main reasons CMS is requiring that TIN-level entities report pricing, and NIP-level entities will be applicable labs, is to reduce the number of entities that have to report pricing, and make it less burdensome for independent, physician office, and hospital outreach labs to report pricing. The rule will not have a big impact on rural hospital labs, CMS added, unless they own independent labs and are largely paid under CLFS.

"We believe that the changes to how CLFS payment rates will be developed will overall decrease payments to entities paid under the CLFS," the agency said in its final rule. PAMA stipulates that 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.

CMS pays $7 billion a year for around 1,300 clinical lab tests under the CLFS. The agency calculated that the new market-based payment system would reduce Medicare Part B payments for CLFS tests by $390 million in fiscal year 2018, and by $1.71 billion and $3.93 billion over five and 10 years, respectively.

"The establishment of a market-based system for determining Medicare reimbursement for laboratory services was clearly preferable to the alternative — unlimited cuts to payment rates by CMS through its technological changes authority, as well as across the board reductions to the CLFS by Congress," ACLA President Alan Mertz said in a statement. "ACLA's next step is to evaluate completely this final rule and consult with our membership."