CMS Responds Positively to Requested Changes in Final PAMA Rule

The Centers for Medicare & Medicaid Services (CMS) has issued the final rules governing laboratories under the Protecting Access to Medicare Act of 2014 (PAMA). Labs appear to have won some significant changes—and victories— compared to the proposed rules, although experts are still poring over the nearly 300 pages of regulations.

Under PAMA, labs receiving more than $50,000 in revenue from the Medicare program are to gather up reimbursement data from private payers and submit them to Medicare for review. The intent is for CMS to use the data in order to realign its reimbursement for lab tests on the Clinical Laboratory Fee Schedule (CLFS) and make it more in line with the commercial market. That was prompted in part by a 2013 report by the Office of the Inspector General that had calculated that Medicare was paying between 18 and 30 percent more for lab tests than the commercial sector, costing the U.S. Department of Health and Human Services $1 billion per year.

CLFS Cuts Remain Significant
According to an analysis by the Chicago-based investment banking firm William Blair & Co., the final PAMA rules are expected to reduce CLFS payments by 5.6 percent in 2018, or $390 million; 4.9 percent over the first five years of implementation, or $1.7 billion; and 5.6 percent over a decade, or $3.9 billion. Those cuts are shallower than the projected savings in the proposed regulations, which totaled $5.1 billion over 10 years. However, the laboratory sector accepted a systematic stabilization of the entire CLFS rather than ongoing and unpredictable reimbursement cuts.

“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,” said Alan Mertz, President of American Clinical Laboratory Association (ACLA), which led the lobbying efforts to modify the final PAMA regulations.

One of the biggest changes came in the criteria for laboratory participation in submitting commercial reimbursement data. Under the proposed regulations, it was going to be based on taxpayer identification numbers. That raised objections from the lab sector, concerned that it would exclude many hospital-based labs from reporting, as few such labs had TINs separate from the hospitals they served. Hospital reimbursement rates also tend to be higher than reference lab reimbursements, creating concerns that CLFS readjustments would skew downward.

As a result, the CMS apparently struck a compromise, relying on National Provider Identifiers attached to labs instead.

Mertz said he believes this would include most of the labs that would have been excluded under the proposed rule. “It is certainly a move in the right direction,” he said.

Bruce Quinn, M.D., a senior director with FaegreBD Consulting in Los Angeles and an expert on reimbursement said that builtin median rate reductions that are limited to 5 percent in any direction are intended to curb any dramatic cuts. However, he also noted that he has yet to delve deeply into the regulations. “I don’t think anybody has enough data to know,” he said in an email.

Another victory for the labs was a one-year delay in implementation of the PAMAbased rates. Data will be gathered in 2017, with changes to the CLFS implemented in 2018.

“We are pleased that CMS will delay the program start date and include data from hospital-based labs in setting payment rates,” said American Hospital Association Executive Vice President Tom Nickels. “The one-year delay will give labs more time to develop the technology needed to participate in the program. Including hospital-based labs will better reflect market trends and lead to more appropriate reimbursement.”

There were also changes regarding the definition of advanced laboratory-developed tests, or ADLTs. The definition had initially excluded tests based on proteins. That has been changed, but Mertz said the ACLA is still examining how that change might impact members.

One other change that has been introduced into the ADLT criteria is a requirement that labs present evidence and attest to the test’s unique algorithm.

“We believe that next-generation sequencing/microarray-based complex testing will fall under the ... definition of ADLT. By mandating clinical evidence, CMS has raised the bar (won’t be easy for me-too type of tests to get reimbursed without clinical data),” wrote Vijay Kumar of the investment banking firm Evercore ISI.

Impact on Publicly-Traded Labs,
The consensus on how PAMA would impact publicly-traded laboratories is mixed.

Zacks Research said in a statement that it was “highly disappointed with the recent CMS proposal related to PAMA.” But Amanda Murphy, an analyst with William Blair, was more sanguine.

“We expect the final rule to affect clinical lab stocks positively,” said Amanda Murphy, an analyst with William Blair & Co. in Chicago, in a recent report. “We believe the labs with the lowest cost structure are ultimately the best positioned in the implementation of PAMA and may ultimately benefit from increased consolidation opportunities as smaller labs face ongoing Medicare pressure. We also generally view the rule to be favorable to the smaller labs with proprietary assays, which typically see meaningfully higher payments from private payers.”

Murphy added that “we continue to like LabCorp given low exposure to the Medicare CLFS (at 7 percent of revenue) and potential earnings upside driven by the Covance transaction. We also increasingly like Myriad given the recent pullback; while investors continue to focus on the hereditary cancer testing market, we see increased value in the company’s newer tests (Prolaris, Vectra, and the companion diagnostics franchise). We also like small-cap names NeoGenomics, given the company’s strong fundamental performance, and Veracyte, given what we view to be compelling valuation (albeit recognizing the limited liquidity in the name).”

Kumar was concerned that larger labs will benefit specifically from the rules regarding ADLTs. “We expect this to favor larger companies that have deeper pockets to fund clinical trials. Second, by raising the hurdle, we expect pricing to firm up in the longer run, as we see potentially lesser competitive intensity,” he wrote, adding that the final rules “will have a mixed impact to next-generation sequencing providers such as Illumina, Thermo Fisher Scientific, Qiagen and Roche Diagnostics.”

Veracyte itself seemed to be pleased about the final rules. The California-based company, which has developed a variety of molecular tests centered around detecting thyroid cancer, issued a fairly neutral statement.

“We believe PAMA implementation will bring welcome transparency and certainty to Medicare pricing. This in turn should help fuel innovation in diagnostics, which is transforming patient care and helping to make precision medicine a reality,” said Veracyte Chief Executive Officer Bonnie Anderson. “Of course, details matter and we look forward to reviewing the PAMA rule closely and continuing to engage with CMS on its implementation.”

Veracyte is not the only entity that plans to dig deeper into the final PAMA regulations. “ACLA’s next step is to evaluate completely this final rule, and consult with our membership,” Mertz said.

Takeaway: The laboratory sector has won significant victories in the final PAMA rules.

EDITOR’S NOTE: G2 Intelligence, in partnership with the American Clinical Laboratory Association presented a special webinar analyzing the final PAMA rule on June 28, 2016 at 2pm EDT. To purchase a recording of the webinar visit www.g2intelligence.com or call customer service at 1-888-729-2315.