Inside the Lab Industry: Latest SGR Fix Has Plenty in It for Labs, Ties Medicare Lab Payment to Market Rates

For a time it appeared that there would be an actual replacement by Congress of the sustainable growth rate (SGR), the payment formula for Medicare participants that has been widely reviled—and typically ignored—since it was implemented in 1997. For well more than a decade, Congress had been issuing one-year “patches” to the SGR that nominally bumped up payments instead of making the double-digit percentage cuts that were mandated by the SGR’s complex payment formula. Both the House and Senate nominally agreed on an SGR replacement earlier this year that would have boosted payments to physicians by 0.5 percent annually for the next five years, but the deal fell apart over whether the bill should include a delay of the individual mandate requirement to purchase health insurance or pay a tax penalty. Instead, lawmakers fashioned yet another patch—its 17th to date—with a modest payment bump for physicians. However, this patch is different than others—it contains what appears to be a bunch of carrots for labs, including the biggest modification to the Clinical Laboratory Fee Schedule (CLFS) since it was implemented in 1984. It contains considerable changes to the ways payments will bet set for laboratory services in the coming years. Some lab executives are happy with the changes, others are skeptical, but there is agreement that the sector is having grievances addressed that had been ignored by government officials for a long time. Among the items in the SGR patch legislation expected to have a major impact on laboratories:

• Beginning in 2016 many labs would be required to report to the secretary of Health and Human Services (HHS) commercial payment rates paid by each private payer during the specified reporting period, and the volume of such tests for each payer for the period. If a lab has different payment rates for the same payer, or different payment rates for different payers for the same test, it would be required to report all rates. The reports have to be made every three years. Payment for clinical diagnostic laboratory tests would be equal to the weighted median for the test for the most recent data collection period.
• Payment reductions would be capped at a maximum of 10 percent for the years 2017 to 2019 and 15 percent for the years 2020 to 2022.
• Fees for sample collection or beneficiaries in skilled nursing facilities or on behalf of a home health agency would be increased by $2 per test.
• An advanced diagnostic laboratory test is defined as meeting the following 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” and it is cleared or approved by the Food and Drug Administration (FDA). HHS would be required to establish temporary Healthcare Common Procedure Coding System codes (effective for no longer than two years) for new advanced diagnostic laboratory tests.
• A new test that does not meet the advanced diagnostic laboratory test criteria would be paid using crosswalking or gap-filling.
• A clinical laboratory advisory panel would be established by next year to provide input on the establishment of payment rates for new tests, the factors to determine coverage and payment for new tests, and other matters.»Starting in 2015, Medicare administrative contractors, or MACs, could issue a coverage policy for a clinical diagnostic laboratory test only in accordance with the process for making local coverage determinations.
• ICD-10, the initiative that would more than triple the coding universe to more than 60,000 Current Procedural Terminology codes, has been delayed from later this year until 2015.

ACA, CAP Split on Fix Alan Mertz, executive director of the American Clinical Laboratory Association, supports the changes made to the CLFS, saying he believes that the changes will likely stabilize the Medicare payment environment for labs in the coming years. However, the College of American Pathologists (CAP) is opposed to the new law. “[The] patch legislation does not provide stability for physician payments, does not address pathologists’ specific concerns with participation in the current pay-for-performance program, and would drastically alter the payment system for clinical laboratories,” said CAP President Gene N. Herbek, M.D. Herbek added that the patch also does not correct the current self-referral loophole. Perhaps the most significant of the changes is the move toward a more market-based system for setting payment rates. Fierce battling for large contracts among the national laboratories has helped to ratchet rates down in the commercial realm, and the new method could lend more transparency overall to pricing of procedures. “I think to a certain extent Medicare has set fees that have been somewhat arbitrary and capricious, and this would go toward addressing them in a more appropriate way,” said Susan Dougherty, vice president of operations and outreach services for Chi Solutions, a Michigan-based laboratory consulting firm. “This is a great development,” said Chris Riedel, chief executive officer of  Hunter Heart, a cardiac specialty laboratory in Los Gatos, Calif. “I know members of Congress and the [U.S. Department of Health and Human Services] have been asking why large payers such as UnitedHealth and Aetna are [setting commercial rates] approaching 50 percent of Medicare for some tests.” Riedel has been suing the larger national labs, claiming their practices to secure payer contracts are anti-competitive. Dougherty also thought the delineation of advanced and more routine tests as they are developed and using separate payment-setting methodologies would also be helpful in terms of setting more relevant reimbursement rates for labs. Nursing, Home Health Charge Debated Executives were less enthused by the $2 per test surcharge. Labs that service the nursing home and home health businesses have been hit hard by reimbursement cuts. Mertz estimates that the surcharge amounts to about a 10 percent average increase in per-accession prices for that particular niche. Charges run about $20 to $22 in the skilled nursing and home health realm, compared to about $35 per accession for other Medicare work. He suggests the surcharge would act as a hedge against cuts. But Stephen G. Ruby, M.D., president and medical director of 4Path Ltd. in Justice, Ill., believes that the fee will mostly provide nominal income, particularly for labs in home health. “Two dollars is probably too low, given that [phlebotomists] have to travel and can only do one draw an hour at most,” he said. Dougherty concurred, noting that the rate of nursing home and home health care draws is slowed by the travel issue when compared to patients providing samples at a physician’s office or visiting a draw center. However, Wall Street is quite enthusiastic about the changes being wrought by the SGR fix—specifically for the national labs. “We view this as a positive for the clinical labs (both LabCorp and Quest Diagnostics) in that it removes the overhang of the CLFS review with a round of potential cuts that will both occur later (starting in 2017) as well as have limits to the amount that they can be cut,” said Michael Cherny, an analyst with ISI International Strategy and Investment. “This should provide a relief point from what has been a significant overhang on shares and should drive both Quest and LabCorp and shares higher.” Takeaway: The latest SGR patch, though opposed by many physicians, should actually address some of the payment issues that have been dogging laboratories for years.