Most Hospital Labs Shut Out of PAMA Reporting Requirements

Hospital laboratories will likely have to tighten their belts in 2017 regarding Medicare reimbursements as the Centers for Medicare & Medicaid Services (CMS) begins determining how much to cut payments under PAMA. But any opportunity they have to provide data on the matter is mostly being squelched for now.

According to the proposed rule CMS issued in the Federal Register this month, most hospital laboratories would be excluded from reporting the levels of reimbursement they receive from private payers, industry officials say.

CMS intends to collect such data in order to set new benchmark reimbursement rates that would hew closer to what private insurers pay for lab services. The Office of Management and Budget has concluded that making such an adjustment would save the Medicare program as much as $360 million for fiscal 2017 and as much as $5 billion over the next decade, although the laboratory sector has argued that Medicare is acting on less than comprehensive information.

The rule has proposed that any laboratory receiving $50,000 or more in revenue from Medicare for laboratory services or 50 percent or more of their revenues from laboratory and physician services must report private payer data and volume from July 1, 2015 through the end of this year. Qualifying labs that don't comply or misrepresent their payment data can face financial penalties as much as $10,000 per day.

CMS intends to use the data to adjust its payment rates by November 2016 for implementation at the start of 2017.

Any payment reductions would be gradual: They 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.

However, most hospital laboratories and many physician office-based labs would be excluded from reporting their payer pricing data under the rule, observers say.

"We believe the statute intends to limit reporting primarily to independent laboratories and physician offices (other than those that meet the low expenditure or low volume threshold, if established by the Secretary) and not include other entities (such as hospitals, or other health care providers) that do not receive the majority of their revenues from the Physician Fee Schedule or Clinical Laboratory Fee Schedule," said Michael Cherny, an analyst with EverCore ISI, in a recent report.

Francisco Velázquez, M.D., chief executive officer of PAML in Spokane, Wash., was also unhappy with the apparent exclusion of hospital laboratories and affiliated parties.

"When you exempt hospital-based laboratories and physician office-based laboratories which provide a significant percentage of the testing in this country, an uneven burden is placed on independent laboratories," said Velázquez, who heads the largest independent lab in the Pacific Northwest. "For the most part independent laboratories are small to medium- sized, most often regional or extended regional facilities which provide a community focused high quality service with value added offerings such as home draws which benefit the Medicare population significantly. There seems to be a somewhat narrow focus on pricing which for the most part will not allow for value-added services, community impact and local continuity of services to be factored in as a value."

Not every laboratory was concerned regarding the proposed PAMA rules. "While details on the proposed PAMA rule still need to be evaluated, we believe it provides a pathway to market-based pricing for the Afirma GEC and we continue to support PAMA's goal of bringing transparency and a market-based approach to how CMS sets Medicare rates for personalized medicine diagnostic tests," said Bonnie Anderson, chief executive officer of molecular lab Veracyte, in a statement. The South San Francisco, Calif.-based Veracyte specializes in molecular-based tests for thyroid cancer, which includes the Afirma assay.

But Alan Mertz, president of the American Clinical Laboratory Association, said he was concerned that excluding hospital labs from the reporting process would further impact the price cuts. "If you take the hospitals out and they don't report their pricing, we are concerned that the pricing would not reflect the true marketplace," Mertz said. He pointed to a 2013 study performed on behalf of ACLA by Avalere Health that concluded commercial payments for tests were significantly higher than in the hospital setting.

Avalere compared private data for 27 test CPT codes representing both low-dollar and high-dollar tests. They constituted nearly half of Medicare spending under the 2011 CLFS. ACLA claimed in a statement that the study it commissioned was far more in depth than the report issued by the U.S. Department of Health and Human Services' Office of the Inspector General in 2013 that led to the passage of PAMA the following year.

For example, a creatinine assay was paid at a commercial mean price of $14.04 in 2012, compared to $6.82 in a non-hospital setting. A comprehensive metabolic panel was priced at $57.91 in 2012, compared to $14.85 in a non-hospital setting.

Mertz noted that under the proposed rule, hospitals are able to report their commercial pricing data if they operate a laboratory with a taxpayer identification number separate from their hospital operations. Only three ACLA members are so situated, according to Mertz. "There may be some of the larger hospitals labs with outreach (operations), but it's hard to tell," he said.

Cherny also believed that the proposed rule would be an overall negative to the lab sector, and could even drag down the profitability of the two biggest publicly-traded labs, LabCorp and Quest Diagnostics. He said the development was "an incremental negative," adding "we peg the downside earnings from our current estimates at (around) 3-4 percent for Quest and 2-3 percent for LabCorp, assuming that not every single test is reduced at the maximum level."

As for PAML, Velázquez said he did expect to see some cuts under PAMA, but that he would "need to see exactly how this will be applied to better understand the long-term impact." Velázquez noted that PAML has been focused on cutting its costs over the past three-and-a-half years, even as testing volumes have decreased.

Mertz said ACLA would advocate for a change in the comments it intends to file with CMS. The agency is accepting comments until the end of November.

"We are going to strongly suggest that we fix this proposed rule that it follows the statute and the intent of the law," he said.

The news is coming at an unwelcome time, coupled with CMS' decision to set some of the molecular pricing for the 2016 preliminary CLFS under the crosswalk approach (Laboratory Industry Report will delve into that in depth in its next issue).

But Cherny noted that the proposed PAMA rule could signal the beginning of the end of labs getting hammered regarding future reimbursements. "We ... view the long-awaited release of the rule as a removal of a meaningful overhang for the space and this should serve as a clearing event for both Quest and LabCorp. Assuming that the definition of 'applicable labs' remains unchanged in the final rule, there is a clear incremental negative headwind, but we would note that this appears to be the last leg of reimbursement uncertainty for the labs," he wrote.

Takeaway: There is concern in the laboratory sector that the exclusion of hospital lab price reporting data could further depress the new Medicare rates as reported under PAMA.