Newly Proposed PAMA Rates for 2018 Confirm Lab Industry’s Worst Fears

The Centers for Medicare and Medicaid Services' (CMS') preliminary 2018 prices for clinical laboratory tests issued under the Protecting Access to Medicare Act (PAMA) came as a big disappointment to the laboratory industry. First, other than for some advanced tests, the prices were lower than expected. Secondly, implementation of the new PAMA payment system will not be delayed and will take effect Jan. 1, 2018. Lastly, CMS stuck to its controversial approach of excluding hospital laboratories from its pricing formula.

The intent of PAMA is to base Medicare payments for specific tests on the weighted median of private payer rates for that test. Since 2014, CMS has been gathering data from "applicable laboratories" to calculate these rates. The proposed Clinical Laboratory Fee Schedule (CLFS) for 2018 represents the agency's first attempt at setting prices using the new formula.

While embracing the idea of market-based pricing, the laboratory industry has objected to CMS' methodology of not including hospital and community labs in its definition of "applicable laboratories." Because these labs charge higher rates, excluding their pricing data was bound to artificially skew rates in a downward direction, the laboratory industry argued.

Payment Cuts
The CMS's CLFS proposal confirms the laboratory industry's concerns, making even deeper and more widespread cuts than feared. The 2018 CLFS would cut payments for approximately 75 percent of lab tests. The only upside for laboratories is that the majority of the rate cuts (58 percent) will be phased in due to CMS's 10% per year cap on reductions from 2018 to 2020. CMS claims that the new rates will save Medicare Part B about $670 million in 2018.

"If these draft rates were finalized, the impact would be devastating," according to Julie Khani, president of the American Clinical Laboratory Association, in a statement. "We fear the impact on laboratories serving the most vulnerable Medicare beneficiaries, laboratories serving rural areas, and those with high Medicare volumes would be the most severely impacted."

Below is G2's analysis of the key takeaways about the proposed 2018 CLFS.

Reference Labs Suffer the Deepest Cuts
While, if implemented, the proposed rate cuts would have widespread effects across the industry, big reference laboratories, like Quest Diagnostics and LabCorp, will be particularly negatively impacted. In a note to investors, Piper Jaffray analyst William Quirk writes that the expected revenue decline of approximately 8 percent in the first three years is even worse than Wall Street's initial expectations of a 6 percent drop in 2018 followed by a leveling in 2019 and 2020.

Both companies have issued statements criticizing the preliminary rates as not being market-based because they exclude payment data from hospital labs. According to Quest CEO Steve Rusckowski, "Hospitals and physician office labs comprise half of Medicare CLFS volume and lab spending, but only accounted for 8.5 percent of the reported lab volume used by CMS to calculate the rates."

Molecular Testing Relatively Unscathed
Proprietary tests would fare better than more common tests provided by large numbers of hospital and reference laboratories. While a few molecular tests would suffer deep cuts (including tests for Lynch syndrome [CPT 81435] and TRB gene rearrangement direct probe [CPT 81341]), molecular assays generally see smaller declines and even a few rate increases.

Sampling of Molecular Test Pricing Changes

Advanced Diagnostic Laboratory Tests (ADLTs)
Another category of tests that fared relatively well are advanced diagnostic laboratory tests (ADLTs), which CMS defines as tests developed and offered by a single lab that use a unique algorithm to analyze multiple DNA, RNA, or protein markers, and provide new clinical diagnostic information that cannot be obtained by any other test. Two noteworthy ADLT test codes that would get payment increases are:

• CareDx's AlloMap for cardiac transplant rejection risk (CPT 81595): a 14 percent increase, from $2,841 to $3,240; and

• Veracyte's Affirma Gene Expression Classifier for classifying thyroid nodules (CPT 81545): a 12 percent increase from $3,222 to $3,600.

Crosswalk Codes
CMS also issued crosswalk- and gap-filling-based preliminary rates for 58 HCPCS codes that received no private payor data.

Takeaway: CMS is expected to issue final rates in November. In the meantime, the laboratory industry has not given up on its efforts to persuade the agency to change the pricing formula to include hospital laboratories or delay the new PAMA rates from taking effect on Jan. 1, 2018.