PAMA-Geddon: CMS Slashes 2018 Part B Lab Rates

Resisting industry pleas for a delay, CMS is sticking to the Jan. 1 start date for the new PAMA payment system. Even worse, it's sticking to its misguided formula for pricing lab tests. Result: The CMS preliminary 2018 Clinical Laboratory Fee Schedule (CLFS) provides for disturbingly deep and widespread cuts in lab payments.

How Did We Get to This Point?
Nobody quibbles with the idea of basing Medicare payments on what payors actually pay for lab tests. The problem is figuring out what the prices actually are. The CMS approach is to gather pricing data from what it calls "applicable laboratories." The problem is that it isn't counting hospital and community labs as "applicable laboratories." These are the labs with the leverage to command higher rates from payors. Consequently, excluding their data not only leaves out a huge part of the lab market but artificially skews everybody else's rates in a downward direction.

Such is the argument that the lab industry has been making ever since CMS proposed the PAMA formula. And the preliminary CLFS that CMS just issued bears out the argument in spades with approximately 75% of all lab tests targeted for cuts. It would be a lot worse but for CMS's 10% per year cap on reductions, which means that 58% of the rate cuts will be phased in over two years.

"If these draft rates were finalized, the impact would be devastating," according to American Clinical Laboratory Association President Julie Khani. "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."

Reference Labs Suffer the Deepest Cuts
The big reference labs like Quest Diagnostics and LabCorp will be hit especially hard. In a note to investors, Piper Jaffray analyst William Quirk writes that the expected revenue decline of approximately 8% in the first three years is even worse than Wall Street's initial expectations of a 6% drop in 2018 followed by a flat 2019-2020. So it is hardly surprising that word of the CLFS sent the share prices of both firms sharply down.

Both labs have also 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 clinical lab fee schedule volume and lab spending, but only accounted for 8.5% of the reported lab volume used by CMS to calculate the rates."

Mixed Bag for Molecular Dx
Newfangled proprietary tests offered by a limited number of labs fared better than reference lab tests provided by large numbers of hospital and reference labs. A notable example is molecular diagnostic tests. Thus, while a few molecular tests did suffer deep cuts (including tests for Lynch syndrome (CPT 81435) and TRB gene rearrangement direct probe (CPT 81341)), molecular assays were hit with generally smaller declines and even a few rate increases.

Advanced Diagnostic Laboratory Tests (ADLTs)
Another category of tests to dodge the axe are the newfangled ADLTs, i.e., tests developed and offered by a single lab that use a unique algorithm to analyze multiple DNA, RNA or protein markers, and which provide new clinical diagnostic information that cannot be obtained by any other test. Two key ADLT test codes to get increases included:

Molecular DX Test Winners & Losers

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

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

Crosswalk Codes
CMS also issued crosswalk- and gapfilling-based preliminary rates for 58 HCPCS codes for which it received no private payor data.

Takeaway: CMS is taking public comments on the proposed rates through Oct. 23 with the expectation of issuing final rates in November. In the meantime, the lab industry has not given up on its efforts to persuade the agency to change the pricing formula to include hospital labs or at least delay the new PAMA rates from taking effect on Jan. 1.