PAMA-Geddon: Proposed 2018 Lab Pay Rates Are a Bloodbath

• There will be no delay; and
• And hospital labs will remain excluded from "applicable laboratories" on which supposed market rate payments for lab tests will be based.

Those were the first two things we learned on Sept. 22 when CMS issued its preliminary Clinical Laboratory Fee Schedule (CLFS) for 2018. And it got even worse for those with the stomach to look at the proposed rates.

The Market Rates Controversy
PAMA is supposed to base Medicare payments on market rates. Starting Jan. 1, 2018, CMS will determine the prices for particular lab tests based on the weighted median of private payor rates for particular tests. So, how does CMS know what those rates are?

To answer that crucial question, CMS has been gathering data from "applicable laboratories" since 2014. The lab industry is perfectly fine with that approach. The problem is the execution, namely, CMS's determination to exclude hospital and community labs in its definition of "applicable laboratories." In addition to being key components of the lab market, these labs have the leverage to command higher rates for tests from payors. Consequently, excluding their pricing data was bound to artificially skew rates in a downward direction.

Deep Cuts in the CLFS
At least that is what the lab industry has been arguing. And, based on the deep and widespread cuts proposed, the industry appears to have been right. The 2018 CLFS would cut the rates of approximately 75% of lab tests. The only saving grace is that 58% of the rate cuts 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 CY 2018.

"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."

Here's an overview of the key things lab managers need to know about the proposal.

Reference Labs Suffer the Deepest Cuts
Although the rate cuts would have widespread effects, they hit big reference labs like Quest Diagnostics and Laboratory Corporation of America 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.

Molecular DX Test Winners & Losers

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:

• 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.