Coming Changes for Clinical Laboratory Fee Schedule May Create New Compliance Risks

Labs need to brace for more changes in the reimbursement environment as the Centers for Medicare and Medicaid (CMS) is set to initiate a new process for setting the clinical laboratory fee schedule (CLFS). In 2016, certain categories of clinical laboratories, identified as “applicable laboratories” will be required to report every three years the rates they are paid by private insurance companies. This new process will determine updates to the CLFS. There will no longer be annual consumer price index updates, geographic adjustments or any other adjustments to the CLFS. All changes, whether they are increases or reductions, will be a result of the market data laboratories provide at these three year intervals covering the reporting period determined by the Secretary of Health and Human Service (the Secretary).

These new policies and others for improving clinical diagnostic laboratory tests are contained in Section 216 of the Protecting Access to Medicare Act of 2014 (“PAMA”), which adds Section 1834A to the Social Security Act. This new section will change the way reimbursements are determined for tests paid under the CLFS. It also affects the way new tests are priced and creates a new designation for so called Advanced Diagnostic Laboratory Tests (ADLT). The tests on the CLFS do not include pathology tests which are paid according to the Medicare physician fee schedule (MPFS), but there are indications in the legislation that laboratories may have to report the rates for these tests also.

The legislation indicates what data will be collected and reported and how to handle reporting different payment rates for the same test for the same or different payers, but it does not provide details about the format and collection process. At this point, there are few details and many questions about which laboratories will have to report data and how data will be reported but that does not mean that laboratories cannot take any action at all. This article will address some compliance risks that may arise out of this new legislation and the actions laboratories should consider taking now to prepare. Although 2015 is just beginning, given the significant work labs will have to do to gear up for this new reporting obligation, January 2016 is not very far away.

Laboratories May End Up Paying for Past Mistakes

Laboratory payments will again be reduced, this year by minus .25 percent. Laboratory fees have been reduced or remained the same far more often over the last decade then they have been increased. When an increase did occur, it was very modest.

A similar trend occurred in the private marketplace where Medicare’s CLFS was often a starting point for private payers to negotiate terms for exclusive contracts and discounts. Laboratories of sufficient size, wanting to gain market share and able to survive low payment rates in the near term, would accept deep discounts to reach these marketing goals.

One result of this constant assault on laboratory fees by Medicare and other government payers as well as private payers, and some laboratory’s seeming willingness to accept them, is a condensed market. Smaller labs and specialty labs were acquired by larger laboratories. It is likely that larger labs believed they could increase rates once they controlled more and more of the market, giving them increased leverage when negotiating with payers.

However, other market factors delayed the ability to negotiate higher fees and thus have distorted the market. For example, new entrants into the marketplace (such as hospital outreach programs) gave payers new providers with whom to negotiate lower fees. CMS therefore has an opportunity to again reduce laboratory payments as it bases the CLFS using today’s distorted market rates. It will likely take several reporting periods to bring the market back to a place where the fees are appropriate for laboratory tests. The new process, if implemented as described, provides an environment where this can happen.

Recent Fee Schedule Disasters Demonstrate the Need for Change

There are two recent events that underscore the need for some kind of revision to the CLFS and the processes used to update and correct payment rates to reflect current trends in the market. The first was the introduction of the tiered payment system for molecular and genetic tests. This includes the ongoing process CMS and other agencies such as the Food and Drug Administration are struggling with to set appropriate payment rates for newer technologies such as next generation sequencing and algorithmic-based test results.

The other is the massive change devised by the American Medical Association’s Current Procedural Terminology (CPT) Editorial Panel to the drug testing section of CPT codes. CMS had concerns that the new coding system would result in overpayments and decided at the last minute that it would not include the new codes in the 2015 CLFS. Instead, CMS created new Health Care Common Procedural Coding System (HCPCS) “G” codes. As a result, laboratories have to accommodate two different ways to bill drug tests based on who is paying. For their Medicare patients, they will use the G codes, but for many of their other payers, they will use the new coding system. Now, with the new process being initiated in 2016, it is unclear what process CMS will use to price the new drug codes.

Another problem laboratories experienced in 2014 was how late CMS provided the 2015 CLFS information. The transmittal announcing the 2015 CLFS rates and other update information (R3152CP) was not issued until Dec. 19, 2014 with an effective date of Jan. 1. This made it difficult for laboratories to get their systems updated for the new codes and new payment rates. This is not the first time CMS has been late with the CLFS fee schedule update. CMS often misses its required dates when it comes to regulations and there is no reason to believe that trend will not continue with the legislation related to this fee schedule change, particularly since it is so massive and complicated.

PAMA Definitions Related to Data Collection and Reporting

Definitions in PAMA are vague at best and leave many unanswered questions. For instance, whether a laboratory is an “applicable laboratory” is determined based on the Medicare fee schedule from which it derives its revenues. According to PAMA section 216, the term “applicable laboratory” means a laboratory that receives a majority of Medicare revenues under Section 1833(h) (all labs paid under the CLFS), Section 1834A (created by PAMA) or Section 1848 (lab tests paid under the Medicare physician fee schedule) of the Social Security Act.

The term “applicable laboratory” is a critical definition. There is a large variety of laboratories in the marketplace operating in a variety of settings, which affects a determination of private pay rates. For example, hospital laboratories that currently have the majority of their outpatient tests paid under a bundled payment system, will be excluded from reporting data. This is a recent change that once again has the potential to distort the market when it comes to the private pay rates received. In many cases, these hospital outreach programs may have been receiving higher rates than many independent laboratories. Not including those higher rates in the calculation will result in lower rate calculations for laboratories.

What to Do Now to Avoid Compliance Risks Later

With so many aspects of the new process as yet unclear and so many unanswered questions about the details of the implementation process, it may seem like there isn’t much labs can do now to prepare. However, barring a complete repeal of this new process, which seems unlikely, laboratories should begin preparing by examining the new law closely, looking to the text of the legislation and the upcoming regulation and highlight the sections that pertain to their laboratory. Then, to help you prepare for the reporting obligation, here are two critical steps you need to start now:

#1: Understand What Data Will Be Reported

One aspect of PAMA that all laboratories are going to have to address in some fashion is the data reporting, beginning possibly as soon as 2016. This presents the biggest compliance risk. Failing to report data when your laboratory should, or reporting incomplete or inaccurate data can lead to fines and penalties that can be significant. In order to ensure accurate reporting of rates, an officer of the company will be required to certify the accuracy and completeness of the information reported. The penalty for not reporting, reporting inaccurate or incomplete information or omitting data, is a per day penalty of up to $10,000.

Even without the details, PAMA provides enough information to know that the reporting aspect is going to be a difficult task for any laboratory. PAMA defines “applicable information” and the parameters for reporting as follows:

For each laboratory test, for each data reporting period:

  • Report the rate paid by each private payer for each test
  • Report the volume of each test for each reported payer
  • Exclude tests paid on a capitated or similar basis
  • Note the data collection period will be defined by the Secretary
  • Include in payment rates all discounts in any form
  • When different rates from the same test from the same payer exist, or different rates from different payers for the same test exist, report each separate one with its volume.

When determining what to report, consider that the legislation defines private payer to mean a health insurer, a group health plan, a Medicare advantage plan and a Medicaid managed care organization.

Note: Once the new rates are established, they are applicable to hospital tests that are separately paid—in other words, not paid as part of a bundled payment. This means these rates will apply to hospital non-patients even though the private payer data from these hospitals, as the legislation is currently written, would not be included.

#2: Test Your System’s Capabilities

Laboratory compliance officers and administrators need to determine their information systems’ ability to generate the data being requested. CMS is very likely to want to receive the information in an electronic format. It is going to require some sophisticated programming to extract the data and organize it so that it can be reported in a format acceptable by CMS. This will be an ongoing process so it will require some staffing and other resources. In some cases it may require new computer hardware or software. So when devising budgets for 2016 and even budget adjustments for 2015, that potential cost should be accounted for.

Laboratories may also want to run some tests on real data to determine what the data is going to show CMS so they can be prepared to answer questions about variations in prices for the same test when paid by the same payer or other odd data. These tests might also detect errors or omissions in the data because of some problem with the software, so the resulting data should be tested for accuracy and completeness by a second objective test, like a manual audit.

Advisory: As with all compliance issues in health care, laboratories need to be aware of the potential for whistleblowers to bring claims related to the data reporting required for this new process. So, review your compliance policies for dealing with whistleblowers and ensure you are encouraging staff to report compliance concerns or questions before they give rise to problems that can lead to whistleblower claims and other liability.


These changes to the creation of the CLFS are a section of the PAMA requirements that carry significant and imminent compliance risks for laboratories. At $10,000 per day, a reporting error made in 2016 that is discovered in 2019 can result in a very large fine.

Note too that there are many other aspects to the PAMA legislation that have been, or will be, explored in this and other G2 Intelligence newsletters, as the implementation process moves forward. So stay tuned.

Takeaway: The changes PAMA will bring to the laboratory industry seemingly impact areas other than compliance—such as revenue. However, the obligations created by PAMA’s data reporting requirements and the tasks necessary to comply with them give rise to potential compliance problems that laboratory compliance officers need to be considering and preparing for now.


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