Compliance Perspectives: PAMA Pitfalls & Survival Strategies

PAMA’s deep Medicare reimbursement cuts have had a devastating impact on the lab industry. Recent CMS changes in the 2019 Final Rule should provide a degree of pricing relief but not until 2021. In the meantime, after last year’s 10% cut, labs are bracing for an additional 10% cut in 2019. Bottom Line: Labs need plans to deal with both the long-term and short-term effects of PAMA.

The 4 Big Problems with PAMA

Labs welcomed the PAMA concept of basing Medicare reimbursement on market rates for tests. The problem has been with CMS’s implementation.

1. “Applicable Laboratories” Definition

The first problem is the agency’s too-narrow definition of “applicable laboratories” that excludes the majority higher priced hospital outreach labs in calculating market rates for lab tests. Although the recent decision to include some hospital outreach lab representation in the 2019 market data collection round helps, industry experts say it’s merely an initial step to achieving the true market-based pricing system envisioned in the PAMA law. In the meantime, the downstream pricing effects of the new reporting policy won’t be felt until 2021.

2. The Data Collection

Another problem is with the actual data collection. Labs, both big and small, had issues submitting accurate data because they didn’t have sound financial systems in place, says Lâle White, a nationally recognized expert in medical financial management and compliance and CEO of the leading consulting firm XIFIN. The result was wide disparity in reported prices, e.g., reported reimbursement of $.01 by one lab for the same test a different lab reported receiving $999,999 in payment.

3. The Data Weighing

Adding to these problems, according to White, is that data collection isn’t weighted appropriately to reflect the actual market and variance in reimbursement rates among them. Specifically, the relatively highest charging segments, hospital and physician office labs, are severely underrepresented in the collected data:

  • Independent labs represent only 50% of the CLFS volume but 90% of the collected data; result: they were overrepresented in the data by 40%;
  • Hospital labs represent 27% of the CLFS volume but only 1% of the data collected; result: they were underrepresented in the data by 26%;
  • Physician’s office labs are 23% of the CLFS volume but only 7.5% of the data; result: they were 15.5% underrepresented in the data.

The next data collection from January to June 2019 is supposed to include more hospital labs. The problem, says White, is that many of these hospital outreach labs aren’t ready to provide the data and have no financial systems in place to produce it.

4. The Pricing Formula

It’s not all CMS’s fault. Part of the problem is how the PAMA legislation is written, specifically its basing of “market price” on weighted “median” rather than weighted average of data collected. Industry groups have called for a “weighted average” formula that considers every price at the volume of tests performed at that price for all submitters. This is extremely important, says White, because if the total number of hospital labs had submitted data, the market pricing calculated at a weighted average (rather than median) could have yielded a CLFS increase of 3.8% increase in the last round. Thus, broadening the “applicable laboratories” definition won’t solve all the problems as long as rate-setting continues to be based on weighted median prices.

Impact: Artificially Deflated Prices
The immediate impact of these problems is a significant—and unfair—reduction in reimbursements for diagnostic tests. Because reductions are capped at 10%, labs saw a 10% reduction in Medicare and Medicaid reimbursements last year. Going forward the top 75 tests will see a 30% overall reduction by 2020.  

White notes that these cuts are significantly more than the original estimates. OIG originally estimated that reductions in lab payments would generate $390 million in Medicare savings in the 2018, the first year of PAMA. But during 2018, OIG revised that estimate to $670 million!  

In the long term, a lab that gets 31% of revenue from Medicare and Medicaid can expect to lose 5.33% of total revenue annually, says White. Harder hit will be rural and nursing home labs that receive 50% of their revenues from Medicare and Medicaid, which can expect a 9.44% cut in revenues cut, enough to erode their entire profit margin.

The Private Sector Ripple Effects
These numbers don’t do justice to the total losses because they don’t account for how Medicare/Medicaid price erosion is also driving down lab test reimbursements in the private sector. Private payers are relying on the lower Medicare/Medicaid rates to ratchet down the fees in renewal contracts by an average of 20-30%, White explains. She estimates the impact of this slow erosion at 3%, a percentage that will grow in 2019 when prices apply to the full year.

The Consequences
How will this hemorrhaging of revenues affect labs and the diagnostics market in the long-term?

Staff cuts. Labs began reducing staff to make up for reimbursement cuts last year, notes White, and suggests more and deeper cuts are likely to occur going forward. 

Lab specialization. In the past, clinical labs believed they needed comprehensive menus of tests, says White. But that will no longer be feasible. Instead, more labs will specialize in test types such as diabetes, cancer, genetic, pain, and cardiovascular.

Shuttering of labs. There will be a decline in rural and nursing home labs that receive much of their revenues from Medicare and Medicaid, says White, with the business likely shifting to community hospital labs with higher routine testing margins and deep connections to the community.

Consolidation. Freestanding and physician labs will face even greater pressures to consolidate. Meanwhile, hospitals will pay greater attention to their labs to ensure they operate with greater efficiency to leverage diagnostic services and reduce overall cost of care in hospital while improving outcomes.

Growth in reference labs. As labs pare down their in-house testing menus and weed out tests that don’t support the volume necessary for cost-effective operation, reference labs that perform higher level and value tests will pick up the slack and experience growth, White predicts.

Takeaway: 3 Survival Strategies

According to White, there are three strategies labs can implement to not only survive but prosper under PAMA and beyond:

1. Private Payer Contract Negotiation Strategies

Unless and until the PAMA CLFS reflects market reality, labs need to focus on eliminating contracts tied to the Medicare fee schedule. One option that seems to have proven successful for some labs is to negotiate a market rate by CPT code for a subset of codes most important to the lab. To implement this strategy, you’ll need to evaluate your costs in run tests, review reimbursement by CPT code and identify outliers that need renegotiation. To prevail in the subsequent negotiation, come to the table armed with a good understanding of your current cost structure, both direct and indirect, by CPT code so you can demonstrate acceptable reimbursement level for each test.

2. Product Strategies 

On the product side, consider diversifying your testing menu to add high level, high value tests with reimbursement levels that support the cost structure and expanding specialty testing capabilities. And regardless of menu options, it will be imperative to expand your cost reduction efforts.

3. Master the Data

Above all, labs need to take charge of their own data. In 21st century medicine, data is the key to survival, not just for labs but all providers and payers, White explains. For now, the minimum requirement is sound pricing data for PAMA reporting and controlling costs to offset reimbursement cuts.

But in the long-term, there’s so much more at stake. Because diagnostic data drives so many aspects of care, labs are at the very hub of the health care system. All of this adds up to incredible strategic opportunity. Labs have (or could put themselves in the position to have) all the data the other stakeholders need. Thus, for example, using the data your lab generates to link test ordering to outcomes would give you a major strategic advantage in working with physicians and patients; by linking test utilization to treatment costs, you could become a major asset to payers. The recipe for success:

  • Recognizing the data opportunity;
  • Mapping out a plan to take advantage of it, including the necessary improvements to current data collection, analysis and reporting capabilities; and
  • Securing the buy-in of the organizational leaders who provide the investment resources needed to bring the plan to fruition.

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