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Labs Lose a Battle But May Win the War Over Market-Based Pricing

by | May 10, 2021 | Blog

In its crusade to get CMS to fix its warped Protecting Access to Medicare Act of 2014 (PAMA) market-based Medicare Part B pricing scheme, the lab industry lost a battle but may still end up winning the war. Here’s a rundown of the rollercoaster PAMA developments and what they may portend for your lab. The […]

In its crusade to get CMS to fix its warped Protecting Access to Medicare Act of 2014 (PAMA) market-based Medicare Part B pricing scheme, the lab industry lost a battle but may still end up winning the war. Here’s a rundown of the rollercoaster PAMA developments and what they may portend for your lab.

The Pollution & Perversion of PAMA Market Pricing

Back in 2014, the idea of substituting traditional Medicare Part B Clinical Laboratory Fee Schedule (CLFS) payment system in which rates were based on local, historical lab charges, updated for inflation, and capped at certain amounts with a system basing prices on real market rates seemed like an excellent idea whose time had come. Nor was there any real objection to putting CMS in charge of determining what those market rates were by requiring “applicable laboratories” to report data on what they charge private payors for particular tests.


The problems began not with the actual PAMA statute but the way CMS went about implementing it, specifically its decision to exclude hospital labs from the definition of “applicable laboratories” required to report pricing data. As a result, CMS relied almost exclusively on data from independent labs to set CLFS rates, omitting hospital labs who provide so many of those tests and who also have the leverage to command higher rates from payors. As it always did, garbage in led to garbage out, in the form of an artificially deflated CLFS that threatened to drive independent labs out of business.

After repeated delays, the new “market-based” CLFS went into effect in 2018. But while financial damage has already been done, the worst is yet to come in 2025 when the full brunt of previously deferred PAMA cuts are phased in. Although CMS has made some concessions, most notably in January 2019 when it agreed to broaden the definition of “applicable laboratories” to include some hospital labs, independent labs are still reeling from PAMA.

PAMA Resistance: Losses in Court

For nearly a decade, the lab industry has pushed back against CMS’ PAMA pricing scheme. Resistance has been along several fronts, including the courts. But other than keeping the pressure on CMS, the litigation effort has borne little fruit. The most recent, and perhaps fatal setback, came on March 30, 2021 when the federal D.C. district court once more tossed the case brought by the American Clinical Laboratories Association (ACLA) challenging the legality of the CMS PAMA system.

One problem faced by the ACLA attorney was the provision in PAMA barring court review of the “establishment of payment amounts.” Besides, CMS argued, the definition of “applicable laboratory” was a moot issue since the PAMA pricing scheme already took effect in 2018. We’re not challenging the pricing scheme, the ACLA countered, but the pricing data collection scheme which remains very much ongoing. Ultimately, the court agreed with CMS on both the statutory bar on court review and the mootness of the dispute and dismissed the case [Am. Clinical Lab. Ass’n v. Becerra, 2021 U.S. Dist. LEXIS 60622].

PAMA Resistance: Promising Developments on the Congressional Front

In fact, the ACLA lawsuit may actually prove to be moot, but for different reasons. Real PAMA pricing relief may be on the way from another source, namely, the Medicare Payment Advisory Commission (MedPAC), an independent, non-partisan agency created by the Balanced Budget Act of 1997 to advise Congress on Medicare reimbursement to private health plans and providers, care quality and other issues. Congress has charged MedPAC with reviewing the methodology used by CMS to implement market-based pricing of CLFS tests under PAMA, as well as the reporting methods the agency uses to gather the data on which it bases those prices, and submit a written report of its findings in June 2021.

As bad as things are now, the distorted CMS scheme will drag prices down even further when the deferred cuts take effect in 2025. MedPAC Senior Research Assistant Carolyn San Soucie said payment rates will decrease by an estimated 24 percent once the rates are implemented.

In addition, private payor rates reported by labs were generally lower than Medicare’s 2017 average payment rates for 77 percent of tests, but higher for about 23 percent of tests. MedPAC noted that although lab test utilization was stable overall from 2017 to 2019, there were “sharp increases in the use of new, high-cost tests,” such as complex genetic tests. As a result, Medicare Part B lab spending actually increased from $7.1 billion to more than $7.5 billion.

Spending on chemistry tests declined 14 percent, in line with PAMA expectations, while molecular pathology spending increased due to higher use of the tests. Panel test spending didn’t decline as expected, which MedPAC attributed to unbundling and a “generous phase-in of payment rate reductions under PAMA.”

MedPAC & PAMA Reporting

MedPAC is also looking into ways to reduce the reporting burden on labs and asked a third-party contractor, RTI, to perform an analysis of the different survey methodologies that could be used to collect representative and statistically valid samples. RTI evaluated multiple sampling techniques based on two criteria:

  • The extent to which a survey could produce accurate estimates of private payer prices for each type of lab; and
  • How many labs would have to report data to generate accurate price estimates.

Using Medicare claims and private payer data to simulate the results of a survey, RTI concluded that setting Medicare payment rates using a survey is feasible and could substantially reduce the reporting burden on labs. RTI found that a survey could produce accurate estimates of private payer rates for all three types of labs that generate the vast bulk of CLFS tests, i.e., independent, hospital outpatient and physician office labs. Even a survey with a minimum as low as 10 labs reporting data for each particular test could reduce the number of labs required to report private payor data by up to 70 percent.

Setting Medicare payment rates on a representative sample of labs would increase program spending by 10 to 15 percent, as compared to the spending that would result from Medicare’s current rates. This increase varied depending on different parameters for different labs, such as only including tests from hospital outpatient labs that were furnished to non-patients.

Although the estimates “should not be considered precise point estimates,” the MedPAC representative noted that going from rates based largely on independent labs to rates based on data from a broader assortment of labs will likely increase Medicare spending significantly.

MedPAC also noted examples where basing payment rates on a sample of private payor rates may not be ideal, namely for routine tests and genetic tests. For routine tests, RTI found that policymakers should exclude high private payor rates resulting from negotiating power rather than the actual costs of providing the test. Medicare should instead set payment rates to ensure beneficiary access while maintaining incentives on laboratories to make better use of taxpayer and beneficiary resources. Policymakers could focus on “efficient laboratories” instead of all labs to exclude these high private payor rates.

For high-cost tests, MedPAC said private payors may have a limited ability to negotiate rates because they’re more complex and proprietary. As a result, the representative suggested that in the future the Commission would “consider alternative ways to set payment rates for new, high-cost technologies, including certain pharmaceuticals, devices, and laboratory tests.”


MedPAC has asked for comments on its findings and intends to use the feedback in the final report it issues to Congress in June. And when that report does come out, it will likely have significant influence. Just as important is the timing. While the devastation wrought by PAMA pricing in the past three years can’t be undone, there’s still time to fix the mess before the bottom falls out in 2025.