Laboratories should begin preparing for changes in the Clinical Laboratory Fee Schedule (CLFS) that are expected to significantly reduce test reimbursements starting in 2018.

On June 17, the Centers for Medicare & Medicaid Services (CMS) released a final rule for implementing provisions of the Protecting Access to Medicare Act of 2014 (PAMA). The rule establishes a framework for recalculating lab fee schedule payments based on rates paid to labs by private payers.

The change will require that labs report commercial reimbursement amounts and is expected to reduce Medicare lab payments by $390 million in 2018, according to CMS1. PAMA authorizes rate reductions of up to 10% per year for the three year period starting in 2018, and up to 15% per year for the following three-year period, beginning in 2021. About $7 billion is paid by Medicare each year under the CLFS for approximately 1,300 clinical diagnostic tests.2

Reporting requirements

According to the rule, laboratories and physician offices that have more than $12,500 in Medicare revenues from laboratory services and receive more than 50% of their Medicare revenues from laboratory and physician services during the six-month data collection period must report private payer payment information to CMS. Labs will be required to report private payer rates for each test, the volume of tests paid at each rate, and the specific codes associated with the test.3

Reporting must reflect all discounts, rebates coupons and other price concessions, according to CMS. Under PAMA, CMS is authorized to impose civil monetary penalties of up to $10,000 per day for each failure to report or each misrepresentation or omission in reporting applicable information. Additional guidance from CMS on reporting should be forthcoming, according to the agency.4

CMS expects that 95% of physician office laboratories and 55% of independent laboratories will not be required to report due to the expenditure threshold. That said, CMS has estimated that the labs required to report account for about 92% of CLFS spending on physician office laboratories and more than 99% of CLFS spending on independent laboratories.5

Data collected between Jan. 1, 2016 and June 30, 2016 will be submitted to CMS in the first quarter of 2017. The new fee schedule, which takes effect Jan. 1, 2018, will be calculated based on the weighted median private payer rate for a given lab test. Certain exceptions will be allowed for new tests and tests defined by statute as new advanced diagnostic laboratory tests (ADLTs). A subsequent reporting period will run from January through June 2019, with the next CLFS revision taking effect Jan. 1, 2021.6

An advisory panel made up of molecular pathologists, clinical laboratory researchers and individuals with clinical laboratory and economics expertise will help establish the new rates, according to CMS.

Rule modifications

The final PAMA rule included a number of modifications aimed at addressing concerns expressed by the provider community during the rule comment period. For example, National Provider Identifiers (NPIs) will be used to define applicable laboratories to ensure the inclusion of hospital outreach labs. At the same time, organizations will be able to report at the Taxpayer Identification Number (TIN) level, thus allowing for consolidated reporting by organizations with multiple laboratories.7

CMS also delayed implementation of the new rates by one year, until January 2018. According to CMS, the delay was designed to allow laboratories sufficient time to develop the information systems necessary to collect private payer rates and to review and verify collected data for accuracy before submitting the information to CMS.8

Preparing for revenue reductions

While the cuts will represent a major hit for many laboratories, the good news is that the delayed implementation should give organizations time to prepare effectively for the reduction. Here are four steps labs may want to consider taking to improve their readiness for the coming diminished revenue environment:

  1. To estimate the likely impact of the payment cuts, practices should consider calculating a 10% reduction in their current CLFS reimbursements. It would also be helpful to review private payer contracts to determine which agreements may be tied to CLFS current year rates. Many private payer reimbursement rates are based on a percentage of equivalent CLFS rates, so practices should anticipate and calculate those projected revenue losses as well.
  2. Weathering the revenue reductions will require that practices identify new opportunities for reducing operational expenses. In addition, practices should consider exploring expansion or outreach opportunities in pursuit of greater, albeit lower-margin, volume.
  3. Groups should redouble their efforts to optimize their existing revenue cycle management. This means addressing denials and effectively working accounts receivable to make sure the practice is receiving every dollar to which they are entitled.
  4. Once CMS provides templates for submitting the commercial payment information, McKesson will be able to extract and aggregate the necessary data from clients’ commercial claims. Groups that are not McKesson clients should work with their IT and billing personnel to make sure they’ll be able to report the required information in the first quarter of 2017.

Developing more efficient, streamlined laboratory operations will be essential as the payment deadline of Jan. 1, 2018 approaches. In the near term, organizations should concentrate on making sure they’re prepared to submit accurate and complete data starting in January of next year.

1Karen S. Lovitch, Kate Stewart, “At Long Last, CMS Issues Final Rule for Lab Fee Schedule Changes” Mitz Levin Health Law and Policy Matters, June 20, 2016
2Ayla Ellison, “CMS finalizes lab fee schedule changes: 5 key takeawaysBecker’s Hospital Review, June 20, 2016

Brian Kemp

About the author

Brian Kemp
Vice President, Laboratory Operations
McKesson Business Performance Services