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First Year of PAMA Leads to Staff and Service Cuts, Efficiency Initiatives, New Business Models


NEW YORK (360Dx) – In the first year of new reduced Medicare prices for many laboratory tests under the Protecting Access to Medicare Act, larger lab organizations have mitigated cuts through efficiency initiatives, but smaller labs have been forced to cut services and sometimes staff.

The new PAMA Medicare prices for lab tests that went into effect on Jan. 1, 2018 were intended to be market-based. But the lab industry contends that the data collection process used to establish market-based pricing was flawed and skewed toward lower prices because it excluded portions of the industry that receive higher rates from reporting.

The new lower Medicare lab test prices have had a ripple effect, ushering in business model changes in laboratories across many sectors of the industry, lab industry experts said.

"We are the busiest we have ever been in 30 years with doing strategic alternatives for very large health systems that are looking at four or five different [lab] operating models for the future," said David Nichols, president and founder of Nichols Management Group. "PAMA, if not the first thing that comes up, is at least in the top two or three subjects that comes up as far as critical issues."

The changes in laboratory operating models being considered by large health systems include operational improvements, network consolidations, or in some cases joint ventures or arrangements to monetize the outreach business, Nichols said. Some large hospital chains have explored reducing lab costs by standardizing equipment and supplies purchasing, or by network consolidation, such as merging labs located geographically close to each other, or consolidating microbiology labs into one location.

But while large health systems can weather PAMA cuts through efficiency initiatives, other parts of the industry have had less flexibility to adapt to the changes and have been hit harder by the lower Medicare lab reimbursement rates.

"The effect is different from lab to lab based on their area of specialty and where they're located," said Lale White, executive chairman and CEO of health information technology company Xifin. "Most impacted continues to be what we thought it would be, which is nursing home labs and rural labs that have a higher degree of Medicare work."

Such labs, she added, have been forced to make hard decisions to adjust to the new PAMA rates.

"What we saw this year was a paring back of services, so some labs cut some of their labor force, and some cut back on things like phlebotomy stations and those types of patient outreach services," White said.

Some of the lab tests on Medicare's clinical lab fee schedule that faced the sharpest reductions under PAMA are basic high-volume, low-cost laboratory screening tests that are conducted routinely by community and regional labs, according to National Independent Laboratory Association Administrator Mark Birenbaum. While cuts are being phased in and are limited to 10 percent the first year, common tests such as the complete blood count and hemoglobin A1c will face cumulative cuts of 35 percent and 36 percent over time, according to a NILA report. 

In May, the association released a study, based on in-depth interviews with 11 community and regional independent laboratories, that found that all the labs reported negative impacts on their business from the new prices. Effects ranged from reduced services to workforce cuts.

"There is streamlining, cost cutting, and automation, but not all labs can afford the outlay upfront for automation," Birenbaum said.

One lab in the NILA study had stopped taking on new skilled nursing facility clients because of the high percentage of Medicare patients they serve.  Out of the two labs in the study that served exclusively skilled nursing facilities, one expressed concern about surviving the year and the other predicted it would close in 2019.

"For many of our labs that do about 25 to 50 percent Medicare, a 10 percent cut in the most common codes would average out to a 2.5 to 5 percent drop in the bottom line. Profit margins for many labs are in the 4 percent to 8 percent range, so it has a huge impact," Birenbaum said.

In addition to community and regional independent labs, the effects of PAMA lab test price cuts are also being felt by smaller health systems, those with less than 1,500 beds according to Nichols, whose company focuses on lab consulting for health systems.  

His firm has dealt with smaller health systems who had played with the idea of expanding their labs or moving into the outreach business. PAMA, he said, is putting an end to those ambitions. "I have seen smaller health systems balk at capital investments in the laboratory and lose their appetite for outreach and growing the laboratory."

PAMA has also been credited with prompting several hospitals to sell their outreach businesses or outsource the management of them through joint venture relationships. Quest Diagnostics recently acquired the outreach business of Marin General Hospital in California while LabCorp acquired the assets of Mount Sinai's outreach business in 2017 ahead of PAMA's implementation. Sonic Healthcare recently entered into a joint venture with Promedica Health System in Ohio.

"We believe the market will continue to consolidate and therefore afford us an opportunity to accelerate growth," Quest Chairman, President, and CEO Steve Rusckowski said during its Q3 earnings call.

However, both Nichols and White anticipate that the pipeline for hospital outreach acquisitions will start to slow.

"I don't know how much more is left to sell as far as the outreach business," Nichols said. "There are transactions underway, but I would assume that will probably plateau."

White noted that there seems to be an increasing shift in interest toward joint ventures as opposed to an outright sale of outreach labs.

"I think health systems are really looking toward the future and they are trying to preserve their control over the lab more than they used to," she said.

Litigation over PAMA

In the meantime, PAMA is being legally challenged. The American Clinical Laboratory Association has sued US Health and Human Services Secretary Alex Azar over the legislation's implementation. Although the case was dismissed by a US District Court judge based on "lack of subject matter jurisdiction," the association is currently appealing the decision.  ACLA, major laboratories, and other lab organizations have also called on legislators to step in and take action to address PAMA data collection concerns.

New changes just announced to the 2019 Medicare fee schedule would include more hospital labs in the calculation of Medicare prices, but lab groups said those changes are too little too late. It's not clear yet whether new rules about who should submit data will capture a comprehensive picture of the lab industry, and under the PAMA structure, the 2019 fee schedule changes would not go into effect until 2021, Birenbaum noted.

By then it may be too late for a lot of labs," Birenbaum said.

Looking forward to the coming year, labs that have already faced cuts will see their challenges exacerbated when the second round of phased-in PAMA cuts take effect on Jan. 1, 2019.

"Assuming that the next round of cuts is going to be in place, which most of the industry is assuming, then they're once again looking at expense reductions in addition to what they already did last year," Xifin's White said.

If there is a silver lining to PAMA, however, it may be that for large health systems, tighter margins have prompted a more strategic assessment of the lab, White said.

"I think that PAMA is something that has really brought the lab into view," White said. "While in past years the lab was viewed as an ancillary service, it is now being looked at a lot more seriously as not just a cost center but a potential revenue center and an area through which they can control the other health system costs by targeting diagnostics more specifically."

Some labs have begun to invest in more sophisticated technology, such as lab-specific billing systems, which can better track lab billing data that might get lost in a hospital billing system, she said.

"They're bringing in financial and reporting integrity that allows them to not only capture the revenues that they would be leaving on the table otherwise, but also allows them to really accumulate the data they need for business analytics and intelligence," she said.

It's a trend that Nichols sees as well.

"It will goad [health systems] into being better managers, making better decisions, and getting rid of some of the excesses in healthcare as they relate to excess capacity and duplicate capital costs," he said.