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MedPAC Report on PAMA a Mixed Bag for Lab Industry

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NEW YORK — The Medicare Payment Advisory Commission's recent report to Congress on the Protecting Access to Medicare Act was something of a mixed bag for the lab industry.

In the report, which was released last week, the commission acknowledged the validity of the industry's complaints regarding price data collection under PAMA. However, it also suggested that more action might be needed to control lab testing costs, including potentially addressing the growth in spending on genetic testing.

Passed in 2014 and implemented in 2018, PAMA calls for the Centers for Medicare and Medicaid Services to set prices for lab tests based on private payor rates that it collected using payment data from clinical labs nationwide. The law was intended to reduce Medicare spending on lab testing and was spurred on by the recognition that for many tests, Medicare was paying higher rates than were private payors.

Under PAMA, the US Department of Health and Human Services established criteria for determining which labs were required to report pricing data. The agency's initial definition of an applicable laboratory excluded the vast majority of hospital outreach labs, which typically have some of the industry's higher reimbursement rates. Industry organizations like the American Clinical Laboratory Association argued that this caused payment data from large reference labs like Quest Diagnostics and Laboratory Corporation of America to dominate the rate setting process. Further, because such labs typically receive lower reimbursement than many hospital and small independent labs, this skewed prices lower than they otherwise would have been.

ACLA filed a suit in 2017 against HHS challenging the implementation of PAMA. That case is still ongoing.

In 2019, Congress passed the Laboratory Access for Beneficiaries Act, which delayed by one year the reporting of lab payment data required by PAMA and called for the Medicare Payment Advisory Commission, or MedPAC, to review the law's implementation.

In its report, the commission concluded that the lab industry was correct that the original HHS data collection process led to deeper payment cuts than would have occurred had price reporting been more representative of the industry as a whole. It noted that for the 100 tests on the Medicare clinical laboratory fee schedule, or CLFS, that accounted for roughly 85 percent of all CLFS spending in 2016, "hospital outpatients and physician-office laboratories received private payer rates that were, on average, 45 percent and 53 percent higher, respectively, than independent laboratories."

"Full representation of hospital outpatient and physician-office laboratories in the first round of data reporting would have resulted in higher Medicare CLFS spending," the commission concluded.

The report went on to suggest, however, that more representative pricing data was not necessarily desirable given PAMA's aim of cutting Medicare lab spending.

"Medicare should ensure that payment rates are sufficient to cover the costs of relatively efficient laboratories but should not increase rates solely to accommodate laboratories that receive high private-payer rates," the commission said, adding that "in setting CLFS payment rates, incorporating private-payer data from a representative sample of all types of laboratories would be imprudent for routine laboratory tests where higher private-payer raters likely reflect provider negotiating leverage rather than the costs of furnishing the tests."

It noted that using a more representative collection of labs for price data reporting would have increased Medicare spending on the top 100 CLFS tests by between 10 percent and 13 percent.

In a statement, ACLA lauded the report's conclusion regarding the PAMA price data collection process, noting that it "validates concerns long expressed by the laboratory community that reimbursement reductions imposed as a result of a flawed data collection process are too extreme and have resulted in unsustainable below-market rates."

The organization was less pleased with MedPAC's suggestion that CMS should perhaps not use a representative sample of labs to set some test prices.

"Limiting data collection to a subset of laboratories is inconsistent with the intent of PAMA as well as MedPAC’s charge to recommend a data collection process that is the least burdensome and is representative of all laboratory market segments," said an ACLA spokesperson. "Notably, no existing Medicare payment system bases payment on efficient providers."

Jeff Myers, VP of consulting services at healthcare consulting firm Accumen, noted that industry forces such as increasing competition from large independent labs like Quest and Labcorp as well as pressure from private payors would likely continue to drive down rates at higher-priced facilities like hospital outreach labs regardless of whether HHS adjusted the PAMA price data collection process.

"I do think there needs to be some normalization of" independent and outreach lab rates, Myers said. "And that is happening regardless of the PAMA legislation."

And, in fact, HHS has since the initial passage of PAMA revised the applicable lab qualifications to include a larger sample of hospital outreach labs. But while organizations like ACLA have supported these changes as a step toward improving PAMA price reporting practices, hospitals have been reluctant to provide this data.

For instance, the American Hospital Association opposed HHS' shift to include more hospital outreach data, with Roslyne Schulman, director of policy at the AHA, telling 360Dx in 2019 that "the increased data reporting burden that would be imposed on hospital laboratories newly meeting the 'applicable laboratory' definition would not be justified by what CMS itself expects to be a minimal impact on the clinical laboratory fee schedule rates."

"Few if any hospitals have been able to report, because a hospital is not set up to be an ancillary service provider and to provide line-item detailed information" on lab pricing, Myers said. "If [a hospital] were to spend three months, or however long it would take, to jury-rig a product so that they could report to CMS, it might change their overall reimbursement by $10,000. Now, if every hospital in the United States did it, then you're talking about hundreds of millions of dollars. But individually, there's no interest. The juice isn't worth the squeeze."

Myers highlighted the MedPAC report's proposal of a random-sampling approach to collecting lab pricing data as a potential way to address this problem.

Working with third-party contractor RTI International, MedPAC looked at whether surveying a sample of labs could prove an effective approach to collecting pricing data, finding that such a method could "reduce the number of laboratories that would be required to submit private-payer data by up to 70 percent."

"I'm very much a believer in what you might term a random sampling technique," Myers said. "I think sampling is a heck of a lot better methodology to create a fairer way to adjust pricing."

Jane Hermansen, manager of outreach and network development at Mayo Clinic Laboratories, said, however, that a sampling-based approach would still be open to concerns about the process used.

"Are we as an industry comfortable that random sampling will accurately represent reality?" she said. "I'm not sure."

Looming over all the discussion of applicable laboratories and price data collection is the fact that, due largely to the rapid growth of molecular and genetic testing, PAMA has not actually succeeded at its stated goal of driving down Medicare lab spending. The report noted that while "overall utilization of CLFS laboratory tests remained relatively flat" after the implementation of PAMA, "aggregate Medicare CLFS spending increased" from $7.1 billion in 2017 to $7.6 billion in 2019.

"This increase was predominantly driven by [a] spending increase for new, high-cost tests in the molecular pathology, multianalyte assays with algorithmic analyses, proprietary laboratory analyses, and genomic sequencing procedures categories," the MedPAC report said. It noted that for many such tests the negotiating power of private payors appeared more limited than for routine tests and suggested that in the future, the commission would take up the question of how "to improve how Medicare sets prices for new high-cost technologies," including lab tests.

"These are tests that are really great for patient care but are often quite expensive when they are evaluated on their own," said Kimberly Zunker, consulting manager at Accumen. She noted that given the rapid pace of growth and innovation in this segment of the industry and the retrospective nature of PAMA, keeping up with these products will likely prove a challenge for the law.

"These tests are being developed rapidly … so even if PAMA gets all the data they need for exome [sequencing] and everything else that wasn't widely performed three or five years ago, they still aren't going to have pricing data on what is created this year and what comes out next year," Zunker said. "Any new and emerging test, PAMA and CMS will have a difficult time with."

Myers noted that despite MedPAC's suggestion that private payors may lack negotiating power for some newer tests, many new molecular codes could see substantial price cuts when PAMA's market-based rates are applied in coming years. For instance, he said that in the first round of PAMA pricing in 2017, there were 120 CPT codes classified as molecular pathology. Two years later, in 2019, there were 220 such codes, he said.

"That's 100 molecular pathology CPT codes that were paid in 2019 that didn't have a weighted median [based on PAMA data reporting], so CMS just set a rate for them," he said. "And what we are finding is that that rate is much higher than the market rate."

As healthcare consultant Bruce Quinn noted in a blog post, test fraud might also have played a major role in rising Medicare CLFS spending. The MedPAC report notes that "in 2019, the Department of Justice alleged that numerous defendants fraudulently billed Medicare more than $2.1 billion for cancer genetic tests."