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CMS 2018 PAMA Pricing Cut for Lab Tests Deeper Than Prior Estimate; Advanced Dx Lab Tests Fare Well

This article was updated on Sept. 25.

NEW YORK (GenomeWeb) – The Centers for Medicare & Medicaid Services' initial prices for clinical lab tests issued under the Protecting Access to Medicare Act (PAMA) would save the government payor around $670 million, shaving nearly 10 percent off the $7 billion that it pays annually for lab tests.

The agency released the draft rates late Friday.

CMS previously estimated that using a market-based system stipulated under PAMA would save $390 million in the first year of 2018, and $3.93 billion over a decade. The deeper proposed cuts, slated to go into effect in January, didn't sit well with the American Clinical Laboratory Association. Industry players have a month to comment on the draft prices and make their case to CMS for any changes before final prices are released in November.

"If these draft rates were finalized, the impact would be devastating," said ACLA President Julie Khani. "We fear the impact on laboratories serving the most vulnerable Medicare beneficiaries, laboratories serving rural areas, and those with high Medicare volumes would be the most severely impacted."

She added that the association is working to halt the finalization and implementation of these "flawed and inaccurate" rates.

PAMA, signed into law in 2014, establishes a market-based pricing system for lab tests where Medicare payment for a test equals the weighted median of private payor rates. In implementing a process for collecting the information needed to establish pricing, CMS said only "applicable labs" could report test payment rates and volumes from private payors.

However, CMS' initial definition of "applicable labs" largely excluded hospital labs from reporting data, which ACLA contested, arguing that PAMA's intent is to establish market-based pricing, and leaving out a portion of the lab market wouldn't achieve that intent. When issuing its final rule for implementing PAMA, CMS tweaked its "applicable lab" definition to include certain hospital outreach labs, which some industry observers saw as a potential positive since these labs receive higher payment rates, compared larger commercial labs.

In a document detailing the data that CMS considered in taking its initial crack at pricing lab tests, the agency said that close to 2,000 "applicable laboratories" submitted around 5 million records. Most of the reported test volume, 90 percent, came from 658 independent labs. Other entities submitting data included 1,106 physician office labs, 21 hospital labs, and 157 other kinds of labs. They each reported 7.5 percent, 1.0 percent, and 1.4 percent of the test volume, respectively, to CMS as it devised the PAMA rates.

CMS performed a simulation to gauge whether including more independent, physician office, and hospital labs would have significantly impacted rates, and concluded that it wouldn't have made much difference. According to CMS, based on information collected from applicable labs, payment for lab tests would decrease by 21.9 percent in 2018, compared to the national limitation amount it paid for lab tests during 2017. According to the simulations it performed, allowing more labs to report would have decreased payments by around 20 percent.

However, from ACLA's point of view, the simulation only further proved that CMS' approach isn't inclusive of the entire lab market. Khani pointed out that CMS considered the impact of including more hospital labs by multiplying by 10 the 21 applicable labs that reported pricing. This means CMS included 210 hospital labs in its simulation, but according to the HHS Office of Inspector General there are approximately 7,000 hospital labs in the US.

"The CMS models do not address the exclusion of data from hospitals from the calculation of PAMA rates," Khani said. "ACLA is continuing to evaluate the draft rates and other information provided by CMS, and will provide comments and analysis to CMS, as well as to Congress."

Draft pricing

Piper Jaffray analyst William Quirk wrote in a note to investors that preliminary prices suggest that PAMA's impact on the two largest reference labs appears ­– Quest Diagnostics and Laboratory Corporation of America – to be "worse than [Wall] Street expectations," with Medicare revenue declining by approximately 8 percent in the first three years. "Specifically, we believe the Street was targeting Medicare revenue down [around] 6 percent in 2018, but then flat in 2019/2020," Quirk wrote.

Quest issued a statement echoing ACLA's concerns that CMS' draft payment rates are not market-based and that they should not be finalized. "Hospitals and physician office labs comprise half of Medicare clinical lab fee schedule volume and lab spending, but only accounted for 8.5 percent of the reported lab volume used by CMS to calculate the rates," Quest CEO Steve Rusckowski, who is also on ACLA's board of directors, said in a statement. 

Based on a review of the draft rates so far, Khani said ACLA has "greater confidence" in the preliminary pricing CMS has issued for sole-source lab tests, because the lack of market representation isn't an issue in that category.

The broader impact on the molecular diagnostics market will likely be more varied. "These tests are offered by independent laboratories, as well as hospitals, academic medical centers and other providers," Khani said. "ACLA's concerns with the prohibition of significant sectors of the laboratory market from reporting, as well as data accuracy and integrity, are inclusive of these [molecular] tests."

For example, Myriad Genetics myRisk Hereditary Cancer test (based on CPT codes 81211 and 81213), received an initial price of $2,949, up from $2,781 in 2017, while its Vectra DA rheumatoid arthritis test (CPT code 81490) also saw a pricing bump to $841, compared to $591.

However, CMS' proposed pricing could be 10 percent lower for Invitae's hereditary cancer panel (CPT code 81432), which is currently being paid at $931 and got a 2018 PAMA price of $838. Under PAMA, the most test prices can be cut from 2018 to 2020 is 10 percent, and then by 15 percent from 2021 to 2023.

Exact Sciences' Cologuard (CPT code 81528) saw a slight dip from $512 to $509. Noninvasive prenatal testing (CPT code 81420) is currently paid at $802 and its proposed reimbursement was reduced to $759, which market analysts, nonetheless, saw as a positive for NIPT providers such as Illumina and Natera.

"For the AMA's genomic sequencing procedure codes, or GSP codes, the results are a mixed bag," Medicare expert Bruce Quinn said. He pointed out, for example, the price for a gene panel for disorders impacting the Ashkenazi Jewish community (CPT code 81412) shot up from $602 this year to $2,449.

On the other hand, based on private payor rates, panel testing for Lynch syndrome (CPT code 81435) would fall from $802 to $38, "which bears no relation at all to the cost of testing or market prices," Quinn said. "Lynch syndrome testing is a common test, and it appears that in 2016, almost no labs were billing the panel code and they were billing individual gene codes instead." Because 2018 pricing can't be cut by more than 10 percent, compared to what CMS paid in 2017, the agency proposed $722 for this code.

Pricing for next-generation sequencing panels that test between five and 50 genes (CPT code 81445) remained stable at $602, relatively flat to $598 reimbursed in 2017, and a panel including more than 50 genes (CPT code 81455) wasn't previously priced but now has a price of $2,920.

PAMA created a new category of assays, called advanced diagnostic laboratory tests (ADLTs), which CMS has defined as tests developed and offered by a single lab that use a unique algorithm to analyze multiple DNA, RNA, or protein markers, and which provide new clinical diagnostic information that can't be obtained by any other test. Each test will be identified by codes unique to them, but the ADLT definition is controversial among industry players. Test developers are awaiting further clarification from CMS regarding the requirement that ADLTs must provide new clinical diagnostic information.

"Most ADLT codes came out well, because sole source labs have tight control of contracting and pricing," Quinn said. This can be seen in the prices Genomic Health reported from private payors for the Oncotype DX breast cancer recurrence test (CPT code 81519), he noted, where the 25th to 75th percentile of rates ranged from $3,713 to $4,153.

Based on the weighted median of all reported rates, Genomic Health would see a price increase for its breast cancer recurrence test, from $3,443 to $3,873, but would receive a few dollars less for its colon cancer test (CPT code 81525), which went from $3,126 to $3,116.

On the other hand, Nanostring's Prosigna (CPT code 0008M), which is another test marketed for gauging breast cancer recurrence and is US Food and Drug Administration-cleared, falls from $3,443 to $900 based on private payor rates. "Prosigna is not a sole-source test, so it might have been billed by labs with varying competence to negotiate with payors," Quinn said. With a 10 percent cut, CMS proposed pricing for this code comes to $3,099.

In the ADLT category, Veracyte's Afirma Gene Expression Classifier (CPT code 81545), for distinguishing which thyroid nodules are benign and which are suspicious of cancer, had a price increase from $3,222 to $3,600, while CareDx's AlloMap test for gauging cardiac transplant rejection risk (CPT code 81595) increased from $2,841 to $3,240.

In addition to releasing draft pricing, CMS also published a raw data file of rates submitted by "applicable labs," which Quinn said, "will be a huge window into the scope and scale and pricing" of several hundred codes for genetic tests by commercial payors. "The raw data published by CMS shows some incredible price ranges," Quinn said. "For example, for BRCA sequencing (CPT code 81211), the new median price is $2,395, but the raw data shows dozens of payments were made at over $30,000." 

For 58 HCPCS codes, CMS received no private payor rates or volumes during the data-reporting period, but decided to still post preliminary pricing for these codes using gapfill and crosswalk methods. The Advisory Panel of Clinical Diagnostic Laboratory Tests will hold a meeting on Sept. 25 to discuss these codes.

What's next?

PAMA represents a seismic shift in the way lab tests are priced, and many lab industry players found it challenging to report the data needed to establish a market-based pricing system.

"The exclusion of such large parts of the laboratory market seems to have been exacerbated by issues of data accuracy and integrity," Khani said. "The retroactive data reporting period and other factors caused many labs to raise concerns with the data they submitted, expressing concerns that patient cost sharing may not have been included, and other issues." And while CMS removed data from its calculation of the weighted median when the rate seemed too high, Khani noted that in cases where data submitted seemed too low, it was included.

CMS listened to industry concerns by extending the data collection deadline by a few months to May 30, and by delaying implementation of PAMA by one year. PAMA pricing was initially slated to go into effect this year, but is now set to go live on Jan. 1, 2018, which CMS appears to be sticking to.

"While an additional delay in [clinical lab fee schedule] rebasing would likely be perceived as a positive by industry, we still believe it would increase the odds that Congress would enact an across-the-board cut to the CLFS to pay for some other bill like reauthorization of the State Children’s Health Insurance Program," Eric Assaraf, director of Cowen Washington Research Group, wrote in an analyst note. "SCHIP is a must-pass bill slated for Oct. 1, that realistically needs to be done by the end of the year."

CMS is seeking public comments on its draft payment rates until Oct. 23, and intends to publish final rates in November. The segment of the lab community that largely fared well in the PAMA pricing process, makers of single-source, multianalyte algorithm-based assays, or ADLTs, support this timeline.

But after seeing the draft rates, ACLA is working with other stakeholders to "aggressively" halt their finalization and implementation. The association will provide comments to CMS, work with policy experts on the Hill, and relay its concerns to HHS and others in the administration. ACLA is also "considering our legal options," according to Khani.

"This is the highest priority for ACLA," she said. "We will pursue all options to ensure that PAMA is implemented in accordance with congressional intent and in a manner that protects Medicare beneficiary access to a broad range of providers for laboratory services."