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CMS Releases Final Clinical Laboratory Payment Rule

Firm Publication


June 29, 2016

Almost a year after its original deadline, the Centers for Medicare and Medicaid Services (CMS) issued its Final Rule implementing Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA) and overhauling how laboratory tests will be reimbursed.1 The Final Rule requires certain laboratories to report private payor payment rates for laboratory tests and the corresponding volumes of tests. CMS will use the weighted median of these reported private payor rates as the basis for the revised Medicare payment rates for most laboratory tests beginning January 2018.

Although any reductions in payment rates will be phased-in, many laboratories are likely to face increased administrative obligations and decreases in revenue in 2018 as a result of PAMA's reimbursement changes. CMS expects that the changes will result in a $3.93 billion reduction in payments during the next 10 years. In the first year of implementation alone, CMS expects to reduce payments by 5.6%, or about $390 million.

The Final Rule's Notable Changes

  • Whether a laboratory qualifies as an "applicable laboratory" will be made at the National Provider Identification (NPI) level, rather than the Taxpayer Identification Number (TIN) level. However, the Final Rule still requires that entities report at the TIN level, for all of its NPI level components that are applicable laboratories.
  • CMS is delaying implementation of the new weighted payments for clinical laboratory tests until January 1, 2018.
  • The data collection period was reduced from 12 months to six months. The first data collection period runs from January 1 through June 30, 2016. Laboratories will have from January 1, 2017 to March 31, 2017 to report the data for the first data collection period.
  • CMS reduced the "low expenditure threshold" from $50,000 to $12,500, meaning that a laboratory that receives less than $12,500 from the Medicare Clinical Laboratory Fee Schedule (CLFS) during a data collection period is not required to report information to CMS.
  • CMS expanded the definition of Advanced Diagnostic Laboratory Tests (ADLT) to include protein-only tests.

Applicable Laboratories

The reporting obligations under the Final Rule apply to "applicable laboratories." An "applicable laboratory" is a laboratory, as defined by the Clinical Laboratory Improvement Amendments of 1988 (CLIA) regulations, that receives more than 50% of its total Medicare revenues from the CLFS or the Medicare Physician Fee Schedule.2

The Final Rule defines an applicable laboratory based on the NPI used to bill Medicare Part B for the laboratory services, rather than TIN as originally proposed.3 By using the entity's NPI, CMS intends to capture hospital outreach laboratories within the applicable laboratory definition. CMS seems to view outreach laboratories as separate and distinct from hospital laboratories providing services covered under the Inpatient Prospective Payment System or the Outpatient Prospective Payment System.

While PAMA explicitly requires the applicable laboratory to report the collected data, the Final Rule places this obligation on what it calls the "reporting entity." The "reporting entity" is the entity that reports tax-related information to the IRS using its TIN for its components that are applicable laboratories.4 In some cases, the reporting entity and applicable laboratory will be the same entity but in many others, the NPI-level requirement will require the reporting entity to perform the threshold calculations and collect the applicable information for each qualifying NPI used to bill Medicare Part B.

Under PAMA, CMS was given the discretion to establish low volume or low expenditure thresholds for excluding a laboratory from the reporting requirements. In the Final Rule, CMS elects not to adopt a low volume threshold but finalizes a low expenditure threshold. CMS reduces the threshold amount from what it had originally proposed to account for the changes to the applicable laboratory definition (i.e., NPI-level rather than TIN-level) and the reduced data collection period.5 Under the low expenditure threshold, a laboratory that is paid less than $12,500 under the CLFS during a 6-month data collection period does not qualify as an applicable laboratory and does not need to report.

With applicable laboratories determined at the NPI-level and the first data collection period closing at the end of this month, organizations should evaluate whether their laboratories qualify as applicable laboratories (i.e., have they received more than $12,500 from the CLFS between January 1 and June 30, 2016?). If so, those laboratories will need to evaluate whether their financial information systems have captured the necessary data and applicable information. This determination may be especially complex for those organizations with multiple laboratories and NPIs and for hospitals with outreach labs.

Applicable Information

Each applicable laboratory must report "applicable information" during a data collection period for all of its Medicare-covered clinical laboratory testing (excluding tests qualifying as ADLTs, as described in more detail below). With respect to each clinical laboratory test paid during the data collection period, the applicable information includes (1) the test Healthcare Common Procedure Coding System (HCPCS code); (2) the payment rate paid by each private payor for that test, and (3) the volume of that test paid at that payment rate. A "private payor" includes health insurance issuers and group health plans, Medicare Advantage plans under Part C, and Medicaid managed care organizations.6

The Final Rule clarifies that the payment rate is the amount the laboratory received as final payment for a clinical laboratory test.7 The payment rate must reflect all discounts, rebates, coupons and other price concessions given to the payor. The payment rate does not need to reflect discounts given to patients by the laboratory for financial need. Also, information does not need to be reported for payments made on a capitated basis or for payments not correlated to a specific HCPCS code. In addition, if a laboratory test claim is still under review by the private payor or is under appeal during a data collection period, the disputed amount would not be considered the final payment rate and would not need to be reported. Further, claims denials by a private payor (functionally, a payment of $0.00) do not need to be reported.

Data Collection and Data Reporting

The Final Rule responds to and incorporates the industry’s suggestions that implementation be delayed until January 2018 to allow laboratories sufficient time to collect and verify the data before submitting.

With respect to most clinical laboratory tests, the Final Rule generally adopts a 6-month data collection period, instead of a 12-month period as originally proposed.8 The first data collection period is already underway, running from January 1 through June 30, 2016. Laboratories will need to report the data they have collected during the first data reporting period, which will be January 1, 2017 through March 31, 2017. All subsequent data collection and reporting periods of covered clinical laboratory tests, excluding certain ADLTs, will follow a similar schedule every three years. CMS provides the following table illustrating the final data collection and reporting periods:

Data Collection Period Six Month Window Data Reporting Period Used for CLFS Rate Years
1/1/2016 – 6/30/2016 7/1/2016 – 12/31/2016 1/1/2017 – 3/31/2017 2018 - 2020
1/1/2019 – 6/30/2019 7/1/2019 – 12/31/2019 1/1/2020 – 3/31/2020 2021 - 2023
Continues every 3rd subsequent calendar year Continues every 3rd subsequent calendar year Continues every 3rd subsequent calendar year New CLFS rate every 3rd year

New ADLT reports will occur on the same schedule, except the reporting will be made on an annual basis, as discussed below.9

Failing to report, or any misrepresentation or omission in reporting, may result in civil monetary penalties of just over $10,000 per day, subject to adjustment for inflation. CMS indicates it will issue additional guidance on what would constitute a failure to report a misrepresentation or omission and noted that it did not intend to apply civil monetary penalties for minor errors. The actual penalty will depend on the facts and circumstances.

Payment Methodology

After receiving the applicable information, CMS will calculate the weighted median by CPT code. The weighted median is distinct from the weighted mean or the average.10

For example, assume that five laboratories report the following private payor rates and volume for the same laboratory test:

  Private Payor Rate Volume of Tests
Lab. A $2.50 5,000
Lab. B $4.00 3,000
Lab. C $5.00 1,000
Lab. D $6.00 900
Lab. E $9.00 1,100

The unweighted median for the laboratory test would be $5.00, because an unweighted median does not take into account the volume of test performed. CMS, however, will use the weighted median to determine the new CLFS rate for this laboratory test, which takes into account the volume of tests billed at a specific private payor rate. Using the example from above, the table would look like:

Applicable Laboratory Private Payor Rate
Lab. A $2.50
Lab. A $2.50
... $2.50
Until...(5,000) $2.50
Lab. B $4.00
Lab. B $4.00
... $4.00
Until...(3,000) $4.00
Etc. for each Lab.  

In this example, the total number of lines in the array would be 11,000, which is the total volume of laboratory test payments received by the five laboratories. The median of 11,000 is the average of the 5,500th and 5,501st entry, which would be $4.00. Therefore, the weighted median is $4.00.

As a phase-in measure, PAMA limits the payment reduction for a test to no more than 10% as compared to the previous year's CLFS rate for the first three years after implementation of the new payment system, and not more than 15% per year for the subsequent three years.11 The Final Rule provides the following example: if a test has a 2016 Medicare payment of amount of $20.00, the maximum reduction in the Medicare payment amount for 2017 is 10%, or $2. Following the 2016 data reporting period, CMS calculates a weighted median of $15.00, based on the applicable information reported for the test. Because the maximum payment reduction permitted under the statute for 2017 is only $2, the Medicare payment amount for 2017 will be $18.00 rather than $15.00. For 2018, a 10% reduction would be $1.80, resulting in a Medicare payment amount of $16.20 for 2018.

For laboratory tests that are assigned a new or substantially revised code prior to December 31, 2017, CMS will continue to use the current methods of crosswalking or gapfilling. After January 1, 2018, new CDLTs will receive the same treatment until applicable information is available to establish a payment amount using the same weighted mean methodology explained above.12

Definition of ADLTs and New ADLT Reporting

PAMA established a special payment status for tests that are unique and are provided only by the laboratory that developed the test.13 This special payment status is intended to reward laboratories that are expending resources to develop novel tests, but is narrowly construed by CMS.

Pursuant to the Final Rule, an ADLT is a clinical diagnostic test covered under Medicare Part B that is offered, furnished and sold by a single laboratory (or its successor owner) and that meets one of the following criteria:

  1. the test (i) is an analysis of multiple biomarkers of DNA, RNA or proteins (ii) is combined with an empirically derived algorithm yielding a result that predicts the probability a specific individual patient will develop a certain condition(s) or respond to a particular therapy(ies), (iii) provides new clinical diagnostic information that cannot be obtained from any other test or combination of tests, (iv) may include other assays;
  2. the test is cleared or approved by the U.S. Food and Drug Administration (FDA).14

In response to numerous public comments, the Final Rule expands the definition of ADLTs to include complex protein-only tests. However, the Final Rule rejects commenters' requests that CMS adopt the exact statutory language requiring only "unique algorithm to yield a single, patient-specific result" rather than CMS's expanded definition: that the test must also provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests.

The Final Rule defines "single laboratory" as a laboratory that "furnishes the test, and that may also design, offer, and sell the test."15 Further, the definition includes entities that own the laboratory or that the laboratory owns. This new definition of "single laboratory" is intended to allow a corporate entity that owns multiple laboratories to furnish a new ADLT at each laboratory site and to enable other parts of the single laboratory organization to be involved with aspects of the ADLT. These changes prompted a revision of CMS's definition of "successor" laboratory, which now means "a single laboratory that has assumed ownership of the single laboratory" through certain changes to the business structure. The Final Rule also removes the requirement that the test be "marketed" by a single laboratory in response to industry concerns that the requirement would unnecessarily burden smaller entities that must contract with third-parties for marketing.

Qualifying for the special payment provisions applicable to new ADLTs will require an application and approval process. CMS plans to provide sub-regulatory guidance on this process, including how to demonstrate that the test is offered and furnished by a single laboratory, what information must be submitted, the timeframes for review of applications, and the process by which an ADLT will receive a unique HCPCS code.16

One concern related to the new ADLT application process is the confidentiality of the information submitted. The Final Rule does not fully alleviate that concern. Instead, CMS acknowledges that information in an ADLT application may be subject to a Freedom of Information Act request. While the Final Rule allows applicants to mark an ADLT application as proprietary and confidential, CMS could not guarantee that the information would be withheld from the public.17 Accordingly, the Final Rule notes that laboratories will have to decide for themselves whether to apply for ADLT status and risk the possibility of public disclosure of information.

ADLTs developed after January 1, 2018 (new ADLTs) will be paid using their actual list charge during an initial period of three quarters.18 The Final Rule clarifies that the new ADLT initial period will begin on the first day of the first full calendar quarter following the later of the date a Medicare Part B coverage decision for the test is made or the date ADLT status is granted by CMS. "Actual list charge" is defined as the "the publicly available rate on the first day the new ADLT is obtainable by a patient who is covered by private insurance, or marketed to the public as a test a patient can receive, even if the test has not yet been performed on that date." Once the new ADLT initial period is over, if CMS determines the payment amount was greater than 130% of the payment amount based on private payor rates, CMS can recoup the difference. It is unclear, however, whether the laboratory will have an obligation to calculate and return the difference automatically.


The Final Rule outlines extensive changes to how reimbursement is determined under the CFLS and will likely result in significant reimbursement reductions for most laboratories. Most fundamentally, reimbursement will be limited to the median weight of private payor reimbursement for tests. This standard could be skewed toward payments made to high volume laboratories. While the Final Rule implements many of the 2015 Proposed Rule's substantive provisions unchanged, CMS is delaying implementation to afford laboratories time to compile and report accurate data and prepare for this significant overhaul in laboratory test reimbursement.

1 Medicare Program; Medicare Clinical Diagnostic Laboratory Payments System, 81 Fed. Reg. 41036 (June 23, 2016) (to be codified at 42 C.F.R. subpt. G (2016)).
2 Id. at 41044.
3 Id. at 41037.
4 Id. at 41048. 
5 Id. at 41050-41051.
6 Id. at 41052, 41055.
Id. at 41053.
Id. at 41066.
Id. at 41063.
10 Id. at 41036.
11 Id. at 41079.
12 Id. at 41078.
13 Id. at 41056.
14 Id. at 41057.
15 Id. at 41059.
16 Id.
17 Id.
18 Id. at 41080.

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