Medicare Clinical Laboratory Testing: CMS Proposes Rule to Implement New-Rate Setting Mechanism and OIG Issues its First Monitoring Report

Medicare is paying about $8 billion per year to laboratories conducting varying volumes of the approximately 1,300 different laboratory tests under the current clinical laboratory fee schedule (CLFS). ¹ The current rates under the Medicare CLFS were established based on charges to the Medicare program in 1984, which have been adjusted only for inflation and have been sporadically updated for new tests. After various lawsuits, settlements and government reports in recent years have highlighted that commercial payors often pay lower rates for clinical laboratory testing than Medicare, Congress has enacted a new mechanism for establishing clinical laboratory test rates as part of the Protecting Access to Medicare Act of 2014 (PAMA). Congress has also, as part of PAMA, instituted requirements for review of laboratory rates by the Office of the Inspector General of the Department of Health and Human Services (OIG). ²

In short, PAMA requires the Centers for Medicare and Medicaid Services (CMS) to establish and, effective January 1, 2017, pay national clinical laboratory rates based on the amounts paid by commercial payors for the same tests. To temper the change, however, PAMA requires CMS to phase in rate reductions over a five year period. For each clinical diagnostic laboratory test, PAMA requires CMS to set the clinical laboratory payment rate at the median commercial payor rate, weighted by volume. In addition, PAMA sets out a different mechanism for laboratory tests that qualify as advanced diagnostic laboratory tests (ADLTs). In order to institute this mechanism, CMS is charged with designing and implementing a system within which laboratories will report the volume and rates received from commercial payors for each of their clinical laboratory tests.

In addition, PAMA mandates that the OIG publicly release an annual analysis of the top 25 laboratory tests by expenditures and conduct an analysis of the implementation and effect of the new payment system. The OIG issued its first report, entitled “Medicare Payments for Clinical Laboratory Tests in 2014: Baseline Data,” on September 29, 2015. ³ The report is a summary of Medicare laboratory expenditures for fiscal year 2014 and establishes a baseline that will be used to assess the impact of the new rate setting mechanism. Among other things, the OIG acknowledges that the new rate-setting mechanism is a major undertaking by CMS and has significant implications for the laboratory industry.

On October 1, 2015, CMS published a proposed rule to implement this new rate setting mechanism. ⁴ As proposed, CMS will require certain laboratories to report to CMS private payor rates and volume information from laboratory tests performed from July 1 – December 31, 2015. This information, due by March 31, 2016, will allow CMS to assimilate the data and set the new CLFS, which will become effective on January 1, 2017. The timeline seems tight given that comments on the proposed rule are due November 24, 2015, making it unlikely that the final rule and promised sub-regulatory guidance on the reporting format will be issued before the first proposed reporting window of January 1 – March 31, 2016. We have highlighted many aspects of the proposed rule below.

Who Is Affected?

The laboratories that will be required to submit initial reports to CMS by March 31, 2016, termed “applicable laboratories,” are those entities holding a Clinical Laboratory Improvement Amendments (CLIA) certificate that receive more than 50% of their Medicare revenues from either the CLFS or the Physician Fee Schedule (PFS). Unsurprisingly, CMS incorporates the CLIA definition of a laboratory, with the result that any entity that holds a CLIA certificate will need to consider whether it qualifies as an “applicable laboratory” subject to reporting. As indicated above, when determining whether an entity qualifies as an applicable laboratory, particularly entities which have laboratory services comprising only a portion of their services, the proposed rule requires looking at revenues across the entire entity, not just the laboratory portion. CMS proposes “Medicare revenues” be defined to include all Medicare payments (whether originating under Part A, B, C or D) and all associated beneficiary deductibles and coinsurance.

Practically, CMS’ proposal to measure revenues across the entire organization may serve to carve out entities such as hospitals that do not have significant laboratory operations as compared to their other service lines such as inpatient and outpatient hospital billing. However, the proposal may not exclude organizations such as physician offices, which may have relatively small laboratory operations but receive significant other reimbursement under the PFS. There is also a low volume threshold such that even if an entity meets the 50% threshold, it would be excluded from the reporting requirement if its total revenues from CLFS services do not reach $50,000. However, because the data collection period for 2015 will only be six months as opposed to the normal 12 months, CMS proposed a low revenue threshold of $25,000 for 2015 rather than the $50,000 threshold it has proposed for subsequent data collection periods.

While not proposed at this time, CMS is seeking comments on whether to allow a corporate entity with multiple associated tax ID numbers to aggregate and report applicable information for all of its entities, rather than individually requiring each entity to report.

What must be reported?

The “applicable information” to be collected during the data collection period and then reported to CMS is: (1) the rate that was paid by each private payor for each test, and (2) the corresponding volume amount of each test paid for by each payor. CMS proposes to exclude reporting on any laboratory test for which payment is made on a capitated basis. In addition, in order to allow CMS to compare across laboratories, CMS proposes to require the specific Healthcare Common Procedure Coding System (HCPCS) code be reported for each test; however, laboratories may list not-otherwise-classified and unlisted Current Procedural Terminology (CPT) codes.

Laboratories must report the payment information for all health insurance issuers, meaning an insurance company, service or organization (including a health maintenance organization) that is licensed to engage in the business of insurance in a state; a group health plan (an employee welfare benefit plan); a Medicare Advantage plan under Part C; and a Medicaid managed care organization. The rate to be reported by these private payors, or the “private payor rate,” is the amount that was paid by a private payor for a clinical laboratory test including any patient deductible and coinsurance amounts, and less any price concessions (e.g., discounts, rebates, coupons, prompt pay discounts, free goods contingent upon purchase, chargebacks, etc). Notably, laboratories are prohibited from identifying specific payors in its reports.

As mentioned above, the applicable information that is required to be reported to CMS includes the volume of tests paid for by each payor. CMS acknowledges that private payors often pay laboratories different prices for the same test. To clarify, CMS notes that volume discounts should be reported by submitting two rates and the associated volume of tests that were paid at that rate. ⁵ This same mechanism would be used if the rate that one private payor paid for a specific test changed during the data collection period, i.e., the laboratory would be required to report both rates and the volume of tests that were paid for at both the new and the old rate.

In the proposed rule, CMS addresses the potential burden that reporting will have on laboratories that offer a large number of tests, but states that it is requiring only the minimum information necessary for CMS to be able to set the CLFS payment rates. And to preserve confidentiality, CMS acknowledges and incorporates into the proposed rule the statutory limitations on when it, or its contractors, may reveal information about the reporting laboratories or the data submitted.

While CMS has not yet detailed exactly how the reporting will occur (e.g., format, electronic submission, etc.), it has stated that it plans to issue a sub-regulatory guidance prior to the first data reporting period (which, as set out above, begins January 1, 2016) that will specify the form and manner for reporting. CMS has indicated that the accuracy and completeness of the information must be certified by one of the following: the President, CEO, CFO or a person with delegated authority of such an officer. ⁶

CMS also proposes regulations to effectuate the statutory penalties for failing to appropriately report. The proposed rule allows for a civil monetary penalty of up to $10,000 per day for each failure of an applicable laboratory to report or for any misrepresentation or omission in reporting. ⁷

When will this occur?

Applicable laboratories are required to collect and report their private payor volume and payment data once every three years (or annually for ADLTs, which are discussed in detail below). With the exception of the initial abbreviated data collection period (which, as mentioned above, will be July 1, 2015 – December 31, 2015), laboratories will be required to collect data over the course of a calendar year and report the results between January and March of the following year. As illustrated in the chart below, CMS will then use the data collected to promulgate new national CLFS rates every three years. The preliminary rates that will take effect on January 1, 2017 should be published by CMS in early September 2016.

How will CMS establish rates?

To establish the rates for clinical laboratory tests, CMS proposes to compile the data and calculate the weighted median by CPT code. CMS provides several examples of how it expects to calculate the median rate, emphasizing that the weighted median is distinctly different from the weighted average.

The proposed rule also promulgates regulations to implement provisions of PAMA that require CMS to create new codes for new clinical laboratory tests without a unique HCPCS code that are “cleared or approved by the FDA” after January 1, 2017. For these new clinical laboratory tests (that are not ADLTs), CMS will establish rates using cross-walking and gap-filling methodologies until payment rates using the methodology described above are established.

Advanced Diagnostic Laboratory Tests (ADLTs)

The statutory provisions and corresponding proposed rules related to laboratories that provide a subcategory of testing called ADLTs are a bit different. In the proposed rule, CMS explains its view that, by including a special provision for ADLTs, Congress sought to establish special payment status for unique tests that are provided only by the single laboratory (or a subsequent owner) that developed the test and expended resources for all aspects of the test (e.g., developing, marketing, performing and selling it). CMS plans to monitor this “one laboratory” aspect by ensuring that the applicable laboratory that reports information for each ADLT holds only one CLIA certificate. Nonetheless, CMS adopts the PAMA definition without expanding it, in defining an ADLT as a laboratory test covered by Medicare Part B that is marketed and performed by a single laboratory and not sold for use to any other laboratory (with the exception of a successor owner of the laboratory), and meets one of the following:

1. The test is a molecular pathology analysis of multiple biomarkers of DNA or RNA that when combined with an empirically derived algorithm, yields a result that predicts the probability a specific individual will develop a particular condition or respond to a particular therapy; and, provides new clinical diagnostic information that cannot be obtained from any other test or combination of tests, though it may include other assays.
2. The test is cleared or approved by the FDA.