Will the CMS Proposal to Adjust Laboratory Reimbursement Through Data Collection Disproportionately Hurt Small Labs? | Diaceutics

Will the CMS Proposal to Adjust Laboratory Reimbursement Through Data Collection Disproportionately Hurt Small Labs?

February 28th, 2016

Eloise Aita

Eloise Aita, PhD, of Diaceutics, writes that on the surface CMS proposals for laboratory reimbursement could simplify a complex process but is concerned that smaller labs, particularly those offering fast test turnaround for critically ill patients, will struggle to compete with the big players.

As part of the Protecting Access to Medicare Act of 2014 (PAMA), the Centers for Medicare & Medicaid Services (CMS) proposed a rule to determine reimbursement rates for laboratory tests that seems to favor larger labs due to their size, high volume operations and lower associated costs. Basing reimbursement rates on deeply discounted negotiated contract fees typical of the large national laboratory networks means that small labs, physician office laboratories (POLs) and hospital facilities, which shoulder higher costs due to their size and lower testing volumes, will be at a disadvantage.

For the past 30 years, CMS has used a clinical laboratory fee schedule (CLFS) to reimburse patient testing. In the past, adjustments were made to CLFS based on the cost of living index, but in recent years laboratories have seen significant reductions to these fees as a result of federal budget cuts, including sequestration. Due to advances in automation and improved testing methods, overall laboratory costs have come down. As part of PAMA, CMS plans to base future CLFS fees on actual provider payments. There will be a requirement for labs of a certain size to report what they are being paid for testing.

Although CMS proposes to base reimbursement rates on private payor rates, only labs earning more than $50,000 in CMS fees will be required to submit payment data for inclusion in the weighted median calculation (the method that will be used to establish the new CMS fees). Payments to hospitals for laboratory services are reimbursed under the Hospital Inpatient Prospective Payment System or Outpatient Prospective Payment System, so hospitals will not be asked to provide payor data to CMS. This exclusion, however, will likely have a negative effect for labs overall as those higher hospital payment rates will not be taken into account when setting the new CMS rates.

By excluding hospitals, academic labs and POLs from the data collection, CMS is essentially saying reimbursement will be based on data collected from large independent labs performing the highest percentage of testing. In addition, payors can negotiate concessions with the large independent labs based on volume discounts, prompt payment schedules, exclusive contracts and a number of other circumstances which could in turn affect the data on payment rates.

“With regard to price concessions, section 1834A of the Act is clear that the private payor rate is meant to reflect the amount paid by a private payor less any price concessions that were applied to a CDLT.” 1

What data will be collected for tests that are not reimbursed or denied coverage by payors? And when an applicable lab performs a test and the insurance company decides there is no clinical evidence for it, will a zero dollar figure be entered into the CMS data, further driving down the median payment?

All this means that future reimbursement for the non-applicable labs (those not required to submit data to CMS) will be dictated by the larger, cost-efficient, volume-driven, highly automated and contracted independent labs, even though the non-applicable labs typically do not enjoy such efficiencies and are performing the same testing at a higher internal cost.

This will negatively impact hospital and academic laboratories in particular, where acutely ill patients require timely testing results that impact treatment using personalized medicine or companion diagnostics. Insufficient reimbursement for these relatively low volume lab tests may well force these laboratories to discontinue such testing, possibly leading to delayed or suboptimal treatment decisions for the most seriously ill patients.

When we look at the different levels of services offered by laboratories it’s not hard to see why this new approach to data collection could affect the reimbursement claims for so many smaller labs. Academic centers and hospitals may offer fairly large test menus, designed to produce quick results that support the best patient care. The needs of acutely ill patients demand that testing be performed in-house and not sent out to reference labs. Lower testing volumes create higher costs on a per test basis.

“Accordingly, under our proposal, only one laboratory may design, market, perform, and sell the test. If more than the one laboratory engages in any of one of those activities, the test would not meet the criteria to be an ADLT. If our proposal is finalized, we would not expect to see more than one applicable laboratory report applicable information for an ADLT.”2

In many instances when a laboratory sends testing to a reference lab, the sending lab will bill payors for the testing and the performing lab will ‘client bill’ the sending lab. The CMS proposal for this situation would not accurately reflect the payor rates as each sending lab might have different fee schedules with multiple payors and, in the case of a hospital lab or non-applicable lab, no payment information for the advanced developed laboratory test (ADLT) may be submitted to CMS at all.

Given the fast pace of advances in laboratory medicine, particularly in molecular testing, an ADLT may be developed with technology that might be replaced by newer, better and possibly less expensive technology in a fairly short time. Additionally, once a novel test has been developed it is critical for patient care that the test be vetted and improved upon by other labs to ensure that the test result is accurate, reproducible and reliable.

The reimbursement strategy for ADLTs outlined in the proposed rule may:

  • Curtail innovation and might actually remove the incentive to improve novel tests if only the originating lab can expect to be reimbursed;
  • Hinder payors’ ability to negotiate lower rates with laboratories as other labs will be unlikely to develop competing tests for an ADLT;
  • Incentivize labs to set high list prices for ADLTs resulting in more out of pocket costs for uninsured patients or patients with co-pays.

The CMS proposal may look like a simplification of the test reimbursement process but will it produce an accurate reflection of the value of tests performed? And will the labs that have no voice in contributing to the data be adequately reimbursed under the proposed new payment schedules? Only time will allow us to answer these important questions but until then we run the risk of negatively impacting patient care and undervaluing critical laboratory testing.


1. Department of Health and Human Services Centers for Medicare & Medicaid Services, Medicare Program; Medicare Clinical Diagnostic Laboratory Tests Payment System, Proposed rule, January 2015.

2. Department of Health and Human Services Centers for Medicare & Medicaid Services, Medicare Program; Medicare Clinical Diagnostic Laboratory Tests Payment System, Proposed rule, January 2015.


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