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Market based? A view of PAMA process, pricing

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Valerie Neff Newitt



September 2017—Under the Protecting Access to Medicare Act of 2014, Medicare rates for laboratory tests will be recalculated to reflect “market-based pricing” as reported by “applicable laboratories.” But are labs going to get a market-based price, or is the Centers for Medicare and Medicaid Services “gaming the system to ensure there will be a cut to the fee schedule”?

That’s the question Lâle White, executive chairman and CEO of Xifin, raised when she addressed the Executive War College this spring.

“Labs have always had a problem with an outdated fee schedule, which has no rhyme or reason and has never accurately reflected the way services are being performed, particularly from a technological perspective,” White told CAP TODAY in a recent interview. But PAMA is likely to have the largest impact on pricing and payment that labs have seen in a long time, she said, and at a time when so many new tests are coming into play.

“Genome sequencing, for example, doubles every two years,” she noted at the meeting.
Whether the government’s aim is true market-based pricing is a question that comes to mind, White said, given how the process has unfolded.

Last year, the Office of Inspector General issued the second of two reports on how the PAMA process was proceeding and how the fee schedule might be affected. “There’s a thread of concern throughout the report that, in essence, some fees may actually go up instead of down,” because some of the regional fee schedules are so low and because Medicare will no longer be able to pay using bundled rates for primarily automated chemistry tests. “And you can see that CMS and OIG express a lot of concern about this, and they talk about what they need to do to make sure the PAMA exercise does not result in a fee increase for these types of scenarios.”

Other indicators: limiting “applicable laboratories” by excluding, in the first phase, all hospital laboratories and then, later, including only those with national provider identifiers, and using for calculation purposes a weighted median instead of a weighted average.

Then, too, the clinical laboratory fee schedule has for years influenced private-payer pricing, with a number of private-payer contracts at a percentage of the Medicare fee schedule. This could mean, White said, “more of a payer-based pricing scenario than a market-based one.”

“It is time to have an excellent review of what pricing should be, based on the underlying services,” she said. “But this [PAMA] exercise, while it is welcomed in theory, may produce some results that are faulty because of the way the exercise was structured.”

Under PAMA, laboratories’ reported private-payer payments are being analyzed to find their weighted median, which will be the basis of a new Medicare clinical laboratory fee schedule. A subset of tests on the fee schedule—advanced diagnostic laboratory tests—reflect different data collection, reporting, and payment policies, as required by the statute, and they will have their own pricing schedule.

While it all sounds reasonable on the face of it, the new schedule could arrive with a punch: The CMS expects to see up to $390 million in payment reductions in fiscal year 2018, and projects just under $4 billion in possible savings through 2025, White said, referencing an OIG report in which estimates were based on limited information.

“Now it is true that this is only applicable to labs’ Medicare work and mostly for the top 20 commodity tests that Medicare is examining. The bottom tests will fare differently,” White said, “and esoteric tests will probably do better, so that will balance some of it out. But top tests are the high-volume tests—the biggest portion of what is paid in the industry—and those are the ones that are at risk.”

Under PAMA, the payment amount for a test cannot be reduced more than 10 percent in any one year for the first three years after implementation of the new payment system, and not more than 15 percent per year in the subsequent three years.

Yet White warned, “Even though a 10 percent reduction in Medicare will be the known impact, private payers do tend to follow Medicare pay schedule guidelines, shaping private-payer pricing over time. That will deliver a bigger impact to labs going forward.”

If the CMS projection—5.6 percent off the fee schedule in year one—were based on true market pricing, perhaps it would be easier for labs to swallow this bitter pill. But the very data upon which it is predicated have been produced with two flaws in the process, White said.

The first flaw, and the biggest of all, is lack of industry participation, due in part to the CMS definition of applicable labs, which dictated which labs could participate in the reporting. After pushback from laboratories and hospitals, the CMS acknowledged that hospital labs should contribute data, and “applicable labs” was expanded in the second phase of reporting to include those hospital labs with a CMS-issued national provider identifier. “But by defaulting to the NPI,” White said, “they still did not reach a large portion of that market.”

More than 9,000 hospitals in the U.S., about 80 percent of which provide outreach services, produce more than half of the laboratory tests performed in the U.S. “Half of this is inpatient; half of it is outreach and outpatient.” Hospitals are more aligned with market-based pricing than many of the labs are, she said, “because hospital contracts are typically negotiated as a percentage of billed.”

Many independent clinical labs negotiate with private payers on a CPT level of pricing that has been lowered over the years by the payer industry, White said. “In some cases it is actually a percentage off of Medicare fees and doesn’t necessarily reflect market prices.” Pricing history is quite different for esoteric or proprietary tests. “Since there is no fee schedule for them, they do reflect market pricing and are being paid in line with the billed amount.”

The second flaw—the use of a weighted median (versus a weighted average) to construct a new fee schedule—is contained in the statute itself. As such, it will take a change of legislation to correct.

With a single test, White illustrated the impact of using weighted medians. “If you are taking a weighted average, you add up all the prices paid for that test, divide that by the total number of [test] units, and you get an average,” she said, which in her example was a price of $8.71. “But if you are taking the weighted median, you take all those units, string them in a line, and you take the middle point of that lineup.” In her example, there were 34 units and the middle range consisted of two components, or two middle values. “You take those two, divide by two, and you get $7.75. So you can see almost a $1 difference between a weighted average and a weighted median,” in this example.

But it gets worse.

“Assume there are 1,000 tests paid at $1 each, and then there are 500 more tests paid at $100. [That is] $51,000 for 1,500 units. A weighted average of that is about $34. On the other hand, if you string all the tests out in a line and find the midpoint, you get a $1 weighted median. This is how dramatic the difference can be. And when you’re talking about larger labs contributing a large set of data and other labs not contributing so much, the difference to us, as an industry, can be very significant.”

White shared a Xifin weighted average analysis for the top 20 tests based on Xifin data. For a mix of clinical laboratories that consists of about 30 percent larger labs and 70 percent smaller labs, a 19.6 percent reduction is seen from the current clinical laboratory fee schedule. “If we up the percentage of larger laboratories in this population, we can see a decline that’s upwards of almost 30 percent—29.6 percent.”

Hospital laboratories with NPIs—larger labs generally with larger outreach programs—are being paid by private payers at a rate that is almost 27 percent higher than the Medicare fee schedule, according to the Xifin analysis. For a mix of hospital labs with and without NPIs, 32 percent higher.

For the top 20 tests of pain management and toxicology testing laboratories, the private payer market is paying almost 50 percent more than the 2016 clinical laboratory fee schedule. For 2017, White noted, Medicare did raise the rates for those tests.

In contrast, “Molecular laboratories fare pretty well,” White said, because they’re closer to market-based pricing than commodity tests. “They do a lot of appeals to make sure their reimbursements are accurate and high enough to support the services, and while they get paid pretty well when they get paid, they don’t get paid for a large majority of the tests they actually bill.” But the newer tests have a better chance of being market priced in a PAMA-type exercise than commodity testing that’s been around for a while.

The weighted median is useful in statistics and used in laboratories—in quality control, for example, White noted. “In a financial exercise,” however, “where we’re trying to get the true market price, we need to understand what the payer is paying on average for any given test.”

The complexities of PAMA reporting requirements, and a new Financial Accounting Standards Board (FASB) revenue recognition rule that will require public labs in 2018 and private labs in 2019 to more accurately report and support revenue projections in a complex billing and reimbursement environment (“much more intense than in the past,” White said), serve to underscore White’s insistence that laboratories need to concentrate on their “financial integrity.”

“FASB will require labs to understand what they are going to be paid through historical and routine daily analysis of allowables on every single payer plan so that they can pro-ject their revenue on an accrual basis, exactly based on contract pricing and collection history,” White says. “As you can imagine, doing that requires a great deal of data—almost identical to PAMA data requirements. And there will be no way around this. Health care, and specifically labs, must get their financial house in order.”

This “house in order” runs contrary to traditional reality. “Laboratories have always put great effort into perfecting their technologies and the services they perform, but the back offices have always been problematic in the industry,” White tells CAP TODAY. Most lab billing systems have been created as add-ons to an LIS or a hospital system, “in a language that is not necessarily a financial language, and lacking financial and referential integrity.” While hospitals’ billing systems address high-balance claims very well, she says, they are not proficient at addressing low-balance claims, like those generated in a laboratory.

“Additionally, hospitals often post in bulk, not at the CPT level, so they are not retaining data and simply do not have the [necessary] data to report. Labs often do not know if they are getting the correct contract price from the payer, if they are missing payments for multiple units of the same CPT code, if they need to make an appeal, if the payer is profitable, and more,” White says. “Essentially, if you’re not viewing what you get from the payer at a CPT level by payer plan, and if you don’t know when you’ve been underpaid so you can file an appeal, you are going to be reporting a lot of incorrect data. And if you do bulk posting, then you have no data to report to begin with.”

Another barrier to financial integrity for labs: “Not everyone has everything in an electronic format.”

“Some postings are done manually, which typically results in more than a 10 percent keying error rate on top of everything else. The data is not clean,” White said.

While the plan to implement PAMA on Jan. 1, 2018 was on track at CAP TODAY press time, even with flawed or inadequate information, the laboratory community and supporting organizations continue to push back with letters of concern to the CMS and Congress about the limited data from the narrow population of applicable labs. They continue to suggest there may be a case for rethinking the PAMA exercise and considering a partial delay. “At the same time,” White said, “the industry doesn’t want to delay on the esoteric testing and the advanced diagnostic laboratory tests because we believe they are the only piece of this exercise that truly does reflect market.”

What lessons have been learned from the PAMA exercise?

“First and foremost,” White said, “if the billed amount equals the allowable amount, your fee schedule is probably off and you’re underbilling.” This artificially deflates the market price and should be noted for future corrections to the billed price.

“When payers pay below the contracted fee schedule, we need to be able to identify that and talk to the payer about adjusting it.”

“We should not be negotiating contracts that are a percentage of Medicare.” Renegotiate to avoid distorting the market-based pricing analysis.

Retain the source documents, which are critical and essential for audits. “No one had the source documents for the PAMA exercise, which means they couldn’t provide a good audit trail for the data they turned in.”

And optimize electronic transactions, “because manual payment and posting is fraught with error.”

“Data is not just about having a bunch of numbers,” White insists. “It is about having clean, sound data and recognizing that the accounts receivable piece of your business is as much a financial exercise as anything else you do. If you do the right thing, get in systems that provide the detailed accuracy needed to manage and optimize your systems, you can offset any loss from decreasing fee schedules by minimizing what you are leaving on the table.

“Also, and importantly, it will prepare you for the future of health care.”

Valerie Neff Newitt is a writer in Audubon, Pa.


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