January 1, 2018 will begin a new era in diagnostic testing. CMS will phase in the first of its kind payment rates under PAMA (Protecting to Access to Medicare Act). The result of which is expected to ripple throughout the diagnostic industry and reduce payment amounts of Medicare covered clinical diagnostic testing (including Part B premium effects) by $390 million for the calendar year 2018.
“Section 216(a) of [PAMA] added section 1834A of the Social Security Act which significantly revises the Medicare payment methodology for certain clinical diagnostic laboratory tests paid under the Clinical Laboratory Fee Schedule (CLFS)” What this means, is that payment amounts will now be factored based on reported data from across the industry, which is then analyzed by CMS and issued on a three-year basis. According to CMS “…payment amount for a test on the CLFS (Clinical Laboratory Fee Schedule) generally will be equal to the weighted median of the private payor rates determined for the test…” This formula is expected to reduce the rates for most tests, however the reduction amount is capped at 10% for the first three years, and 15% thereafter.
Initial data collection began on January 1, 2016 and ended on June 30, 2016. The following 6 months after data collection were used to review accuracy and procedures. Data reporting began on January 1st, 2017 and ran until March 31, 2017. 1,942 Independent, Physician Office, Hospital, and other laboratories participated. All 50 states, Puerto Rico, and the District of Columbia were represented. Certain requirements must be met for a laboratory to be required to send data which can be found here.
Currently, CMS is accepting public comments until October 23, 2017. All comments must be submitted electronically to CLFS_Annual_Public_Meeting@cms.hhs.gov.
In early November, CMS is expected to release the final CY 2018 CLFS rates. These rates will take affect January 1, 2018. There is no mechanism in place to dispute or arbitrate any rates once they have been issues.
Based on a preliminary data set issued by CMS, the average percent change in test payment is 1.01% due to the number of tests that previously did not have a place on the CLFS. However, the clear majority of tests will decrease in payment.
Some very common tests will have a major impact on many laboratories. A complete CBC with auto diff wbc will drop to $9.59 from $10.66. This reduction will result in a reduced payout system wide of $31,638,393.37.
According to Dark Daily, an industry resource, “Over 10 years, CMS expects these cuts will reduce spending by $5.4 billion from the current spending level”
The silver lining in this process is that the reduction in payment can be predicted accurately and therefore planning can be done to help offset the losses.
Do not forget, there is still time to submit opinions to CMS. All comments should be e-mailed to CLFS_Annual_Public_Meeting@cms.hhs.gov.
Cost cutting in all areas is the first logical step, often accompanied by implementation of a robust improvement plan backed by Six Sigma/Lean or other PMP methods. Labs will be faced with the task of doing more with less, as many low margin, high volume tests will now be barely profitable, if at all.
The next step should be looking at the supply chain dynamics. Both material providers and vendors as well as shipping and logistics should be reviewed. Everything that does not take place inside the testing facility must add value.
One of the largest costs in any supply chain is the last mile of delivery, often outsourced partially or fully to a third-party logistics firm (3PL). This area is ripe for cost improvement. A true partner 3PL should guarantee service standards and have in place standardized billing. The logistics spend should be predicable. The role of a 3PL should be to reduce costs, not increase, therefore a good 3PL will work to minimize costs through optimization procedures. The value of a 3PL should be measured in overall costs plus client satisfaction (which is directly linked to market share).
PAMA is set to radically change the payment landscape of diagnostic testing. Through data driven price reductions, CMS will put many labs out of business and significantly reduce the profits of others. Now is the time to prepare by revising budgets and evaluating all vendors. There is significant risk in keeping the status quo, what has worked in the past will now be a risk to the future.
 (Centers for Medicare & Medicaid Services, 2017)
 (Centers for Medicare & Medicaid Services, 2017)
 (Jude, 2017
Centers for Medicare & Medicaid Services. (2017, September 22). PAMA Regulations. Retrieved from CMS.gov: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/ClinicalLabFeeSched/Downloads/CY2018-CLFS-Payment-System-Summary-Data.pdf
Jude. (2017, September 20). Medicare Clinical Laboratory Price Cuts and Cost-cutting Predicted to be 2018’s Two Biggest Trends for Medical Laboratories in the United States. Retrieved from Dark Daily: https://www.darkdaily.com/medicare-clinical-laboratory-price-cuts-and-cost-cutting-predicted-to-be-2018s-two-biggest-trends