With Final Rule, PAMA Set to Spark Changes in Lab Market and IVD Strategy

With Final Rule, PAMA Set to Spark Changes in Lab Market and IVD Strategy

This blog reviews regulatory developments in the United States relevant to the clinical lab services and U.S. in vitro diagnostics (IVD) markets. For more information regarding recent market developments or trends in either market, Kalorama Information offers the market research reports United States Market for In Vitro Diagnostic Tests and Clinical Laboratory Services Market.

Make sure to visit our In Vitro Diagnostics page, Kalorama's all-in-one resource covering the IVD market. 

In late June of this year, the Centers for Medicare and Medicaid Services (CMS) announced the final rule of the 2014 Protecting Access to Medicare Act (PAMA) or a sweeping market-based pricing reform for Medicare-reimbursed lab tests. PAMA is intended to introduce a more organic methodology to reimbursement adjustments for lab testing under Medicare and will replace uniform cuts implemented across the Clinical Laboratory Fee Schedule (CLFS) along with the Affordable Care Act (ACA). Whereas past CLFS cuts represented another layer of uncertainty in lab investment and thus the IVD market, PAMA-based adjustments will provide labs and IVD suppliers relatively more foresight of future test prices. The recent CMS final rule delays implementation of market-based pricing and expands the body of applicable labs in order to make prices more reflective of the entire lab market. The law has the potential to significantly cut Medicare reimbursement prices on routinely performed, highly automated tests - sparking further consolidation in the clinical lab services market - and increase IVD industry emphasis upon the development of new biomarkers and sophisticated and esoteric assays.

The ACA introduced annual 1.75% reductions to CLFS prices for the years of 2011-2015 and multi-factor productivity (MFP) adjustments of 0.8-1.3% subtracted from annual consumer price index (CPI) inflation updates. Multi-factor productivity adjustments could not reduce CPI updates to below 0%. Resulting price adjustments were -1.75%, (+)0.65%, -2.95% -0.75% -0.25% and 0% for 2011-2016 sequentially. Additional cuts to the CLFS were enacted through legislation outside of the ACA. Frequent and clustered reimbursement cuts to CMS fee schedules have burdened the U.S. clinical lab industry for years - curbing growth and encouraging industry consolidation - but have yet to reverse growth in U.S. testing demand and IVD sales, particularly as healthcare utilization has grown with enrollment as part of the ACA. Anticipated reductions in the reimbursement rates for certain tests as part of PAMA are similarly unlikely to impact long-term IVD demand, but rather shift test performance to lower-cost centralized clinical and independent labs.

Beginning in 2017, PAMA requires applicable clinical labs in the United States (largely independent labs) to submit payment rates and corresponding volumes for lab tests ordered by private payers during the six-month period of January 1 through June 30, 2016. The lab-reported test payment and volume data will be used by CMS to calculate the weighted median payment rates to be paid by Medicare for lab tests. The new payment rates are scheduled in 2018 to replace CLFS payment rates calculated under the previous methodology.

The market-based methodology rate-setting under the original proposed PAMA rule was criticized by the U.S. clinical lab industry for failing to include hospital labs and other testers in its reporting requirements and calculation of weighted median payment rates. The resulting disproportionate representation of independent labs in calculated median rates would have depressed Medicare payment rates below true median payment rates for lab tests in the U.S. clinical testing services market. Based on Taxpayer Identification Number (TIN), rather than CLIA or National Provider Identifier (NPI) registration, the proposed lab reporting was be limited to a subset of larger independent labs, but few physician office labs (POLs) or hospital labs that are highly active in the market through outreach businesses.

In its final rule, CMS still holds TIN-level entities responsible for reporting, but each applicable NPI-level lab under the reporting entity must submit testing data. In other words, even if the TIN-level entity does not meet the criteria for PAMA reporting - at least 50% of testing revenue paid by CMS - each member lab must submit data if they individually have at least 50% of payments from CMS worth up to $12,500 annually. With the revision to reporting criteria in its final rule, PAMA is able to capture hospital outreach labs and obtain a better representation of market rates.

With the final rule of PAMA, CMS believes 55% of independent labs and 95% of POLs will be precluded from reporting private payer data. However, reporting will include larger labs (above the 50% of received payments and $12,500 CMS threshold) that represent approximately 92% and 99% of CLFS payments to POLs and independent labs respectively.

Data will be reported by applicable labs to CMS every three years. Annual adjustments to CLFS rates beginning in 2018 cannot exceed 10% of the test price for the first three years of payment implementation (2018-2020). Beginning in 2021, annual adjustments to payment rates will be capped at 15% of the test price. CMS noted that its final rule was economically significant as it could have an annual impact on the economy of $100 million or more. Bloomberg BNA calculated that PAMA could result in $360 million less in Medicare payments to labs.

Market-based CMS payments for lab tests have the potential to introduce a negative feedback loop in market lab test reimbursements. Often, CMS reimbursement rates serve as a benchmark for negotiations between private payers and independent labs that result in discounts for private payers below the CMS rate. The continued use of CMS market-adjusted rates as a starting point for private payer discounts could place additional pricing pressure on labs if private clients seek discounts over what is already reflected in Medicare rates.

 With the introduction of market-based Medicare pricing, routine tests are likely to see sharp reductions in reimbursement. Certain tests were noted by HHS in 2011 to be paid for by CMS at rates 18-20% higher than paid by private payers. High-volume tests such as clinical chemistry panels, lipid panels, complete blood counts (CBCs) and routine infectious disease screens will be reimbursed according to rates paid for such tests when performed at high economies of scale in large clinical labs. As a consequence, the same tests performed at lower volumes in smaller labs may be reimbursed by CMS below cost and become unfeasible to perform at decentralized locations. Non-automated tests and routine CLIA-waived manual tests with unique reimbursement codes are unlikely to experience the same scale of rate erosion as tests performed on high-throughput automated instruments.

PAMA will variably affect molecular diagnostic codes or MoPath codes reimbursed by CMS. Most Tier 1 codes (the most commonly used molecular tests) are unlikely to see positive adjustments as private payer market rates will be heavily influenced by automated test performance at centralized clinical labs. PAMA will update CMS reimbursement rates for molecular tests to reflect the steady price erosion in the clinical lab market resulting from automation and competition. With CMS pricing for common molecular tests in sync with private payer rates, it is unclear if private payers will be able to negotiate and win revised rates below the newly market-adjusted Medicare rates.

 The effect of PAMA on more esoteric molecular tests will be inconsistent due to the unclear relative pricing between private payers and national rates determined without contributions from all MACs. Many advanced molecular tests, such as sequencing assays, MAAAs or proprietary laboratory-developed tests (LDTs), will be eligible for designation as ADLTs under PAMA. Tests must meet the following criteria to be eligible as ADLTs: offered only by a single laboratory and not sold by any laboratory except the original developer and either incorporates multiple biomarkers of DNA, RNA or proteins in a unique algorithm (MAAA); is cleared and approved by the FDA; or meets other similar criteria established by the Secretary of HHS. The criteria capture the technical or market availability features of many advanced molecular tests often categorized as MAAAs, NGS assays, or LDTs. PAMA provides list pricing for ADLTs in the first three quarters of 2017, thereafter ADLT prices will be updated annually rather than every three years as with non-ADLT tests.

For more information regarding the impacts of the ACA and PAMA on the U.S. IVD market, Kalorama Information offers United States Market for In Vitro Diagnostic Tests.