The Uncertain Future of PAMA (Protecting Access to Medicare Act)

In 2014, Congress passed the Protecting Access to Medicare Act (PAMA), a broad-sweeping “extender” bill meant to protect physicians from a then-impending 24 percent cut in medicare reimbursements.

Tucked into PAMA was Section 216(a)—legislation designed to improve medicare policies for clinical diagnostic laboratory tests. Section 216(a) calls to bring the clinical laboratory fee schedule (CLFS) into greater alignment with market rates and was the first major reform to the CLFS since 1984. In addition to CLFS rates that more accurately represented market rates, the intent of section 216(a) was to establish greater transparency and predictability in payment methodology for CLFS.

While the intent of PAMA legislation was to create competitive, market-based laboratory testing rates, the methodology used by the Center for Medicare Services (CMS) to determine rates is criticized as being highly flawed. In 2018, first-round cuts (up to 10 percent) were made to the majority of reimbursement rates, and in early 2019, clinical and diagnostic laboratories across the nation were hit with a second round of cuts.

There are more cuts to come in 2020. Keep reading to learn the journey to these cuts, and how it is affecting labs and patients all across the U.S.

Fee Schedules Before and After PAMA

Before PAMA, the CLFS was based on rates that labs charged Medicare for diagnostic services in 1984 and 1985, adjusted for inflation. These rates were typically higher than the rates laboratories charged to private payers.

PAMA legislation called for reform to this methodology, switching the strategy for calculating rates to a market-based approach. Following PAMA, CLFS rates were to be calculated using data collected about rates charged to private payers, with adjustments scheduled at three-year intervals. The legislation also included a phase-in for any discovered fee cuts, allowing no greater than 10 percent cuts to rates between 2018 and 2020, and no deeper than 15 percent between 2021 and 2023.

The CMS Calculates New Fees

To adhere to PAMA legislation, the Center for Medicare Services (CMS) was charged with obtaining private payer data. CMS gathered information by putting the impetus for data reporting on “applicable” laboratories. Applicable laboratories were defined as those that:

  • Meet the Clinical Laboratory Improvement Amendments (CLIA) definition of a laboratory
  • Bill Medicare Part B using their unique National Provider Identifier (NPI)
  • Garner more than 50 percent of revenue from the the CLFS
  • Make more than $12,500 in Medicare revenue in the data gathering period

In addition, CMS relied on laboratories to self-report whether or not they qualified as an applicable lab. Applicable laboratories that failed to report relevant data to CMS could be charged up to $10,000 per day of non-compliance.

Through the first reporting period between January 1, 2017 and March 31, 2017, 1,942 applicable laboratories submitted information to CMS: 90.1 percent of the data came from independent labs, 7.5 percent came from physician office labs, 1 percent came from hospitals, and the remaining 1.4 percent came from other laboratories. After running an analysis from the applicable laboratories, it was determined that, in total, Medicare Part B was paying 21.9 percent more for laboratory and diagnostic services than private payers.

While CMS found that around 10 percent of the Healthcare Common Procedure Coding System (HCPCS) codes used by the CLFS were actually less than private payers, a reduction to the fee schedule in future calendar years would impact 75 percent of HCPCS codes on the CLFS. With the phase-in of reductions protecting laboratories from drastic cuts all at once, 17 percent of codes would experience a full cut in one year and nearly 58 percent of HCPCS codes would require multiple-year reductions. In total, CMS estimates that their findings will save Medicare $3.9 billion over the course of ten years.

The Laboratory Community Claps Back

Following the publishing of the fee schedule, the CMS was met with severe criticism from the laboratory community.

Influential community members expressed that the methodology for data reporting was flawed; it did not result in market-based prices; and it fundamentally ignored congressional intent. Sentiments in the laboratory community were so strong that that the American Clinical Laboratory Association (ACLA) presented CMS with a lawsuit asking the courts to drop PAMA regulations in order to give CMS time to come up with something that would be more in alignment with the intent of section 216(a) of PAMA.

Although the ACLA lawsuit was dismissed by a district court on the basis that it was powerless to hear the arguments, ACLA and other members of the laboratory community maintain that their criticisms regarding PAMA need to be heard in order to protect patient access to diagnostics.

Narrow Definition of a Qualifying Lab

The main criticism raised by the laboratory community was in regard to the narrow definition of what constitutes an applicable lab in the CMS reporting process. The definition as crafted by CMS led to a reporting process where only 0.7 percent of the almost 250,000 labs across the nation reported on their billing data, and the lab community argues that this is sample not an accurate representation of the market.

Specifically, the laboratory community emphasizes that because hospital labs do not generally have individualized NPI numbers, they did not qualify as applicable labs and their data was vastly underrepresented in reporting. This omission of hospital data is significant because hospital lab charges to private payers are often much higher than what independent labs charge, with some studies putting hospital rates charged to private payers at 176 percent higher than what is charged to Medicare. As a result, the CMS fee schedule released in 2018 was skewed much lower than actual competitive market rates.

Other Criticisms of the PAMA Implementation

There are other criticisms of PAMA from the lab community as well. Opponents note that the reporting timeline placed lopsided burden on community labs to report data in an unmanageably short period of time, thereby skewing the results toward high-profit, high-volume discount labs who could bring in extra staff to meet reporting requirements.

Because the rate calculation was done as a weighted median instead of a mean average, data is also skewed toward high volume instead of reflecting the average of all the prices charged. The lab community also points out that self-identification as an applicable lab is not a robust enough way to determine which lab data should be included in reporting. The CMS had no transparency around how they would determine whether submitted data met universal quality standards.

Finally, the American Medical Association (AMA) opposed PAMA on the basis that section 216(a) was added into PAMA without public vetting.

The Impact of PAMA on Laboratories

Despite these criticisms of the fundamental flaws in methodology, the CMS-calculated fee schedule still went into effect on January 1, 2018, with subsequent cuts going into effect on January 1, 2019. In total, over the course of the years, these cuts will reduce Medicare lab test reimbursement by anywhere from 34 to 45 percent, resulting in anywhere from $390 million to $670 million in revenue reductions in 2018 alone.

According to one estimate, just a 10 percent cut to CLFS will result in a 3 to 4 percent drop in annual laboratory profit margins.

For high-volume, nationwide, and speciality labs, this may not be an issue, but both ACLA and the American Medical Association (AMA) predict small labs, rural labs, and small-scale privately owned labs may be forced to lay off a large part of their skilled workforce, close their doors, or sell out to larger companies.

Labs that serve nursing homes and garner that majority of their payments from Medicare also are expected to feel the impact of PAMA to a greater degree than big players in the industry. In anticipation of the deep impact of the cuts in 2018, several hospital outreach labs actually sold their operations to larger players.

In addition to drops in profit-margins and attenuated pressure on small, rural, geriatric-facing labs, the AMA is concerned that the impact on laboratories has the possibility to create a public health risk in the face of pandemics or epidemics.

The Impact of PAMA on Patients

Although PAMA is supposed to be a measure that protects healthcare access, there is a generally-held consensus that the exact opposite will happen for patients seeking testing through Medicare. Three major demographics will be impacted: members of rural communities, nursing home residents, and seniors.

The PAMA-mediated cuts to Medicare reimbursement mean that these patients, in particular:

  • May experience heavy delays to testing
  • May not have access to the types of diagnostic testing they require
  • May experience a loss of continuity of care

In addition to reduction in access to services, patients across all demographics using Medicare to access services can expect out-of-pocket contributions for diagnostic services to increase.

In addition to curtailing access for current patients in need, PAMA may have an unintended effect of halting innovation in the laboratory sciences for the needs of future patients. With lower rates of reimbursement for services rendered, research labs will have to rely more heavily on outside funding in order to conduct experimental research on new diagnostic pathways. Many labs will be de-incentivized or unable to pursue innovation, as they will have to turn their focus toward just staying fiscally solvent in a post-PAMA reimbursement landscape.

The Laboratory Offensive Strategy

Questionable methodology or not, the PAMA cuts are in effect and there has been an outpouring of strategies to help labs protect themselves from closure. Diversification and expansion of services into the speciality testing arenas like Advanced Diagnostic Laboratory Tests (ADLTs) are often-cited strategies. Learning which CLFS codes have high, stable reimbursement rates, and adding them to offerings may help labs to stay afloat or even flourish in a post-PAMA reimbursement landscape.

Improving operational efficiency is also a way that labs can attempt to shave wasted dollars off their bottom line. Strategies for operational efficiency include tactics like:

  • Centralizing lab services
  • Keeping testing in-house
  • Reducing small-dollar claim write-offs
  • Workflow automation
  • Improved connectivity
  • Redundancy assessments

With an estimated 5 to 20 percent of revenues lost through billing system deficiencies, assessing and upgrading the adequacy of a lab’s financial management system is another tactic recommended for labs who want to survive the impact of section 216(a).

Labs should upgrade to systems that have PAMA-compliant reporting capabilities in order to ensure operationally efficient reporting in the next expected reporting cycle. Labs also should choose systems that are designed by those concerned with fiscal solvency—not just those systems created with technical functioning in mind. Additionally, labs should consider systems that optimize business management in order to ensure that they are collecting payment on every test.

Hope for 2021: Hospital Outreach Labs Required to Report

As outlined in PAMA legislation, the CLFS rates will be reassessed at three-year intervals. Between January 1 and March 31, 2020, applicable labs will need to submit PAMA data to CMS for the January 1 to July, 30 2019 time period.

In response to the criticisms from the laboratory community, CMS updated their the criteria for what types of labs qualify as “applicable labs,” now requiring data reporting from hospital outreach labs who make more than $12,500 in Medicare revenues. Because most hospital outreach labs are now required to report their billing to private payers, there is a prediction that the median price level will increase for the 2021-2023 CLFS cycle—if the majority hospital outreach labs actually report their data.

Although these changes do not respond to all of the critiques raised by the laboratory community and do not provide any aid to the small, rural, and independently owned labs—those at the most risk of closure based on the current schedule of cuts to the CLFS—it is a step toward a more accurate and truly market-based system for rate calculation. If labs can figure out how to hold on until 2021, perhaps patient access to Medicare will truly be upheld or even improved in the long term.