Jury still out on the most significant technical changes in its history 

By Gary Tufel 

On April 1, President Obama signed into law the Protecting Access to Medicare Act of 2014. The major goal of the new legislation was to avert cuts to Medicare physician payments by creating a temporary “fix” to the Medicare sustainable growth rate (SGR)—the 17th such patch that Congress has enacted since the SGR formula became law as part of the Balanced Budget Act of 1997. And as usual, Congress took advantage of the moving legislation to make other changes to current-law health provisions, and to extend other health-related provisions set to expire.

But for laboratorians, passage of the bill was more than merely lawmaking as usual, as it marked the first time in 30 years that Congress also passed diagnostics payment reform measures, including modernizing the Centers for Medicare & Medicaid Services (CMS) Clinical Laboratory Fee Schedule (CLFS), the Medicare payment system for diagnostic tests.

“The laboratory industry has been locked into the CLFS since 1984, with no ability to determine its own fate with regard to pricing,” says Rina Wolf, vice president for commercialization strategies, consulting, and industry affairs at Xifin Inc; a former president and board member of the California Clinical Laboratory Association; and an active participant in the American Clinical Laboratory Association and the Personalized Medicine Coalition.

While the CLFS has remained essentially unchanged since it was first implemented in 1984, the schedule’s payment rates for diagnostic testing have been frozen or cut in 16 of the last 24 years. In 2000, an Institute of Medicine study found that Medicare policies and payment levels for diagnostics were outdated and severely flawed for various reasons, including a lack of transparency; excluding new technologies; using an outdated methodology for rate determination; stifling investment and progress; and impeding effective patient care.

Andrew Fish, JD, AdvaMedDx

Andrew Fish, JD, AdvaMedDx

“Payment reform and Medicare fee schedule modernization for diagnostics has been a priority of the organization for many years,” says Andrew Fish, JD, executive director of diagnostics industry association AdvaMedDx. “We applaud Congress for recognizing the full contribution of modern diagnostics to healthcare quality and outcomes, and taking these important steps toward ensuring that patients have access to the latest advances in diagnostic testing.”

KEY IMPROVEMENTS

According to JR Associates president Judy Rosenbloom and vice president for global health policy Jo Ellen Slurzberg, the CLFS has not undergone this level of change since it came into being. Scheduled to be fully implemented in 2017, the new legislation includes a number of key improvements and provides solutions to long-standing flaws in the current payment system for diagnostic tests.

As part of the reforms, CMS is required to establish an independent advisory panel of patients, clinicians, and technical experts to advise the agency about diagnostic payment rates, and specifically for the evaluation and appropriate reimbursement of new tests. “We’re very hopeful that the panel will bring much more expertise to bear,” Fish says.

The bill also greatly expands transparency and public input into a historically opaque reimbursement process. The legislation requires CMS to take into consideration the recommendations of the new advisory panel and provide rationales for its payment decisions that will help make the decision-making process more transparent. The panel process will help illuminate the factors that go into CMS payment decisions.

The bill also allows for creation of a mechanism to align Medicare payment rates with private sector market rates—essentially moving the CLFS to a market-based payment system. This means that the whole market—including what private payors reimburse labs for tests, not just the Medicare component of the market—will influence how much labs are reimbursed for tests and services. Beginning in 2016, CMS will calculate the weighted mean of the private payor data for each test, and that will serve as the basis for calculating the Medicare rate beginning January 2017. That process will repeat every 3 years.
[reference id=”37543″]Key Lab Fee Reforms[/reference]
LAB TEST MACS 

According to Wolf, one facet of the legislation that could become troublesome is the potential for CMS to revoke the authority of the 10 existing Medicare administrative contractors (MACs) to make coverage and pricing determinations for laboratory testing.

Under the new legislation, CMS will have the authority to designate one or more MACs as the primary administrative contractors for clinical laboratory services. In this role, the contractors will have responsibility for making coverage determinations and processing claims, not unlike the MACs that are authorized to manage durable medical equipment. In turn, there will likely be fewer MACs making coverage decisions.

Rina Wolf, Xifin Inc

Rina Wolf, Xifin Inc

How many MACs should be appointed, and according to what criteria, are both questions that will need to be addressed, says Wolf. “Will it be purely a cost-based bidding process, or will there be an attempt to identify levels of expertise?” she asks. “Will this be the opportunity that Palmetto has been waiting for to nationalize its molecular diagnostics program, which, while well-intentioned, has proven to be quite controversial and has generated much concern?”

For Medicare beneficiaries, this change may result in greater consistency in coverage and patient access determinations, but it will also mean that a non-coverage decision has broader geographical reach. “So a ‘no’ will be a big ‘no,’ and will mean that fewer Medicare beneficiaries will have access to that test,” say Rosenbloom and Slurzberg.

ADVISORY PANEL REPRESENTS EXPERT INPUT 

To obtain expert input into coverage issues and payment levels, the newly enacted legislation requires CMS to create an outside advisory panel by July 1, 2015. The panel is expected to include pathologists, laboratory scientists, and other subject matter experts. Once the panel is operational, CMS will make public the decision-making processes and rationale underlying coverage, coding, and payment determinations for new tests—activities that up until now have been fairly opaque.

The idea of creating such a panel isn’t exactly new. In a proposal submitted to CMS last fall, the California Clinical Laboratory Association suggested the formation of a committee modeled after the Medicare Payment Advisory Commission (MedPAC) specifically for molecular diagnostics and new technologies.

In theory, such a panel should improve the reimbursement decision-making processes at CMS by creating a transparent vehicle for input and discussion among experts in the field. But whether the advisory panel will prove to be an effective tool may depend on how its members are actually selected. “Once again,” says Wolf, “the beauty will be in the details.”

Until the market-based payment system is implemented, new tests that do not qualify as advanced diagnostics will continue to be reimbursed by means of the “crosswalk” and “gap-fill” methodologies that laboratories and manufacturers have become accustomed to using. These fairly antiquated processes permit practitioners to use the codes for a test that is already covered when requesting reimbursement for a similar new test that hasn’t yet been granted coding (crosswalk), or allow Medicare contractors to use local pricing data to set the payment levels for the first year of a test’s availability, until a national payment level is determined (gap-fill).

Jo Ellen Slurzberg, JR Associates

Jo Ellen Slurzberg, JR Associates

According to Rosenbloom and Slurzberg, such older methods of adjusting the prices that CMS pays for laboratory tests have become problems in their own right. The gap-fill method is particularly prone to regional and state variation, and there is no mechanism to ensure the legitimacy of the data on which the payment rates are based. CMS currently has statutory authority to make further technical changes or adjustments to payments, but the process by which the agency accomplishes such adjustments has always been something of a “black box.”

Under the new legislation, there is at least some chance that such processes will be improved, say Rosenbloom and Slurzberg. The new advisory panel should be able to ensure that input to the agency’s price-setting mechanisms is credible. And the agency’s statutory authority to adjust payments without a transparent process will be rescinded in favor of using the panel’s expertise to guide the process of rate-setting.

Still, even with the changes enacted under the new legislation, getting test pricing set correctly won’t be automatic, says Wolf. “We were pleased to see a reinforcement of the requirement for Medicare contractors to follow the previously mandated rules for local coverage determinations. However, this is still no guarantee that policies will be reflective of real clinical practice and the most updated thinking,” she says. “We have very recently experienced proposed local coverage determinations that received massive numbers of informed comments regarding their inappropriateness, yet the contractor dismissed those comments in their entirety. So, while definitely preferable to unilateral coverage by article or mandate, this piece also needs enhancing.”

In the end, says Wolf, addressing such issues will be accomplished not only by the new legislation itself, but also through the results of negotiated rule-making to implement the legislation. “Hopefully, that process will provide answers for all of these questions,” she says. “But one way or another, the implementing regulations will make the difference as to whether this legislation is a boon or a detriment.”

TOUGH TRANSITION

In June 2013, the Department of Health and Human Services Office of the Inspector General (OIG) issued a report, “Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings,” which found that private payors reimburse about 20% to 30% less than Medicare for 20 high-volume and high-cost clinical lab tests.

The rates paid by private health plans will become especially important beginning in 2016, when labs will be required to report to CMS their private payor pricing—information that has always previously been viewed as contractual and proprietary. This information will give Medicare the ability to leverage lower payment for tests if it determines that Medicare has been paying more than other payors.

Making the transition to such a market-based pricing system won’t be simple or painless for everyone. The current size and status of individual labs may affect how difficult the transition will be. In particular, says Wolf, labs that do not have sophisticated revenue cycle management systems may encounter difficulty in supplying all of the pricing information they are required to disclose under the new legislation.

Another concern is the implementation of price determinations based on “weighted medians,” says Wolf. “The largest laboratories already have contracted pricing with commercial payors, often at painfully low rates.” Because of the heavy volume of testing represented by those labs, she says, “those rates could potentially skew the pricing significantly downward for all.”

“But the biggest concern is that commercial payors have indicated their intention to pay at much larger discounts off the Medicare fee schedules than in recent years,” Wolf says. “Last year, Aetna announced that it wants contracted rates to be in the neighborhood of 40% to 50% of Medicare. And the Blues are already contracting at less than 50%.

“This means that on the second cycle of the new legislation’s pricing exercise, the allowed rates submitted to CMS will likely be substantially less than on the first round. The agency will discount its pricing 15% from those rates, and commercial rates will plummet again.

“This has the potential to become a circuitous downward spiraling of rates that could make it impossible for many laboratories to survive—let alone sustain a profit margin,” says Wolf.

REDUCED FEES ON THE HORIZON

Fish acknowledges that the new legislation will reduce overall payment rates for tests in the coming years, but says the act’s provisions are better than some alternatives that would have cut fees even more sharply.

Over the years, lab fees have already endured reductions from a variety of sources. The Affordable Care Act of 2010 cut the CLFS to the tune of 1.75% per year to help fund provisions of that legislation. And budget sequestration, the automatic spending cuts put in place by the Budget Control Act of 2011, imposed further cuts.

This year, President Obama proposed to extend the Affordable Care Act’s annual cuts of 1.75%. And it was apparent that Congress would make additional cuts to the CLFS in order to offset the costs of this year’s SGR “doc fix,” as it has done before. “Taken together, these proposed fee cuts would have been drastic,” says Fish. “We saw that this would happen again in the latest SGR bill, so we worked to minimize cuts as well as to pass policy reform.”

“We have been trying to gain the right to have a more market-based pricing mechanism for some time, and this bill could be a step toward gaining that right,” says Wolf. “While seemingly well-intentioned, however, this bill is fraught with unanswered questions and detailed requirements that could make all the difference about whether it has a positive or negative impact in the years to come.

“It is also important to note that while the bill was supported by some representative organizations, it was vehemently opposed by others—a situation that is not atypical with clinical laboratory affairs,” Wolf adds. “That places Congress, and others, into a difficult position for trying to reach a consensus.”

Wolf says the most positive effect of the new legislation will be to give the laboratory industry pricing security through 2016. “It has been many years since we have had a breather from trying to stave off price cuts on an annual basis, so this reprieve is very welcome,” she says. “At least temporarily, it removes the uncertainties of the previously announced plan to reprice the entire CLFS.”

Rosenbloom and Slurzberg agree that, in general, the changes made to the CLFS will result in reduced payments for clinical lab tests. “Medicare has historically reimbursed labs based on the clinical lab fee schedule. Private payors negotiate payments for the same tests and may be willing to negotiate less payment for many routine tests in return for preferred payment for other tests,” they note.
[reference id=”37544″]Code Update Postponed[/reference]
NEW CODES, MORE QUESTIONS 

To minimize delays in patient access to diagnostic technologies, the new legislation establishes a system for rapid assignment of temporary codes for new tests. “Currently, getting codes assigned can take up to 2 years, which is a barrier to coverage and earlier utilization of tests, and impedes patient access to new technology,” says Fish. “This new legislation allows the assignment of new codes much earlier than is currently the case.”

Additionally, the legislation includes a provision for the establishment of test-specific identifiers. Test developers will be able to apply for specific codes that identify both the test and its developer. “This is important for transparency,” notes Fish. “The current codes are more general than specific. These test-specific identifiers will allow developers—both manufacturers and labs—to make value cases for their tests and distinguish them from other tests in the same category.”

CMS will also be required to establish specific coding and payment rules for advanced diagnostic laboratory tests. This new category of tests consists of multi-analyte specialty tests that have been cleared or approved by FDA, or meet other CMS criteria, and fall into the category of genomic or similar specialty tests that apply algorithms or other formulas to yield a result. Such tests must be furnished by a single laboratory, which will often be the developer and manufacturer of the test.

Judy Rosenbloom, JR Associates

Judy Rosenbloom, JR Associates

Advanced diagnostic laboratory tests will be paid at their list price for three quarters before becoming subject to the market-based system created under the legislation. However, since such tests will be subject to public data reporting, manufacturer pricing and payor charges will be available to competitors. According to Rosenbloom and Slurzberg, it is unclear how creation of this new category will influence shifts in the development of other new tests—especially specialty tests—when the manufacturer is also the specialty lab.

According to Wolf, the intent of the legislation to allow advanced laboratory testing to have its own pricing rules, so that test developers might finally have the potential of recouping R&D costs, is a good one. “However, even here there are important unanswered questions. Is the starting point of the first three quarters determined by the date the test becomes commercially available, or by the date that Medicare coverage begins?”

Also, by defining the advanced diagnostics category as synonymous with tests that incorporate an algorithmic component, the legislation excludes the fastest-growing area for new tests: those performed on next-generation sequencing platforms that typically do not have such a component. For this rule to truly represent the latest technologies, says Wolf, “this is a hole that must be plugged.”

Another provision of the legislation provides a period of pricing protection for tests that receive market clearance from FDA—a process that is costly and can greatly extend time to market—or meet other criteria established by the agency.

“The 2-year pricing reprieve will be welcomed by some, but questions remain,” says Wolf. “What are those ‘other criteria’? How will pricing be managed in the context of existing contracted pricing? How will CMS deal with the gap-fill process for tests that are not considered advanced lab tests (hopefully, better than with the molecular pathology codes issued last year). How will the required advisory panel on molecular diagnostics and other new technologies influence coverage determinations?”

Investors have already been delving into the significance of this bill, and will be watching its implications very carefully, says Wolf. “That said, we still see a tremendous opportunity for well-validated and clinically significant personalized medicine assays as the days of ‘one size fits all’ testing are coming to a close.”

For more information, read Gary Tufel’s Q&A with Timothy Sheets, national director for managed care and reimbursement at Progenity, a national CLIA-licensed laboratory provider of noninvasive prenatal testing and genetic carrier screening.

Gary Tufel is a contributing writer for CLP. For further information, contact chief editor Steve Halasey via [email protected].