Payment Rates Under the Microscope

Protecting Access to Medicare Act (PAMA) requires reform of the payment system for clinical lab tests

As a result of these current turbulent economic conditions, the handling of money is being scrutinized by both government and private entities like never before. The United States Department of Health and Human Services (HHS) has ushered in new legislature under the Center for the Medicare and Medicaid Services (CMS) that will compare payment rates, monitor fee activities and evaluate lab fees for ongoing payment reduction. HHS’s goal is twofold: first, to decrease rates where possible to realize substantial savings, and, secondly, to level the playing field for equal access to all service recipients, regardless of their socioeconomic capabilities.1,2

Because of this groundbreaking initiative, there is a large volume of legislative and guidance documents being released by both governmental and private parties.

When looking at the topic, it goes without saying that much of the content is littered with details and dry reading. The goal of this article is give key points of the payment reduction plan by shedding some light on the historic activity, current events and future endeavors for HHS, CMS and Office of Inspector General (OIG) in terms of mandates for payment rates for lab fees.

1984-2012: Once Upon A Time Thirty Years Ago

The last HHS review of lab fee charges was conducted thirty years ago during the years 1984 and 1985.

In 2000, the Institute of Medicine (IOM) reported that, “Medicare’s fee schedule for lab tests and its methodology for setting payment rates had not evolved to account for technological and market changes.”3 During that time, the IOM suggested to CMS that the lab tests “be based on a single, rational, national fee schedule.”3 This schedule would then be adjusted for geographical, cost of labor and supplies considerations.

In a 2010 finance study, Medicare uncovered that it paid an estimated $8.2 billion for clinical lab services under Medicare Part B.3 This made CMS the largest payer compared to other purchasers of lab services. This huge dollar amount led the finance leaders of HHS and CMS to decide, due to economic conditions, that a fiscal analysis needed to be conducted again. Snapshot reviews during the following years revealed that the reimbursement protocol needed to be revisited for the government.

2014: Uncover Escalating Payment Rates

During 2014, the payments escalated. CMS paid $7.0 billion for lab tests.4 Due to the ever-increasing levels of expected reimbursements, the finance leaders of HHS and CMS decided that a fiscal analysis needed to be conducted again.

According to the 2014 CMS baseline study (5) of the American Medical Association’s (AMA) Current Procedural Terminology (CPT) codes, the top three lab tests to receive the bulk of the reimbursement payments accounted for over $400 million each.

  • Blood test for thyroid-stimulating hormone           (Code #84443): $477 million
  • Blood test for a group of blood chemicals             (Code #80053): $453 million
  • Complete Blood Cell Count automated test          (Code #85025): $431 million

Protecting Access to Medicare Act (PAMA) was introduced to Congress in March, 2014, and became Public Law No. 11-93 in April, 2014.1 This new HHS regulation required payment review and reform for clinical laboratory tests payment rates. In addition, the PAMA mandate is to ensure oversight and reduction of lab fees over the next several years.

2015-2016: Lab Experts Have Some Say

In April of 2015, a team was formed, titled The Charter Medicare Advisory Panel. This two year panel consisted of 15 experts with skills including, but not limited to clinical laboratory, health care economics, lab research and molecular pathology. The panel was tasked to review lab financing issues and make recommendations regarding process reviews to the secretary of HHS and the administrator of CMS under section 1832A. The suggestions were to be forwarded by year 2017.5

The monetary containment topics covered the following areas:

  • Calculation of weighted medians of private payer rates for laboratory tests
  • Phase-in of reductions in Medicare payment rates based on private rates, as required
  • Application of market rates to establishment of Medicare payment rates
  • Evaluation and designation of tests as advanced diagnostic laboratory tests as defined in section 1834A of the Act
  • Whether to use cross walking or gap filling to determine payment for a specific new test
  • The factors used in determining coverage or payment processes for new clinical diagnostic laboratory tests.

Although the panel reported directly to both HHS and CMS, supervisory support services were provided. This managerial oversee was placed under the supervision of a CMS employee, the designated federal officer (DFO). The DFO was expected to attend all of the panel’s meetings and ensure that the proceedings were recorded.1

The panel is expected to meet four times during each of the designated two years (2015-2016) in order to prepare recommendations for the key topics specified above. The suggestions from 2015 were already forwarded to HHS and CMS administrators. The 2016 suggestions will be sent during the coming year.

2016-2017: Collectors and Watchers

The goal stated in the September, 2015 OIG report is that, “Beginning in 2017, Medicare will update the Clinical Laboratory Fee Schedule using data on rates paid to private payers.”1

These rates will be applied nationally and will be updated every three years (not 30), using data reported to labs. In addition to answers to rate issues, other answers, such as key process and monitoring inquiries have also been formulated. Two key process and monitoring answers include:

  1. CMS The Collectors: How will fee analysis occur? The Center for the Medicare & Medicaid Services (CMS) will begin collecting private-payer fee rate data from laboratories across the nation. It is believed that the collection activity support the PAMA’s cost containment goal.
  2. OIG The Watchers: Who will monitor the fee reduction process? How will this fee reduction goal be realized? Will Be In fact the September 2015 publication release from The Office of Inspector General (OIG) states that OIG “will monitor Medicare payments for lab tests and the implementation of the new payment system”.1

2017-2022: What Will The Lab Look Like?

Naturally, discussions on budget reductions and cost containment, whether in public or in the private sector, breed controversy. With PAMA, there has been and will continue to be controversy and debates. In a world of escalating costs to provide services, everyone is concerned about price control measures and profit.

The bottom line of any successful lab is profit. If you don’t make a profit, you won’t be in business for very long. And as we all know from basic finance, making a profit is pretty simple, really. You just have to make more money via fees than you spend.

With the release of CMS’s PAMA legislation, the reduction the prices (i.e., CMS payment) has many laboratory leaders worried. That concern is that fees decreased over time may hamper their profit or bottom line in the future.

Pricing debates aside, the following is a look at the PAMA’s reduction schedule. It revealed that, over time (between the years of 2017-2022), Medicare may reduce test fees by as much as 50%.5 The following is the proposed reduction schedule over the next 6 years, beginning with  2017:

  • 10% in 2018
  • 10% in 2019
  • 15% in 2020
  • 15% in 2021
  • 15% in 2022

Yes, PAMA and the document related to it is dry reading. And yes, fee examination and reduction is going become a very complex scenario. But with the ongoing CMS cost containment project already underway, one thing is clear. Lab administrators will have to come up with ingenious ways of offering value to customers, while, at the same time, considering limited Medicare revenue streams to accommodate not only test fee services, staffing coverage and other lab for future sustainability.


  1. Levinson, Daniel R., Inspector General. Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings. Department of Health and Human Services, Office of Inspector General.
  2. 42 CFR Part 4124, Thursday, October 1, 2015. Federal Register, Vol. 80, No. 190, Department of Health and Human Services, Centers for Medicare and Medicaid.
  3. Now and in the Future, January 2000 Institute of Medicine, Medicare Laboratory Payment Policy.
  4. Charter Medicare Advisory Panel On Clinical Diagnostic Laboratory Tests. The Secretary of Health and Human Services, Washington, D.C. www.
  5. Medicare Payments for Clinical Laboratory Tests in 2014: Baseline line Data. Department of Health and Human Services, Office of Inspector General.

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