The Ugly Truth About Payors and PAMA

Recently CAP Today provided an excellent recap of XiFin CEO and Executive Chairman, Lâle White’s Executive War College presentation “Ugly Truth about Payors & PAMA: What Labs Can Expect and How to Respond.” In this blog post, we break down some of the key points: 

PAMA Is a Price Reduction Program

Contrary to its publicized goal of achieving market-based pricing, the government remains fixed upon cost savings. The latest Government Accountability Report criticized the fact that PAMA pricing calculations were not based on the average Medicare price, but instead on the national limitation amounts. This amounts to the government saying it believes the $670 million savings it got instead of the $390 million it had originally projected was not enough.

Automated Multichannel Chemistries Pricing Changes Are Still Playing Out

In the same GAO report, the government focused on the removal of the automated multichannel chemistry price bundling, expressing fears the move would cost the government $10 billion. In reality, panel ordering did not decrease any more than the single test ordering decreased, and there was no unbundling by the industry. The government’s cost fears were unfounded. However, there was one unintended side effect of the panel price bundling, which is that Medicare administrative contractors eliminated their edits for panel coding for automated multichannel chemistries by error.

“We do have to be careful that we are still coding properly, but other than that, we’ll have to see what the outcome will be of the congressional discussions about how automated multichannel chemistries should be handled,” explained White. “We know they’ll add their edits back in October of this year and recoup any over-payments back to the beginning of 2019, but will they do anything else? That will be a question.”

Changes in Applicable Laboratory Definition Not a Cure-All

With the publishing of the physician fee schedule in 2018, the applicable laboratory definition was expanded, eliminating Medicare Part C from the calculation, which altered the majority of revenue thresholds, and as a result, these thresholds were broadened. Also, the National Provider Identifier (NPI) definition changed to include more outreach labs. CMS said this added approximately 43% more labs to the group of applicable labs.

XiFin CEO, Lâle White, addresses laboratory executives at 2019 Executive War College

However, there are still questions and issues about how CMS broadened the definition. CMS said that most outreach hospital labs would be included in the applicable lab’s definition, but data should only be collected for the nonpatient (outreach) laboratory work, which excludes the outpatient data.

White further explained that excluding outpatient from PAMA reporting, especially given that CMS is calculating pricing using the median rather than the simple weighted average, yields very different pricing results. The lab industry (minus hospital inpatient) breaks down to about 44% of lab testing coming from hospital outreach, about 28% from large independent labs, and another 28% from all other labs. If PAMA data was reported at these ratios, we would have seen an increase of almost 3.8%  instead of what actually did see, which was 30% cut on the top 25 tests. With the broadening of the applicable lab’s definition, the industry was poised to see reporting ratios much closer to the actual industry breakdown. However, once outpatient was removed from the mix, the ratios skew heavily toward independent labs. One analysis puts outpatient testing at 65% of hospital outreach (or 29% of the total laboratory pie), leaving only 34% (or 15% of all laboratory testing) for nonpatient. Excluding the lion’s share of outreach dramatically changes the laboratory testing breakdown: large independent labs now represent 40%, the rest of labs also 40%, and hospital nonpatient only 20%. The result is large laboratory pricing, which is typically lower than that of the hospital outreach sector; disproportionately affects the average median calculated from PAMA reporting.

Exacerbating this price skewing is the use of median rather than (mean) average in price determination. The median methodology means that the added participation of nearly all outreach labs may not have the impact the industry had hoped for. Full participation will move it slightly, but it may not be enough. CMS has stated that if it doesn’t see enough of a difference with the inclusion of outreach labs, it may once again exclude them in the following collection round simply because of the administrative burden the collection represents. We will have to wait and see, but there are real questions about how much impact the addition of only the nonpatient portion of outreach testing will have.

PAMA Pricing Triggered Private Payor Pricing Erosion

There has been an erosion of private payor pricing since PAMA pricing went into effect in early 2018. Hospitals saw about a 3.5% decline in the private commercial business, and independent labs about 2.9%. While these seem like relatively small decreases, the majority of the cuts didn’t happen until Q4. That means the decreases will be much larger once they have been in effect for a full year. Private payors took advantage of expiring contracts, the fact that some of the contracts allow fees to be changed mid-year, and new people coming into the programs to begin mirroring PAMA pricing cuts much more quickly than had been anticipated. In fact, White reported evidence on a number of fronts that indicate private payors are moving to cut prices even more aggressively than PAMA dictates:

• XiFin data indicates that Aetna, Cigna, the Blues, and United Healthcare started early in the year, offering 20 to 25% off of the 2018 Medicare fee schedule (which in itself already had a 10% cut in it). These private payers seem to be seeking to obtain the full PAMA cut upfront, without the CMS-mandated 10% per year cap.
• XiFin data showed that Multiplan, which is a plan that contracts for multiple insurance carriers at the same time, cut fees in some regions by as much as50%. Given that the number of individuals who go into high-deductible health plans has increased to almost 50% of beneficiaries, it is that much harder for laboratories in the private payer market to collect coinsurance and deductibles.
• Looking at the top six revenue-generating high volume tests, commercial payers from 2017 to Q4 of 2018 cut their pricing by about 10% overall, and the prices at the end of Q4 of 2018—not to mention the additional cuts in Q1 2019–were not only below the 2020 Medicare fee schedule but also below the PAMA median even from the last data collection period.
• While molecular tests did fairly well in the last reporting period, it did not fare so well in the private sector. XiFin private payor data from the first data collection period revealed a 25 to 30% decline over the Medicare fee for the G codes. Likely the current PAMA collection/reporting period will yield a reduction for G codes.
• Erosion in more of the routine type of molecular testing services is occuring as well. XiFin analysis revealed that in the private sector, infectious disease pricing has gone down about 3.6%, in somatic testing about 2.1%, and in prenatal about 1.2%.
• Looking across all payer types for 2018, PAMA had an approximately 1.8% impact across the board on revenue. Conversely, commercial insurers, if you annualize the cuts, they made in 2018, cut almost 5.6% off the bottom line for labs.

Proper Contracting Is Key to Success

In the current environment, it’s important to pay attention to the pricing strategy payors are implementing and to do contracting with care. White pointed out that private payor contracting is something the laboratory industry has not done well. Although hospital labs have the ability to leverage their hospital contracts, independent labs must negotiate with savvy to obtain equitable fees in their contracts. It is not enough to decouple a contract from the current—or even past—Medicare fee schedules; the contract negotiation has to be much more thoughtful than that. White’s negotiation tips include:

Laboratories Need to Get Their Data Act Together

PAMA is an excellent demonstration of the fact that as an industry, health diagnostics do not have their financial data act together. With an accurate financial system in place, PAMA should be a simple exercise, yet most labs had great difficulty with it. It’s a strong indication that laboratories are not yet ready for new data analytics, machine learning, or artificial intelligence. Now is the time for labs to become much better at understanding data, not just from a revenue stream perspective, but also as a point of contact for the patient, payor, and physician, and to produce greater quality at a lower cost, with better outcomes. That goal can be reached only through the use of technology and automation. In the end, all of this is about financial integrity first and foremost, deep data analytics, and a health information technology infrastructure with connectivity to facilitate clinical integration, scalability, operational efficiency, full automation in every way the lab is run.

Read “Up-front on PAMA impact, private payor pricing” for more about White’s Executive War College presentation, including expectations for the coming PAMA-driven pricing changes.