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The 5 Keys to Minimizing the Impact of PAMA

At this year's Executive War College Conference, XIFIN CEO and Executive Chairman, Lâle White presented on PAMA’s effects on laboratories and gave some thought-provoking ideas on how labs can respond. This blog post will cover many of the topics that Lâle discussed, starting with this timeline of industry events which provides background on the laboratory reimbursement environment:

Now that we have some context, we can address the most pressing issue:

What is the impact of PAMA on labs?

Based on an average industry billing mix, the PAMA cut is projected to deliver an approximate 5% reduction in the total annual revenue in year three for both clinical and pathology labs. This reduction in revenue flows straight to the bottom line. This means that if a lab earns 31% of its revenue from Medicare and Medicaid, it can expect to lose 5.33% of total revenue per year.

This reduction in annual revenue is slightly less for hospitals at approximately 2% since they tend to have significantly higher private payor pricing than clinical labs, helping them to preserve more of their annual revenue and thus their margins. However, nursing homes, as expected, experience the most significant impact. Since almost 50% of their revenue comes from Medicare and Medicaid, they see an approximately 9% hit to their annual revenue, which almost wipes out their entire margin. Molecular and pain management labs were not affected much by the first round of PAMA cuts.

In addition to the direct impact of PAMA fee cuts, private insurers are following suit, sometimes even more aggressively and faster than through PAMA. Based on XIFIN client data for independent labs, there was approximately a 3% erosion in private payor pricing in 2018, while the hospital market saw a decrease of about 3.5%. Private payors are using the lower Medicare and Medicaid rates to reduce the fees in renewal contracts by an average of 20% to 30%. We can expect this trend to continue with greater impact being felt as new contract prices apply for the full calendar year. This means that looking at the impact of the PAMA cuts alone only tells part of the story.

So how can labs mitigate future price cuts and minimize the impact of PAMA? Here are the 5 keys:

1. Solidify Reporting
  • Report on actual allowable vs. payments
  • Validate the accuracy of payments
  • Optimize appeals activity to avoid reporting underpayments
  • Correct contracting problems before the reporting period by eliminating coupled contracts and evaluating fees for each CPT to determine outliers that need to be renegotiated
  • Establish financial systems with appropriate reporting capabilities and retain source documents
2. Reduce Costs
  • Implement workflow automation to remove clerical decision making and achieve labor efficiencies
  • Reduce the total cost of billing to below 4% while achieving bad debt targets
3. Take a Closer Look at Testing
  • Diversify testing menu
  • Expand specialty testing
4. Negotiate Private Payor Contracts
  • Leverage the hospital to negotiate better lab pricing
  • Leverage regional presence and value-based pricing concepts
5. Improve Technology
  • Select an accounting-based billing software that has deep analytics and has sound financial integrity
  • Incorporate patient engagement automation

Want more information on strategies to combat PAMA? Read our white paper, “PAMA: Strategies Moving Forward.”


Published by XIFIN
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