New Medicare Reimbursement for Lab Tests May Overpay by Billions

December 06, 2018 - A new Medicare reimbursement system for clinical laboratory tests could increase spending for the public healthcare program by over $11 billion by 2020, a new Government Accountability Office (GAO) report shows.

The federal watchdog found that Medicare’s new method for determining the payment rates for laboratory tests, which was supposed to reduce Medicare spending by $360 million in the first year, could actually boost expenditures.

Medicare started to revise how it pays for clinical laboratory tests four years ago under the direction of the Protecting Access to Medicare Act of 2014 (PAMA). The act required CMS to establish a national fee schedule for laboratory tests based on private payer data.

Prior to the new Medicare reimbursement system’s implementation in 2018, Medicare paid clinical laboratories for tests based on charges for the same tests in 1984 through 1985 adjusted for inflation.

Concerns that Medicare paid more for clinical laboratory tests than private payers spurred lawmakers to mandate a new payment system. Specifically, the HHS Office of Inspector General (OIG) found in 2013 that Medicare reimbursement rates for laboratory tests were 18 to 30 percent higher than the rates paid by certain private payers.

READ MORE: The Difference Between Medicare and Medicaid Reimbursement

The single national fee schedule was supposed to reduce Medicare reimbursement for laboratory tests closer to the rates paid by private payers, resulting in millions in savings.

However, the GAO recently reported that Medicare may overspend on laboratory tests under the new Medicare reimbursement system because CMS used above-average payment rates as a baseline to calculate new rates, GAO reported.

PAMA requires the new rate to be phased in, limiting the payment rate reductions to ten percent per year until 2020. But when applying the 10 percent payment reduction limit, CMS used the 2018 national limitation amounts to establish a single, national payment rate for laboratory test. Therefore, the new Medicare payment rate for a test could not be less than 90 percent of the test’s 2017 rate.

However, some payment rates were lower than the national limitation amount prior to 2018, especially if the test was typically bundled.

“As a result, by reducing payment rates from national limitation amounts, CMS did not always reduce rates from what Medicare actually paid,” GAO reported.

READ MORE: Transforming the Hospital Laboratory into a Profit Center

The watchdog predicts Medicare to increase spending on laboratory tests by $733 million from 2018 through 2020 because of the above-average payment rates used as a baseline.

Unbundling certain tests could also have a $10.3 billion impact on Medicare spending on laboratory tests, GAO added.

Medicare claims that PAMA requires the agency to create individual payment rates for laboratory tests. Therefore, the agency may not have the authority to continue bundling laboratory tests for payment despite the risk that unbundling could increase Medicare spending.

Incomplete data, which was used to calculate new Medicare reimbursement rates for the tests, could also perpetuate overspending through inaccurate payment rates.

To establish the national fee schedule, CMS collected and analyzed data from about 2,000 laboratories on almost 248 million laboratory tests to create new Medicare reimbursement rates. CMS reported that the data collected included private payer rates for 96 percent of the 1,347 eligible billing codes.

READ MORE: Key Ways to Improve Claims Management and Reimbursement in the Healthcare Revenue Cycle

However, not all laboratories required to submit information to CMS did.

The federal agency still used the data to calculate a median private payer rate weighted by volume and according to the ten percent payment reduction limit.

For 2018, the Medicare reimbursement rates were lower than the program’s previous rate for 88 percent of laboratory tests, GAO reported.

But the GAO stated that the data collection strategy currently in place will not result in Medicare savings after the phasing in of payment reductions is complete in 2020 because not enough data would be available to determine accurate payment rates.

CMS must calculate new payment rates every three years, requiring the federal agency to collect private payer data from laboratories again. And CMS did not collect data from all the laboratories required to report the information to the federal agency, GAO stated.

“Our analysis of the potential effects that collecting data from additional laboratories could have had on Medicare payment rates and expenditures found that the effect of CMS not collecting complete data would likely have been greater absent PAMA’s limits on annual reductions to Medicare payment rates,” the watchdog explained. “As a result, CMS may face challenges setting accurate Medicare rates if it does not collect complete data from all laboratories required to report in the future when PAMA allows for greater annual payment-rate reductions.”

For example, if CMS collected 20 percent more data, doing so could boost Medicare spending on laboratory tests by as much as three percent or reduce expenditures by three percent depending on that payment rates in the additional data.

Absent the annual limits on Medicare payment reductions, though, collecting the additional data could increase Medicare spending by as much as nine percent or reduce expenditures by nine percent.

GAO advised CMS to attempt bundled rates for certain laboratory tests consistent with its billing practices prior to 2018 by working with lawmakers to clarify and/or expand its authority to bundle.

The watchdog also recommended that CMS take steps to collect all the data required from laboratories and phase in payment rate reductions that start from the actual payment rates Medicare paid prior to 2018.