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The Diagnosis for Diagnostics: Changes to Medicare Payment and Coverage of Clinical Laboratory Tests

Evidence-Based OncologyAugust 2015
Volume 21
Issue SP12

The basis for determining Medicare payment rates for clinical diagnostic laboratory tests is changing. These changes will be important for all payers and providers to follow for future reimbursement and contract negotiations.

In the United States, Medicare is the single largest purchaser of clinical laboratory tests, paying approximately $9.7 billion in 2012. Mostly driven by volume increases, Medicare spending on clinical laboratory testing rose by approximately 5.6% between 2003 and 2012.1 Coding changes for molecular diagnostic and novel tests in recent years have provided CMS and other payers with more clarity regarding which tests are actually being included on claims. This has led to a greater ability to focus on and scrutinize the medical necessity of testing. Recent legislative changes and forthcoming CMS regulation will soon fundamentally change the methodology Medicare uses to determine payment rates for clinical laboratory tests paid under the Medicare Clinical Laboratory Fee Schedule (CLFS). We review the past, present, and future of Medicare payment for clinical laboratory services, which will impact all payers and providers in coming years.

Evolution of the Clinical Laboratory Fee Schedule

Under Medicare Part B, CMS covers laboratory tests that are considered reasonable and necessary when they are furnished in a Medicare participating laboratory and ordered by a physician or qualified non-physician practitioner who is treating the patient. Clinical laboratory tests (excluding most pathology services) are paid for by Medicare under the CLFS, which was created under the Deficit Reduction Act of 1984 (DRA).2 The CLFS was established for laboratory tests on a regional, state, or carrier basis and was based on what local laboratories charged at that time. The DRA also mandated that the Consumer Price Index for All Urban Consumers (CPI-U) be used annually to adjust for inflation.

Following the DRA, the Consolidated Omnibus Budget Reconciliation Act of 1985 mandated that Congress establish national limit amounts (NLAs) on laboratory payments.3 Initially capped at 115% of the median carrier rate for each test, the NLA was subsequently lowered by Congress from 1988 to 1998 to 74% of the median carrier rate for each lab test.4 The payment amount for each test is determined based on the lowest of the provider’s charge, carrier rate, or NLA. In order to establish rates for new tests, CMS uses 1 of 2 methods: cross-walking and gap-filling. Cross-walking is used when a new test is determined to be clinically or technologically similar to existing test(s) on the fee schedule. The exact payment amount of the test(s) used in the cross-walk becomes the NLA for the new code. Gap-filling is used when no comparable test is available. Under this method, each Medicare Administrative Contractor (MAC) is instructed to ascertain a payment amount for its geographical area(s) for use in the first year; this subsequently serves as a benchmark for CMS to set an NLA based on the median of MAC rates.5

A Whole New World Under PAMA

Until recently, apart from various legislative actions—reducing payments across the entire CLFS, adjustments for inflation and productivity, and the addition of new codes—the CLFS has received little attention since the 1980s.6,7 However, Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA) will significantly change how Medicare determines payment rates for clinical laboratory tests reimbursed for under the CLFS. All rates for tests on the CLFS will eventually be valued on market-based payment and volume data, somewhat similar to the Average Sales Price (ASP) methodology used for outpatient drugs and biologics. While we are still awaiting the details of implementation from CMS, the law will require applicable laboratories to report private payer (ie, commercial, Medicare Advantage, and Medicaid Managed Care) payment rates, including discounts, and volumes for existing tests beginning January 1, 2016, with those rates to be used to establish a weighted median for payment starting in January 2017. Collection of these data will be driven by unique Healthcare Common Procedural Coding System (HCPCS) codes, although many tests will map to the same code or be reported commonly with unlisted or unclassified codes. The law also allows for tests meeting certain criteria to obtain temporary codes until permanent codes are established. PAMA includes some protections to prevent reimbursement rates from dropping too low: for the years 2017 through 2019, payment amounts cannot be reduced by more than 10% per year; from 2020 through 2022, payments cannot be reduced by greater than 15% per year compared with the preceding year. Other adjustments, such as geographic, budget neutrality, or annual update adjustments, will no longer be applicable.

Following the initial collection and reporting for existing tests, the law separates new tests entering the market on or after January 2016 into 2 categories: advanced diagnostic laboratory tests (ADLTs) and non-advanced diagnostic laboratory tests (non-ADLTs).

Tests that meet the narrow definition of ADLT include those that are offered by a single laboratory and that are either:

(a) an analysis of multiple biomarkers or proteins combined with a unique algorithm to yield a single patient-specific result;

(b) FDA-cleared or approved; or

(c) a test of another type based on other criteria established by the HHS.

To create financial incentives for access to the marketplace, ADLTs will be reimbursed based on the list charge for the first 3 quarters following market entry. At the beginning of the fourth quarter, CMS will transition reimbursement to a weighted median of private payer rates, with the potential for clawback if the list price is greater than 130% of the market-based fee. Reporting for ADLTs will be required on an annual basis, as opposed to every 3 years for non-ADLTs.

Non-ADLTs, which are new tests that do not meet the narrow definition of ADLT, currently account for a majority of the tests on the fee schedule. They will continue to be priced per the gap-fill and cross-walk methodologies until payment rates are established for the tests using private payer data.

In addition, PAMA creates several other provisions to assist with the overhaul of the fee schedule. PAMA calls for an Expert Advisory Panel to be created to comment on payment and coverage processes, and the secretary of HHS may designate 1 or more (not to exceed 4) MACs to establish coverage policies rather than leaving coverage decisions for clinical laboratory tests up to each individual Part A/B MAC. The Congress also directs the Government Accountability Office and HHS Office of the Inspector General to conduct studies to ensure that Medicare cost savings with the new payment methodologies do not harm beneficiary access or clinical decision making.8

So, why does this matter to payers other than Medicare? Ultimately, the goal of PAMA is to lower laboratory reimbursement rates based on competitive pricing and contracting to improve Medicare cost savings. This is a significant paradigm shift from current practice where subsequent to tests being reimbursed for based on an antiquated Medicare fee schedule, Medicare often forms the basis of reimbursement for private payers. While PAMA will force the industry to prioritize contract negotiations with private payers, the specific approach by private payers and laboratories to adjust their future negotiating and contracting to account for the changes in Medicare payment rates remains undetermined. In the short term, this payment shift may create a volatile marketplace for laboratories and manufacturers due to the uncertainty of consistent or adequate payment, as well as create a hefty reporting burden on laboratories. Most likely, payment changes will vary by test code and we could see downward, neutral, and upward adjustments to future laboratory test payment rates.

The Rise of Molecular Testing Has Increased Payer Scrutiny

In the current healthcare environment, diagnostic developers face ever-growing demands by payers to establish the value of their product to gain favorable coverage. With the rise in the number of multipanel genetic tests and the introduction of newer technologies such as next-generation sequencing (NGS), both public and private payers have established processes and criteria to aid in making coverage decisions. Establishing the clinical utility, namely, changes in clinical decision making and outcomes based on the information obtained by the test, has been a significant hurdle faced by industry stakeholders when introducing new diagnostics into the market.

Under Medicare, one requirement for determining that a diagnostic test is medically reasonable and necessary is that the results of the test will change the management of a beneficiary’s condition. This could be shown by changing treatment pathways or determining eligibility for a unique drug or drugs based on the test’s results. While there have been several Medicare Evidence Development & Coverage Advisory Committee meetings on molecular diagnostics, coverage determinations have largely been developed at the local level. In 2011, Palmetto GBA (Palmetto), the Part A/B MAC for Jurisdiction 11 (North Carolina, South Carolina, Virginia, and West Virginia), launched the MolDX Program, which was designed to produce evidence-based coverage policies for molecular diagnostic tests. As part of the new program, all manufacturers and laboratories seeking coverage for their tests must provide Palmetto with robust clinical evidence demonstrating not only the analytic validity but also the clinical validity and utility of their test. To date, Palmetto has issued 18 local coverage determinations (LCDs) detailing limitations and indications for coverage of certain molecular tests, although they have also made de facto coverage decisions for a large number of analyte-specific molecular tests outside of the LCD process.9 While the Palmetto MolDX Program is only active in certain MAC jurisdictions at present, it could grow to the national level in the future, particularly with the new authority delegated to the secretary of HHS under PAMA. However, CMS has not yet indicated that it will move to a consolidated coverage process for laboratory tests.

Private payers are also active today in determining whether molecular testing used in the clinic is experimental, investigational, or medically necessary. While most large private payers have internal health technology assessment committees, the levels of focus and expertise in the technical aspects of complex testing methodologies vary. While Medicare policies are relied on as a basis for determining private payer coverage policies for certain tests, such as in oncology for companion diagnostics, many tests are more appropriate for populations outside of the Medicare population, or are excluded by statute from the Medicare program (eg, susceptibility or screening tests).10 This means that payers will need to evaluate coverage and payment on their own terms for a wide range of new tests. Payers generate coverage policies based on peer-reviewed literature, external technology assessments, and evidence-based guidelines produced by medical specialty societies or other groups such as the National Comprehensive Cancer Network.

As payers demand robust evidence demonstrating the clinical utility of diagnostic testing, it is critical that manufacturers provide adequate evidence on how changes in clinical action based on test results lead to an improvement in patient outcomes.

What Does the Future Hold for Laboratory Test Reimbursement?

The number of clinical laboratory tests—in particular molecular diagnostics—on the market will continue to rise, and that growth will impact the various players in the healthcare industry in several ways. Payers will likely see a continued steady increase in the volume of claims entering their systems as well as the sustained need for medical review of novel diagnostics. Due to increased payer scrutiny and efforts to control costs, as well as greater market competition, manufacturers and laboratories will need to be prepared with higher levels of evidence, in particular strong clinical utility. Manufacturers and clinical laboratories should invest in establishing this higher bar of evidence during test development and prepare for pricing and reimbursement pressures to continue, especially in the time leading up to and after the changes in Medicare payment rates, outlined in PAMA, take effect in 2017.

As private payer rates will drive future Medicare reimbursement, contracting and price negotiation will form an increasingly important piece of the puzzle for both laboratory providers and payers. If pricing pressures are too great to bear for some smaller laboratories, we could see further consolidation or narrow laboratory networks come into play even more than today. In addition, we will see a greater payer focus on managing laboratory testing benefits through shifts in cost-sharing or benefit management services, such as United Healthcare’s use of Beacon Laboratory Benefit Solutions, Inc (Beacon LBS) for commercial members in Florida.11 It is uncertain if the program will be expanded geographically or if other payers will look to manage laboratory benefits through a third party—as many do today for prescription drugs through pharmacy benefit managers—but the potential exists.

Laboratory testing is often a gatekeeper to, or influencer of, other healthcare services. As we await regulations around the Medicare payment changes under PAMA, and as laboratory testing continues to rise as an area of focus for payers and providers, the next 2 years will prove crucial for testing. All stakeholders should monitor the ongoing changes to Medicare payment and coverage for clinical laboratory testing, as the impact will be felt throughout the healthcare industry.

Funding Source: NoneAdam Borden, MHA, is director, Avalere Health, LLC; Danielle Showalter, MPH, is senior manager, Avalere Health, LLC; Geoffrey Storchan, PhD, is manager, Avalere Health, LLC; Kathleen Hughes, MBA, is vice president, Avalere Health, LLC.

Corresponding Author

Adam Borden, MHA

1350 Connecticut Ave, NW

Suite 900

Washington, DC 20036



1. Medicare Payment Advisory Committee. A data book: health care spending and the Medicare program. http://www.medpac.gov/documents/publications/jun14databookentirereport.pdf?sfvrsn=1. Published June 2014. Accessed June 19, 2015.

2. H.R.4170 - Deficit Reduction Act of 1984. Congress.gov website. https://www.congress.gov/bill/98th-congress/house-bill/4170. Accessed July 1, 2015.

3. H.R.3128 - Consolidated Omnibus Budget Reconciliation Act of 1985. Congress.gov website. https://www.congress.gov/bill/99th-congress/house-bill/3128. Accessed July 1, 2015.

4. Social Security Act §1833(h)(4)(B). CMS website. http://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNMattersArticles/Downloads/MM8132.pdf. Accessed July 1, 2015.

5. 42 CFR § 414.508 Payment for a new clinical diagnostic laboratory test. Cornell University Law School website. https://www.law.cornell.edu/cfr/text/42/414.508. Accessed July 1, 2015.

6. Medicare Prescription Drug, Improvement, and Modernization Act of 2003. U.S. Government Publishing Office website. http://www.gpo.gov/fdsys/pkg/PLAW-108publ173/pdf/PLAW-108publ173.pdf. Accessed July 1, 2015.

7. Medicare Improvements for Patients and Providers Act of 2008. CMS website. http://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNMattersArticles/downloads/MM6042.pdf. Accessed July 1, 2015.

8. Protecting Access to Medicare Act of 2014. Congress.gov website. https://www.congress.gov/bill/113th-congress/house-bill/4302/text. Accessed June 17, 2015.

9. MolDX Program website. http://www.palmettogba.com/palmetto/MolDX.nsf/DocsCatHome/MolDx. Accessed June 23, 2015.

10. Social Security Act §1862(a). Social Security Administration website. http://www.ssa.gov/OP_Home/ssact/title18/1862.htm. Accessed July 1, 2015.

11. UnitedHealthcare Laboratory Benefit Management Program. UnitedHealthcare website. https://www.unitedhealthcareonline.com/b2c/CmaAction.do?channelId=9cc7b96891e22410VgnVCM2000002a4ab10a____ . Accessed June 24, 2015.

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