With clinical laboratories facing Medicare cuts of up to 30% over the next 3 years under the Centers for Medicare and Medicaid Services’ (CMS) new fee schedule, Darwin’s famous axiom about survival of the fittest seems apropos. The laboratories most likely to survive the cuts are those that are operationally efficient, financially fit, and strategically diversified, according to experts. As labs now see the 2018 rates reflected in their books, the real effects of the Protecting Access to Medicare Act (PAMA) that called for the new market-based payment scheme is coming into sharp relief.

Laboratories that have not maximized their efficiencies are going to face a rough road ahead. “There’s going to be a lot of pain,” said Dennis Weissman, president of Dennis Weissman and Associates in Washington, D.C. “Small labs will be in jeopardy.”

Hardest hit will be laboratories that serve nursing homes and receive the bulk of their laboratory testing payment from Medicare and Medicaid, he added, noting that many of these labs will not survive. CMS now reimburses most hospital laboratory testing under bundled payments. However, payment for outpatient testing, which for some health systems includes a significant amount of outreach testing arrangements with physician practices, relies on the CMS fee schedule and private payer contracts.

Aculabs, which performs testing for more than 320 skilled nursing and assisted living facilities in Maryland, Delaware, New Jersey, and Pennsylvania, estimates that its total revenue will be cut by 30% over the next 3 years. CEO Peter Gudaitis has warned that the cuts are not sustainable and could force the company out of business. “As laboratories exit this market segment, skilled nursing facilities will be forced to transport elderly and often frail patients to nearby, more expensive hospitals for lab testing—a logistical nightmare which will create a host of challenges, jeopardize timely access to laboratory results, and ultimately cost more,” Gudaitis said after the 2018 payment rates were announced.

AACC warned CMS of the problem when the agency released preliminary payment rates in October 2017. “One unintended consequence … is that it may force many laboratories to stop or significantly curtail their testing, particularly rural hospitals, small health clinics, and physician office laboratories,” AACC wrote in a letter to CMS, warning that the cuts would “likely mean fewer laboratories and less patient access to testing services.”

A Limited Upside

Laboratories that will fare the best under the new payment system are those that offer proprietary testing. For example, Genomic Health’s Oncotype DX Breast Cancer test will get a 12% increase to $3,873, and CareDx’s AlloMap test will increase 14% to $3,240. However, the payment benefit for proprietary testing may diminish over time. “In the first round, it worked out relatively well,” Weissman said, “but down the road, private payers aren’t going to be willing to pay these amounts. Eventually, it will even out.”

Also expected to get favorable pricing, at least initially, are Advanced Diagnostic Laboratory Tests (ADLTs), a new category of assays that CMS defines as tests developed and offered by a single lab that use a unique algorithm to analyze multiple DNA, RNA, or protein markers. ADLTs must also provide new clinical diagnostic information that can’t be obtained by any other test. New ADLTs will be paid the actual list charge for the first 3 quarters after being introduced. After the initial period is over, payment for a new ADLT will be based on the weighted median private payer rate, like all other tests on the fee schedule.

Uncertainty for Physician Office Laboratories

For physician office laboratories (POLs), the new rates are something of a mixed bag. A few of the most commonly performed waived tests, such as HbA1c (CPT 83037) and specimen cultures (CPT 87084), will actually get increases in the next 3 years, while many other high-volume tests, such as complete blood counts (CPT 85025), will see a decrease in Medicare payment.

“I believe some POLs will attempt to offset their revenue loss in lab testing by offering more customized test profiles that Medicare will be paying on an individual test basis in 2018,” Weissman said. Medicare announced last year that tests bundled into automated testing profiles would be paid individually beginning January 1. As always, the tests must be medically necessary, and CMS will be carefully monitoring claims to ensure proper utilization.

Hospital outreach laboratories will also take a hit in 2018 and beyond, with Medicare cuts of 10% to most tests in the fee schedule each year through 2020 and up to 15% a year for the following 3 years. In anticipation of the cuts, several health systems with large independent laboratories, including PAML and PeaceHealth Labs, sold their labs to Quest or LabCorp within the past year.

While some in the laboratory industry had hoped the lawsuit filed in December by the American Clinical Laboratory Association challenging the new payment rates would stop the new system from going forward, experts believe that is unlikely. However, the lawsuit could lead to a refinement in the way CMS handles the data collection of private payer rates in the next round, ultimately resulting in payment rates that reflect the market more accurately, they say. Under PAMA, CMS surveys labs every 3 years to update rates.

What should clinical laboratories with a big exposure to the fee schedule do to cope with these hits to their bottom line? Industry experts say that while the way forward will be difficult, there are still opportunities for reducing costs and increasing revenues that may help labs survive.

Last Chance for Better Financial Management

Many laboratories do not have adequate financial systems in place, resulting in an inability to fully capture critical data and revenues, maintained Lâle White, CEO of XIFIN Inc., a health information technology company. “I think the PAMA reporting showed labs just how bad their systems were and how they weren’t retaining the level of detail and data that they needed,” she said. “Most of the billing systems out there are designed by [laboratory information system] vendors or technical lab people, not financial people. They are mostly bill generators with some accounts receivable management tools, but they don’t have the financial integrity required to capture data accurately, precisely, and make it fully auditable, which is absolutely key to managing your business.”

A strong financial system that captures the level of detail needed for PAMA reporting—volume and payment by contract rather than just by payer—provides labs a wealth of data they can use to negotiate contracts and ultimately to collect monies owed. White believes that many labs fail to collect between 5and 10% of their revenues simply because of weak financial systems.

Capturing the revenues that are left on the table could more than offset a 10% Medicare cut, White said. “One of the reasons to correct this sooner rather than later is we’re going into another reporting period for PAMA in 2019,” she said. “Labs need to prepare. This is the time whenthey should be aggressively reviewing all of their contract pricing and trying to figure out how to make sure they are getting paid at the right price.”

Operational Efficiency

Process improvements also lead to significant cost savings that may help offset the PAMA cuts, said Suzanne Carasso, director of business solutions consulting at ARUP Laboratories. “Labs need to take a hard look at themselves,” she advised. “Does your lab have the right equipment, is it performing the right tests, are you staffed appropriately, is there redundancy in the system?”

Carasso, who works with large health systems, said she often recommends that lab services be centralized to take advantage of economies of scale. “Moving lab services to a central lab will result in a dramatic reduction in cost per test,” she noted. “We also work to impress on health systems the importance of keeping all testing within the system as much as possible.”

Operational efficiency even extends to the billing department, explained Carasso, who said ARUP helped one hospital lab save several million dollars simply by reducing the amount of small dollar claims that were being written off. In the case of outreach laboratories, Carasso advises that labs evaluate the advantages of outsourcing outreach billing to a commercial vendor, noting that billing in-house typically costs 10 to 12% of a lab’s revenues versus 6 to 8% of revenues for outsourced billing.

Workflow automation and improved connectivity also help bring down costs and improve efficiency, White added, noting that manual labor tends to drive up costs.

Diversification opens another avenue to offset Medicare cuts, according to Weissman, who noted that finding new sources of revenues will reduce the extent to which labs are dependent on Medicare reimbursement. LabCorp, for example, has diversified and expanded its business beyond lab testing and now performs testing on food and for clinical trials.

“The typical lab can’t do that, but any opportunity to deal directly with consumers could provide a new line of revenue,” he said, pointing to Sonora Quest’s success with MyLab ReQuest, a service that allows patients in Arizona to order certain lab tests on their own.

What Does the Future Look Like?

Ultimately, the diagnostics landscape is likely to look much different in a few years, experts said. “I think the larger diagnostic landscape will be impacted gradually over time due to more industry consolidation and an unknown number of labs closing,” Weismann said. “The remaining labs will be focused even more acutely on cost efficiencies and reductions, thereby fighting for every penny in negotiations with equipment and reagent vendors.”

ARUP’s Carasso believes there could be a renewed interest in laboratory networks as labs join forces to create leverage in contract negotiations. She pointed to Joint Venture Hospital Laboratories Network (JVHL) as an example of a successful lab network. JVHL, based in Michigan, negotiates contracts on behalf of more than 120 hospital laboratories across Michigan, Ohio, and Indiana. “Laboratory networks can work,” she said. “We’ve seen it done.”

Kimberly Scott is a freelance writer who lives in Lewes, Delaware. +Email: [email protected]