News
July 6, 2016

Sweeping Changes in Store for Laboratory Payments: Medicare Sets Rule for Market Rates Starting in 2018

Arnold & Porter Advisory

On June 17, 2016, the Centers for Medicare and Medicaid Services (CMS) released a final regulation1 implementing § 216 of the Protecting Access to Medicare Act of 2014 (PAMA), which makes significant changes to how Medicare establishes its payment rates to clinical laboratories for tests paid on the Clinical Laboratory Fee Schedule (CLFS). In response to over 1,300 comments from stakeholders, CMS significantly modified its proposals, released in October 2015,2 by delaying implementation for one year and significantly expanding the set of laboratories that will be required to report information on which payment rates will be based. CMS also revised its definition of certain advanced laboratory tests that are subject to special reporting and pricing arrangements. This Advisory describes the major provisions of the Final Rule and discusses the strategic and operational decisions facing clinical laboratories.  

PAMA Overview and Implementation Timeline

PAMA ends the CLFS’ administered pricing system, which has been widely criticized as being inflexible and unresponsive to technological change, with a system based on market prices. Current CLFS payment rates appear to exceed, on average, those paid by private payors by amounts reported to be between 18 and 30 percent.3 PAMA requires applicable laboratories, as defined in the Final Rule, to report to the Federal government, information on the payments they receive from private payors for tests paid on the CLFS. For each test on the CLFS, referred to as a Clinical Diagnostic Laboratory Test (CDLT), CMS will use the resulting data on private payor rates and volumes to calculate a volume-weighted median payment rate, which will, subject to certain phase-in requirements, become the CLFS payment rate.4 For most CDLTs, applicable laboratories will report private payor information every three years, and CMS will update the rates for those tests every three years as well. However, for a subset of molecular diagnostic tests called Advanced Diagnostic Laboratory Tests (ADLT), sponsors will be required to report data on private payor rates, and CMS will update the CLFS payment rates for ADLTs, every year. Reflecting this new system of updating CLFS payment rates, CMS will no longer use the current mechanism for updating rates across-the-board to reflect inflation and productivity advances.

The statute, enacted April 1, 2014, required CMS to begin paying laboratories using the new rates on January 1, 2017. CMS has delayed the start of the new payment system until January 1, 2018, due to delays in releasing the proposed and final rules.  

The challenges of implementing these new procedures are formidable for both CMS and for laboratories, and CMS believes that the delay will permit more orderly implementation. Laboratories must first determine whether they are applicable laboratories and, if they are, to collect, format, organize, validate and submit their data. They must build information systems to collect private payor data and establish internal compliance processes to review and verify the data. CMS also will need time to assemble the data, calculate CLFS payment rates, and provide an opportunity for the public to review the rates before they are implemented. Further, CMS expects the delay will permit independent validation testing of its systems and provide laboratories time to register and perform end-user testing prior to the data reporting period. The revised schedule for implementation is shown in the table below. The effective date of the final rule is August 22, 2016.

Revised Schedule for Implementation

Step

Proposed Rule Timing

Final Rule Timing

“Data collection period” – information on laboratory services paid during this period will be reported and reflected in rate setting

July 1 to December 31, 2015, (January 1 to December 31 in subsequent years)

January 1 to June 30, 2016

“Six month window” – opportunity for laboratories to compile their data

Not included in proposed rule

July 1 to December 31, 2016

“Data reporting period” during which laboratories will report data to CMS

January 1 to March 31, 2016

January 1 to March 31, 2017

CMS will develop new rates

April 1 to November 2016

April 1 to August 2017

CMS will publish preliminary rates

CMS mentioned in the proposed rule, but did not build into the proposed timeline

September 2017

CMS will publish final rates

November 2016

November 2017

New rates go into effect

January 1, 2017

January 1, 2018


In addition to delaying implementation of the new CLFS rates based on private payor data for CDLTs, the payments based on the actual list charge for new ADLTs (called the “new ADLT initial period” in the Final Rule) are also delayed until January 1, 2018. PAMA requires CMS to use the payment methodologies in effect on March 31, 2014, that is, crosswalking and gapfilling, to pay for existing ADLTs between April 1, 2014, and December 31, 2016. Because of the delay, CMS will continue using crosswalking and gapfilling until December 31, 2017.

Consistent with its change to the implementation timeline, CMS also decided to delay by an additional year the phase-in of the new payment rates. The statute limits reductions in payment rates to no more than 10 percent of the prior year’s rate in each of the years 2017 to 2019, and to no more than 15 percent of the prior year’s rate in years 2020 to 2022. In the Final Rule, CMS says that it is appropriate to permit laboratories to get the full benefit of the payment reduction phase-in the statute intended, and it will limit reductions in payment rates to 10 percent in 2018 to 2020 and to 15 percent in 2021 to 2023. These changes eliminate a year of potential savings (2017) for the federal government. CMS estimates, based on very limited data, that payments on the CLFS will decline by about 5.6 percent in the first year of the new payment system, with the reductions totaling $390 million in 2018 and $3.9 billion over the ten-year period of 2018 to 2027.

Definition of an Applicable Laboratory

PAMA defines an “applicable laboratory” as one that receives the majority of its Medicare revenue from either the Physician Fee Schedule (PFS) or the CLFS. The Secretary is given authority, but is not required, to establish a low volume or low expenditure threshold for excluding a laboratory from the definition of applicable laboratory.

In its proposed regulations, CMS sought to define applicable laboratory in a fashion that balanced the need for robust data on private payor rates with the burden of reporting. CMS proposed to define a “laboratory” as an entity that is a laboratory as defined in regulations under the Clinical Laboratory Improvement Amendments (CLIA).5 The agency proposed that laboratories report applicable information by Taxpayer Identification Number (TIN). A single TIN may include a single laboratory, multiple laboratories, and/or other types of providers or suppliers as identified by National Provider Identifiers (NPI).6 Since CMS believes that discounts to laboratories’ payment rates are typically negotiated with private payors at the TIN level, CMS believed reporting at the TIN level rather than at the level of the CLIA laboratory would be less burdensome while not running the risk of losing data important for accurate rate calculations. CMS proposed that only TINs which receive, collectively from all their associated NPI entities/individuals, more than 50 percent of Medicare revenues7 from either the CLFS or the Physician Fee Schedule (PFS) would report private payor rates, thereby excluding most hospital laboratories as they are typically part of a larger TIN entity that receives the bulk of its Medicare payments under the inpatient and outpatient prospective payment systems. CMS also proposed that if an applicable laboratory receives less than $50,000 in Medicare revenue from the CLFS in a calendar year ($25,000 for the initial data collection period from July 1 to December 31, 2015), it would not be required to report applicable information. CMS estimated that its proposed low-revenue threshold would exclude 94 percent of physician office laboratories (POL). Importantly, CMS also proposed that a laboratory that did not meet the definition of an applicable laboratory would be prohibited from reporting applicable information.

CMS received many comments proposing alternative definitions of an applicable laboratory. The American Clinical Laboratory Association (ACLA) disagreed with the proposal to exclude hospital laboratories, and recommended that CMS define an applicable laboratory at the level of the CLIA certificate.8  The American Hospital Association (AHA) also disagreed with excluding hospitals, but recommended that CMS define an applicable laboratory at the NPI level instead and permit hospitals and health systems that have outreach or reference laboratories to voluntarily submit their private insurer data.9 The American Medical Association (AMA) supported CMS’ proposal to set a low-revenue threshold that would exclude POLs,10 but the Point-of-Care Association advocated for a special reporting process for certain point-of-care (POC) tests that are primarily performed in POLs.11 Companies that offer new molecular diagnostic tests including tests that might qualify as ADLTs were likewise worried that the low-revenue threshold could exclude them from being applicable laboratories, and thus make them ineligible to report applicable information even when such as laboratory is the only laboratory to perform the test.12 In cases where no applicable information was reported, CMS proposed to use crosswalking or gapfilling to set payment rates.    

In the Final Rule, CMS has expanded the definition of an applicable laboratory and addressed stakeholder concerns about the low-revenue threshold. CMS agreed that hospital outreach laboratories should be included as applicable laboratories so that CLFS rates reflect “a broader representation of the national laboratory market.” In the Final Rule’s preamble CMS defines a hospital outreach laboratory as one that furnishes laboratory tests for patients that are not admitted as hospital inpatients or registered as outpatients of the hospital. The Final Rule defines an applicable laboratory as an entity that: (1) is a laboratory, as defined in the CLIA regulations;13 (2) bills Medicare Part B under its own NPI; (3) in a data collection period, receives more than 50 percent of the NPI’s Medicare revenues14 from the CLFS or the PFS; and (4) has at least $12,500 of revenue from the CLFS. However, for a single laboratory that offers and furnishes an ADLT, the $12,500 threshold does not apply with respect to the ADLTs but does apply to the other CDLTs the laboratory furnishes.

By defining an applicable laboratory as a laboratory that has its own NPI, CMS is giving each hospital the potential of reporting by obtaining a separate NPI for its hospital outreach business rather than including the outreach laboratory under the hospital’s NPI. If the outreach laboratory has a separate NPI, it will likely meet the threshold for reporting (50 percent of revenue from the CLFS or the PFS), while this is unlikely if the laboratory is under the hospital’s NPI. Because the majority-of-Medicare-revenue threshold is to be applied at the NPI-level entity, rather than the TIN-level entity on behalf of its associated NPIs as proposed, CMS believes that this approach is “consistent with our view that the statute supports limiting reporting to primarily independent laboratories and POLs.”15

CMS believes that the TIN-level entity is typically the one that negotiates pricing and is in the best position to collect private payor rates and report applicable information for its multiple NPI-level entities. Therefore, CMS added the concept of a “reporting entity” to the mix. A reporting entity is one “that reports tax-related information to the Internal Revenue Service using its TIN for its components that are applicable laboratories.”16 CMS believes that reporting at the TIN level will be less burdensome for all types of applicable laboratories.

Because CMS changed the definition of an applicable laboratory from the TIN-level entity to the NPI-level entity and shortened the data reporting period from one year to six months, the agency also lowered the low-revenue threshold from the proposed value of $50,000 to $12,500. CMS notes that some laboratories will not know whether they meet the threshold until the data reporting period is over and that laboratories with volumes near the threshold will need to reassess whether they meet the threshold each year.17 CMS estimates that 95 percent of POLs and 55 percent of independent laboratories will be excluded by the new threshold, while those required to report account for 92 percent of CLFS spending on POLs and 99 percent of CLFS spending on independent laboratories.

CMS agreed with commenters that it would not be appropriate to apply a discretionary low-revenue threshold to the single laboratory with respect to the ADLT(s) that it offers because if the laboratory was excluded from the definition of an applicable laboratory, no private payor information would be submitted to CMS even though such information might be available. Thus, CMS’ low-revenue threshold of $12,500 does not apply to a laboratory with respect to the ADLT(s) it offers. However, if such a laboratory also offers CLDTs that are not ADLTs, the $12,500 threshold would apply to the CLDTs; this means that a laboratory may be required to report for its ADLTs, but not for its other CDLTs.

CMS finalized its proposal to prohibit laboratories that do not meet the definition of an applicable laboratory from submitting applicable information for the purpose of rate setting.

The Final Rule significantly expands the number of entities that will be required to report. CMS estimated in the proposed rule that of 68,000 TIN-level entities, about 4,800 would have met the proposed  criteria for an applicable laboratory. In the final rule, CMS estimates that of 266,000 NPI-level entities, about 13,600 will be applicable laboratories.

Process and Timelines for Reporting and Compliance Monitoring

Data Reporting Requirements for Applicable Laboratories. A reporting entity must report applicable information for each CDLT furnished by its component applicable laboratories during the data collection period.

The Final Rule defines applicable information as: (1) the specific HCPCS code associated with the test; (2) each private payor rate for the test for which final payment has been made during the data collection period; and (3) the associated volume of tests performed corresponding to each private payor rate. Information about tests for which payment is made on a capitated basis is excluded from the reported data. Laboratories will report this data every three years for all CLDTs that are not ADLTs. Tracking the law, CMS finalized its proposal to define a private payor as (1) a health insurance issuer; (2) a group health plan; (3) Medicare Advantage plan; and (4) Medicaid managed care organization.

CMS notes that commenters provided many examples of payments that should be excluded from the definition of applicable information, including hard copy (manual) remittances where HCPCS-level payment data are not captured or the formatting of the hard copy is not conducive to optical scanning, manual remittances that group several test-level payments into a single payment for an encounter, payments that were made in error, bulk settlements, post-payment events such as recoupments, payments from secondary insurers, and payments that do not reflect specific HCPCS code-level amounts.

CMS addressed these issues by stating that if a laboratory cannot correlate a private payor amount to a specific HCPCS code, that amount is not a private payor rate and thus does not constitute applicable information the laboratory would be required to report. CMS finalized its proposal to define a specific HCPCS code as one that does not include an unlisted CPT code established by the AMA or a Not Otherwise Classified (NOC) code established by the CMS HCPCS Workgroup.  With respect to the test volumes that are to be reported as part of the applicable information, CMS notes that sometimes laboratories are paid different amounts for the same CDLT by a single payor, and clarifies that an applicable laboratory must report “each such private payor rate and the volume associated with each rate for the CDLT.”18 Moreover, if the private payor rate paid to a laboratory for a given CDLT changes during the data collection period, the laboratory is to report both the old and new rates and the volume of tests associated with each rate.    

Commenters asked that CMS permit stakeholders to decide whether the burden of collecting and reporting certain payment information outweighs the potential influence that information would have on the final rates. In response, CMS stated that it “cannot permit stakeholders to exercise that discretion” as the agency “believe[s] the statute does not support selective reporting.”19 It “requires comprehensive reporting” so that the new CLFS rates “accurately reflect the rates paid by private payors to laboratories.”20 In addition, CMS will not permit applicable laboratories to report individual claims data, or to report private payor names. 

CMS revised the proposed definition of applicable information to clarify that the private payor rates to be reported are final payment rates; if a test is performed during a data collection period, but a final payment is not made until afterward, information about the test is not applicable information. The preamble notes that CMS received many questions from commenters about whether private payor rate information collected during the data collection period is based on the date of payment, date of service, date of claim submission, or date of denial; whether denials or “zero payments” are to be excluded; how to handle claims undergoing an appeal; and whether non-contracted amounts were to be reported for out-of-network laboratories or services.

In response, CMS modified the definition of a private payor rate as follows: A private payor rate is the final amount that is paid for a CDLT after all private payor price concessions are applied. It does not include information about denied payments. In the preamble CMS says that laboratories should not report payments of zero dollars for CDLTs where a private payor has denied payment, but they should report private payor rates for out-of-network laboratories.

Private payor rates must include “any patient cost-sharing amounts required by private payors” including deductibles, coinsurance, and copayments.21 However, price concessions made by the laboratory, such as waivers of patient cost sharing due to financial hardship, are excluded.  The rule is silent as to how laboratories should allocate single copayments across multiple tests.         

Private Payor Price Concessions. The statute lists specific price concessions in section 1834A(a)(5) of the Social Security Act (SSA)—discounts, rebates, and coupons; as well as referencing section 1847A(c)(3) of the SSA, which includes volume discounts, prompt pay discounts, cash discounts, free goods that are contingent on any purchase requirement, chargebacks, and rebates (except for Medicaid rebates under section 1927 of the SSA). CMS reiterated that these lists are examples of price concessions that might be reflected in private payor rates, and were not meant to be exhaustive. Other price concessions that are not described also should be reported.

Certification by Executives. Consistent with the new distinction between an applicable laboratory and a reporting entity, CMS now requires that to certify data integrity, the President, CEO, or CFO of a reporting entity (not the applicable laboratory, as proposed) or an individual with appropriate delegated authority (and who reports directly to such an officer) must sign a certification statement that the data provided are accurate, complete, and truthful, and meet all the reporting parameters.

Civil Monetary Penalties (CMP). The statute authorizes the Secretary of Health and Human Services to apply a CMP in an amount of up to $10,000 per day for each failure to report or for each misrepresentation or omission. The final rule applies the CMPs at the level of the reporting entity. CMS also notes that the CMP amount is a maximum statutory amount, not a minimum, and the agency expects to work with the Office of the Inspector General (OIG) to assess whether a CMP should be applied, and if so, to determine the actual penalty based on the facts and circumstances of each case. CMS says, “The purpose of PAMA is to collect complete and accurate data in order to set payment rates, not to force a laboratory to close as a result of a CMP assessment.”22 CMS has also updated the CMPs to reflect changes required by the Federal Civil Penalties Inflation Adjustment Act of 2015, so the CMP maximum is $10,017 in 2016, and this figure will be updated annually in the future. The new amount will be included in regulations published by the Secretary before January 15 each year. 

Confidentiality and Disclosure. CMS will not disclose applicable information reported to CMS in a manner that would identify a specific payor or laboratory, or prices charged or payments made to a laboratory. However, the statute permits CMS to disclose data to the Comptroller General, the Director of the Congressional Budget Office, and the Medicare Payment Advisory Commission. CMS finalized its proposal to add the HHS Office of Inspector General and the Department of Justice to this list on the basis that such disclosure is necessary to administer and enforce the new payment system. The name of an applicable laboratory will be exempt from disclosure under the Freedom of Information Act (FOIA).

Determination of Medicare Payment Rate. Each test furnished on or after January 1, 2017, will be paid using the weighted median payment from private payors for the test. CMS will calculate a weighted median for the test, by “arraying the distribution of all payment rates reported for the period for each test weighted by volume for each payor and each laboratory.”

Once established, the payment rates for CDLTs will be national and updated every three years based on information reported in the next collection and reporting period. PAMA prohibits any other updates such as for inflation. These rates will apply to CDLTs furnished by a hospital laboratory if separate payment for the test is made under the CLFS, and not as part of a bundled payment under Medicare’s Inpatient or Outpatient Prospective Payment Systems.

CMS will publish preliminary payment amounts in September that reflect the full median private payor rate for each CDLT for the next calendar year. Stakeholders will have the opportunity to review and comment on the proposed rates. CMS will make publicly available final CLFS payment rates at least 60 days prior to the beginning of the next calendar year, or no later than November 1. CMS also intends to make available to the public a file that includes aggregated private payor rate and volume data for each test (e.g., unweighted median private payor rate, range of private payor rates, total volume, median and mean volume, number of laboratories reporting.)

CMS is also exploring whether it will be possible to release a file of the raw data reported by applicable laboratories. CMS believes that releasing the raw or aggregated data for an ADLT is permitted by the statute, but in deference to stakeholders’ concern about disclosure of proprietary information, CMS will not report data for tests that the agency considers to be uncommon or that are only provided by a single laboratory, such as new ADLTs. “Uncommon” means that a test is offered or furnished by only a few laboratories or paid by only a few private payors. CMS plans to refine its definition of “a few” after the close of the data reporting period in first quarter of 2017, and will explain further when the raw or aggregate data is posted publicly.

Definition of ADLT and Pathways for ADLT Designation

PAMA includes special payment provisions for ADLTs. The statute defines an ADLT as a CDLT covered under Medicare Part B that is marketed and performed only by a single laboratory or its successor owner and not sold for use by a laboratory other than the laboratory that designed the test and that meets the following criteria:

  • is an analysis of multiple biomarkers of deoxyribonucleic acid (DNA), ribonucleic acid (RNA), or proteins combined with a unique algorithm to yield a single patient-specific result;
  • is cleared or approved by the FDA; or
  • the test meets other similar criteria established by the Secretary.

CMS has modified its proposals in the Final Rule to address stakeholder concerns with several aspects of the proposed definition, but the agency did not agree with recommendations from a federal advisory panel to remove the proposed uniqueness criterion, or to calls from industry to guarantee protection of intellectual property submitted as part of an application for ADLT status. Below we consider the components of the statutory definition and CMS’ proposals and discuss how each was revised in the Final Rule, if at all.

Single Laboratory. CMS proposed to define a “single laboratory” as a facility with a single CLIA certificate, and to define a “successor owner” as “a single laboratory that has assumed ownership of the laboratory that designed the test” that meets specific criteria.23 The basis for this limited definition was that CMS viewed PAMA as “intending to award special payment status to the one laboratory that is expending the resources for all aspects of the test—developing it, marketing it to the public, performing it, and selling it.”  In the Final Rule, CMS has revised the definitions. A “single laboratory” is the laboratory, as defined by CLIA regulations, which furnishes the test and that may also design; offer or sell the test, and other entities, specifically the entity that owns the laboratory or the entity that is owned by the laboratory, that may design, offer or sell the test.

CMS agreed with commenters that restricting the definition to a single CLIA certificate was impractical, as requiring the laboratory to administer every aspect of the test—offer, furnish, develop, and sell—at only one physical location is inconsistent with how laboratories operate (for example, having one location that does research and development and another that does testing for patients) and could possibly impede beneficiaries’ access to unique and innovative tests. Further, commenters asserted that activities such as marketing and promoting the test would go beyond the intent of Congress, as the statute requires the test to be “offered and furnished” by a single laboratory. Commenters noted that a small ADLT laboratory may partner with larger laboratories to provide marketing support while still performing and billing for its tests, and CMS agreed that relying on third parties to market a test should not preclude a test from being an ADLT.

However, relying on third parties’ laboratories to perform a test precludes it from being eligible for ADLT status, as the preamble states that if a reference laboratory performs a test on behalf of another laboratory, the reference laboratory is the one that offers and furnishes the test.24 In addition, a laboratory that purchased or licensed the intellectual property for a test “would not be expending its own resources on all aspects of the development of the test and therefore, could not be considered an original developing laboratory.”25 Likewise, CMS believes that an academic institution that creates a test but “does not fully develop it for use by the public would not be considered the original developing laboratory” if it is not a laboratory with a CLIA certificate that designs, offers, sells, and furnishes the test. 

In addition to being performed by a single laboratory or its successor owner, an ADLT must meet the criteria of one of two pathways: (1) the non-FDA pathway or (2) the FDA pathway. A third option in the statute gives the Secretary the authority to designate other criteria for ADLT status, which CMS is not implementing at this time, but CMS states that notice-and-comment rulemaking would be used if the agency decides to do so in the future.

The Non-FDA Pathway

To be designated as an ADLT under the non-FDA pathway (that is, the pathway for tests that have not been approved or cleared by the FDA), CMS proposed that the test must be a molecular pathology test that analyzes multiple biomarkers of DNA or RNA, and could also, but is not required to, include assays that analyze proteins. CMS proposed that the algorithm must be empirically derived, and that the test must provide new clinical diagnostic information that cannot be obtained from any other existing test on the market or combination of tests. The decision as to whether a test provides new clinical diagnostic information that cannot be obtained elsewhere would be made by CMS.

CMS received many comments about the exclusion of multi-analyte protein-based tests, which stakeholders view as valuable drivers of innovation in precision medicine and are specifically included in the statutory definition of an ADLT. The Federal Advisory Panel on CDLTs also made a unanimous recommendation to CMS to include multi-analyte protein-only tests and to remove the uniqueness criterion. Many commenters likewise objected to the proposal that would require the test to provide “new clinical diagnostic information,” asserting that the statute requires that the algorithm itself be unique, but not that it produce a unique result. In the Final Rule, CMS did not finalize its proposal to exclude protein-only tests and defined an ADLT as “an analysis of multiple biomarkers of DNA, RNA, or proteins.” CMS explained that “complex protein-only tests” may provide more comprehensive or advanced information than tests that only look at DNA or RNA, and such tests are “consistent with our [CMS’] view that ADLTs are innovative tests that are new and different from any prior test already on the market.”26 But the agency “continue[s] to have concerns about granting ADLT status for protein-only tests that are not advanced tests,” which is why CMS finalized its proposal that the test must be “combined with a unique algorithm to yield a single patient-specific result.”27 CMS asserts this will ensure “simple protein analyses” are not ADLTs.28

However, CMS finalized its proposals that required an “empirically derived algorithm” and that the ADLT must provide new diagnostic information. The latter requirement, in CMS’ view, is necessary because the statute requires an ADLT to yield a single patient-specific result. CMS did not discuss or define the meaning of “new diagnostic information.” CMS also rejected the argument that the requirement for new diagnostic information would give the first test to market a competitive advantage, indicating that second-to-market tests could always qualify as CLDTs and compete with the first-to-market ADLT.   

The FDA Pathway

Tests approved by FDA under a Premarket Approval Application or cleared under section 510(k) of the Federal Food, Drug, and Cosmetic Act could be considered ADLTs under the FDA pathway. The Final Rule clarifies that an FDA-approved or -cleared test must be performed by a single laboratory or its successor owner in order to be recognized as an ADLT, thus excluding in vitro diagnostic devices that are sold to multiple laboratories from eligibility for ADLT status. Other than the requirement that the test be from a single laboratory, the criteria in the non-FDA pathway do not apply to the FDA pathway.

Application for ADLT Status. Laboratories that wish to receive ADLT status must apply to CMS. CMS received comments suggesting that the application for ADLT status should include an objective checklist of the statutory criteria and be submitted and reviewed on a quarterly basis. CMS will establish an application process that will require applicants to demonstrate that the test is offered and furnished by a single laboratory and has not been sold for use by another laboratory, and to submit information (as yet unspecified) demonstrating how the test meets the ADLT criteria. The process and timeframes will be outlined through sub-regulatory guidance. CMS will take “into consideration” the recommendation to review applications quarterly.29 Several important aspects of the application process for the non-FDA pathway are not described in the Final Rule, including the level of detail required to describe the test protocol; the types of medical evidence that should be included; who will review the application; the criteria that will be used to determine that the test provides information that can’t be obtained from other tests; the ability of applicants to communicate or meet with CMS during this process; and whether there will be a mechanism to appeal denied applications.

Confidentiality. CMS received many comments about its statement in the proposed rule that the information in an ADLT application is not explicitly protected from disclosure under either the confidentiality provisions of the statute or the Freedom of Information Act (FOIA). Stakeholders asked that CMS require only publicly available information in the application, or, if proprietary information about the algorithm and assay were required, that CMS protect that information from disclosure as a trade secret. The Final Rule repeats CMS’ guidance from the Proposed Rule that information in an ADLT application may not be protected from public disclosure under FOIA, even if it is marked as confidential and proprietary, unless, consistent with FOIA exemption (b)(4), the information relates to trade secrets and commercial or financial information whose disclosure would cause substantial competitive harm to the applicant. The ADLT applicant would need to prove this point to CMS in a separate statement using the process outlined in Executive Order 12600; the Final Rule says that “laboratories will have to decide for themselves whether to apply for ADLT status and risk the possibility of public disclosure of information they do not want to be publicly disclosed.”30 This issue is especially important for non-FDA pathway applications.

A laboratory’s decision about whether to apply for ALDT status, and which pathway to apply under, will likely require test-by-test consideration, taking into account the advantages, disadvantages, potential risks and cost(s) of the two pathways as well as the advantages and disadvantages of being considered an ALDT or a CLDT with respect to reporting of applicable information, Medicare coding, coverage, and reimbursement.

Payment for ADLTs. PAMA requires that for new ADLTs, that is, ADLT’s that have not been paid on the CLFS prior to January 1, 2017, Medicare will pay based on the actual list charge, or the publicly available rate on the first day that the test is available for purchase by a private payor. In the Final Rule, CMS defined the following parameters: The first day a test is available means the date a test is obtainable by a patient who is covered by private insurance or marketed to the public as a test a patient can receive, even if the test has not yet been performed on that date. Publicly available rate means the lowest amount charged for an ADLT that is readily accessible in such forums as a company website, test registry, or price listing to anyone wanting to know how much a patient would pay for the test without the benefit of a negotiated rate.

This rate based on actual list charge will be in effect for the first three full calendar quarters that the test is on the market. CMS finalized its proposals that (1) the first day of this three-quarter period will begin on the first day of the next calendar quarter after the first day the test becomes available, and (2) the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory will set the payment rate before the three-quarter period begins.

Laboratories performing ADLTs must report private payor payment data not later than the last day of the second full quarter after the first day the test become available. Starting at the beginning of the fourth full calendar quarter, Medicare’s payment rate for the ADLT will be based on the private payor data reported. In the event that no private payor rates are available by the end of the second quarter, the payment rate for the ADLT following the new ADLT initial period would be determined through crosswalking or gapfilling.

CMS’ proposed definition of the new ADLT initial period tied its start to the date a test is first performed. Commenters noted that a test could have private payor coverage, but not Medicare coverage at launch, and thus the payment at the publicly available rate could expire before the laboratory ever receives a Medicare payment. In response, the Final Rule ties the start of the new ADLT initial period to the later of the date that the test (1) receives a coverage determination from a MAC, or (2) has an ADLT application approved by CMS. As a result, a new ADLT will be paid at its publically available rate for a full three quarters, irrespective of when the test was first available or had private payor coverage.  

Recoupment for Overpayments. PAMA requires that if CMS determines that the Medicare payment amount during the new ADLT’s initial three-quarter period (that is, the rate based on the actual list charge) is more than 130 percent of the Medicare payment amount determined using the weighted median of private payor rates that is applicable after the initial period, CMS shall recoup the difference.  CMS proposed to recoup the entire difference between the Medicare payment amounts during the initial period and the Medicare payment amount, which is based on the weighted median of private payor rates. This proposal meant that Medicare would recoup the entire amount between the list price it paid and the weighted median private payor rate. Commenters pointed out this was not consistent with the intent of PAMA and that when list prices were 130 percent or less of the weighted median private payor rate, nothing would be recouped. Based on the comments received CMS did not finalize its proposal to recoup the entire difference between the list price and the weighted median private payor rate and instead finalized a policy that will recoup the difference between the actual list charge and 130 percent of the weighted median private payor rate.

Payment for Tests When no Private Payor Payment Data is Available. For tests where there is no applicable information available upon which to set payment rates, CMS will use crosswalking or gapfilling to set rates. CMS finalized the proposal to use this approach even if private payor data was available for a previous data collection period.

Payment for New CDLTs that are not ADLTs. CMS finalized its proposal to define new CDLTs as those tests that are assigned a new or substantially revised Healthcare Common Procedure Coding System (HCPCS) code and that do not meet the definition of an ADLT.  As noted above, CMS will use crosswalking or gapfilling to set rates for tests when no private payor payment data is available.  Because a test must have a specific HCPCS code in order to meet the definition of applicable information, we infer that rates for new CDLTs, including any CDLTs that did not have a specific HCPCS code during the data collection period of January 1 to June 30, 2016, but are assigned a specific HCPCS code after the data collection period, will be set using crosswalking or gapfilling until the next cycle of reporting applicable information.  Laboratories will accumulate applicable information for those CDLTs during the next data collection period, January 1 to June 30, 2019, and payment will be based on private payor rates starting January 1, 2021.       

Coding Provisions

PAMA requires that, not later than January 1, 2016, the Secretary shall assign a unique HCPCS code and publicly report the payment rate for each existing ADLT and each existing CDLT that is cleared or approved by the FDA for which payment is made as of PAMA’s enactment date (April 1, 2014), if such test has not already been assigned a unique HCPCS code. CMS finalized its proposal to adopt temporary HCPCS Level II codes (G codes) that would be effective for up to two years, until a permanent HCPCS code is established, unless CMS believes it is appropriate to continue to use the G code.

CMS received many comments recommending that HCPCS Level 1 (CPT) codes be used rather than G codes, since private payors may not recognize G codes and the use of two codes for the same test could create confusion in reporting and billing. CMS clarifies in the Final Rule that CPT codes will be used whenever possible and that the agency expects to use G codes only when CPT codes are not available or do not met the agency’s coding needs.31 The AMA has proposed to create a new category of CPT codes, Proprietary Laboratory Analyses (PLA) codes. These codes would be assigned by the CPT Editorial Panel, based on recommendations from a PLA Advisory Group, on a quarterly basis for both CDLTs and ADLTs, upon the request of the laboratory that performs the test. The codes would identify both the test and the laboratory.32 The Final Rule notes that CMS lacks the authority to change the AMA’s annual process of new CPT code assignments to a quarterly process. CMS’ responses to comments are consistent with the possibility that the agency may accept PLA codes if they satisfy CMS policy requirements, but CMS does not address this possibility explicitly.

CMS also states that the statute’s requirement to establish unique codes for FDA approved/cleared tests means that where, for a given analyte, there are both FDA approved/cleared tests and laboratory-developed tests that are not FDA approved/cleared, that a FDA approved/cleared test will, if a unique code is requested by a stakeholder, have a different code than the non-FDA approved/cleared test(s). As a result, the payment rates could be different, as applicable information for the FDA approved/cleared test will be submitted under the code for that test and not the code for the non-FDA cleared/approved test(s).

Unique Identifiers. PAMA also requires CMS to assign a unique identifier for an ADLT or other CDLT that is cleared or approved by the FDA if a laboratory or a manufacturer requests one for tracking or monitoring purposes. Currently, the same HCPCS code is used for both FDA-approved laboratory tests and lab-developed tests that detect the same analyte (e.g., KRAS). CMS finalized its proposal to use the existing HCPCS coding process to implement this provision. If a laboratory requests a unique HCPCS code for tracking or monitoring an FDA-approved or cleared test, CMS would assign an HCPCS Level II code (G code). Note that this provision in PAMA is separate from the provision requiring CMS to assign a HCPCS code to ADLTs or CLDTS that are FDA approved or cleared. CMS received a few comments recommending that the McKesson Z-Code™ Identifiers, a set of unique 5-character alpha-numeric codes assigned within the McKesson Diagnostics Exchange test catalog and decision support tool, be used rather than G codes, and suggesting that the Z-CodesTM could be adapted to use as unique identifiers.33 In the Final Rule, CMS apparently rejects this proposal because (1) the current HCPCS process will meet its needs for PAMA, and (2) the McKesson Z codesTM are not a HIPAA-compliant code set.  

Coverage Decisions. The Final Rule leaves many unanswered questions about the relationship between coding, coverage, and payment. With the AMA and CMS jointly responsible for code assignment, CMS responsible for decisions on ADLT status, and MACs making local coverage decisions, it is unclear if these reviews will be coordinated or how long the process will take overall, and how test developers should approach this complex, multifactorial process. Furthermore, the Final Rule is silent as to the future role of Palmetto’s MolDx program. Starting January 1, 2015, PAMA required CMS and its MACs, including Palmetto GBA, to issue coverage policies for laboratory tests in accordance with the process established for MAC local coverage determinations (LCDs) and for reconsideration of those decisions. PAMA also authorizes the Secretary to designate between one and four MACs to process CLFS claims. CMS will further consider whether to use this authority to reduce the number of MACs developing LCDs and/or processing claims and says that in the interim MACs should continue to develop LCDs in accordance with the guidance set forth in Chapter 13 of the Medicare Program Integrity Manual. 

What Happens Next?

The Final Rule identifies several areas where CMS plans to release additional subregulatory guidance, including:

  • more details about the process for reporting applicable information, including access to the web-based portal that CMS is developing;
  • a list of the specific HCPCS codes for tests paid on the CLFS for which applicable information will be reported (as opposed to codes paid on the PFS);
  • details on the process by which reporting entities’ executives will certify the completeness and accuracy of the data submitted on behalf of their applicable laboratories;
  • guidelines from CMS on the assessment of CMPs, including what would constitute a failure to report or a misrepresentation or omission in reporting;
  • more information about the raw or aggregated data CMS plans to make available to laboratories so they can understand the basis for the new CLFS rates;
  • the application process for seeking ADLT status, including the frequency with which CMS plans to approve ADLT applications;
  • what medical evidence or other data a laboratory will be required to submit to demonstrate that its candidate ADLT has an empirically derived algorithm that provides new clinical diagnostic information; and
  • a process for laboratories to specify that a test is FDA-cleared or -approved so that CMS can assign a unique HCPCS code.
  1. Medicare Program: Medicare Clinical Diagnostic Laboratory Tests Payment System,” 81 Federal Register 41036 (June 23, 2016). Available here.

  2. Proposed rule at 80 Federal Register 59386, described in our previous Advisory, here.

  3. Office of Inspector General, “Comparing Lab Test Payment Rates: Medicare Could Achieve Substantial Savings,” OEI-07-11-00010, June 2013.

  4. As at present, CLFS rates will be the same across the country, with no adjustment to reflect local costs.

  5. 42 CFR § 493.2.

  6. A TIN is defined as “a Federal taxpayer identification number or employer identification number as defined by the Internal Revenue Service in 26 CFR § 301.6109-1.”

  7. Including fee-for-service payments under Medicare Parts A, B, C (Medicare Advantage), and D (outpatient prescription drugs).

  8. ACLA comment letter, available here.

  9. AHA comment letter, available here.

  10. AMA comment letter, available here.

  11. POC Association comment letter, available here.

  12. Coalition for 21st Century Medicine comment letter, available here.

  13. 42 C.F.R. §493.2.

  14. Medicare revenues includes fee-for-service payments under Medicare Parts A and B, Medicare Advantage payments under Medicare Part C, prescription drug payments under Medicare Part D, and any associated Medicare beneficiary deductible or coinsurance for services furnished during the data collection period.

  15. 81 Fed. Reg. 41046.

  16. 81 Fed. Reg. 41048.

  17. If a laboratory receives less than $12,500 in Medicare revenues for CLFS services paid on Form CMS 1500 or its electronic equivalent during a data collection period, the laboratory is not an applicable laboratory. 82 Fed. Reg. 41051.

  18. 81 Fed. Reg. 41052.

  19. 81 Fed. Reg. 41054.

  20. 81 Fed. Reg. 41064.

  21. 81 Fed. Reg. 41055.

  22. 81 Fed. Reg. 41069.

  23. The criteria are (1) the removal or addition of a member of a partnership; (2) transfer of title and property of an unincorporated sole proprietorship; (3) merger or consolidation of a corporation; or (4) leasing of all or part of the facility that originally developed the test.

  24. 81 Fed. Reg. 41056.

  25. 81 Fed. Reg. 41060.

  26. 81 Fed. Reg. 41060.

  27. 81 Fed. Reg. 41061.

  28. 81 Fed. Reg. 41061.

  29. 81 Fed. Reg. 41062.

  30. 81 Fed. Reg. 41062.

  31. 81 Fed. Reg. 41074.

  32. A presentation from the February meeting of the AMA CPT Editorial Panel’s Molecular Pathology Coding Workgroup is available here.

  33. McKesson’s comment letter, available here. The MolDx program administered by the MAC Palmetto GBA has used Z-CodesTM since 2011 in conjunction with its local coverage decisions for molecular diagnostic tests.

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