Medicare Laboratory Tests: Implementation of New Rates May Lead to Billions in Excess Payments

Medicare paid $7.1 billion for 433 million laboratory tests in 2017. These tests help health care providers prevent, diagnose, and treat diseases.

PAMA included a provision for GAO to review CMS's implementation of new payment rates for these tests. This report addresses, among other objectives, (1) how CMS developed the new payment rates; (2) challenges CMS faced in setting accurate payment rates and what factors may have mitigated these challenges; and (3) the potential effect of the new payment rates on Medicare expenditures. GAO analyzed 2016 Medicare claims data (the most recent data available when GAO started its work and the year on which new payment rates were based) and private-payer data CMS collected. GAO also interviewed CMS and industry officials.

The Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Services (HHS) revised the Clinical Laboratory Fee Schedule (CLFS) for 2018, establishing new Medicare payment rates for laboratory services. Prior to 2018, these rates were based on historical laboratory fees and were typically higher than the rates paid by private payers. The Protecting Access to Medicare Act of 2014 (PAMA) required CMS to develop a national fee schedule for laboratory tests based on private-payer data. To revise the rates, CMS collected data on private-payer rates from approximately 2,000 laboratories and calculated median payment rates, weighted by volume. GAO found that the median private-payer rates were lower than Medicare's maximum payment rates in 2017 for 88 percent of tests. CMS is gradually phasing in reductions to Medicare payment rates, limited annually at 10 percent over a 3-year period (2018 through 2020), as outlined in PAMA.

CMS relied on laboratories to determine whether they met data reporting requirements, but agency officials told GAO that CMS did not receive data from all laboratories required to report. CMS did not estimate the amount of data it should have received from laboratories that were required to report but did not. CMS took steps to exclude inaccurate private-payer data and estimated how collecting certain types and amounts of additional private-payer data could affect Medicare expenditures. However, it is not known whether CMS's estimates reflect the actual risk of incomplete data resulting in inaccurate Medicare payment rates. GAO found that PAMA's phased in reductions to new Medicare payment rates likely mitigated this risk of inaccurate Medicare payment rates from 2018 through 2020. However, GAO found that collecting incomplete data could have a larger effect on the accuracy of Medicare payment rates in future years when PAMA allows for greater payment-rate reductions.

CMS's implementation of the new payment rates could lead Medicare to pay billions of dollars more than is necessary and result in CLFS expenditures increasing from what Medicare paid prior to 2018 for two reasons. First, CMS used the maximum Medicare payment rates in 2017 as a baseline to start the phase in of payment-rate reductions instead of using actual Medicare payment rates. This resulted in excess payments for some laboratory tests and, in some cases, higher payment rates than those Medicare previously paid, on average. GAO estimated that Medicare expenditures from 2018 through 2020 may be $733 million more than if CMS had phased in payment-rate reductions based on the average payment rates in 2016. Second, CMS stopped paying a bundled payment rate for certain panel tests (groups of laboratory tests generally performed together), as was its practice prior to 2018, because CMS had not yet clarified its authority to do so under PAMA, according to officials. CMS is currently reviewing whether it has the authority to bundle payment rates for panel tests to reflect the efficiency of conducting a group of tests. GAO estimated that if the payment rate for each panel test were unbundled, Medicare expenditures could increase by as much as $10.3 billion from 2018 through 2020 compared to estimated Medicare expenditures using lower bundled payment rates for panel tests.

GAO recommends that the Administrator of CMS (1) collect complete private-payer data from all laboratories required to report or address the estimated effects of incomplete data, (2) phase in payment-rate reductions that start from the actual payment rates rather than the maximum payment rates Medicare paid prior to 2018, and (3) use bundled rates for panel tests. HHS concurred with GAO's first recommendation, neither agreed nor disagreed with the other two, and has since issued guidance to help address the third. GAO believes CMS should fully address these recommendations to prevent Medicare from paying more than is necessary.

Medicare is the single largest purchaser of laboratory tests in the United  States. In 2017, Medicare paid $7.1 billion for 433 million laboratory tests  that gave health care providers information they used in preventing,  diagnosing, and treating disease. Medicare—a federal health insurance  program administered by the Centers for Medicare & Medicaid Services  (CMS), an agency within the Department of Health and Human Services  (HHS)—pays for laboratory tests under Medicare Part B using payment  rates established under the Clinical Laboratory Fee Schedule (CLFS).

On January 1, 2018, Medicare began paying for laboratory tests using  rates established with a new payment rate-setting methodology (the 2018  CLFS), as required by the Protecting Access to Medicare Act of 2014  (PAMA). The 2018 CLFS reflects the first major change in payment  methodology for laboratory tests in three decades. Prior to 2018, the  CLFS was based on historical laboratory charges from the mid-1980s,  adjusted annually for inflation and other factors, and had remained  relatively unchanged.

PAMA directed CMS to develop new rates for the CLFS based on rates  paid by certain private payers, creating a single, national fee schedule for  laboratory tests. PAMA also called for a phase-in of the new payment  rates by limiting any reductions to 10 percent per year for each of the first  3 years of implementation. PAMA continues phasing in the reductions in  the second 3-year cycle after implementation, limiting any reductions to  15 percent per year. In 2015, CMS estimated that the changes in  payment rates resulting from PAMA would reduce Medicare expenditures  by $360 million in the first year.

PAMA included a provision for GAO to review CMS’s implementation of  the new payment rates for laboratory services in the revised CLFS. This  report examines:  1.  what is known about the payment rates laboratories receive from  2.  how CMS developed the 2018 CLFS payment rates;  3.  the challenges CMS faced in setting accurate Medicare payment rates  based on complete and accurate private-payer data, and what factors  may have mitigated these challenges; and  4.  the potential effect of CMS’s implementation of new payment rates on  Medicare expenditures.

To describe what is known about the payment rates laboratories received  from private payers, we reviewed market reports from industry analysts  and laboratory representatives that analyzed private-payer rates for  laboratory tests. We identified these market reports by searching a  database of industry analyses from 2014 through 2018. We also  identified reports cited by laboratory industry representatives and  reviewed information submitted to CMS by industry stakeholders during  rate-setting processes. We did not independently verify the data in these  reports. We also interviewed officials from three organizations  representing the laboratory industry and laboratory companies that we  identified. We selected these organizations because they represented a  large and diverse group of laboratories and different perspectives in their  support for the new payment rates initially proposed by CMS. We relied  on market reports and interviews with industry officials because we were  unable to identify a reliable and comprehensive source on private-payer  rates for laboratory tests.

To describe how CMS developed the 2018 CLFS payment rates, we  reviewed documents from CMS, such as guidance to industry and  Medicare contractors, and the agency’s proposed and final rulemaking  that describes the process CMS established to collect data on private- payer rates that laboratories received. We also reviewed documentation  CMS published about its preliminary and final calculations of the 2018  CLFS. In addition, we compared the median private-payer rates  (weighted by volume) that CMS calculated to Medicare’s 2017 national  limitation amounts for laboratory tests (the maximum that CMS would pay  for a laboratory test). We used this comparison to determine the  percentage difference between the median payment rates and the 2017  national limitation amounts. We also interviewed CMS officials and  representatives from the laboratory industry and laboratory companies.

To determine the challenges CMS faced in setting accurate Medicare  rates based on complete private-payer data, and what factors may have  mitigated these challenges, we conducted two types of analyses. First,  we determined the share of Medicare payments in 2016 that reporting  laboratories received to compare against the share that CMS estimated  laboratories meeting reporting requirements would receive. We identified  laboratories reporting data to CMS using the national provider identifier  (NPI) they reported. We used the Medicare claims data to determine  these laboratories’ share of Medicare payments in 2016. We assessed  the reliability of the claims data by testing for missing data and obvious  outliers. On this basis, we determined that these data were sufficiently  reliable for the purposes of our report.

For our second analysis related to collecting complete data, we estimated  the potential effects that collecting data from additional laboratories could  have had on Medicare payment rates and expenditures from 2018  through 2020. For this analysis we used the private-payer data that  CMS collected to estimate what Medicare expenditures could be if CMS  had received additional data. Specifically, we used the private-payer data  CMS collected to identify median private-payer rates and payment rates  at other percentiles. We then estimated the amounts of additional private- payer data as well as the payment rates in these additional data that  would be needed to shift median private-payer rates to these other  percentiles. To estimate the amount that additional data could shift  median private-payer rates, we assumed that all of the payment rates in  additional data could shift these medians in the same direction, either up  or down. For example, we estimated that collecting 20 percent more data  with payment rates above the 60th percentile of payment rates in the data  already collected could shift median rates to the 60th percentile,  approximately. Conversely, we estimated that collecting 20 percent more  data with payment rates below the 40th percentile of payment rates in the  data already collected could shift median rates to the 40th percentile,  approximately. We then estimated Medicare payment rates and  expenditures using payment rates at these percentiles as median private- payer rates. See appendix II for our calculations at the different  percentiles.

To determine the challenges CMS faced in setting accurate Medicare  rates based on accurate private-payer data, we analyzed the effects on  Medicare expenditures of including and excluding data that CMS  identified as potentially inaccurate in calculating the payment rates,  assuming that the same number of laboratory tests performed in 2016  was also performed in each year from 2018 through 2020. We also  interviewed CMS officials about how they addressed the effect of  inaccurate private-payer data on Medicare payment rates and their  estimates of the potential effect of inaccurate data on Medicare  expenditures, as well as the effect of incomplete private-payer data. We  compared CMS’s activities to relevant federal standards for internal  control related to identifying, analyzing, and responding to risk.

To examine the potential effect of CMS’s implementation of new payment  rates on Medicare expenditures, we estimated Medicare expenditures  from 2018 through 2020, using CLFS rates CMS published and  conducted two analyses related to panel tests, which are groups of tests  performed together. The first analysis examined the effect of using 2017  national limitation amounts to phase in reductions to payment rates for  panel tests, which Medicare commonly paid at lower rates. We estimated  changes in Medicare expenditures if CMS had limited annual reductions  to payment rates for panel tests based on the average amounts Medicare  had allowed for payment in 2016 instead of on the national limitation  amounts from 2017.

For our second analysis of the potential effect of CMS’s implementation of  new payment rates on Medicare expenditures, we examined the effect of  paying for panel tests as a group using bundled payments or separately  as individual component tests using multiple, unbundled payments. We  estimated potential changes in Medicare expenditures due to paying  separately for each component test that makes up a panel test, in  comparison with paying a bundled rate. For panel tests without billing  codes, we used Medicare bundled payment rates from 2016 to compare  with CMS’s calculated payment rates for component tests from 2018  through 2020 because bundled payment rates are not available for these  years.

We took additional steps to support or extend our analyses. We reviewed  analyses conducted by CMS and reviewed information from a  subcommittee to the Medicare Advisory Panel on Clinical Diagnostic  Laboratory Tests regarding payment for panel tests. We interviewed CMS  about its legal authority to use bundled payment rates and its actions to  avoid paying more than necessary for laboratory tests. We compared  CMS’s actions to the relevant standards for internal control in the federal  government related to using quality information and to designing and  implementing control activities to respond to risks.

We conducted this performance audit from July 2017 to November 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Medicare Payment for Individual and Panel Tests before PAMA’s Implementation in 2018

Medicare pays for laboratory tests that are performed individually or in a  group. For individual tests, laboratories submit claims to Medicare for  each test they perform that is on the CLFS; tests are identified using a  billing code. Prior to the implementation of PAMA in 2018, the payment  rates on the CLFS were based on rates charged for laboratory tests in  1984 through 1985 adjusted for inflation. Additionally, 57 geographic  jurisdictions had their own fee schedules for laboratory tests. CMS used  the 57 separate fee schedules to calculate a national limitation amount,  which served as the maximum payment for individual laboratory tests.  Thus, the payment rate for an individual test was the lesser of the amount  claimed by the laboratory, the local fee for a geographic area, or the  national limitation amount for a particular test.

Medicare pays bundled payment rates for certain laboratory tests that are  performed as a group, called panel tests. Panel tests can be divided into  two categories—those without billing codes and those with billing codes.  Panel tests without billing codes are composed of at least 2 of 23 distinct  component tests. Additionally, there are 7 specific combinations of these  23 component tests that are commonly used and have their own billing  code. Prior to 2018, Medicare paid for both types of panel tests (those  without or with a billing code) using a bundled rate based on the number  of tests performed, with modest payment increases for each additional  test conducted. For example, in 2017, Medicare paid $7.15 for panel  tests with two component tests and $9.12 for panel tests with 3  component tests, with a maximum bundled payment rate of $16.64 for all  23 component tests. Prior to 2018, the Medicare Administrative  Contractors would count the number of tests performed before  determining the appropriate bundled payment rate. For those panel  tests with a billing code, the payment rate was the same if laboratories  used the associated billing code for the panel test or listed each of the  component tests separately.

Medicare Payment for Individual and Panel Tests after PAMA’s Implementation in 2018

After PAMA’s implementation in 2018, the 57 separate fee schedules for  individual laboratory tests were replaced with a single national fee  schedule. The payment rates for this single national fee schedule were  based on private-payer rates for laboratory tests paid from January 1,  2016 through June 30, 2016. Specifically, the payment rate for an  individual test was generally based on the median private-payer rates for  a given test, weighted by test volume.

Payment for panel tests also changed in 2018. For panel tests without  billing codes, Medicare Administrative Contractors no longer counted the  number of component tests performed to determine the bundled payment  rate; instead, Medicare paid the separate rate for each component test in  the panel. For panel tests with a billing code, the payment rate depended  on how the laboratory submitted the claim. If a laboratory used the billing  code associated with the panel test, Medicare paid the bundled payment  rate for that billing code. If a laboratory submitted a claim for the panel  test, but listed each of the component tests separately instead of using  the panel test’s billing code, Medicare paid the individual payment rate for  each component test. Table 1 below summarizes the changes to payment  rates before and after 2018.

Multiple types of laboratories receive payment under Medicare. The three  laboratory types that received the most revenue from the CLFS in 2016  were independent laboratories, hospital-outreach laboratories, and  physician-office laboratories. (See table 2.)

Estimates of the size of the total U.S. laboratory market vary. For  example, the Healthcare Fraud Prevention Partnership estimated that the  laboratory industry received $87 billion in revenue in 2017, while another  market report estimated the laboratory industry received $75 billion in  revenue in 2016. Similar to Medicare, the three laboratory types that  generally receive the most revenue overall are independent laboratories,  hospital-outreach laboratories, and physician-office laboratories, when  laboratory tests performed in hospital inpatient and outpatient settings  were excluded.

Estimates of revenue received by these laboratories also vary. For  example, in recent years, estimates of the share of laboratory industry  revenue generated by independent laboratories ranged from 37 percent  to 54 percent. Additionally, estimates of revenue generated by hospital- outreach laboratories recently ranged from 21 to 35 percent, and  physician-office laboratories ranged from 4 to 11 percent of total  laboratory industry revenue.

Private-Payer Rates for Laboratory Tests Generally Vary by Laboratory Type and Other Characteristics

Private-payer rates for laboratory tests conducted by the three largest  laboratory types generally vary by type and other characteristics,  according to market reports and the laboratory industry officials we  interviewed.

Independent laboratories. These laboratories generally receive  lower private-payer rates than other types of laboratories,  according to industry officials we interviewed. Market reports we  reviewed noted that about half of the independent laboratory  market is dominated by two national laboratories and that these  national laboratories provide more competitive pricing by  performing a large volume of tests at one time. Medicare  accounted for a smaller proportion of the revenue earned by these  two national laboratories (12 percent), compared to other  laboratories, according to another market report we reviewed. In  contrast, a different market report noted that smaller, independent  laboratories tend to earn more of their revenue from Medicare (34  percent).

Hospital-outreach laboratories. These hospital-affiliated  laboratories typically receive relatively higher private-payer rates,  according to industry officials we interviewed. Although hospital- outreach laboratories perform tests similar to other laboratories,  they can obtain above-average payment rates by leveraging the  market power of their affiliated hospital when negotiating rates  with private payers, according to industry officials and market  reports. Hospital-outreach laboratories generally receive about  25 to 30 percent of their revenue from the Medicare CLFS.

Physician-office laboratories. Physician-office laboratories  typically receive higher private-payer rates than independent  laboratories, according to a recent analysis by a laboratory  industry association. This industry association also noted that  the cost structure to operate in a setting such as a physician-office  laboratory is different than in large independent laboratories, as  the physician-office laboratory is unable to conduct a large  number of tests at one time. Officials from another industry  association we interviewed said that payment rates for these  laboratories are generally dependent on the size of the physician  practice group. These same officials told us that larger physician  groups (e.g., 10 or more physicians) typically negotiate higher  rates from private payers than smaller physician groups. Most  physician-office laboratories received less than $25,000 in  revenue per year from Medicare, according to CMS.

Additionally, in 2013, the Department of Health and Human Services  Office of Inspector General found that Medicare’s payment rates on the  CLFS were higher than rates paid by some private health insurance  plans. Specifically, it found that Medicare rates for laboratory tests were  18 percent to 30 percent higher than rates paid by certain insurers under  health benefits plans for federal employees.

CMS Analyzed Private-Payer Data to Develop New Payment Rates

Definition of Applicable Laboratories  Required to Report Private-Payer Data to  CMS  CMS defined applicable laboratories as those  meeting four criteria: (1) they met the  definition of laboratory under regulations  implementing the Clinical Laboratory  Improvement Amendments of 1988; (2) they  billed Medicare Part B under their own  Medicare billing number, also called the  national provider identifier; (3) more than 50  percent of their total Medicare revenues  came from the Clinical Laboratory Fee  Schedule (CLFS) and/or the Physician Fee  Schedule; and (4) they received at least  $12,500 in Medicare revenue from the CLFS  from January 1, 2016, through June 30, 2016.

CMS analyzed private-payer data it collected from about 2,000  laboratories to develop new payment rates for individual laboratory tests  on the CLFS. PAMA defined laboratories required to report private-payer  data, called applicable laboratories, as laboratories that meet certain  criteria. (See sidebar.) Applicable laboratories with their own specific  billing number, the NPI, submitted these data to CMS. If one  organization operated multiple applicable laboratories, each with its own   NPI, then the organization could report data to CMS for multiple  applicable laboratories. CMS collected data from applicable laboratories  on payments they received from private payers during the first half of  2016. Specifically, CMS collected data on (1) the unique billing code  associated with a laboratory test; (2) the private-payer rate for each  laboratory test for which final payment was made during the data  collection period (January 1, 2016, through June 30, 2016); and (3) the  volume of tests performed for each unique billing code at that private- payer rate. For the data CMS collected between January 1, 2017, and  May 30, 2017, CMS relied on the entities reporting to CMS to attest to the  completeness and accuracy of the data they submitted.

CMS relied on each laboratory to identify whether or not it was an  applicable laboratory and took steps to assist laboratories in meeting  reporting requirements. According to CMS officials, they relied on  laboratories to self-identify as applicable laboratories because they were  unable to accurately identify the number of laboratories required to  report. To assist laboratories, CMS issued multiple guidance documents  to the industry outlining the criteria for being an applicable laboratory and  describing the type of data CMS intended to collect. CMS also  conducted educational calls when the proposed and final rules were  issued and prior to the data collection period. CMS officials told us they  conducted additional outreach activities, including holding conference  calls with national laboratory associations and attending professional  conferences. Officials said they used these outreach activities in addition  to the guidance issued to inform laboratories of the reporting  requirements for applicable laboratories, for example.

In addition, CMS established a revenue threshold of $12,500 in an effort  to reduce the reporting burden for entities that receive a relatively small  amount of revenues under the CLFS. In its final rule, CMS noted that it  expected that many of the laboratories that would be below this revenue  threshold and, thus exempt from reporting data to CMS, would be  physician-office laboratories. CMS also chose to use the NPI in its  definition of applicable laboratory in the final rule to allow hospital- outreach laboratories that use their own NPI to submit data to the  agency. In its proposed rule, CMS suggested using an alternative  identification number to the NPI. However, according to the final rule,  CMS chose to use the NPI in its definition of applicable laboratory to allow  those hospital-outreach laboratories billing using their own NPI to submit  private-payer data to the agency.

According to CMS, at the end of the 5-month submission period, the  agency had received data from approximately 2,000 applicable  laboratories, representing a volume of almost 248 million laboratory tests;  these data accounted for about $31 billion in revenue from private payers.  CMS reported that the data it collected included private-payer rates for 96  percent of the 1,347 eligible billing codes on the CLFS. CMS used these  data to calculate a median, private-payer rate, weighted by volume and  phased in this change by limiting payment-rate reductions to 10 percent  per year. Beginning in 2018, these new payment rates served as the  single, national payment rate for individual laboratory tests. These  payment rates were also used for the individual, component tests that  make up panel tests and were used when laboratories billed Medicare for  panel tests by listing the component tests separately.

In general, the median payments rates, weighted for volume, that CMS  calculated were lower than Medicare’s previous payment rates for most  laboratory tests. According to our analysis, these median payment rates  were lower than the corresponding 2017 CLFS national limitation  amounts (the maximum that CMS would pay for laboratory tests) for  approximately 88 percent of tests. Figure 1 below describes the  percentage difference between these median payment rates and  Medicare’s 2017 national limitation amounts for laboratory tests.

The final payment rates that CMS calculated, which included the 10- percent, phased in, payment-rate reductions, will remain in effect until  December 31, 2020; PAMA requires CMS to calculate new payment rates  for the CLFS every 3 years. Reporting entities will next be required to  submit data on private-payer rates to CMS in early 2020, for final  payments made from January 1, 2019 through June 30, 2019. PAMA  capped any reductions for the second 3-year cycle after implementation  to a maximum of 15 percent per year.

PAMA’s Provisions and CMS’s Actions May Have Mitigated Some Challenges Related to Incomplete and Inaccurate Private-Payer Data, but Future Challenges Remain Incomplete Data Likely Had a Limited Effect from 2018 through 2020 but Could Affect Future Rates

CMS did not collect private-payer data from all laboratories required to  report this information and did not estimate how much data was not  reported by these laboratories, according to agency officials. CMS relied  on laboratories to determine whether they met data reporting  requirements and submit data accordingly. CMS emphasized the  importance of receiving data from all laboratories required to report by  stating that it is critical that CMS collect complete data on private-payer  rates in order to set accurate Medicare rates. However, agency officials  told us that CMS did not receive data from all laboratories required to  report. They also told us that CMS did not have the information available  to estimate how much data was missing because not all laboratories  reported or the extent to which the data collected were representative of  all of the data that laboratories were required to report.

Prior to collecting private-payer data, CMS estimated that laboratories  subject to reporting requirements would receive more than 90 percent of  CLFS expenditures to physician-office laboratories and independent  laboratories. Specifically, based on its analysis of 2013 Medicare  expenditures, CMS estimated that reporting requirements would apply to  the laboratories that received 92 percent of CLFS payments to physician- office laboratories and 99 percent of CLFS payments to independent  laboratories.

After laboratories reported private-payer data, we analyzed the share of  CLFS expenditures received by the laboratories that reported. Our  analysis found that CMS collected data from laboratories that received  the majority of CLFS payments to physician-office, independent, and  other non-hospital laboratories in 2016. However, the laboratories that  reported private-payer data received less than 70 percent of CLFS  expenditures to physician-office, independent, and other non-hospital  laboratories. Specifically, using Medicare claims data, we calculated that  CMS collected data from laboratories that received 68 percent of 2016  CLFS payments to physician-office, independent, and other non-hospital  laboratories.

Although it did not collect complete data, CMS concluded that it collected  sufficient private-payer data to set Medicare payment rates and that  collecting more data from additional laboratories that were required to  report would not significantly affect Medicare expenditures. This  conclusion was based, in part, on a sensitivity analyses that CMS  conducted of the effects that collecting certain types and amounts of  additional data would have on weighted median private-payer rates and  the effects those rates could have on Medicare payment rates and, thus,  expenditures. Results from these analyses showed that Medicare  expenditures based on the CLFS would have changed by 2 percent or  less after collecting more data from the various types of laboratories. For  example, CMS estimated that doubling the amount of private-payer data  from physician-office laboratories would increase expenditures by 2 percent and collecting ten times as much data from hospital outreach  laboratories would increase expenditures by 1 percent. (See fig. 2.)

PAMA’s 10-percent limit on annual payment-rate reductions likely  reduced the effect that incomplete private-payer data could have on the  CLFS because this limit applied to most Medicare payment rates for  laboratory tests. As demonstrated in figure 1, while 59 percent of tests  had median private-payer rates that were at least 30 percent less than  their respective 2017 national limitation amounts, CMS published  Medicare rates for these tests for 2018 through 2020 that were reduced  by only 10 percent per year as a result of this limit. For example, a  hypothetical laboratory test with a 2017 CLFS national limitation amount  of $10.00 and a median private-payer rate of $7.00 would result in CLFS  rates of $9.00 in 2018, $8.10 in 2019, and $7.29 in 2020. Changes to  median private-payer rates due to collecting more complete data or  eliminating inaccurate data would have no effect on Medicare payment  rates from 2018 through 2020 for this hypothetical test if they resulted in  new median rates of $7.29 or less.

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. 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. To conduct this analysis, we used the  private-payer data CMS collected to analyze the range of effects that  collecting additional data could have on Medicare expenditures, assuming  2016 utilization rates remain constant. The extent of these effects  depends on the amount of additional data CMS would need to collect to  obtain complete data and whether the payment rates in these additional  data would have been greater or less than the medians of the rates  reported. For example, we estimated that if CMS needed to collect 20  percent more data for its collection to be complete, doing so could  increase Medicare CLFS expenditures from 2018 through 2020 by as  much as 3 percent or reduce them by as much as 3 percent depending  on the payment rates in these additional data. However, if annual limits to  Medicare payment-rate reductions were not applied, collecting these  additional data could increase CLFS expenditures by as much as 9  percent or reduce them by as much as 9 percent. (See fig. 3 and app. II  for additional information about these estimates.)

As demonstrated in figure 2, CMS did analyze how collecting certain  types and amounts of data from additional laboratories would affect  Medicare expenditures. However, without valid estimates of how much  more data these additional laboratories were required to report and how  much these data would change median payment rates, it remains  unknown whether CMS’s analyses estimate the actual risk of setting  Medicare payment rates that do not reflect private-payer rates from all  applicable laboratories, as mandated by PAMA. CMS could have  compared the data it collected with independent information on the  payment rates laboratories were required to report, for example. The  independent information could be estimated by auditing a random sample  of laboratories or could be estimated using data from third-party vendors,  if these vendors could supply relevant and reliable information.

CMS Mitigated Challenges of Setting Accurate Medicare Payment Rates by Identifying and Excluding Inaccurate Private-Payer Data that Could Have Led to Paying More than Necessary

We found that CMS mitigated challenges to setting accurate Medicare  payment rates by identifying, analyzing, and responding to potentially  inaccurate private-payer data. CMS addressed potentially inaccurate  private-payer data and other data that CMS determined did not meet  reporting requirements.

CMS removed or replaced data from four reporting entities that  appeared to have or confirmed having reported revenue—which is  the payment rate multiplied by the volume of tests paid at that  rate—instead of payment rates. We estimated that if CMS had  included these data that CLFS expenditures from 2018 through  2020 would have increased by 7 percent.

CMS removed data it determined were reported in error including  duplicate submissions and submissions with payment rates of  $0.00. We estimated that removing these data will change CLFS  expenditures from 2018 through 2020 by less than one percent.

CMS identified four other types of potentially inaccurate data that it  determined would not significantly impact Medicare payment rates or  expenditures and did not exclude them from calculations of median  private-payer rates. CMS considered the following potentially inaccurate  data to have met its reporting requirements:  1.  data from 57 entities that reported particularly high rates in at least 60  percent of their data,  2.  data from 12 entities that reported particularly low rates in at least 50  percent of their data,  3.  data with payment rates that were 10 times greater than the 2017  national limitation amounts or 10 times less than these amounts, and  4.  data from laboratories that may not have met the $12,500 low- expenditure threshold or that reported data from a hospital NPI  instead of a laboratory NPI.

We found that each of these four types of potentially inaccurate data  would have changed estimated Medicare CLFS expenditures from 2018  through 2020 by 1 percent or less if CMS had instead excluded the data.  To conduct this analysis, we recalculated Medicare rates after excluding  each type of data and estimated Medicare expenditures assuming 2016  rates of utilization.

CMS’s Implementation of New Payment Rates Could Lead to Medicare Paying Billions More than Necessary for Some Tests

CMS’s Approach to Phase In Reductions to Payment Rates Temporarily Increased Some Rates and Contributed to Estimated Increases in Medicare Expenditures for Certain Laboratory Tests

Although weighted median private-payer rates were lower than  Medicare’s 2017 national limitation amounts for 88 percent of tests, we  estimated the total Medicare expenditures based on the 2018 CLFS  would likely increase by 3 percent ($225 million overall) compared to  2016 expenditures, assuming test utilization remained at 2016 levels.  This increase in estimated expenditures is due, in part, to CMS’s use of  above-average payment rates as a baseline to calculate payment rates  for those laboratory tests affected by PAMA’s annual payment-rate  reduction limit of 10 percent. (See fig. 4.)

When applying the 10-percent payment-rate reduction limit, CMS used as  its starting point the 2017 national limitation amounts in order to set a  single, national payment rate for each laboratory test. Thus, the Medicare  payment rate for a test in 2018 could not be less than 90 percent of the  test’s 2017 national limitation amount. However, prior to 2018, some  payment rates were commonly lower than the national limitation amounts  because they were based on the lesser of (1) the amount billed on claims,  (2) the local fee for a geographic area, or (3) a national limitation amount,  and because panel tests had different bundled payment rates. As a result,  by reducing payment rates from national limitation amounts, CMS did not  always reduce rates from what Medicare actually paid.

Panel tests, in particular, frequently received bundled payment rates that  differed substantially from national limitation amounts associated with  their billing codes prior to 2018. We compared national limitation  amounts, which represent maximum Medicare payment rates for tests,  with the average amounts Medicare allowed for payment in 2016, which  reflect actual Medicare payment rates. For example, figure 5 below  shows that the 2017 national limitation amount for comprehensive  metabolic panel tests ($14.49) was substantially higher than both the  average amount Medicare allowed for payment in 2016 ($11.45) and the  median payment rate laboratories reported receiving from private payers  ($9.08). As a result, using the 2017 national limitation amount as a basis  for payment reductions caused Medicare’s payment rate to increase from  an average allowed amount of $11.45 in 2016, to a payment rate of  $13.04 in 2018, instead of decreasing towards a lower median private- payer rate of $9.08. By increasing average payment rates rather than  phasing in reductions to rates, CMS’s implementation may lead to paying  more than necessary for some tests.

Federal standards for internal control for information and communications  require agency management to use quality information to achieve its  objectives. Basing reductions on national limitation amounts rather than more relevant information on how much Medicare actually paid—such as  the average allowable amounts in 2016, for example—could result in  Medicare paying more than necessary by $733 million from 2018 through  2020, according to our estimates.

CMS’s Changes to Payment Rates for Panel Tests Could Lead Medicare to Pay Billions of Dollars More than Is Necessary

In implementing PAMA, CMS eliminated bundled rates for panel tests that  lack billing codes and started paying separately for each component test  instead. CMS also implemented the 2018 CLFS in a manner that could  lead to unbundling payment rates for panel tests with billing codes. If  payment rates for all panel tests were unbundled, we estimated that  Medicare expenditures could increase by $218 million for panel tests that  lack billing codes and by as much as $10.1 billion for panel tests with  billing codes from 2018 through 2020. CMS also estimated that there  could be significant risks of paying more than necessary associated with  unbundling and has taken initial steps to monitor these risks and explore  possible responses, but had not yet responded to these risks as of July  2018.

CMS Unbundled Payment Rates for Panel Tests without Billing  Codes  Beginning in 2018, CMS no longer uses bundled payment rates for panel  tests without billing codes and instead pays laboratories individual  payments for each component test that comprises these panel tests.  However, CMS staff and members of its advisory panel discussed  concerns with this approach. At an advisory panel meeting in 2016, CMS  staff relayed concerns from stakeholders that CMS would not be able to  collect valid data on private-payer rates for these panel tests. According  to agency staff, stakeholders had informed CMS that private payers  commonly use bundled payment rates for these panel tests, but  laboratories would only be able to report unbundled payment rates for  individual component tests.

We estimated that unbundling these payment rates would increase  Medicare expenditures from 2018 through 2020 by $218 million in  comparison to the estimated Medicare expenditures over the same time  period based on Medicare’s 2016 utilization and allowable amounts. For  example, under the 2016 CLFS, Medicare paid approximately 435,000  claims for panel tests that included the laboratory tests assay of  creatinine (HCPCS code 82565) and assay of urea nitrogen (HCPCS  code 84520) at an average bundled payment rate of $6.82. In contrast,  under the 2018 CLFS, these two component tests are reimbursed  individually at $6.33 and $4.88, respectively, or $11.21 combined—a 63  percent increase.

Despite concerns about the validity of available private-payer data on  component tests for panel tests without billing codes, CMS used these  data to set payment rates for component tests. CMS officials told us that  they stopped using bundled payment rates for these panel tests because  it is not clear that CMS has the authority to combine the individual  component tests into groups for bundled payment as it did before 2018  due to PAMA’s reference to payments for each test. However, in July  2018, CMS officials told us the agency was reviewing its authority  regarding this issue. CMS officials told us they are exploring alternative  approaches that could limit increases to Medicare expenditures but had  not yet determined what additional legal authority would be needed, if  any, and did not know when CMS would make this determination. Agency  officials told us that CMS has taken initial steps to monitor unbundling and  explore possible responses, including the following:

Monitoring unbundling: CMS has begun monitoring changes in  panel test utilization, payment rates, and expenditures associated  with its implementation of PAMA, according to officials. For  example, CMS officials told us that preliminary data indicated that  Medicare payments for individual component tests of panel tests  has increased substantially in 2018, but, as of July 2018, it was  too early to draw conclusions from these data because  laboratories have up to one year to submit claims for tests.

Collecting input on alternatives: In 2016, a subcommittee of an  advisory panel that CMS established reviewed Medicare’s use of  bundled payment rates for panel tests and published different  approaches for CMS to consider implementing in combination with  other changes to implement PAMA.

CMS’s Implementation of PAMA May Have Allowed Unbundling of  Payment Rates for Panel Tests with Billing Codes  Beginning in 2018, laboratories that submit claims for any of the seven  panel tests with billing codes by using the billing codes for the individual  component tests now receive the payment rate for each component test,  rather than the bundled rate. Prior to 2018, laboratories could submit  claims for these panel tests either by using the specific codes for panel  tests or by billing separately for each of the component tests, and,  regardless of how laboratories submitted claims, Medicare Administrative  Contractors would pay bundled payment rates based on how many of the  23 component tests were conducted. However, CMS instructed Medicare  Administrative Contractors to stop bundling payment rates for tests that  are billed individually on claims rather than billed on claims using codes  for panel tests, beginning in 2018. CMS did so because it was not clear  that CMS had the authority to combine the individual component tests into  groups for bundled payment as it did before 2018 due to PAMA’s  reference to payments for individual tests, according to agency officials.  This change could potentially have a large effect on Medicare spending.  For example, if a laboratory submitted a claim individually for the 14  component tests that comprise a comprehensive metabolic panel it would  receive a payment of $81.91, a 528 percent increase from the 2018  Medicare bundled payment rate of $13.04 for this panel test. (See fig. 6.)

Improving how reductions to payment rates for panel tests are phased in  could mitigate, but not completely counteract, the effect of unbundling  these payment rates. For example, for the comprehensive metabolic  panel test described in figure 6, basing maximum reductions on 2016  average allowable amounts would result in a 2018 Medicare bundled  payment rate of $10.31 instead of $13.04 and individual payment rates for  the 14 component tests that total $56.06—a 32 percent decrease from  $81.91 that Medicare would otherwise pay.

If the payment rate for each panel test with a billing code were unbundled,  we estimated that Medicare expenditures for these tests from 2018  through 2020 could reach $13.5 billion, a $10.1 billion increase from the  $3.3 billion we estimated Medicare would spend using the bundled  payment rates in the CLFS. Similarly, prior to implementing PAMA, CMS  estimated that Medicare expenditures to physician-office, independent,  and other non-hospital laboratories could potentially increase as much as  $2.5 billion in 2018, alone if it paid for the same number of panel tests  with billing codes as it did in 2016 but paid for each component test  individually. These estimates represent an upper limit on the increased  expenditures that could occur if every laboratory stopped using panel test  billing codes and instead used the billing codes for individual component  tests. We do not know the extent to which laboratories will stop filing  claims using panel test billing codes.

CMS officials also told us that they were aware of the risks associated  with paying for the individual component tests instead of the bundled  payment rate for a panel test with a billing code. However, CMS  guidance, which was effective in 2018, continued to allow laboratories to  use the billing codes for individual component tests rather than the billing  code for the panel. CMS officials explained that this was due to PAMA’s  reference to payments for individual tests, similar to CMS’s decision to  stop paying bundled rates for panel tests without billing codes. At the time  we did our work, CMS had not implemented a response to these risks but  had taken some initial steps to monitor unbundling and consider  alternative approaches to Medicare payment rates for these tests. HHS  provided additional information on planned activities to address these  risks in its written comments on a draft of this report. (See app. III.)

CMS collected data on private-payer rates from laboratories that were  required to report these data, but not all laboratories complied with the  reporting requirement, and the extent of noncompliance remains unclear.  PAMA’s provision directing CMS to phase in payment-rate reductions to  Medicare payment rates likely moderates the potential adverse effects of  incomplete private-payer data. However, in the future, failing to collect  complete data could substantially affect Medicare payment rates because  private-payer rates alone will determine Medicare payment rates. In  addition, we estimated that Medicare expenditures on laboratory tests will  be $733 million higher from 2018 through 2020, because CMS started  phasing in payment-rate reductions from national limitation amounts  instead of more relevant data on actual payment rates, such as average  allowable amounts. Finally, changes to payment rates, billing practices,  and testing practices could increase Medicare expenditures by as much  as $10.3 billion from 2018 through 2020, if CMS does not address the  risks associated with unbundling payment rates for panel tests. Agency  officials indicated that it was unclear if PAMA limited CMS’s ability to  combine individual component tests into groups for bundled payment,  and, as of July 2018, CMS was reviewing this matter but did not know  when it would make a determination.

We are making the following three recommendations to CMS:

The Administrator of CMS should take steps to collect all of the  data from all laboratories that are required to report. If only partial  data can be collected, CMS should estimate how incomplete data  would affect Medicare payment rates and address any significant  challenges to setting accurate Medicare rates. (Recommendation  1)

The Administrator of CMS should phase in payment-rate  reductions that start from the actual payment rates Medicare paid  prior to 2018 rather than the national limitation amounts. CMS  should revise these rates as soon as practicable to prevent paying  more than necessary. (Recommendation 2)

The Administrator of CMS should use bundled rates for panel  tests, consistent with its practice prior to 2018, rather than paying  for them individually; if necessary, the Administrator of CMS  should seek legislative authority to do so. (Recommendation 3)

We provided a draft of this report to HHS for review and comment. HHs  provided written comments, which are reproduced in appendix III. HHS  also provided technical comments, which we incorporated as appropriate.

HHS concurred with our first recommendation to take steps to  collect all data from laboratories required to report and  commented that it is evaluating ways to increase reporting. In  particular, in a November 2018 final rule, HHS changed the  definition of an applicable laboratory, which it expects will increase  the number of laboratories required to report data on private-payer  rates to the agency.

HHS neither agreed nor disagreed with our second  recommendation to phase in payment-rate reductions that start  from the actual payment rates Medicare paid prior to 2018. HHS  noted that any changes to the phasing in of payment-rate  reductions would need to be implemented through rulemaking. We  estimated that by using the national limitation amounts as a  starting point for these reductions, Medicare expenditures would  increase by $733 million from 2018 through 2020. For this reason,  we continue to believe CMS should revise these rates as soon as  practicable and through whatever mechanism CMS determines  appropriate.

HHS neither agreed nor disagreed with our third recommendation  to use bundled rates for panel tests. However, HHS commented  that it is taking steps to address this issue. More specifically, for  panel tests with billing codes, HHS is working to implement an  automated process to identify claims for panel tests that should  receive bundled payments, similar to the process used to bundle  payment rates for these panel tests prior to PAMA’s  implementation and anticipates implementing this change by the  summer of 2019. In addition, HHS posted guidance on November  14, 2018, stating that the panel tests with billing codes,  laboratories should submit claims using the corresponding code  rather than the codes for the separate component tests beginning  in 2019. To reduce the potential of paying more than necessary,  we believe it is important that CMS implement its proposed  automated process to allow for these payments as soon as  possible.

In contrast, for panel tests without billing codes, HHS commented  that it is continuing to review its authority and considering other  approaches to payment for these panel tests, such as adding  codes to the CLFS. We estimate that unbundling the payment for  these panel tests could increase Medicare expenditures by $218  million from 2018 through 2020 compared to expenditures based  on Medicare’s 2016 utilization, and the actual amount could be  higher if utilization increases. For this reason, we believe CMS  should implement bundled payment rates for these panel tests to  avoid excess payments.

We are sending copies of this report to the appropriate congressional  committees and the Administrator of CMS. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov. If you  or your staff have any questions about this report, please contact me at  (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix IV.

Appendix I: Table of Key Dates Related to Developing the New Payment Rates for the 2018 Clinical Laboratory Fee Schedule

Appendix I: Table of Key Dates Related to  Developing the New Payment Rates for the  2018 Clinical Laboratory Fee Schedule Event  Centers for Medicare and Medicaid Services (CMS) issued the CLFS proposed rule.

CMS issued responses to frequently asked questions regarding the CLFS proposed rule.

CMS issued responses to frequently asked questions regarding the CLFS final rule.

CMS held the joint Annual Laboratory Public Meeting and Medicare Advisory Panel on  Clinical Diagnostic Laboratory Tests meeting.

CMS issued laboratory billing codes subject to data collection and reporting.

CMS issued guidance to laboratories for collecting and reporting data.

CMS held a Medicare Advisory Panel on Clinical Diagnostic Laboratory Tests meeting.

CMS issued the CLFS data reporting template.

CMS collected data on (1) the billing code associated with a laboratory test; (2) the  private-payer rate for each laboratory test for which final payment was made during the  data collection period (i.e., January 1, 2016, through June 30, 2016); and (3) the volume  of tests performed for each billing code at that private-payer rate.

CMS issued additional guidance for laboratories as the data collection period began.

CMS issued the CLFS fee-for-service data collection user’s manual.

CMS issued revised guidance to laboratories for collecting and reporting data.

Deadline for stakeholders to submit comments on the proposed CLFS rates to CMS.

Appendix II: Estimated Effects on Medicare Expenditures from Collecting Additional Data

Table 4 below demonstrates the challenges the Centers for Medicare &  Medicaid Services (CMS) faces in setting accurate Medicare payment  rates to the extent it does not collect complete data from laboratories on  private-payer rates. Specifically, the table shows the potential effect that  collecting additional data for each laboratory test could have on Medicare  expenditures and how this effect could vary depending on (1) the amount  of additional data collected, (2) payment rates in the additional data, and  (3) limits to annual reductions in Medicare payment rates. These limits  are in place from 2018 through 2023 to phase in changes to payment  rates.

Appendix III: Comments from the Department of Health and Human Services

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Martin T. Gahart, Assistant  Director; Gay Hee Lee, Analyst-in-Charge; Kaitlin Farquharson, Sandra  George, Dan Lee, Elizabeth T. Morrison, Laurie Pachter, Vikki Porter, and  Russell Voth made key contributions to this report.

Medicare paid $7.1 billion for 433 million lab tests in 2017, and typically paid higher rates than private insurers. Medicare is required to use a new methodology to establish payment rates in 2018, which tries to address this issue.

However, we found that this new methodology could cause Medicare to pay billions more than is necessary for several reasons. For example, it uses maximum payment rates for lab services—the most Medicare will pay for—rather than actual payment rates in 2017 as a baseline to reduce rates. We recommended that Medicare address this issue.