On June 17, 2016, CMS released a long-anticipated final rule revising the Medicare payment system for clinical diagnostic laboratory tests paid under the Clinical Laboratory Fee Schedule (CLFS) (the Final Rule).  In 2018, CLFS rates will be based on the weighted median of private payor rates—a change CMS estimates will cut overall payments by approximately 20 percent compared to the current CLFS.  Additionally, the private payor rate data will be collected and reported by the laboratories themselves, with civil monetary penalties for noncompliance.  Finally, CMS will phase in payment reductions through 2023.

First adopted in 1984, CLFS rates have only been updated to establish payment rates for new tests or for statutory, across-the-board updates.  In the Final Rule, CMS explained its belief that some laboratory tests may no longer be priced appropriately due to the vast expansion in the number of laboratory tests and the advancement of laboratory testing technology since the inception of the CLFS in 1984. 

As required under Section 216(a) of the Protecting Access to Medicare Act of 2014, the Final Rule significantly overhauls the CLFS payment model, such that laboratory tests furnished on or after January 1, 2018, will be paid equal to the weighted median of private payor rates determined for that test.  The revised payment model is a significant change from the current payment model where CLFS rates are based on the local fee schedule amounts established by Medicare contractors. 

Data Collection and Reporting

With limited exception, the Final Rule establishes data collection and reporting requirements that affect many laboratories immediately.  Laboratories will be required to collect and report private payor rate data to CMS, with the first data to be collected January 1 through June 30, 2016 and reported to CMS January 1 through March 31, 2017.  All subsequent data collection and reporting periods will recur similarly every three years, with the exception of advanced diagnostic laboratory tests, which require annualized collection and reporting.  Laboratories will be subject to a civil monetary penalty of up to $10,000 per day for noncompliance with the data collection and reporting requirements. 

However, a majority of independent and physician-owned laboratories will be exempt from the data collection and reporting requirements.  The exemption applies to laboratories that receive fewer than $12,500 from the CLFS during a data collection period, or receive 50 percent or less of their total Medicare revenues from the CLFS and the Physician Fee Schedule.  CMS anticipates that exempt laboratories will not be significantly affected by the new payment model because those laboratories constitute a small percentage of total CLFS spending. 

Payment Reduction

Under the Final Rule, annual payment reduction amounts are capped until 2023.  Payment amounts for a test cannot be reduced by more than 10 percent as compared to the previous year’s payment amount for the first three years after implementation of the new payment system (2017-2020).  Beginning in 2021, payment amounts for a test cannot be reduced by more than 15 percent per year for the subsequent three years (2021-2023). 

To illustrate by example, if an existing test under the CLFS for CY 2017 has a payment rate of $20, but the CY 2017 weighted median private payor rate is $15 for that test, then in 2018, CMS may only reduce payment to $18 ($20 minus $2), the maximum 10 percent reduction allowed from the prior year.  The following year, CMS may only reduce payment by another 10 percent to $16.20 ($18 minus $1.80).  The maximum percentage reduction cap would continue to apply to the prior year’s payment until the amount reaches the weighted median of the private payor rate for that test.  In this scenario, the payment will bottom-out at $15 in the third year. 

The Final Rule is scheduled to be published in the Federal Register on June 23, 2016.  Please click here for a pre-publication copy.  A copy of the CMS Fact Sheet is available here.

Reporter, Michael LaBattaglia, Summer Associate, Washington, D.C., + 1 202 262 2387, mlabattaglia@kslaw.com