On Friday July 19, 2013, the Centers for Medicare & Medicaid Services (CMS) published the 2014 Medicare Physician Fee Schedule and the 2014 Medicare Hospital Outpatient Prospective Payment System Notices of Proposed Rulemaking.  The proposed rules are available in the Federal Register at pages 43282 and 43534, respectively.   These notices include three proposed changes to Medicare payment for Clinical Laboratory services that would address the rapid technological changes in the clinical diagnostic lab environment.

First, CMS is proposing a process that would allow for the systematic examination of payment amounts on the Clinical Laboratory Fee Schedule (CLFS).   The process would:

• Identify those CLFS codes that had undergone “technological changes” affecting the price of the test. CMS defines a technological change as any change to the tools, machines, supplies, labor, instruments, skills, techniques and devices that results in changes to the resources required to perform the test, the types of personnel required to perform the test and/or the volume, frequency and site of service of the testing;

• Review all CLFS codes over a five-year period, beginning with the oldest codes, reviewing a portion of the total codes each year; and,

• Make appropriate adjustments to payment rates on the CLFS whenever necessary.  CMS anticipates that most adjustments will be decreases; however, they note that the process could result in increased payments as well.

Notably absent from their review is an analysis of the costs of the resources needed and used to develop tests,  including intellectual property costs, which can be a significant portion of the costs of newer tests and costs which are generally not accounted for under the CLFS.

The full list of codes that CMS is proposing to package is available on CMS' website(Addendum P).

The second proposal involves proposed changes to the Hospital Outpatient Prospective Payment System (OPPS) for CY 2014.  Specifically, the Notice of Proposed Rulemaking includes a proposal to bundle clinical laboratory payments into the OPPS payments for related services.  CMS believes that, in general, clinical laboratory tests essentially support the underlying outpatient encounter. CMS argues that, because the OPPS is meant to be an all-inclusive payment system and not a fee schedule, bundling clinical laboratory payments into the OPPS payment is appropriate.

CMS proposes two exceptions to this policy: 

• If a lab test is unrelated to the primary service, that is, if the test was ordered for purposes unrelated to the OPPS encounter, it would continue to be paid separately. Lab tests meeting this exception criterion would also need to be ordered by a physician other than the physician ordering the OPPS service. 

• Exempt molecular diagnostic tests, citing the novelty and different use patterns for these tests. 

The third proposal would limit Medicare payments for non-facility based services paid under the Physician Fee Schedule (PFS) to the amount paid when the service is performed in the facility setting. CMS believes that anomalies in data used to set rates under the PFS and the way that data are used in the PFS’s resource-based Practice Expense (PE) methodology leads to inaccurate payments for certain services. CMS believes that PE input data voluntarily submitted to the Relative Value Scale Update Committee (RUC) may be inaccurate, incomplete or biased. Further, the lack of a comprehensive review and evaluation of PE inputs is believed to contribute to these discrepancies. For most services, this proposed policy change will have a small impact (-2 percent to +1 percent); however, for clinical laboratories in particular, CMS estimates that this proposal will reduce payments by 25 percent.

If finalized, these three proposals would operate to substantially affect Medicare payment for clinical laboratory services, and could likewise affect market demand for some tests.