The lab industry is aware that there was also a substantial section changing the way clinical laboratory tests will be paid in the future, at market-based rates, which has been widely discussed (e.g. by my firm and at Dark Daily.) However, there is ALSO a section which gives the Medicare agency a much more free hand in setting the rates paid for pathology tests, such as flow cytometry, in situ hybridization, and immunohistochemistry. For more detail, click to continue.
Pathology Tests versus Clinical Chemistry Tests
Pathology tests and clinical chemistry tests fall under different areas of Medicare law and policy. Pathology tests are treated similarly to other tests like CT and MRI - a physician is required to interpret the test, and the interpretation and the test are both paid on the Physician Fee Schedule (PFS), even when the physician interpretation is only 5% or 10% of the total cost. In contrast, clinical chemistry tests are considered services of a laboratory, and have their own policy and budget category. The distinction is whether or not the test "requires" (read that, requires) the interpretation of a physician before it is released.
How Medicare Prices Pathology Tests
Medicare prices pathology tests (chiefly anatomic pathology like biopsies, flow cytometry, and special stains on anatomic tissue like immunohistochemistry and in situ hybridization) on the Physician Fee Schedule, a tables of many thousands of physician services, essentially walking through the 800 page AMA Current Procedure Codes (CPT) and assign a work and expense value to each service.
In the summer of 2014, Medicare proposed that it would price certain pathology tests not by a bottom up method of physician work, staff labor, capital equipment, overhead, etc, but by capping the price of the test to what the corresponding service would be paid in a very different system, the hospital outpatient service pricing system or APCs - ambulatory payment categories. This would have suddenly cut the price of some pathology tests by 50% or more. Stakeholders complained that the APC pricing system was very different - it takes groups of 10 or 20 services and assigns them one price based on fairly crude calculations intended to reflect hospital costs. I discussed this at some length as one of three summer 2014 proposals by CMS, the white paper here.
What happened last year: CMS withdraw this particular proposal. I believe one of the strongest arguments was that the statute that creates Medicare's Physician Fee Schedule requires prices to be set by practice expenses only (see Social Security Act 1848(c)(2)(C)(ii)). The costs of a hospital might be higher or lower than the costs of a freestanding pathology lab, but either way, it isn't relevant, because those costs are not data on "physician practice expenses" and cannot be the basis for this pricing.
Protecting Access to Medicare Act of 2014
See Wikipedia here and the legislation here.
Legislation Opens Pandora's Box for Pathology Test Pricing
Section 220 of PAMA is titled, "Ensuring accurate valuation of services under the physician fee schedule." Whereas the law had been concise before - CMS prices "must be based only on practice expenses" - Section 220 allows CMS to use a wide range of data that it may find 'appropriate" to set relative value units for physician services.
The power of the new language becomes clear when you recall the old language was pivoted only on "practice expenses." The new sources of information for CMS decision-makers include information collected by the Secretary directly or indirectly from any eligible professional or any other source. The information may be used for setting RVUs. The information may include time, costs, overhead, or "any other element that would improve the valuation of services." The collection mechanisms may include "surveys, logs, billing systems, or records" including electronic health records, or "any other mechanism [of collecting information] determined appropriate by the Secretary." The Secretary can set thresholds for using the data, including "the exclusion of information obtained from...professionals who use very high resources" to accomplish a service. The Secretary has $2M per year to support these efforts. Finally, among many potential uses, the Secretary may seek and apply information where "there is a significant different in payment for the same service between different sites of service." (Of course, the Secretary can also apply the new data for any other codes "determined appropriate.") Essentially each section of the new law allows the Secretary to collect data and use it according to A,B,C,D, or (E) anything else.
R.I.P for last year's stakeholder argument that hospital APC pricing can't be used to set the Part B prices for pathology tests.
How CMS Can Set RVU’s
Solely based on practice expenses