Transforming Lab Operations Ahead of 2018 Medicare Fee Reductions

Transforming Lab Operations Ahead of 2018 Medicare Fee Reductions
Financial / Market Forces

Article highlights:

  • Labs of all sizes should investigate how they can transform operations to help offset diminishing margins.
  • New lab strategies have potential to deliver higher value and accuracy to the industry.

The Protecting Access to Medicare Act (PAMA) establishes new clinical laboratory payment rates, set to go into effect on Jan. 1, 2018, based on weighted median private payer rates. Implementation of the new payment system by the Centers for Medicare and Medicaid Services (CMS) would cut nearly 10% from the current $7 billion paid to Medicare-enrolled labs for more than 1,300 types of tests on the Clinical Laboratory Fee Schedule (CLFS).

This schedule sets the CMS reimbursement amounts for outpatient diagnostics. Inpatient test volumes are not impacted by PAMA as tests performed on an inpatient basis are billed under a Diagnosis Related Group (DRG). Also not in scope for PAMA are diagnostics performed on tissue samples using Immunohistochemistry, in Situ Hybridization, Digital Pathology & Workflow technologies and techniques, as these are reimbursed under the Medicare Physician Fee Schedule (MPFS).

Industry response to the CMS data release has been critical. A group of 22 lab industry stakeholders contends that CMS erred in its data collection process and, as a result, produced "unreliable and unsustainable" draft payment rates. The group wants CMS to suspend the draft rates until it can accurately assess data from all segments of the lab market.

The American Clinical Laboratory Association (ACLA) cautions that the CLFS cuts could lead to job losses and lab closures. "[The] proposed rates will devastate many of our members," says ACLA President Julie Khani, "and create severe disruptions in access to laboratory services, particularly for the most vulnerable Medicare beneficiaries."

Nonetheless, until the rule challenge plays out, any labs serving Medicare patients should expect significantly reduced revenue starting in 2018 and continuing through the ensuing decade under PAMA. Labs of all sizes should investigate how they can transform operations to help offset diminishing margins on CLFS-covered tests.

Options on the Table


Operational-improvement initiatives can flow from any of the following areas:


In hospital environments, lab specialists should participate in meetings with other departments to determine which and how many tests are appropriate for each patient. Laboratorians, the “resident experts" in these discussions, can weigh in on the ordering of duplicate or obsolete tests.


Lab managers should work with IT specialists to close the gap on the 5% of lab tests that are never retrieved by healthcare practitioners. Failure to retrieve results not only undermines evidence-based care and implementation of informed treatment plans, but also increases labor required for retesting. Automated alerts ensure that physicians check the status of every ordered test. Additionally, systems that flag duplicate, unnecessary, inappropriate, or expensive orders save time, effort, and money.


Labs burdened by equipment downtime, high rerun rates, and manual processes need to consider how automation can help. A properly automated lab optimizes the use of personnel and equipment, improves safety, and reallocates staff resources to focus on abnormal or critical results. Close observation of what's not working in the lab—bottlenecks or nonstandard practices, for example—will reveal opportunities for improvement.


Labs should also be open to new strategies with potential to deliver higher value to the institution as a whole. For instance, diagnostic management teams– comprised of experts who provide advice about lab tests and interpret results—can help a health system save millions of dollars in pharmacy costs. On a smaller scale, development of standardized lab protocols will aid in areas such as consistently selecting the right tests, providing more accurate results, and generally streamlining operations.


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