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. 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. In general, the median payments rates, weighted for volume, that CMS  calculated were lower than Medicare’s previous payment rates for most  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. 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. 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’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. As a result,  by reducing payment rates from national limitation amounts, CMS did not  always reduce rates from what Medicare actually paid. 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 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. 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. 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. 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. (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. 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. However, HHS commented  that it is taking steps to address this issue. 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.