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Outside the Lab Profession, Laboratory management, Regulation and standards

Surviving the PAMA Pinch

At a Glance

  • Rising healthcare costs in the USA are negatively affecting the overall growth of the country’s economy
  • In response to this challenge, the US Congress enacted the Protecting Access to Medicare Act (PAMA), which revises Medicare’s payment methodology for clinical laboratory tests
  • Payment cutbacks will affect clinical laboratories’ ability to maintain adequate profit margins
  • There are strategies, including product focus, laboratory test development, referencing out tests, and partnering with other labs, that can minimize PAMA’s effects
The PAMA problem

Healthcare costs are skyrocketing in the USA, surpassing US$3.4 trillion and totaling more than $10,000 per person in 2016 (1). With a growing number of aging Americans and an increase in life expectancy, these costs are expected to rise by approximately 5 percent per year over the next decade. If left unchecked, healthcare costs may top 25 percent of gross domestic product by 2025 – with a clear negative effect on the overall growth of the US economy.

Although the bulk of healthcare costs are attributed to hospital care and physician’s office fees, it is estimated that clinical testing and laboratory services account for approximately 3 percent of total US spending on healthcare, or approximately $100 billion per year (2). These numbers prompted the US Congress to enact the Protecting Access to Medicare Act (PAMA) in an effort to revise the payment methodology for the majority of clinical diagnostic laboratory tests paid for by Medicare, the country’s social insurance program for healthcare. The Centers for Medicare and Medicaid Services (CMS) predict that PAMA will save taxpayers as much as $670 million in 2018 alone, with additional savings estimated through 2020. PAMA is designed to affect Medicare Part B rates only; however, similar cuts in other government-based insurance plans and from private health insurance providers may follow. Such changes to Medicare payment rates, although phased over a period of three (or more) years, have raised major concerns among clinical laboratories. Despite ongoing lobbying efforts to the contrary, PAMA officially took effect on January 1, 2018 – a step that will have significant effects on the profitability and survivability of clinical laboratories nationwide.

Profit squeeze

Clinical laboratories, regardless of size and scope, are the backbone of healthcare in America. They provide timely and accurate diagnostic and prognostic information that influences a vast range of physician recommendations. With advancements in genetic testing and the discovery of new disease biomarkers, it is now possible to provide accurate diagnosis and prognosis for most common medical conditions. Moreover, public opinion supports more “personalized medicine” to enhance patient-focused treatment efficacy, and clinical tests are critical for public health emergencies, such as emerging diseases, acute infections, and pandemics (for example, the Zika and influenza virus outbreaks). It’s clear that laboratory information has a significant and broad-ranging effect on patients’ treatment options and overall care.

Clinical labs process hundreds of millions of patient samples each year. Despite the large volume, though, maintaining profitability is a constant challenge. A 2012 report by the Department of Health Policy at the George Washington University School of Public Health painted a grim picture of clinical laboratory profit margins, with nearly half of labs surveyed reporting profit margins in the range of 0 to 3 percent (3). A deeper look at the data shows that, as is the case with many high-volume “bread and butter” clinical tests, low fee limits and reimbursement rates are the main cause of these relatively small profit margins. Competition between large clinical laboratories and small- to mid-sized ones struggling with relatively smaller test volumes only adds pressure. And, of course, those who ultimately suffer most are the patients. The availability of key laboratory tests is crucial to patient welfare, but as small laboratories face the risk of losing profitability or even shutting down, patients’ choice between labs will shrink, service availability will decrease, and turnover times will rise.

PAMA’s implementation is poised to make the picture bleaker still. It impacts the calculation of Medicare payment rates for more than 1,250 Current Procedural Terminology codes and decreases Medicare reimbursement for certain tests by as much as 10 percent per year from 2018 to 2020, and up to 15 percent per year from 2021 to 2023. Examination of the top 25 tests by volume and costs reported by CMS shows that all but one will suffer a decrease in payment (compared with 2017 rates) of anywhere from 0.7 percent to a staggering 27.1 percent by January 2020 (see Figure 1). In contrast, more than 340 tests will remain at the same or higher rates throughout that time. Nevertheless, with labor costs increasing, decreases in Medicare reimbursement spell bad news for labs performing the common tests affected, and for those already struggling with small profit margins.

Figure 1. PAMA-based changes to reimbursement rates for the 25 most common clinical tests.
For laboratories to remain competitive in an era of reimbursement cutbacks, managers and medical directors will need to be creative.
Controlling the effects of PAMA

For laboratories to remain competitive in an era of reimbursement cutbacks, managers and medical directors will need to be creative. Business operation considerations in realms including sample acquisition, delivery, logging, and processing can all improve the bottom line and increase profit margins. For example, focusing on specific geographic regions, increasing employee productivity, and introducing automation can all reduce overall costs. But if we want to have an immediate impact on profit margins, we can take some additional steps to reduce expenses and negate some of the effects of PAMA:

  • Scale-up: The power of numbers applies to many markets; clinical testing is no exception. Increasing the volume of identical or closely related laboratory tests should allow clinical laboratories to do more with less. Focusing on specific tests that use common equipment can minimize the need for large capital investments and additional personnel training, providing a cost benefit. For example, laboratories focusing on tissue histology services may benefit from simply increasing the scope of biomarker tests provided. Autostainers and imaging hardware and software are flexible in nature and offer the opportunity to incorporate new stains, antibodies, and other ways to detect disease biomarkers. Such an approach requires little capital investment and training over the short term, providing some relief from the PAMA changes. Moreover, pre-existing networks of physician offices, hospitals, and other patient care centers may be more receptive to expanding their relationship with clinical laboratory partners already offering histology services. Similar approaches can be employed in laboratories focusing on other lucrative test areas, such as molecular or genetic testing.
  • From IVD to LDT: FDA-approved in vitro diagnostic (IVD) tests are used in most Clinical Laboratory Improvement Amendments (CLIA)-approved settings without the significant burden of assay validation. IVDs are appealing not only because of their FDA stamp of approval, but also because they offer a highly standardized testing platform that can be used anywhere in the US. In contrast, laboratory-developed tests, or LDTs, describe diagnostic tests developed and performed by a single laboratory entity. A test offered as an LDT cannot be “exported” from one laboratory to another and remains under enforcement discretion. Nevertheless, they still have significant value. LDTs provide the opportunity to trial new or alternative laboratory tests as part of the path to an IVD. LDT approval is state-dependent and, in most cases, regulated by CLIA, making approvals more efficient and less expensive. This approach translates to a lower cost per test in the long run and will yield a clearer route to IVD certification.
  • Reference out: Higher volumes and LDT development are not viable gateways for every laboratory. In some small- to mid-sized labs, it may make sense to reference out some tests instead. Larger clinical labs can offer discounted prices to smaller labs due to their high sample volume and lower reagent costs. Although referencing out may seem negative at first glance, such an approach may provide some financial relief. For example, referenced tests require minimal or even no capital investment and, with good shipping logistics, may bypass the need to maintain costly courier contracts. Furthermore, by establishing strong relationships with other clinical labs for reference services, smaller laboratories can expand their menu of tests to match those of larger labs, enabling them to find new customers or capture additional business from existing ones. Finally, reference laboratories often offer in-house LDTs and assume the cost and time associated with their development. Small- to mid-sized laboratories can partner with reference laboratories with unique LDTs, increasing the diversity of their portfolios without the cost of developing such tests themselves – at least in the first instance. Of course, as the lab’s test volume grows and they establish a market by offering a particular test, they can later invest in an LDT of their own, thanks to the initial boost from their partnership.

Despite PAMA’s anticipated negative effects on profit, all is not lost when planning for the future. Clinical laboratories are not only a vital component in providing optimal patient care, but also experts in cost control, automation, and process efficiency. By focusing on and accelerating our efforts in these areas and simultaneously working to reduce operational expenses, it is possible to maintain profit margins while still fulfilling the clinical laboratory mandate to improve patient care.

Eitan Akirav is a Senior Manager of Business Development at Enzo and an Assistant Professor at Stony Brook University, Farmingdale, USA.

Dieter Schapfel is Chief Medical Director at Enzo Clinical Labs, Enzo Biochem Inc., Farmingdale, USA.

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  1. Centers for Medicare & Medicaid Services, “National Health Expenditure Data” (2018). Available at: go.cms.gov/1Jy5kin. Accessed March 13, 2018.
  2. CY Johnson, “Why America’s health-care spending is projected to soar over the next decade” (2017). Available at: wapo.st/2kTWlFG. Accessed March 13, 2018.
  3. M Regenstein, E Andres, “Results from the National Survey of Independent and Community Clinical Laboratories” (2012). Available at: bit.ly/2GFN64M. Accessed February 2, 2018.
About the Author
Eitan Akirav and Dieter Schapfel

Eiter Akirav is a Senior Manager of Business Development at Enzo, and an Assistant Professor at Stony Brook University, Farmingdale, USA.
Dieter Schapfel is Chief Medical Director at Enzo Clinical Labs, Enzo Biochem Inc., Farmingdale, USA.

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