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The Obama Administration has stopped the paying bills from hundreds of health care companies, and it has nothing to do with sequestration.
This is a story of bureaucratic mismanagement at the Centers for Medicare and Medicaid Services, and the harm it’s visiting on the diagnostic testing industry.
At issue is the way that Medicare reimburses everyone from the big laboratory companies such as the Laboratory Corp of America (LH:NYSE) and Quest Diagnostics Inc. (DGX:NYSE), to the molecular diagnostic labs inside academic hospitals, and especially smaller firms that make proprietary tests used by doctors to more effectively target treatments to patients with conditions like cancer.
Some of these proprietary tests — focused around the more accurate diagnosis of prostate cancer — areprofiled in today’s edition of the New York Times. The incompetent manner in which Medicare has handled a change in the reimbursement of similar tests has the potential to stymie one of the most important and potentially cost-saving technologies in the pipeline.
At issue are molecular diagnostics, used to screen for everything from genetic markers that predict disease to proteins that help diagnose illnesses and guide peoples’ response to treatments. These tests are transforming the treatment of cancer, among many other maladies.
The Medicare agency decided to change the way it reimburses these sorts of diagnostic tests. But it’s been slow to decide on its new approach. So in the absence of a policy, the Medicare program is simply not paying its bills.
Previously, these diagnostics were reimbursed through a method called “code stacking.” Under this old approach, adding up the “cost” of each discrete step needed to perform a particular test derived the price paid for molecular tests.
This “cost plus” approach to setting payment rates was familiar to government actuaries. But it had many problems. Not least of which, it didn’t necessarily correlate payment rates with value – but merely the complexity of the test.
Some labs grew more adept than others at exploiting the payment scheme. A handful of crafty labs would create more complex tests, or “stack” additional steps in their molecular panels in order to game higher reimbursement.
The result was a lot of variability in what was paid for similar diagnostics, depending on which lab ran the test, and how good it was at “stacking” codes.
Moreover, private insurers that reflexively piggy backed on the Medicare payment scheme complained that the bills they got only identified a series of molecular testing steps. These bills didn’t pinpoint the actual test that was being performed. So insurers often didn’t know what they were paying for.
The private health plans could have fixed this on their own, by demanding that labs provide more information. But many health plans, looked to Medicare to fix the billing system. Under pressure, the agency said it would develop a new scheme.
The prior payment system was far from optimal. But so is Medicare’s approach to replacing it. Moreover, under the new payment schemes, even when Medicare starts to pay its bills again, the rates for individual tests are likely to come down. That was the overriding impetus for changing the scheme in the first place – to save the government money. It’s another reason why big lab companies that make a lot of their margin on the complex, molecular tests could get pinched going forward.
To move away from the “code stacking” and to a system that paid diagnostics based on what each product was testing for, in 2010 Medicare asked the American Medical Association to come up with specific codes for the most common (and important) molecular tests. There were 116 of these new codes in the first tranche. These test-specific codes became effective in 2011. But Medicare chose to retain the existing “stacking codes” and not convert to the molecular codes until 2012.
Why wait? The idea was to give Medicare time to set prices for each of these new codes. Medicare was urged by the labs to cross walk some average price being paid to existing tests to the new codes (perhaps a median or weighted average of the stacks being used, which CMS would be able to measure).
But Medicare didn’t trust the current prices. It didn’t want to import any relic of the flawed stacking system into the new codes.
But instead of coming up with a new system, CMS took the full year to do largely nothing. The agency sat on its hands. Then, only after winding down the clock, the agency announced that it would let the local Medicare carriers figure out what prices to assign to each of the different diagnostic codes (through a byzantine process called “gap filling”). In other words, Medicare punted.
It basically means that the local carriers, which contract with CMS to administer the Medicare program for different regions of the country, now have wide discretion to come up with their own prices. The entire punt gave the local Medicare contractors no time – and no clear direction – on how to assign prices to the different diagnostic codes. The result is that no prices have been established for the vast majority of the marketplace. And so many tests simply aren’t being paid for.
This is having a profound impact on the market for developing new tests. Investors are shunning new investments as this gets sorted out. It says nothing about how these rates are ultimately going to be established, and whether the prices that the government assigns will reflect the value and innovation that these products offer.
There has also been little transparency around how the local Medicare carriers are coming up with their price schedules. There’s no right of appeal from affected companies. And no clear methodology on how this all gets done.
The political class talks about the need to more effectively target treatments to help improve medical outcomes and drive more value. Yet they are systematically unraveling the very technology that is going to enable this sort of personalization.
In practice, what’s happening is that contractors are starting to copy the price schedule of the only Medicare contractor setting some sort of rates – the contractor that covers California (the firm Palmetto). In effect, the State of California may end up setting prices paid for most of the molecular diagnostics marketplace.
Some contractors have not priced anything, such as the Medicare contractor for the market covering Florida. That means diagnostic labs located in markets like Florida aren’t getting paid at all. In many cases, Medicare contractors look into setting a price only after they see a lot of claims for the same sort of test.
There’s no clear deadline on when this will all get resolved. There’s some speculation that when the Medicare contractors submit their 2013 pricing on April 30th, they’ll have to declare their prices for these various molecular tests. Once they do, the labs should get paid retroactively. But the April 30thdeadline seems soft. This could linger much longer.
There’s also a risk for labs that the individual Medicare contractors may decide not to pay for certain codes (and tests) altogether.
This sort of bungling may be without precedent, even for the Medicare agency, which is quietly viewed in Washington – among both Democrats and Republicans – as being poorly administered. This isn’t a political slur. The agency’s skill level seems to persist equitably through transitions in political power. Problems emanating from CMS have cursed both Republicans and Democrats alike.
Diagnostic tests were supposed to usher in an age of personalized medicine. Now they’re being actively priced controlled. And by a bureaucratic regime that can’t even figure out what prices they want to pay for these services.
Follow Dr. Scott Gottlieb on Twitter @ScottGottliebMD. Dr. Scott Gottlieb is a director to two clinical lab companies that have not been affected by the current problems.
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