PAMA - Finding the Silver Lining
January-February 2018 - Vol. 7 No. 1 - Page #4

On January 1, 2018, the 2014 Protecting Access to Medicare Act (PAMA) went into effect. As a result, nearly every laboratory in the country that performs testing for Medicare beneficiaries will realize a decrease in reimbursement, regardless of laboratory size or type (hospital, independent, or physician office-based). Further, in most states, Medicaid fee schedules are based upon Medicare rates, thus Medicaid reimbursement is likely also to decrease.

The details of PAMA are widely noted, as are questions regarding flawed data collection processes or the extreme measures taken by the laboratory industry to halt PAMA’s implementation. Though the act is far from ideal, the sky is not falling. Frankly, all laboratories must face the future with PAMA in place and establish a framework for moving ahead in our industry’s new reality. It is time to look past the sensational messaging and place perspective on the true impact of PAMA in order to create a positive action plan for laboratory survival into the future.

Make Informed Decisions

Many community-based hospitals, health care systems, and integrated delivery networks operate laboratory outreach programs, and the 2018 CMS Clinical Laboratory Fee Schedule (CLFS) will certainly impact reimbursement for the Medicare and Medicaid beneficiaries served by those laboratories. For these organizations, leadership may not completely understand what this impact will be, and may be considering selling or outsourcing their laboratories in order to minimize future risk or loss. These actions may provide a short-term solution in the form of a financial influx, but there may be long-term consequences to losing control of the laboratory department, which generates critical information required for disease diagnosis, treatment, monitoring, and prevention.

When reviewing all possible avenues in light of PAMA (as well as other operational factors), the facility must take into account certain considerations and take specific actions.


Medicare is not your only payor. It is unlikely that a hospital-based laboratory outreach program is serving exclusively Medicare and Medicaid patients. The 2018 CLFS is for fee-for-service testing only. If the hospital is performing testing on patients that are covered under alternative or bundled payment models, such as an Outpatient Prospective Payment System (OPPS) or other value-based payments, those are not impacted. If you have not already done so, perform an evaluation of your payor mix, including patients covered by Medicare, Medicaid, commercial health plans, self-pay, and uninsured.

Laboratory outreach is profitable. The typical hospital-based outreach program has a contribution margin of over 30%. Even with reductions in Medicare reimbursement, the laboratory contribution margin remains strong because Medicare is not the outreach program’s only payor. Using client-submitted data, Mayo Medical Laboratories performed an analysis of the impact of PAMA on the hospital laboratory outreach program’s profitability. With flat volumes and no change in commercial payor reimbursement, the outreach program Net Operating Income (NOI) shows a post-PAMA net decrease of only 3% (see FIGURE 1).

Laboratory outreach programs continue to grow. Due to increasing physician employment by hospitals and health systems, outreach and outpatient test volumes performed by hospital laboratories continue to increase. Mayo Medical Laboratories’ hospital client data shows volume increases of up to 20% per year. Certainly, some of that growth is coming from Medicare patients, but as demonstrated above, it is unlikely to have a discernable negative impact on the laboratory’s net operating income.


Use caution in contracting with payors. When establishing contracts with commercial payors, a frequent mode of fee schedule creation is to apply a multiplier to the Medicare rate. As per PAMA, the CLFS will be reduced in 2019 and 2020. If the laboratory contracts are tied to the CLFS, there is a risk of an automatic reduction each time the fee schedule is updated. The laboratory must communicate with the payor contracting team in order to ensure that they understand the potential negative impact of this common practice. An alternative approach is to establish discrete fees for each test, independent of the CLFS.

Determine and communicate laboratory outreach program NOI. It is essential that organizational leadership understands the laboratory outreach program’s net contribution. When leadership understands the financial value of the outreach program, they are less likely to consider outsourcing or other alternatives. As demonstrated in FIGURE 1, the impact of PAMA is likely to be minimal. It may be necessary to perform a similar evaluation to demonstrate the impact of post-PAMA Medicare rates.

Demonstrate the impact of volume on overall unit cost. The hospital-based laboratory’s primary role is to perform routine and urgent testing for hospital patients, 24 hours per day. If test volumes are limited to inpatients only, the laboratory is underutilized and testing can be expensive at the unit cost level. Outreach test volumes allow for optimal utilization of laboratory staff and equipment, lowering the overall unit cost.

Using client-submitted data, Mayo Medical Laboratories performed an analysis of the impact that outreach volumes have on the cost per test for the hospital laboratory. Without outreach volumes, laboratory cost per test is 24% higher (see FIGURE 2).

Drive efficiency and eliminate waste. Although it may seem obvious, we must find new ways to continually improve our laboratories by managing costs and reducing waste. Implement LEAN processes or replace manual systems with automation. Become diligent in test utilization management initiatives. Leverage laboratory tests to impact patient outcomes, reducing length of stay or readmission, or lower the overall cost of care.

Moving Forward

Although the laboratory industry will continue to bemoan the nature of PAMA and the associated impact to the Medicare CLFS, this is the new reality. It is necessary to have a thorough understanding of the true impact that PAMA will have on your laboratory, and demonstrate the value that outreach test volumes will continue to bring, even with reduced reimbursement. The sky is not completely falling! Remain steadfast in the knowledge that the laboratory impacts nearly every patient within the health care system, and take the measures necessary to ensure that value is recognized and appreciated by every stakeholder within the health care system.

Jane M. Hermansen, MBA, MT(ASCP), is outreach and network manager at Mayo Medical Laboratories in Rochester, Minnesota. She received a BA in medical technology from Concordia College in Moorhead, Minnesota, and an MBA from the New York Institute of Technology. Jane’s 25+ years of clinical laboratory experience spans clinical research; process engineering; project management; and laboratory outreach consulting, training, and facilitation.

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