At Applied Policy, we assist many clients in understanding how Medicare reimburses for in vitro diagnostic (IVD) lab tests.

Why do we focus on Medicare? Because Medicare payment policy decisions made by the Centers for Medicare & Medicaid Services (CMS) and its contractors are publicly available, rigorous, and often serve as the basis for private payer policies.

In a nutshell, there are three components essential for IVD lab test reimbursement: coverage, coding, and payment. These three components of reimbursement are not mutually exclusive (i.e., all three must be present for laboratories to be reimbursed). For example, there may be an applicable code and an established payment rate for a test but no coverage because the test is considered experimental and investigational. Let’s take a more in-depth look.

Coverage refers to whether an insurer will pay for a particular item or service. Generally, Medicare covers IVD testing that it deems medically necessary, meaning the service is needed to prevent, diagnose, or treat an illness or injury. The testing, to be considered medically necessary, must be ordered by a physician. To be eligible for coverage, a test must demonstrate clinical utility (i.e., what is the test’s impact on clinical decision making). This means that the test’s result will impact or change how a physician manages a patient’s care —- the result is not just a “nice to know” piece of information; the results are a “need to know” piece of information.

A test must also have a code to be reported on a claim form, with most IVD tests being reported by analyte (i.e., what is being measured by the test). In the U.S., standardized codes represent medical procedures, supplies, products, and services and are used to process health insurance claims by Medicare and other payers. For diagnostic tests and services, the Healthcare Common Procedure Coding System (HCPCS) is the code system that can result in a specific payment. HCPCS is divided into two subsystems, Level I and Level II:

• Level I is comprised of Current Procedural Terminology® (CPT®)[1] codes which consist of five numeric digits.

• Level II HCPCS codes identify products, supplies, and services not included in the CPT code set. Level II codes consist of a letter followed by four numeric digits.

When an existing code is insufficient to describe an item or service, entities may use an unlisted code or request a new CPT code or a new non‐CPT HCPCS code.

A relatively new subsection of the CPT code set is made up of Proprietary Laboratory Analyses (PLA) codes which are managed and approved by the American Medical Association (AMA) CPT Editorial Panel. The code set was created in response to language in Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA). PLA codes are alphanumeric CPT codes that provide corresponding descriptors for laboratories or manufacturers seeking a way to identify their tests more specifically. Tests assigned to PLA codes must be performed on human specimens and must be requested by the manufacturer or clinical laboratory that offers the test.

The last component is the payment. Payment is the amount of money Medicare or an insurer will pay for an item or service. Medicare and other payers provide payment for the item or service depending upon the site of service. Each setting relies on a payment system with a unique methodology to determine individual payment rates for services or groups of services. Payments under one system are typically not affected by changes to a separate system, often referred to as “payment silos.”

IVD lab tests may be paid under several different systems. For example, Medicare pays for a patient’s hospital stay under the Medicare Inpatient Prospective Payment System (IPPS) with a single bundled payment, which includes all costs. These payments are captured under the Medicare Severity Diagnosis-Related Group (MS-DRG) system. Bundled payments are also made for services provided in the hospital outpatient department and services associated with kidney dialysis tests. On the other hand, a medically necessary IVD test performed in a physician’s office or independent lab are paid separately under the Medicare Clinical Laboratory Fee Schedule (CLFS).

Providers and payers are most interested in the value of the information provided by the IVD test and how it affects treatment decisions, not just in the quantity of information provided.

[1] CPT codes, descriptions and other data only are copyright 2021 by the American Medical Association (AMA). All Rights Reserved. CPT is a trademark of the AMA.

 

The next article in this series will take a deeper dive into the first component of IVD test reimbursement: coverage.