Hey there, I’m Shivang. Each week, I write in plain English about how health insurance works, why claims get denied, and how patients and healthcare teams can get paid or reimbursed.

TL;DR: PAMA (Protecting Access to Medicare Act) is the 2014 law that set out to price Medicare's lab tests based on what private insurers actually pay for them. The first collection round in 2017 was heavily weighted toward large independent labs, whose high volumes and lower negotiated rates pulled Medicare’s calculated “market price” downward. By the end of this issue, you'll understand how that price gets calculated, why the next cut lands in 2027, and what it means depending on where you sit: patient, physician, lab, revenue cycle, or market access.

Here's the whole shape of it, before the story. PAMA exists because Medicare’s laboratory fee schedule was still rooted in prices established decades earlier. Although those rates received periodic adjustments, they were not routinely rebuilt around current private-market payments. By the 2010s, Medicare’s prices had drifted away from what many private insurers were paying.

The fix was supposed to be simple: ask labs what private insurers pay them, and set Medicare's price to match. It hasn't stayed simple. The data that feeds the calculation leans on whichever labs bother to report, and that one flaw touches almost everyone downstream of it.

A patient never sees any of this on their bill. A doctor running an in-office lab might be on the hook for a reporting deadline they've never heard of. A revenue cycle team has to track which codes are affected and when the next cut lands. A diagnostics company has to decide whether 2027's rate cut belongs in next year's model. Same law, four different stakes. Here's how it actually works.

Margaret had her quarterly bloodwork done on a Tuesday. Nothing dramatic, just the basic metabolic panel Dr. Singh orders every few months to keep an eye on her kidneys. Biscuit tagged along, mostly for the treats the front desk kept in a jar by the door.

A few weeks later, an Explanation of Benefits showed up in Margaret's mailbox. Biscuit got to it first, sniffed at the number circled near the bottom, and trotted straight to Sage's office.

"Eight dollars and twenty-seven cents," Biscuit announced, dropping the paper on the desk. "That's what Medicare paid for Mom's whole panel. A coffee costs more than that."

Sage didn't look up from the claims queue. "That's the CLFS rate. It's not random. There's a whole system behind that number, and it's about to change again."

"A whole system," Biscuit repeated. "For eight dollars."

That was enough to pull Shivang in from across the hall.

Before explaining anything else, Shivang starts with the question underneath all of it: how does Medicare decide what to pay for a lab test in the first place?

Medicare covers thousands of different lab tests, from a basic blood count to advanced genetic panels, and each one has its own price. The system that sets those prices is called the Clinical Laboratory Fee Schedule, or CLFS. The harder question Congress eventually had to answer was whether those prices bore any real relationship to what anyone else in the country was actually paying for the same tests.

"This one starts in 1984," Shivang says. Biscuit groans.

Otis, who'd wandered in with his usual folder of paperwork, picks it up. "Medicare set its first lab prices that year based on what labs were charging at the time. Reasonable enough for 1984. The problem is those prices barely moved after that. For decades, Medicare mostly adjusted them for inflation instead of checking whether they still matched anything real."

By the 2010s, that gap had grown wide. The Department of Health and Human Services' Office of Inspector General looked into it and found that Medicare was paying noticeably more for many lab tests than private insurance companies were. Large commercial labs had negotiated volume discounts with insurers over the years, discounts Medicare's frozen fee schedule never accounted for. That did not necessarily mean every private rate was fair. It meant Medicare was frequently paying more than the private rates the OIG examined.

Congress responded in 2014 with the Protecting Access to Medicare Act, known as PAMA. The idea was simple: stop guessing, and start pricing Medicare's lab tests based on what the private market actually pays.

"So how does a test get its price?" Biscuit asks, still stuck on the eight dollars.

Sage takes this one. "Every three years, labs that bill Medicare a meaningful amount for these tests have to report two things: what private insurers paid them for each test, and how many times they ran it."

Otis explains “meaningful.” Not every lab has to report. Generally, a lab qualifies only if more than half of its Medicare revenue comes from laboratory and physician-fee-schedule services and it received at least $12,500 from the CLFS during the six-month data-collection period. That can include independent labs, physician-office labs, and certain hospital outreach labs.

Once CMS has that data, the math is not complicated. For each test code, CMS lines up every reported private payment, weights it by how often that price actually happened, and finds the middle of the list. That middle number, the weighted median, becomes the new Medicare price.

"So Mom's test is priced at the middle of whatever private insurers paid for it," Biscuit says slowly, "weighted by how often labs actually charged that."

"Exactly," Sage says. "Simple math. The complicated part is who shows up to report."

Biscuit stares at the whiteboard for a moment. “Wait,” he says. “Medicare asks private insurers what they paid, then uses those payments to decide what Medicare should pay?”

“That’s the idea,” Sage says.

“But where did the private insurers get their prices?”

Sage pauses. “That is where ‘market price’ starts becoming a slippery phrase.”

When a lab has a contract with an insurer, the two sides usually agree on a payment schedule. The lab may begin with its own list price, but that is rarely what the insurer ultimately pays. The actual rate can depend on the lab’s volume, its negotiating leverage, whether the insurer wants it in-network, what competing labs accept, and sometimes what Medicare already pays for the same test.

Medicare is, in effect, asking the private market for an independent opinion, even though parts of that market may have copied from Medicare’s earlier answer.

But it gets stranger when the lab does not have a contract. Many laboratories, especially specialized and newer diagnostic companies, are not in-network with every health plan. In those cases, there may be no negotiated price at all. The lab submits a charge, and the insurer applies whatever out-of-network amount its plan recognizes. That amount might come from the payer’s own fee schedule, a percentage of Medicare, a proprietary pricing system, or another methodology the lab had little or no role in choosing.

The payer might allow $200 on a test the lab bills at $1,000. That does not necessarily mean the lab agreed the test was worth $200. It may simply mean $200 is what the payer decided it would recognize.

Yet, when the claim is paid, that allowed amount can still become part of the private-payer data used under PAMA.

PAMA gathers these amounts, weights them by how often they occurred, and calls the middle result the private-market rate.

That is the central irony. Medicare says it is listening to the private market, but the “market” may include rates influenced by Medicare itself and rates set by insurers without any negotiation with the lab. PAMA then turns all of those different payment arrangements into Medicare’s next price.

“So it’s a market price,” Biscuit says, “except sometimes Medicare influenced it, sometimes the payer invented it, and sometimes the lab actually negotiated it.”

“Correct,” Sage says.

“And all three go into the same calculation?”

“Now you understand PAMA.”

The rates going into PAMA were already more complicated than the phrase “private-market price” suggested. Then came another problem: the laboratories supplying those rates did not represent the market evenly.

When CMS first collected the data in 2017, most of the reported volume came from large independent laboratories, the organizations most likely to process tests at scale and negotiate lower per-test rates.

Hospital-based labs and physician office labs, which typically get paid more per test, reported far less often. Independent labs accounted for roughly 90 percent of the reported data, despite representing only about half of actual test volume nationwide.

That imbalance pulled the calculated price toward the lower end. Starting in 2018, CMS cut CLFS rates on around 800 test codes, capped at up to 10 percent per year for three straight years, adding up to an estimated $3.8 billion in reduced lab payments.

Congress has repeatedly delayed further reductions without fully resolving the data problem underneath them. Legislation enacted in February 2026 prevented additional CLFS reductions during 2026. Beginning in 2027, affected codes may face reductions of up to 15 percent per year. Meanwhile, CMS opened the next reporting window from May 1 through July 31, 2026, collecting private-payer rates from January through June 2025 to calculate the next set of Medicare prices.

Ask a hospital lab administrator about PAMA and you'll likely hear frustration. The data used to set these prices never fairly represented what hospital labs get paid, and the cuts land on real budgets regardless.

Ask someone at CMS, and you'll hear a different case. The law asks Medicare to pay what the private market pays, based on whatever data labs report, and Congress can update the reporting rules if they need fixing.

Ask a large independent lab, and you may hear a third view. They report consistently and accurately, and the resulting rates reflect real, documented negotiated prices.

None of these views is wrong. Each one just stands in a different part of the same system.

For patients like Margaret, this story is mostly invisible. Her bloodwork happens the same way regardless of the rate behind it.

For labs, the rate decides whether a routine test turns a profit or a loss. Physicians running an in-office lab may not realize that their practice could qualify as an applicable laboratory based on its Medicare revenue mix and CLFS payments, and missing a reporting deadline can carry a penalty of up to $10,000 a day. Hospital revenue cycle teams now track which codes are affected and when the next cut lands as a routine part of the job. And companies building new diagnostic tests need the potential 2027 rate changes in their financial models, not as a footnote.

If you run or bill for a lab, confirm whether your practice crosses the $25,000 threshold and mark the next reporting window on your calendar well before it opens. CMS publishes reporting guidance directly on its CLFS page, worth reading before assuming the rule doesn't apply to you.

If you're building a company in diagnostics, put the 2027 rate reset into your financial model now instead of reacting to it later. The reset is public and scheduled well in advance. There's no reason to be caught off guard by it.

For diagnostics companies and reimbursement teams, CLFS is a reminder that Medicare pricing isn't fixed. It gets recalculated on a schedule, using data that labs themselves supply. That makes accurate, timely reporting more than a compliance task. It's one of the only direct inputs a lab has into how its own test gets priced three years out.

For anyone building evidence strategy or coverage policy around a new lab test, the CLFS mechanism is worth understanding long before a rate lands. A test's Medicare price is downstream of a data collection window most companies never think about until the number changes underneath them.

That's it for this issue. Hit reply. I read everything.

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