What You Need to Know About the CMS Plan to Regulate Improper Lab Payments in 2025

Editor’s Note: This blog was originally published on January 7, 2025, and has been updated since. CLICK HERE for more information on the current state of laboratory billing and looming fee schedule cuts in 2027.  

The Centers for Medicare & Medicaid Services (CMS) released its Fiscal Year 2024 Improper Payments Fact Sheet in November, highlighting various instances of improper payments across several healthcare services, including clinical laboratory services.

As we move into 2025, anatomic pathology practices and clinical labs should be aware that CMS plans to regulate improper payments and enforce corrective actions more robustly. Because of this, they should take the necessary steps to avoid violations and the accompanying stiff penalties.

Why is More Regulation Needed?

So why is there a need for more stringent regulation and enforcement? The simple answer is to address ongoing issues such as fraud, waste, and abuse within laboratory billing practices.

Key Reasons for Heightened Regulatory Focus

• Rising Improper Payment Rates: CMS periodically audits healthcare providers and suppliers to identify improper payments, including overpayments, underpayments, or payments made without sufficient documentation. Improper payment rates in clinical laboratories have been a persistent issue, prompting closer oversight.
• High Costs of Laboratory Services: Laboratory services account for a significant share of healthcare spending. Inaccurate laboratory billing (laboratory revenue cycle management) or improper payments can unnecessarily inflate costs, burdening taxpayers and healthcare budgets.
• Compliance with Medicare and Medicaid Rules: Laboratories must adhere to strict coding, documentation, and lab billing rules under Medicare and Medicaid. Noncompliance, intentional or accidental, can result in substantial financial losses for CMS.
• Increased Fraud Cases: The healthcare system has seen an increase in fraudulent laboratory billing practices, including submitting claims for unnecessary tests, upcoding, and billing for services not rendered. Tighter regulation helps prevent these abuses.
• Promoting Accountability and Transparency: Enhanced oversight aligns with CMS's broader goals of ensuring that healthcare providers operate transparently and accountably, fostering trust in the Medicare and Medicaid programs.
• Evolving Payment Models: With the shift toward value-based care, CMS aims to ensure that payments align with the quality and necessity of services provided rather than the volume of services.

By implementing more stringent regulations and oversight mechanisms in 2025, CMS seeks to reduce financial losses, improve the integrity of medical laboratory billing, and ensure that funds are used appropriately to deliver necessary and effective care.

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Common Causes of Improper Lab Payments

Even though the CMS fact sheet mentioned above didn't provide specific examples of improper lab payments in 2024, it did identify a few common causes affecting clinical lab and pathology services.

• Insufficient Documentation: This occurs when the provided documentation does not adequately support the billed services, making it challenging to verify that the services were necessary and delivered as claimed.
• Medical Necessity Errors: These errors occur when the submitted documentation fails to justify the medical necessity of the services provided, resulting in payments for services that may not meet coverage criteria.
• Incorrect Coding: This involves inaccuracies in service coding, such as incorrect procedure codes or modifiers, which can result in improper payments.

To mitigate these common issues, CMS continues to emphasize the importance of thorough documentation, accurate coding practices, and adherence to medical-necessity criteria to ensure lab compliance and avoid becoming a target of oversight. 

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What Can Medical Labs Proactively Do to Avoid Fault?

Clinical laboratories and pathology groups can take several proactive steps to avoid CMS penalties for improper payments going forward, and lab revenue cycle management vendors should be able to help. 

What follows are measures that focus on compliance, documentation, staff training, and ongoing quality improvement to ensure adherence to Medicare and Medicaid regulations, plus some helpful comments from Gayane Haroutyunyan and Aram Avakyan, highly skilled members of LigoLab's lab billing support team.

Strengthen Documentation Practices

• Ensure Complete Documentation: Maintain detailed records that support the medical necessity of all laboratory tests, including complete test requisitions, physician orders, and supporting patient data.
• Educate Ordering Providers: Train physicians and healthcare providers on documentation requirements, with clear guidance on the information needed to establish medical necessity for laboratory testing. 

"Having a robust document management system is a good first step toward CMS compliance," said Haroutyunyan. "For example, the laboratory revenue cycle management platform should make it easy to access and print documentation that may be required for billing, and if the platform is deeply integrated with the organization’s laboratory information system (LIS), all documentation is consolidated in the same encounter record."

Improve Coding and Laboratory Billing Accuracy

• Hire Qualified Staff: Employ certified coders who are familiar with CMS regulations, including CPT and ICD coding.
• Regularly Update Laboratory Billing Solutions: Ensure laboratory billing software is up to date with the latest CMS codes and guidelines.
• Perform Pre-Submission Reviews: Audit claims before submission to identify errors in coding, documentation, or eligibility.

Discover More: Clinical Laboratory Management Solutions for Lab Revenue Cycle Management (Lab RCM)

"Modern laboratory billing solutions give users the ability to build dynamic workflow automation and eliminate what were previously mostly manual administrative tasks," added Avakyan. "For example, a lab billing team with a robust and streamlined pricing engine with pricing policies can work via extensive automation and rules, enabling easy and convenient CMS code updates when necessary."

Stay Informed on CMS Guidelines

• Monitor Regulatory Changes: Keep up with CMS updates, including new policies, laboratory billing codes, and coverage criteria for services.
• Participate in CMS Programs: Attend educational webinars and workshops offered by CMS.

Implement Robust Compliance Programs

• Develop a Compliance Plan: Create a formal plan to ensure adherence to CMS rules, including policies for documentation, laboratory revenue cycle management, and reporting.
• Designate a Compliance Officer: Assign a dedicated professional to oversee compliance and proactively address potential issues.

Use Advanced Laboratory Information System and Lab Billing Technology to Enhance Compliance

• Leverage Laboratory Information Systems: Utilize modern medical LIS software with built-in compliance checks to flag potential errors before claims are submitted.
• Adopt Decision Support Tools: Implement lab RCM tools that help verify medical necessity and eligibility criteria at the point of care.

"Modern laboratory billing solutions such as the LigoLab platform provide RCM tools that prevent improper payment due to a lack of medical necessity," Haroutyunyan said. "These tools are NCD/LCD/MUE edits that are applied via automation and rules. The lab billing team can also review these edits on an individual CPT line right inside the encounter record."

Discover More: How Much is Your Outdated Laboratory Revenue Cycle Management Costing Your Lab?

Verify Patient Eligibility

• Real-Time Eligibility Checks: Use electronic systems to confirm patient eligibility before performing tests.
• Ensure Authorization Compliance: Obtain prior authorization for tests when required by CMS.

Discover More: Workflow Tips to Help Manage Prior Authorization Requirements

Educate and Collaborate with Providers

• Provide Targeted Training: Offer training sessions to ordering providers on proper test ordering and documentation practices.
• Share Resources: Develop easy-to-understand guides and checklists for referring providers.

Monitor and Mitigate Overutilization

• Implement Utilization Management: Review patterns of test ordering to identify and address overuse.
• Work with Providers: Educate providers on appropriate test ordering based on CMS guidelines.

"Improper payments, especially underpayments, can only be detected by a medical institution if it employs a modern laboratory revenue cycle management solution with reporting utilities that allow for this kind of visibility," said Avakyan. "The LigoLab platform has reports that provide visibility on what any insurance company or insurance group pays on average for specific CPT codes or CPT code groups, enabling users to monitor and address underpayment trends."

Respond to CMS Audits Effectively

• Prepare for Reviews: Maintain a reliable system to retrieve required documentation during audits. 
• Correct Errors: Address findings from CMS audits and implement corrective action plans to prevent future issues.

Participate in Quality Assurance Programs

• Engage in CMS Quality Initiatives: Participate in programs like the Quality Payment Program (QPP) to align operations with CMS goals.
• Benchmark Performance: Use external benchmarks to assess and improve compliance and operational efficiency.

Editor's Note: Here’s more information from CMS on Improper Payments Measurement Programs.

When clinical labs and pathology groups proactively focus on education, robust documentation, accurate laboratory billing, and internal audits, they can significantly reduce improper payments and enhance compliance with CMS regulations. By fostering a culture of accountability and staying informed about policy changes, these lab enterprises can maintain integrity and avoid financial or reputational risks.

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Learn How Modern LIS Systems and Lab Revenue Cycle Management Platforms Transform Lab Billing

Standalone laboratory information systems and lab revenue cycle management platforms typically operate in silos, creating disconnected entities that lack transparency and synchronization, leading to frequent denials due to missing or inaccurate data. This leaves lab directors and managers with two costly options: reworking claims manually or writing them off as bad debt.

The all-in-one LigoLab Informatics Platform offers a comprehensive, end-to-end solution that features a unified LIS system and lab RCM workflow. By integrating and automating processes within such a unified platform, LigoLab delivers superior performance and efficiency.

Discover More: The Best Laboratory Information System Companies and the Advantages They Offer to Their Laboratory Clients

Unlike outdated LIS software and laboratory billing solutions, LigoLab enables the initiation of the laboratory billing process at order entry, an essential and incredible advantage in today's challenging environment of shrinking margins, rising costs, and tighter regulations.

Ready to Strengthen Your Lab's CMS Compliance?

Ready to experience the power and efficiency of LIS-RCM integration? A unified informatics platform can help your lab initiate compliance checks and lab revenue cycle management workflows the right way.

Take Action: Contact a LigoLab Product Specialist Today!

Frequently Asked Questions About CMS Regulation of Improper Lab Payments and Modern Laboratory Revenue Cycle Management

Why is CMS increasing regulation of lab payments?

CMS is responding to persistent improper payment rates, the high cost of laboratory services, fraud cases like upcoding and unnecessary testing, and a broader shift toward value-based care that ties payments to quality and necessity rather than service volume.

What are the most common causes of improper lab payments?

The three most common causes are insufficient documentation, medical necessity errors (where documentation fails to justify the service billed), and incorrect coding, such as using the wrong procedure codes or modifiers.

What can labs do to strengthen documentation practices?

Labs should maintain detailed records that support the medical necessity of every test, including complete requisitions, physician orders, and patient data, and educate ordering providers on the required documentation.

How can technology help labs stay compliant with CMS regulations?

Modern laboratory information systems and laboratory billing platforms include built-in compliance checks, such as NCD/LCD/MUE edits, automated coding updates, and decision-support tools that verify medical necessity and eligibility before claims are submitted.

How can labs detect underpayments, not just overpayments?

Labs should use a modern lab RCM solution with reporting utilities that show what insurers pay, on average, for specific CPT codes or code groups, enabling monitoring and addressing underpayment trends.

What should labs do to prepare for a CMS audit?

Labs should maintain a robust system for quickly retrieving and providing documentation during reviews, and should address any audit findings with clear corrective action plans to prevent recurring issues.

Where can labs find more information on CMS's improper payment programs?

More information is available directly from CMS.