2009’s Top Ten Lab Stories Reflect Some Good, Bad

Year unfolds with a mixed bag of developments even as economic recession dampens activity

CEO SUMMARY: As the closing year of the first decade of the new century and the new millennium, 2009 brought neither disruption nor upheaval to the majority of laboratories in the United States. Rather, it was marked by at least two themes. One was how public disclosure of problems with lab testing services generated media headlines. The other was economic, and ranged from the effects of the recession to how specific healthcare reform proposals might negatively affect the financial status of laboratories.

TAKEN AS A WHOLE, 2009 was not an auspicious year for laboratory testing and the pathology profession. All the blame can not be attributed to the ongoing economic recession, the deepest in this country since 1981-82.

A careful review of THE DARK REPORT’S list of the “Top Ten Lab Stories for 2009” indicates that six of the most significant stories reflect negative events, either for specific laboratory companies or for the collective lab testing industry. These range from issues involving the accuracy of lab testing services at some laboratory companies to budget cutbacks at most hospital labs and unprecedented proposals to tax laboratory services as a way to help pay for reforms to the nation’s healthcare system.

In fact, 2009 brought at least four important reminders to pathologists and clinical lab administrators that public trust in the integrity of laboratory testing services makes any deviation from this assumption into a national news sensation.

Two of these stories involved Quest Diagnostics Incorporated. (See page 5.) One story involved the District Health Boards of Auckland, New Zealand, and Labtests. (See page 8.) Canada had a new revelation about issues in the accuracy of breast cancer testing, this time in the province of Quebec. (See page 7.)

In all these situations, media coverage of laboratory issues attracted much public attention. That should be no surprise, since the quality and integrity of laboratory testing services is generally taken for granted in most developed countries. Thus, news that a laboratory may have reported inaccurate results or had service disruptions that affected many patients and physicians, is the kind of news that fits the “man bites dog” metaphor.

Moving to the financial domain, 2009 was not an auspicious year for the laboratory industry at large in the United States. In particular, hospital laboratories were under pressure to spend less money than authorized in their original budgets as their parent hospitals and health systems responded to declines in the value of investment portfolios and reduced admissions. These spending cutbacks had an impact on in vitro (IVD) diagnostic manufacturers and several other sectors of the lab service industry. (See page 6.)

$750 Million Lab Tax Averted

Another major financial hit was averted, at least for the moment, when a proposed annual tax of $750 million on laboratory testing services was deleted from the language of a health reform bill written by the Senate finance committee. However, the trade-off was for the lab industry to accept less reimbursement in coming years under the Medicare Part B fee schedule. (See page 6.)

One bright spot during 2009 was the fact that the Novel A/H1N1 influenza strain failed to become more virulent or lethal during the fall flu season. So far, the nation’s clinical labs have not experienced an overwhelming demand for flu tests. (See Page 7.)

Another positive story was how Catholic Health Systems (CHI) of Denver, Colorado—at $8.6 billion, one of the country’s largest health systems—intends to pursue a cornerstone strategy of profitable growth in outreach laboratory testing. To achieve this, it became an equity owner in Pathology Associates Medical Laboratories (PAML) of Spokane, Washington. Together, CHI and PAML will develop laboratory outreach joint ventures with the 78 CHI-owned hospitals located in 20 states. (See page 9.)

This affirmation in the value of a hospital laboratory outreach testing program is a positive sign for the laboratory industry. It is powerful evidence that hospital and health system administrators are waking up to the fact that the clinical laboratory is a valuable asset that has been underutilized in supporting their organization’s most important strategic goals.

Decade Is Soon To End

It should be noted that we are approaching the end of the first decade of this new century and this new millennium. The 2000s is a decade that lacked many of the disruptive events of the 1990s.

The years between 1990 and 1999 were marked by gatekeeper HMOs; capitated, full-risk managed care contracts; wide-spread consolidation within the commercial lab sector; and rapid concentration of hospital ownership—which triggered significant consolidation within the hospital laboratory sector. Over the course of the decade, few labs were untouched by the consequences set loose by these trends.

By contrast, the years 2000-2009 were marked by a relative stability within the clinical laboratory industry. If a trend was transformative, it acted in a slower fashion. Thus, advances in the technology and performance of laboratory automation solutions came at a steady pace. The advent of Lean and Six Sigma in laboratories and hospitals has similarly occurred at a measured pace. Genetic testing and molecular diagnostics have yet to be a rapidly disruptive force in laboratory medicine.

Evolutionary Forces

Thus, it can be argued that 2009 was a generally quiet year for clinical laboratories and the pathology profession. But it would be a strategic mistake not to study the most significant events of the year as a way to understand how they represent the evolutionary forces that are always shaping how laboratories serve physicians, patients, and payers.

Top Ten Stories 2009 – Story Number One
Quest Diagnostics’ Vitamin D Test Alert/Retest Effort Makes Headlines

DURING THE FIRST DAYS OF 2009, Quest Diagnostics Incorporated found itself in the eye of a national media storm due to potentially erroneous results for Vitamin 25 (OH)D tests that the company acknowledged it had reported on an undisclosed number of patients.

Starting in early 2007 and running into 2008, Quest Diagnostics stated that it had reported “potentially inaccurate results” produced by its laboratory developed test (LDT, or home brew) LC-MS/MS method for Vitamin 25(OH)D.

It was January 8, 2009, when the New York Times published a story about the matter titled “Quest Acknowledges Errors in Vitamin D Tests,” after learning about the situation from THE DARK REPORT’S coverage of this issue just days earlier. (See TDR, December 22, 2008.) Public knowledge of these problems first surfaced in October 2008 when Quest Diagnostics launched a campaign to alert physicians to “questionable results” for Vitamin D tests and to offer free retesting to those patients.

For the next several days, the national media covered the story that a major lab company was contacting thousands of physicians to advise them of the situation and offer free retesting to patients.

For the greater lab testing profession, these events were a powerful reminder that trust in lab test accuracy lies at the heart of every clinical laboratory’s relationship with the physicians and patients it serves. Thus, whenever that trust is breached by news of potentially inaccurate lab testing, it can become a major news event.

Top Ten Stories 2009 – Story Number Two
Quest Diagnostics Pays $302 Million To Resolve Federal Qui Tam Lawsuit

ON APRIL 15, 2009, Quest Diagnostics Incorporated found itself again in the national news. That was the day that the United States Attorney’s Office for the Eastern District of New York announced a settlement with the company that it characterized as one of the largest federal settlements ever to involve a medical device.

The global settlement with the federal government involved Quest Diagnostics Incorporated and its now-defunct subsidiary, Nichols Institute Diagnostics (NID). One part of the global settlement involved a guilty plea by NID “to a felony misbranding charge in violation of the Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301 et seq” related to the problems in the performance of the NID Advantage Intact PTH Assay for about a six-year period of time ending in 2006, according to the U.S. Attorney’s Office. A $40 million criminal fine was paid by NID. Quest was not charged with any crime.

The global settlement also included an agreement by Quest Diagnostics to pay approximately $262 million “to resolve federal False Claims Act allegations relating to the Advantage Intact PTH assay and four other assays manufactured by NID that allegedly provided inaccurate and unreliable results,” the U.S. Attorney’s Office announced. A Corporate Integrity Agreement between Quest and the OIG was also part of the global settlement.

Top Ten Stories 2009 – Story Number Three
Hospitals Prune Budgets, Causing Laboratories to Rein in Spending

FOR HOSPITAL LABS, 2009 was a tough budget year. In response to the long-lasting recession, hospitals and health systems slashed budgets. It meant that hospital labs were asked to reduce current spending below authorized budget levels. (See TDR, March 16, 2009.)

The impact of this belt-tightening was felt by the in vitro diagnostics (IVD) manufacturers and other lab vendors. Many hospital laboratories deferred capital spending as one strategy to cut overall spending and stay under budget. However, because many analyzers and instrument systems are sold under “per click” or reagent rental arrangements, IVD manufacturers have done better during 2009 than their counterparts in radiology and durable medical equipment.

Another consequence of budget belt-tightening by hospital labs was a decline in attendance at many laboratory meetings and conferences. At the same time, because of more stringent Medicare compliance regulations, many lab industry vendors were spending fewer dollars on promotional activities at national and regional laboratory meetings.

This was the first time since the deep recession of 1981-82 that the nation’s hospitals and laboratories have had to cope with an economy in sharp decline. Economists believe that it may not be until the second half of 2010 before unemployment rates begin to drop significantly. If this proves true, labs will likely continue to carefully monitor spending throughout 2010.

Top Ten Stories 2009 – Story Number Four
Labs Dodge $750 Million Annual Tax Proposed in Baucus Reform Bill

EFFORTS BY CONGRESS AND THE NEW ADMINISTRATION to enact deep reforms to the existing health system have dominated headlines throughout 2009. Lawmakers targeted every sector of healthcare to seek concessions on future reimbursement as a way to find money to fund health reform proposals.

The laboratory industry was no exception. In September, it found itself in the tax increase cross hairs of the Senate Finance Committee. A version of the committee’s health reform bill called for a new $750 million annual performance tax on clinical laboratories. (See TDR, September 21, 2009.)

This tax was to be assessed on the relative market share of clinical labs covered by the proposed legislation. The Secretary of Treasury would determine the assessment. As well as the proposed $750 million annual tax, this version of the Senate bill proposed cuts in future funding of lab testing services.

Then, in negotiations with members of the Senate Budget Committee and their staff, the laboratory industry was able to get the proposed $750 million annual lab tax dropped from the bill. However, future cuts to the Medicare lab fee schedule remain. According to current numbers provided by the American Clinical Laboratory Association (ACLA), the lab industry may face up to a 9% reduction in projected Medicare spending during the next 10 years.

Top Ten Stories 2009 – Story Number Five
Labs Experience Quiet Fall Flu Season Despite More Cases of Novel A/H1N1

FOLLOWING THE TUMULTUOUS EMERGENCE OF NOVEL A/H1N1 during the spring, it has been a relatively quiet fall influenza season for most labs across the country.

Fears that Novel A/H1N1 might evolve into a more virulent or lethal form of influenza have not been realized to date. Nor have the nation’s laboratories seen a comparable demand for influenza testing as was experienced last spring, when the Novel A/H1N1 influenza strain surfaced in Mexico and went global. (See TDR, June 8, 2009.)

In fact, the unexpected emergence of Novel A/H1N1 flu last spring provided ample evidence of how molecular technologies and other advances in laboratory medicine now provide pathologists and laboratory scientists with a wide range of enhanced capabilities, including rapid testing.

Within weeks of identifying the new strain of influenza, a number of laboratories, ranging from the Centers for Disease Control and Prevention (CDC) to independent commercial labs, had developed assays that were useful in identifying Novel A/H1N1.

This was a faster response than what followed the outbreak of SARS (severe acute respiratory syndrome) and the identification of this new strain of coronavirus in 2003. It demonstrates how the steady improvements in molecular technologies are compressing the time required to identify a new infectious agent and produce a lab test that can detect that agent.

Top Ten Stories 2009 – Story Number Six
Testing Failures in Canadian Labs Are Warning to Govt. Health Programs

DEFICIENCIES IN BREAST CANCER TESTING in the province of Quebec caused headlines mid-year. This came only weeks after a respected judge in Newfoundland released her long-awaited report on the laboratory problems that contributed to inaccurate ER/PR test results on hundreds of patients in the province.

It was March 3 when Judge Margaret Cameron released the report of her com- mission. The commission published a list of laboratory problems that contributed to at least 386 breast cancer patients get- ting inaccurate test results between 1997 and 2005. The latter date was when failures in the laboratory conducting ER/PR testing for Newfoundland and Labrador became public. (See TDR, May 18, 2009.)

Then, in May, health officials in Quebec acknowledged they had received a report on the results of a study on the accuracy of breast cancer testing performed by a number of labs in the province. This report indicated the existence of significant problems.

By July, Quebec’s health minister confirmed that the lab results of 2,730 cases of breast cancer were undergoing review by a laboratories outside the province. This covered patients tested between April 1, 2008, and June 1, 2009.

The Canadian press has reported similar quality issues in pathology labs in three other provinces. Collectively, these issues provide evidence that decades of underfunding for lab testing services may now be a factor in these lab problems.

Top Ten Stories 2009 – Story Number Seven
Cost of Whole Genome Sequencing Falls as Low as $20,000 per Person

WHOLE HUMAN GENOME SEQUENCING is closing in on the $1,000 target. It is a goal that may be achieved within the next 12 to 18 months.

It could mean at least one company will be capable of quickly and accurately sequencing the 3-billion base pair human genome for $1,000 or less. Experts believe the $1,000 whole human genome sequence will initiate a gold rush for the sequencing industry.

At the forefront of this competition is Complete Genomics, Inc., of Mountain View, California. It says it can now sequence the whole human genome for approximately $4,400 in materials and—for orders of eight or more genomes—will price each complete human genome sequence at $20,000.

Not far behind is Illumina, Inc., of San Diego, California. This company is pricing its whole genome sequence at $48,000—and has customers at this price! (See TDR, November 23, 2009.)

These fast-moving events serve notice to pathologists and lab administrators that the gene sequencing business is going to change radically over the next year or two. The same technology which is rapidly cutting the cost of sequencing a single DNA base pair will find its way into clinical molecular diagnostics.

This creates a double-edged opportunity for labs. One edge is the ability to perform sophisticated molecular analysis. The other edge is to offer the information technology needed to store and evaluate the genetic sequences.

Top Ten Stories 2009 – Story Number Eight
Auckland Lab Contract Decision Disrupts Physicians and Patients

IT WAS A PAINFUL DOSE OF REALITY for physicians and patients in Auckland, New Zealand. Start up of a new, exclusive contract laboratory provider in the region earlier this year triggered considerable disruption to the region’s healthcare system.

This began in August as Labtests initiated service to 12,000 patients per day from a newly-constructed, newly-equipped, and newly-staffed lab. Despite three years of District Health Board assurances that the transition to Labtests from the previous exclusive lab provider, Diagnostic Medlabs (DML), would be seamless and transparent, just the opposite happened when the new contract started. (See TDR, September 21, 2009.)

This situation is an important story for pathologists worldwide, due to at least two reasons. First, it provides an early example of what happens when a government health service pursues cost savings in spite of the risk that lesser amounts of funding for laboratory testing might be associated with widespread service deficiencies and breakdowns in patient care.

Second, the Auckland DHBs implemented a plan for lab testing services never before attempted in the world until now. They tried to build, equip, staff, and initiate, from a near standing start, service with a new clinical lab facility that would serve 12,000 patients per day. It was no surprise to laboratory professionals that widespread problems resulted.

Top Ten Stories 2009 – Story Number Nine
Companion Diagnostics Activity Gains Momentum During 2009

IT WAS A BUSY YEAR FOR COMPANION DIAGNOSTICS. A number of prescription drugs, each paired with a specific lab test, found favor in the clinical marketplace during 2009.

Herceptin and Her2neu are no longer the most compelling example of a therapeutic drug and companion diagnostic test. Amgen, Inc., developed a K-RAS companion diagnostic that can predict whether a patient with metastatic colorectal cancer will respond to Amgen’s drug Vectibix. Similarly, a K-RAS test is also used to predict response to the drug Erbitux, which only works for patients whose tumors are not mutated. Erbitux is sold by ImClone, LLC, which is owned by Eli Lilly and Company.

One confirming sign of the pharma industry’s acceptance of the concept of companion diagnostics is an agreement announced this summer. GlaxoSmithKline PLC (GSK) is having Abbott Laboratories, Inc., develop a PCR-based molecular companion diagnostic test to be used to qualify patients for GSK’s MAGE-A3 Antigen Specific Immunotherapy (ASCI). The new test will be run on Abbott’s automated m2000 molecular instrument system. (See TDR, October 12, 2009.)

All these deals point to a rosy future for companion diagnostics. As this area of clinical lab testing expands, pathologists and lab scientists will play greater roles in diagnostic and therapeutic decisions.

Top Ten Stories 2009 – Story Number Ten
Catholic Health Initiatives Invests In Pathology Associates Med Labs

IT IS NOTEWORTHY when one of the nation’s largest health systems invests in a commercial laboratory company. Thus, the announcement by Catholic Health Initiatives (CHI) that it had taken a 25% equity ownership in Pathology Associates Medical Laboratories (PAML) was a major news story during 2009.

CHI, headquartered in Denver, Colorado, owns 78 hospitals in 20 states and has annual revenue of $6.8 billion. PAML, based in Spokane, Washington, is one of the largest independent laboratory companies serving the physicians’ office segment of the lab testing marketplace. (See TDR, November 2, 2009.)

What makes this transaction significant is that a major health system is recognizing the value of laboratory outreach testing and taking steps to increase its participation in this clinical activity. CHI intends to have PAML develop a series of outreach laboratory testing joint ventures among the 78 CHI hospitals.

PAML says that plans are already complete to initiate between six and eight new lab outreach joint ventures with CHI hospitals during the next 24 months. This indicates that CHI is serious about tapping laboratory outreach testing as a way to improve relationships with local physicians, generate profitable cash flow, and create a valuable market asset from these laboratory outreach joint ventures.

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