2011’s Top 10 Lab Stories Point to a Busy 2012

Few “earthquake news events” during a year when many were anticipating ObamaCare reforms

CEO SUMMARY: Given the specific news stories that make up THE DARK REPORT’S list of the “Top Ten Lab Stories for 2011,” it might be said that 2011 was a rather quiet year overshadowed by anticipation of the coming reforms mandated by the Accountable Care Act of 2010. For the clinical lab testing industry, 2011 was a year where much of the news was about government and payer proposals. The biggest lab acquisitions of the year were done by major corporations buying their first lab companies.

IN FUNDAMENTAL WAYS, at the end of 2011, the laboratory testing industry looked much as it did at the end of 2010. Seen from this perspective, 2011 was a relatively calm year for most clinical laboratory organizations and pathology group practices.

But that belies the fact that a number of important trends moved forward during 2011. As these trends play out in coming years, their individual and collective impact on the laboratory testing industry will be significant.

These trends are salted throughout THE DARK REPORT’S “Top Ten Lab Industry Stories for 2011.” Lab administrators and pathologists will recognize that many of 2011’s top lab industry stories are directly associated with major forces of transformation.

Certainly 2011 lacked the drama of a major laboratory acquisition that promised to reshape the competitive marketplace for laboratory testing services. Rather than making the biggest lab companies bigger, the important laboratory acquisitions involved major corporations buying their first—and important—stake in the lab testing market.

That is certainly true of the transaction that saw Novartis AG purchase Genoptix, Inc., for $470 million in January, 2011. Similarly, with its purchase of Caris Life Sciences, Inc., for $725 million in October, Miraca Holdings, Inc., of Tokyo, Japan, gained a major foothold in this country’s lab market. (See Top Ten Story 3.)

For our number one lab industry story of the year, THE DARK REPORT selected the Medi-Cal whistleblower case that centered around allegations that certain independent laboratory companies violated state laws by offering some providers discounted lab tes. prices that were not also extended to Medi-Cal, California’s Medicaid program. (See Top Ten Story 1,)

THE DARK REPORT believes the $300 million collected in the various settlement agreements in the Medi-Cal case may encourage other laboratory whistleblowers to file qui tam actions that focus on controversial lab industry marketing practices, including the use of deeply-discounted lab test prices.

Big changes lie ahead in how both government health plans and private payers will reimburse clinical laboratories. At least three stories on the 2011 Top Ten list involved developments in such areas as reforms to code stacking for molecular tests, first steps by Medicare and private payers to implement value-based reimbursement, and the advent of accountable care organizations (ACOs). This latter model of clinical care may evolve to include lab testing as part of a bundled reimbursement. (See Top Ten Stories 2, 4, and 8.)

Make Way for Informatics

The rapid evolution in information technology and the Internet is a contributing factor in several of the 2011 Top Ten stories. During the year, mobile computing became the hot growth trend in healthcare. With smartphone use accepted and growing, the advent of iPads and similar tablets over the past 24 months has loosed a torrent of demand by physicians to incorporate these devices into their clinical practice. (See Top Ten Story 6.)

A new factor in the lab testing marketplace is the growing demand by consumers for lab testing that is provided by an Internet-based provider. Economics is fueling this source of consumer demand. These are price-shopping patients who lack health insurance or are required to pay high deductibles. They are actively turning to the Internet to find the lab tests they need at affordable prices. (See Top Ten Story 7.)

Of course, EMR adoption by hospitals and providers, stimulated by federal incentive payments for meeting “meaningful use” requirements was one of 2011’s big stories. Across the nation, clinical labs and pathology groups are being stretched by the requests of office-based physicians to interface their EMR system with the LIS. (See Top Ten Story 109.)

Government Budget Battles

Another noteworthy development in 2011 was national recognition that government spending has finally outrun revenue. Budget battles in Washington, DC, revealed the intensity of the problem at the federal level.

But what is equally significant is that this same intense budget process is happening at the city, county, and state levels. How this affects healthcare generally— and clinical laboratories specifically—will be seen in coming years. What made 2011 a watershed year is that elected officials now struggle in the normal budget approval process to meet spending demands. (See Top Ten Story 9.)

It is our recommendation that laboratories and pathology groups use these “Top Ten Lab Industry Stories for 2011” as the basis for a strategic planning session. The list provides a good foundation to evaluate current business plans against changes in the laboratory marketplace.

Events That Influence Labs

In compiling this year’s list of “Top Ten Lab Stories for 2011,” the goal was to draw attention to the news events that would be expected to have great influence on the management and operation of clinical laboratories and pathology groups. As an ancillary service, laboratory testing is influenced and shaped by a wide range of trends and market forces.

1-TDR 2011 TOP TEN
Big Medi-Cal Settlement Sets Stage for More Qui Tam Lab Test Price Suits

ONE GREAT SCHISM in the clinical laboratory industry centers around the use of deeply-discounted laboratory test prices by a select number of lab testing companies. That is why settlement of the Medi-Cal qui tam lawsuit in California got lots of attention.

During 2011, all of the defendant laboratories are reported to have finalized settlement agreements with the California Attorney General. In the case of Quest Diagnostics Incorporated and Laboratory Corporation of America, each vigorously denied the allegations of the whistleblower lawsuit. Quest Diagnostics paid $241 million and LabCorp paid $49 million to end their respective roles in the case.

It is known that similar qui tam suits, filed in at least six other states, are challenging discounted lab test prices that are alleged to violate Medicaid laws in those states. Meanwhile, in August, a group of lab industry executives filed a whistleblower lawsuit in federal court that accuses LabCorp of offering lab test prices discounted below the Medicare Part B fee schedule to managed care companies in violation of federal inducement and anti-kickback statutes.

Thus, across the nation, multiple legal challenges are winding their way through state and federal courts that accuse some lab firms of offering discounted lab test prices in violation of certain state and federal laws. In this sense, one genie is out of the bottle. A surprise court ruling could change the status quo.

 

2-TDR 2011 TOP TEN
First Payers Poised to Reform/Change Code Stacking for Molecular Claims

GOVERNMENT HEALTH PLANS and private payers are concerned about the increased utilization of expensive genetic and molecular tests. Another related issue is the ever-increasing use of code stacked claims that labs submit to payers.

So it was that 2011 marked the first steps by a payer aimed at addressing the issues caused by the use of code stacking when labs submit claims for certain genetic and molecular tests. For the Medicare Region J1, Medicare carrier Palmetto GBA proposed two local coverage determinations (LCD) and a molecular test registry process (MolDx) that it intends to implement on February 27, 2012. (See TDRs, November 7 and November 28, 2011.)

Meanwhile, private payers want to institute pre-authorization requirements for expensive genetic tests and molecular diagnostic assays. Progress on this front has advanced enough to motivate Laboratory Corporation of America to incorporate a new business it calls BeaconLBS (for lab benefit solutions). (See TDR, December 19, 2011.)

In parallel with these developments, some 100 new CPT codes for molecular assays were released by the AMA with an effective date of January 1, 2012. At this point, the national Medicare office has not priced these new codes for 2012 and will leave it up to each local Medicare carrier to determine if they want to accept and pay the new codes in 2012.

 

3-TDR 2011 TOP TEN
Several Corporate Giants Buy their First Stakes in Lab Test Marketplace

ALTHOUGH THE NUMBER OF SIGNIFICANT LABORATORY ACQUISITIONS was limited during 2011, several important new players spent heavily to buy stakes in the laboratory testing market.

The year opened with Novartis AG, the pharmaceutical giant, acquiring Genoptix, Inc., for a purchase price of $470 million. That deal was announced in January 2011.

The other big transaction saw Japan-based Miraca Holdings, Inc., pay $725 million to purchase Caris Life Sciences, Inc., of Irving, Texas. That announcement came in October 2011.

It is worth noting that, in October 2010, GE Healthcare purchased Clarient, Inc., for a price of $570 million. It has been long expected that General Electric Corporation—which is one of the world leaders in imaging and radiology products—would buy its way into in vitro diagnostics (IVD).

Thus, in the 12 months between October 2010 and October 2011, three corporate giants spent a total of $1.8 billion to buy into the clinical laboratory testing marketplace.

Further, each of the acquired lab companies has a primary focus on anatomic pathology testing, particularly cancer. The strong prices paid by the buyers of these companies demonstrate how Wall Street continues to view laboratory testing in general—and anatomic pathology specifically—as a sector of healthcare that will continue to see strong growth in revenue and specimen volume.

 

4-TDR 2011 TOP TEN
Medicare and Private Payers Ready to Implement Value-Based Payment

IN THE UNITED STATES, the end is coming to the era dominated by fee-for-service reimbursement. During 2011, the Medicare program took its first steps to formally launch demonstration projects that utilize value-based reimbursement.

Meanwhile, some major health insurance companies have quietly begun to negotiate contracts with providers that include value-based reimbursement for selected healthcare services. These arrangements typically link improved patient outcomes with greater reimbursement for the provider.

This transition will not happen quickly. It will require years before value-based reimbursement becomes the dominant form of payment from payers.

While accountable care organizations (ACO) and medical homes garnered most of the headlines during 2011, less attention was focused on Medicare demonstration projects that center upon bundled reimbursement and value-based reimbursement. The draft requirements for participation in these Medicare demonstration projects were published during 2011.

It was noteworthy that, in the four different models of bundled reimbursement defined by Medicare officials for that demonstration project, two models specifically required that laboratory test costs were to be included in the bundled price. Alert lab administrators will want to track these developments.

 

5-TDR 2011 TOP TEN
First Wave of Lab Professionals Retires As Oldest Baby Boomers Turn 65

ON JANUARY 1, 2011, a major milestone was reached in American society. That was the day that the oldest baby boomers marked their 65th birthday.

It also marked the beginning of a major demographic trend. During the next 20 years, each day 10,000 of the nation’s 80 million baby boomers turn 65 years old. That makes them eligible for Medicare and Social Security benefits.

This retirement wave also has a direct effect on clinical laboratories and anatomic pathology groups throughout the United States. It means that labs will see their most experienced professionals retire in greater numbers than at any time in the past.

Unfortunately, few laboratory organizations have implemented effective succession planning programs. This is particularly true of many smaller anatomic pathology groups, where the number of physicians can range from three to six.

The impending retirement of one or two of these pathologists—and the inability of the pathology group to recruit replacement pathologists—means that these smaller group practices begin to look at consolidation with other local groups, or even outright sale.

For clinical labs, the coming retirement of senior administrators and experienced lab managers will come with its own set of challenges. For that reason, all lab organizations should have succession planning strategies in place.

 

6-TDR 2011 TOP TEN
Mobile Computing Poised to Find Wide Acceptance within Healthcare

MOBILE COMPUTING IN HEALTHCARE was a big story in 2011, although the full impact of this trend has yet to diffuse across the clinical lab industry.

The big driver in this trend is the expanding use of smartphones and iPads by physicians. Often purchased for personal use, many doctors quickly become interested in using these devices to support their clinical activities.

Essentially, as users of smart-phones and iPads, physicians began pressing hospital information technology (IT) departments to allow them to access relevant clinical and administrative information via these mobile devices. Thus, physicians are “pulling” demand for more mobile computing solutions from hospitals.

The other element in this story is that new information technology makes it simple and fast to design and deploy mobile computing applications. This was the case at Holy Name Medical Center, in Teaneck, New Jersey. The IT department there took just three weeks to write “MicroHIS,” a mobile computing app that allows physicians to use their smartphones to view patient information, including laboratory test data.

In response to these developments, a number of early-adopter lab organizations are working to deploy mobile computing applications that will allow client physicians to access the lab test data of their patients. Expectations are that physicians will welcome these solutions.

 

7-TDR 2011 TOP TEN
Internet-Based Lab Test Companies Grow by Serving Price-Shopping Patients

THERE ARE NEW TYPES OF CONSUMERS for clinical laboratory tests and first to tap this market segment are Internet-based lab testing companies.

These consumers are motivated primarily by lower cost and generally fit into one of three situations.

One group of these patients are uninsured. A second class of patients are what some health policymakers characterize as “underinsured.” Typically, this means that these individuals have a health insurance plan that offers limited benefits.

The third group is comprised of people who have high deductible health insurance plans. That includes folks covered by a PPO, a POS, an HMO, and a fee-for-service plan, where employers now commonly require annual deductibles of $1,500 or more. (Those with health savings accounts [HSA] may have a 100% out-of-pocket annual deductible of as much as $3,100.)

It is access to the lowest price for lab testing which motivates these consumers. Often they are encouraged by their physicians to use these Internet-based lab test companies, since the physicians recognize their patients might skip the clinical lab tests completely if required to pay the “patient bill” prices charged by established clinical labs.

The importance of this trend is that a growing number of patients now have a motivation to shop for labs, using lowest price as a primary selection criteria. For this reason, it may be timely for labs to revisit their test pricing strategy.

 

8-TDR 2011 TOP TEN
Welcome to ACOs and Medical Homes: Goal is to Integrate Clinical Care

HOSPITALS, HEALTH SYSTEMS, AND PHYSICIANS spent all of 2011 preparing for the advent of accountable care organizations (ACO). This triggered the largest wave of provider consolidation since the mid-1990s.

ACOs are one of the major health-care reforms in the Accountable Care Act (ACA) of 2010. Starting in 2012. the Medicare program will contract with ACOs in an effort to improve patient outcomes while better controlling the cost of care. Savings that result from improved patient outcomes will be shared with the ACO.

Most of the nation’s hospitals and health systems are giving full attention to ACOs, as are office-based physicians. In particular, hospitals and health systems have been acquiring office-based physician practices at a stunning pace. Physicians—concerned about their future in a healthcare market expected to be dominated by ACOs—proved willing to sell their practices to local hospitals.

Even health insurers are acquiring ownership of physician practices. This is a big story for the clinical laboratory industry, because it means there are fewer private medical group practices that can freely choose their lab testing providers.

Instead, the owners of these office-based physician groups will be hospitals, health systems, and health insurers. This will make it more difficult for competing labs to retain or expand their market share of office-based physicians.

 

9-TDR 2011 TOP TEN
Federal and State Budget Battles Are a Sign of Unprecedented Fiscal Stress

THROUGHOUT 2011, the financial crises in cities, counties, states, and the federal government dominated the national news headlines. It is a red flag that pathologists and lab administrators ignore at their own peril.

Two things are precipitating the financial melt-down of all levels of government in the United States. One is the direct impact of the longest-lasting depression since World War II (2008- 2010), followed by a very weak economic recovery.

But the second is that the demand for government spending across all sectors—education, health, roads, social programs, and retirement benefits to government employees, to name a few—is growing at the same time that sources of additional taxes and government revenue are flattening or even shrinking.

Independent of the political solutions coming from the left and the right, the black hole of government finances is a fact that every clinical lab and pathology group must recognize in its strategic planning.

The year 2011 will be seen as a clear dividing line, separating relative years of plenty in the 1990s and the 2000s with the rancorous budget battles and inability of government at all levels to fully fund the level of healthcare, education, and social services that the American population has come to take for granted. Labs should budget very carefully, keeping these trends in mind.

 

10-TDR 2011 TOP TEN
First Year of EMR ‘Meaningful Use’ Ends for Hospitals and Physicians

DURING 2011, HOSPITALS AND OFFICE-BASED PHYSICIANS strived to adopt electronic medical records (EMR) on a timetable established by federal incentive programs.

To qualify for federal incentives, hospitals and physicians must meet “meaningful use” (MU) requirements. These incentives will be paid in response to providers meeting Stage 1 and Stage 2 meaningful use guidelines.

In response to these developments, throughout 2011, clinical labs were kept busy working to interface their laboratory information systems (LIS) to the EMR systems of their client physicians. This activity is part of the wider trend to achieve integration of healthcare informatics.

Clinical laboratories and anatomic pathology groups are having to upgrade their own information technology (IT) capabilities in order to fully integrate their LIS’s with the EMRs of client physicians. The particular focus is for labs to support electronic lab test orders that come from the physicians’ EMR, while transmitting lab test results directly back to the patient record in the EMR.

The transition by office-based physicians and hospitals to a fully-digital electronic medical record is a one-time event. That raises the stakes for clinical labs, because if they don’t step up and meet the interface needs of their clients, those physicians are likely to switch and refer their laboratory tests to a competing lab that will meet those needs.

 

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