CEO SUMMARY: For 2013, the big story was money—or, more accurately, less money for providers. This was not limited to clinical labs and pathology groups, but was equally true of hospitals and physicians. In THE DARK REPORT’S annual lookback at the year’s 10 most important stories for the lab industry, the main theme is that government and private payers are reducing reimbursement at an unprecedented pace. In response, most clinical laboratories and anatomic pathology groups are actively reducing their operational costs and looking for ways to boost productivity.
EACH YEAR for more than a decade, THE DARK REPORT has presented its list of top lab industry stories. But never has such an annual list contained the seeds of bad news like 2013.
When gauging the impact of 2013 on clinical laboratories and pathology groups, it is easy to identify finances as the number one challenge confronting the lab testing industry at this time. Payers are proactively taking steps to reduce the prices they pay for laboratory tests.
This is clearly revealed by THE DARK REPORT’S list of the “Top 10 Lab Industry Trends for 2013.” Most of these stories involve payer actions or market events that reduced the money flowing to clinical laboratories and pathology groups. In practical terms, this means that nearly every laboratory organization in the United States is expecting to be paid less money for the same volume of services. In some cases, there have drastic price reductions for specific CPT codes and lab tests.
Similarly, at the national level, the number of hospital inpatient admissions is in the midst of a multi-year decline. As well, hospitals are being paid less for inpatient services. For hospitals experiencing a decline in revenue, one obvious response is to cut the budgets of all clinical services, including the laboratory.
During 2103, there were other important changes to the outreach marketplace that had negative financial consequences for hospital laboratory outreach programs. One such story was that of health insurers excluding hospital outreach labs from their provider networks. Another story was that of office-based physicians selling their medical practices to hospitals, health systems, and even private insurers.
Compounding the gloom that marked 2013 was the failure of the federal Centers for Medicare & Medicaid Services (CMS) and private payers to implement the 114 new molecular test CPT codes that took effect on January 1, 2013. Labs performing these tests went four or five months into the year without payment for these molecular test claims. There were bankruptcies and lab closures as a result of this situation.
Lab Cost-Cutting Trend
It should be no surprise then—given the trends described above—that lab cost-cutting was a top 10 lab industry story for 2013. With hospitals cutting lab budgets and payers slashing lab test prices, smart laboratories responded by accelerating their cost-cutting programs. That is one reason why consultants offering Lean and process improvement services to labs had a boom year.
For the anatomic pathology profession, 2013 may eventually be recognized as a watershed year, for two reasons. First, this is the year when a host of price cuts for a number of important pathology procedures were enacted.
Medicare’s Final Rules
Second, this was when CMS published draft rules for 2014 that proposed draconian price cuts to important anatomic pathology procedures. Yes, the final rules published at the end of November did ease back some of the worst proposals. But not completely. (See TDR, December 3, 2013.)
Thus, moving into 2014, pathology group practices will see less reimbursement from Medicare—and it can be expected that private payers will impose similar price cuts. Additionally, Medicare intends to move ahead with its plan to bundle anatomic pathology procedures and clinical lab tests into its hospital Outpatient Prospective Payment System (OPPS).
All of this is not likely to turn out well for pathologists. Historically, Medicare has not treated pathology appropriately when establishing bundled pricing. The example of inpatient DRGs from the early 1980s is a prime example.
At the same time, pathology group practices will need to respond to the changes in the outreach marketplace, along with the growth of accountable care organizations (ACOs) and similar new models of integrated clinical care. Pathologists can expect that the traditional business model of the private group practice is unlikely to survive these developments. If true, then 2013 will be a watershed year for the entire anatomic pathology profession, since the largest proportion of pathologists work in private group practices.
Good News During 2013
For those who prefer to focus on the positive aspects of the market, the good news is that whole human genome sequencing and rapid gene sequencing is poised for wider clinical acceptance. By the end of 2013, multiple vendors were offering advanced gene sequencing systems capable of generating faster, cheaper, and more accurate gene sequences.
Similarly, there was good news from some of the nation’s largest patient-centered medical home (PCMH) programs. In just a few years of operations, several PCMHs reported cost savings in the tens of millions of dollars annually, accompanied by measurable improvement in patient outcomes.
Another story that was positive is that the Affordable Care Act (ACA) did not have much impact on clinical labs and pathology groups in 2013. (See trend 10 on page 9.) But, given recent media revelations about the design of insurance products offered through the health exchanges, that may not be true by the end of 2014!
TDR 1: Collectively Across All Payers: 2013 Was Year That Labs Were Paid Less
WITH HINDSIGHT, pathologists and clinical lab managers may look back and acknowledge that 2013 was the year that the worm turned on reimbursement for lab testing services.
Across the board, the collective weight of coverage and reimbursement decisions during 2013 by all classes of payers–Medicare, Medicaid and private health insurers–meant less money for lab testing services. Scanning back three decades, there is no comparable year where medical laboratories saw such an across-the-board reduction in what they are paid for lab tests. (See TDRs, February 11 and July 8, 2013.)
Again, to emphasize, the cumulative effect of various payer decisions on coverage and reimbursement through the course of 2013 meant an overall reduction in the revenue paid to nearly all lab organizations.
Evidence supports the conclusion that the payer pricing dynamics that surfaced during 2013 will be the “new normal” for coming years. This will be particularly true for lab testing that is routine, highly-automated, and provides minimal clinical utility for the physician and the patient.
Lab executives can expect to see payers take active steps to reduce their spending on lab testing. It is likely that capitated pricing and bundled reimbursement (think outpatient/outreach “DRGs”) will become quite common.
TDR 2: Cost -Cutting and Productivity Now Essential Themes for Medical Labs
GIVEN THAT REDUCED REIMBURSEMENT for lab tests is one big story in 2013, then it is perfectly logical that more intense cost-cutting by labs of all sizes is an equally significant story this year. (See TDR, May 6, 2013.)
The three primary sectors of the lab industry are all experiencing less money. Reduced lab test prices mean less revenue for independent clinical labs. Anatomic pathology groups saw significant cuts in several important CPT codes, not to mention the end of the TC Grandfather Clause in 2012 that compounded this year’s price cuts.
Hospital laboratories are experiencing a financial double whammy. First, outreach programs are seeing reduced lab test fees. Second, hospitals are shrinking their lab budgets in response to reduced inpatient admissions an associated revenue.
Across the land, lab organizations are devoting more attention and resources to cost-cutting and productivity improvement . At last October’s Lab Quality Confab conference, a record number of attendees showed up to learn effective ways to use the techniques of Lean, Six Sigma, and process improvement in their labs.
There is a direct consequence to this trend. Increasingly, the most successful lab managers will be those who bring both scientific expertise and cost-cutting savvy to their labs’ operations and workflow. To survive in the coming decade, it will be essential for all laboratory organizations to master the skills of continuous improvement.
TDR 3: CMS Was Unprepared to Administer New Molecular CPT Codes on Jan. 1
WHEN JANUARY 1, 2013, ARRIVED, the federal Centers for Medicare & Medicaid Services (CMS) was not ready to implement the 114 new Molecular Tier and Tier II CPT codes.
This was equally true for the majority of private health insurance plans. The direct consequence of this situation was that clinical laboratories and pathology groups submitting claims for these CPT codes went unpaid for months. It was not until the late spring that most Medicare Administrative Contractors (MACs) and private payers began processing these claims. (See TDRs, April 15 and May 28, 2013.)
The disruption and chaos that resulted from this lack of preparedness still lingers. Many labs suffered financially because of the interruption to timely processing of their molecular test claims during the first part of 2013.
For the second half of the year, it was mixed news. In reviewing molecular test claims, some MAC’s declined to cover certain molecular assays. In other cases, the price established for reimbursement was less than what had been paid for the same test when billed under stacked codes during 2012.
The financial damage that was done to individual lab companies and to the lab test industry as a whole is significant. Some labs with proprietary molecular tests went out of business. Other labs are dealing with “no coverage” decisions or deep price cuts to their most important molecular tests.
TDR 4 : Economics of Private Practice Pathology Unraveled on Multiple Fronts During 2013
EVENTS OF THE PAST 24 MONTHS have not been kind to the business model of the pathology private group practice.
This year, on January 1, the diagnostics and digital pathology Medicare program implemented a 52% reduction on the technical component (TC) for CPT 88305. For many pathology labs, this represented a substantial decrease in revenue. The impact of the 88305 price cut was compounded by the termination of the TC Grandfather clause that took effect on July 1, 2012. As a result of both cuts, histology labs operated by many private pathology groups for are losing money or barely breaking even. (See TDR, November 11, 2013.)
It is also true that smaller pathology groups lack the capital they need to beef up their information technology to connect to the EHRs of physicians and hospitals, as well as to support advanced diagnostics and digital pathology.
At the same time, smaller pathology groups also don’t have the money to invest in more complex diagnostic technology. Nor do these small groups have the ability to recruit the subspecialist pathologists they need to perform these procedures.
To this list of woes must be added the approaching end of payment by fee-for-service and the ongoing consolidation of hospitals and doctors into integrated care organizations. These trends are harbingers that the classic era of the pathology private group practice is soon to end.
TDR 5: Nationwide, Hospitals See Decline In Inpatient Admissions, Revenue
IN RECENT YEARS, THE HOSPITAL INDUSTRY has experienced a decline in inpatient admissions. At the same time, many hospitals are reporting a decline in average revenue per inpatient as payers reduce reimbursement for these services.
These facts have not gotten much attention within the lab testing industry. Yet each trend portends important changes for clinical labs and pathology groups.
First, the decline in inpatient admissions is partially a consequence of more office-based physicians practicing proactive care with the goal of keeping their patients out of hospitals. Collectively, their efforts are bearing early fruit.
Second, RAC audits and Medicare penalties for readmissions have caused hospitals to admit a larger number of patients for observations and bill for these services under the Hospital Outpatient Prospective Payment (OPPS).
MedPac, in its report to Congress in March, 2012, wrote, “Inpatient admissions per FFS beneficiary declined 1% per year from 2004 to 2010 and 1.3% from 2009 to 2010. Inpatient use also has declined among non-Medicare patients, and as a result inpatient occupancy has declined as well.”
Both developments are significant for a simple reason. Every hospital that sees a decline in its inpatient revenue will then seek to reduce the budgets of each clinical service, including the clinical laboratory. That is why hospital labs are devoting more attention to cost-cutting initiatives during 2013.
TDR 6: Hospital Laboratory Outreach Model Runs into Tough Market Challenges
ONE WAY TO CHARACTERIZE THE EVENTS of 2013 as they relate to hospital laboratory outreach programs is to say that the year brought multiple headwinds to the established business model of laboratory outreach.
First, many national health insurers took deliberate and even aggressive steps to exclude local clinical labs – including hospital lab outreach programs – from their provider networks. This is because private payers see hospital laboratories as high-cost providers, at least compared to the national lab companies. (See TDR, July 8, 2013.) Second, in a growing number of cities, physician groups have been selling themselves to local hospitals or health systems. This reduces the size of the outreach market for competing hospital outreach programs.
Third, the parent hospitals are seeing flat or even declining inpatient admissions. Faced with less revenue, these institutions are cutting the budgets of their clinical services, including their laboratories. This is starving hospital lab outreach programs of the capital they need to upgrade services, like the information services and LIS-to-EHR interfaces, that are necessary to retain existing clients and win new business.
Several health systems sold their outreach labs to national labs during the year, including Dignity Health and Muir Health. These actions were seen as indicators of a tougher outreach market.
TDR 7: Patient-Centered Medical Homes Are Producing Significant Savings
FOLLOWING YEARS OF INCUBATION as a model of proactive clinical care, patient-centered medical homes (PCMHs) are delivering impressive results in both improved patient outcomes and a reduced overall cost of care.
Examples from Maryland and Michigan are providing solid evidence of the potential for PCMHs to bend the healthcare curve in positive ways.
In June, CareFirst BlueCross BlueShield in Maryland announced that its PCMH program involving about 1 million members had saved $38 million in year one and $98 million in 2012, the second year of the program.
A similar story played out in Michigan. In July, Blue Cross Blue Shield of Michigan (BCBSM) published a clinical study indicating that its PCMH program saved an estimated $155 million during its first three years of operation. The practices participating in this PCMH program provide care to 1 million BCBSM members and another 2 million Michigan residents.
These are substantial cost savings and are a direct result of improved health outcomes for the patients served by PCMH practices. In fact, to date, PCMH programs like the Maryland and Michigan examples are reporting more significant gains than the earliest results disclosed by the Medicare Pioneer accountable care organizations, admittedly only in their second year.
Pathologists and clinical lab managers may want to be more proactive at developing added-value lab services that target PCMH physicians.
TDR 8: Strong Growth in Number of ACOs, Enrollment Now in Tens of Millions
EVERYONE KNOWS THAT THE NEXT BIG THING IN HEALTHCARE is expected to be accountable care organizations private (ACOs) and similar new models of integrated clinical care. 2013 was the year that hundreds of ACOs were announced or began operations.
The Medicare program was first to organize ACOs. However, in many regions across the country, it didn’t take long for prominent hospitals and health systems to organize ACOs in conjunction with physicians and private health insurers.
The year opened with Oliver Wyman, the consulting firm based in New York City, estimating that 259 Medicare ACOS were in operation. Oliver Wyman estimated that between 25 million and 31 million Americans were enrolled in Medicare and ACOs at the end of 2012. (See TDR, February 11, 2013.)
As of September 2013, the Leavitt Partners Center for Accountable Care Intelligence estimated that 493 ACOs were either in formation or already in operation. It was also that the formation of new ACOs had slowed over the course of 2013.
What remains unclear is how ACOs will reimburse clinical labs and anatomic pathology providers for their lab testing services. No definitive trend in ACO reimbursement for lab testing has been identified.
TDR 9: Whole Human Genome Sequencing Poised to Play Big Role in Clinical Care
DURING THE COURSE OF 2013, two things happened that made it more feasible to use whole human genome sequencing for clinical purposes.
First, and most importantly, the latest-generation rapid gene sequencing systems offer more accuracy, shorter sequencing times, and increased automation. Each of these attributes makes it simpler and easier to use gene sequencing for clinical purposes.
Second, the cost of sequencing continues to fall. One manufacturer has gene sequencing equipment that makes it possible to sequence an entire human exome in just a few hours for $875. The price of this gene sequencing system is about $125,000.
Not surprisingly, academic center laboratories are acquiring the advanced equipment necessary to do next-generation gene sequencing in support of clinical diagnostics and announcing collaborations in this field.
That is why Baylor College of Medicine (BCM) in Houston, Texas, is partnering wit DNAnexus (a platform-as-a-service company) and Amazon Web Services ( the cloud computing provider). BCM has already sequenced 3,751 whole genomes and 10,771 whole exomes, representing about 14,000 individuals.
Most importantly, ongoing technology improvements will only improve the gene-sequencing process. These improvements will be mirrored by advances in big data analysis of genetic data. This will make it feasible for more labs to offer gene testing.
TDR 10: Affordable Care Act: Big in 2013, Little Change for Lab Industry-Yet!
IN 2013, ONE OF HEALTHCARE’S BIGGEST STORIES has been the steady implementation of specific elements of the Affordable Care Act (ACA). To date most elements of the ACA have had little impact on how providers use laboratory tests.
Rather, it was the launch of health insurance exchanges—accompanied by the cancellation notices sent to millions of Americans who had individual health insurance policies—that generated regular national headlines this fall. But there will come a time when labs see some form of change or disruption associated with the ACA.
For example, the health insurance exchanges are now offering enrollment in Bronze, Silver, Gold, and Platinum plans for coverage in 2014. Private payers that offer these products are establishing narrow provider networks as a way to minimize their costs.
Narrow networks can often exclude hospital lab outreach programs and independent labs, due to their higher prices compared to the national labs. The extent of this trend and how it may alter competition in different regions is not yet apparent.
Also, the Bronze, Silver, Gold, and Platinum plans require patients to pay a deductible for lab tests for each date of service, up to $45. This will become obvious in 2014 and may increase patient bad debt levels for many labs.