CEO SUMMARY: During 2015, two stories captured the full attention of most pathologists and clinical lab managers. One was how CMS intends to gather lab price market data as mandated by PAMA. The other was the continued efforts by the FDA to move ahead on proposed guidance for regulation of LDTs. However, the full list of THE DARK REPORT’s “Top 10 Lab Industry Stories for 2015” includes additional developments with the potential to radically change the lab industry as it operates today.
IT WOULD BE EASY TO CHARACTERIZE 2015 as a quiet year for clinical labs and pathology groups. But that hides the reality of how, over the course of 2015, several significant developments took place that will greatly influence the clinical, financial, and operational aspects of laboratory medicine for years to come.
In presenting THE DARK REPORT’S list of the “Top 10 Lab Industry Stories for 2015,” the goal is to identify the year’s most important events through news stories of significance during the year. It is an effective way to understand major trends in the U.S. healthcare system and the clinical laboratory marketplace.
It was a year when acronyms dominated the headlines of lab industry stories: CMS, PAMA (lab price marketing reporting), ADLT, FDA, and LDT. These acronyms represent a federal government agency, new definitions, and activities that will directly cause changes in how labs provide clinical services and get paid.
Of greatest concern to the lab industry are proposed rules by the Centers for Medicare & Medicaid Services and the Food and Drug Administration issued in 2015. The two agencies have yet to finalize and implement their respective proposed rules. That is expected to happen during 2016. (See story 1.)
In the case of CMS, this fall it issued the proposed rule to implement the lab test market reporting requirements of the Protecting Access to Medicare Act of 2014 (PAMA). CMS missed the deadline mandated by PAMA for releasing this rule.
Meanwhile, the FDA issued its draft guidance for regulatory oversight in late 2014 and has taken additional steps during 2015. This year, the FDA gathered input from stakeholders, including clinical laboratories and in vitro diagnostics manufacturers. It also testified at a hearing in Congress last month about LDT regulation.
2015 Was a Watershed Year
In this regard, in coming years when lab administrators and pathologists look back on 2015, they will probably consider this to be the watershed year when everything that followed in the lab testing marketplace was much different than what happened in the years prior to 2015.
One reason is the expanding use of new diagnostic technologies by clinical labs. Faced with a flood of new molecular and genetic tests, government and private payers are unable to develop coverage guidelines and pricing in a timely fashion. Instead, many health insurers are simply deciding not to cover most new genetic tests. (See story 2.)
One response to this trend was some payers required pre-authorization of certain clinical laboratory and genetic tests. The pilot laboratory benefit management program that UnitedHealthcare launched in early 2015 for some of its health plans got the most attention. But the year ended with Blue Cross Blue Shield of South Carolina implementing its own lab test pre-authorization program that is administered by a new lab benefit management company. (See story 4.)
The health insurance industry took other actions during 2015 that had significant financial consequences for nearly all the nation’s clinical laboratories and pathology groups. Some national health insurers got much tougher when auditing labs. In particular, they wanted documentation that the labs had been collecting copays and deductibles from patients. (See story 6.)
National news coverage of federal whistleblower lawsuits against lab companies that settled in 2015 brought attention to a growing problem within the clinical lab industry: fraud and abuse on an unprecedented scale. In court documents the Department of Justice filed during the summer against the principals involved with Health Diagnostic Laboratories of Richmond, Virginia, for example, federal prosecutors claimed that the Medicare and Tricare programs had paid HDL more than $500 million in 60 months between 2010 and 2014!
This fall, Millennium Health, a toxicology testing company, agreed to pay $256 million to settle its qui tam case for alleged false claims submitted from 2008 through May 2015.
It is estimated that just these two lab companies generated $1 billion in Medicare payments using, as described in court documents, inducement schemes that violated federal and state antikick-back laws. This fraudulent activity has Medicare officials on the alert and motivated several private health insurers to file civil lawsuits against lab companies they claim are engaged in fraudulent billing practices. (See story 3.)
Ups and Downs at Theranos
Of course, no list of the 10 biggest lab industry stories for 2015 would be complete without including Theranos, Inc., the controversial lab testing company based in Palo Alto, California. As 2015 opened, Theranos was the darling of the business press and was hailed as poised to disrupt the clinical lab industry. In Phoenix, it was offering lab testing in about 40 Walgreens Pharmacies. However, as 2015 closed, Theranos was in full defensive mode, after a series of investigative news stories in The Wall Street Journal revealed serious problems Theranos was having with its proprietary technology. (See story 10.)
THE DARK REPORT encourages you to use this list of the 10 biggest lab industry stories for 2015 as the basis for strategic planning at your lab organization.
Fed Regulators Target Lab Industry with PAMA Reporting, LDT Rules
TWO FEDERAL AGENCIES USED 2015 to advance their plans to increase control and oversight of the clinical lab industry. For CMS, the goal is to reduce prices the Medicare program pays for lab tests. For the FDA, it is to regulate LDTs.
CMS is acting under the mandate of the Protecting Access to Medicare Act (PAMA) of 2014. One section of the law calls for CMS to gather lab price market data in 2016, then use this data to set Part B Clinical Laboratory Test fees for 2017.
The federal agency released its proposed rule on September 25. The comment period ended in late November. The lab industry is closely watching to see what CMS will do next to issue the final rule. CMS further stated that it projected cost reductions of $5 billion over 10 years from implementation of this mandate. (See TDR, October 5, 2015.)
For its part, the FDA released its draft guidance for laboratory-developed tests (LDTs) in 2014. However, throughout 2015, there was plenty of action on this subject. The FDA conducted industry forums. It also testified at Congressional hearings this fall about how LDTs should be regulated.
Every lab will feel the impact of both regulatory initiatives as they are implemented. That is why this story is the most significant one of 2015 for the lab industry. The two regulatory programs will mean less revenue for labs and increased costs to comply with both proposals.
Payers Get Tougher with Lab Audits, Genetic Test Coverage Decisions
Audits of clinical laboratories got tougher, including some payers asking audited labs to document that they were billing and collecting amounts patients owed. Provider networks continued to narrow as health insurers worked to exclude higher-priced labs. (See TDRs, May 11 and August 24, 2015.)
Reimbursement for lab tests continued to shrink, particularly for new molecular diagnostic assays and genetic tests. Similarly, labs introducing new lab tests found it much more difficult to get a favorable decision to cover.
Many lab executives say they cannot remember a tougher year than 2015 for negotiating managed care contracts and obtaining favorable coverage decisions for new tests, particularly for molecular and genetic tests.
Experts say that this is the new reality in healthcare. The Medicare program struggles to balance its finances in the face of ongoing increases in the demand for all healthcare services, including lab testing. Private health insurers believe the skyrocketing number of claims for new genetic tests to be financially unsustainable. This is why they consider one solution to this problem is simply not to cover most new genetic tests. For these reasons, why lab executives should consider 2015 to be the “new normal” in payer contracting.
Immense Scale of Lab Fraud, Abuse Revealed in HDL, Millennium Cases
FRAUD AND ABUSE by a substantial number of laboratory organizations has been happening and has gone unnoticed by most hospital lab administrators—unless their outreach lab found itself competing against one or more of these labs willing to push federal and state compliance boundaries.
Did you know that federal prosecutors claim that just two lab companies used false claims to be paid almost $1 billion by Medicare and Tricare during the period 2008 through 2015? This is lab fraud on an immense scale.
Defendants in these two whistleblower cases were Health Diagnostics Laboratories of Richmond, Virginia, and Millennium Health of San Diego, California. Each lab company agreed to settle these charges and pay penalties during 2015, while not admitting guilt. (See TDRs, September 14 and November 16, 2015.)
There is market evidence to indicate that these two cases are simply the tip of the iceberg and that fraud and abuse is extensive, particularly in the lab testing sectors of toxicology/pain management and some specialty lab testing.
Private health insurers are waking up to this fraud and abuse. HDL found itself sued by both Aetna and Cigna. The two insurers want to recover the money they paid HDL from claims that they say, in court documents, violate their contracts with HDL.
This is why, for 2015, payers are getting tougher on labs. Audits of lab test claims are more rigorous, even as payers get tougher on out-of-network billing and coverage of new proprietary lab tests.
‘Lab Test Benefit Management’ Launches at UnitedHealth, BC of SC
DURING 2015, TWO MAJOR HEALTH INSURERS implemented different approaches to managing the utilization of laboratory tests by ordering physicians. This marks the formal launch of the era of “laboratory test benefit management programs.”
Similar to pharmacy benefit management, a lab test benefit management company wants to deliver two benefits to payers. One, it uses algorithms developed from evidence-based medicine to pre-authorize designated tests when a physician places an order. Two, on behalf of the payer, it manages a network of clinical labs that meet criteria for patient access, quality and price.
In April, UnitedHealthcare launched full implementation of its laboratory benefit management program, which is managed by BeaconLBS, a division of Laboratory Corporation of America.(See TDRs, July 21, 2014 and April 20, 2015.)
Last month, Blue Cross Blue Shield of South Carolina began its own lab test benefit management program administered by Avalon Healthcare Solutions. (See TDR, November 16, 2015.)
Two factors motivate payers to manage lab test utilization. One is how the growing number of molecular and genetic tests—many lacking data to support their clinical value—overwhelms payers. The second factor is that insurers are responding to the escalating amount of fraud by certain lab companies in certain sectors of lab testing. (See TDR, September 14, 2015.)
Health Insurers Seek to Consolidate: Aetna Buys Humana, Anthem Buys Cigna
IT FINALLY HAPPENED THIS YEAR! The nation’s biggest health insurers moved to swallow less-big national health insurance companies as the consolidation of the health insurance industry took an unwelcome turn for labs and pathology groups.
Aetna, Inc., started this latest round of consolidation on July 3 by announcing an agreement to buy Humana for $37 billion. Then, just 21 days later, Anthem said it would acquire Cigna for $48 billion.
Both deals must first clear regulatory reviews before they can close. Antitrust regulators and Congress have expressed concerns about these acquisitions. Should both companies survive these reviews and go to a closing, the result will be that, between them, Aetna and Anthem would provide medical insurance to about 73 million beneficiaries.
This development is inauspicious for hospital lab outreach programs, community labs, and independent lab companies. That’s because the larger health insurers prefer to contract with the two national lab companies to obtain the deeply-discounted lab prices these labs offer.
Wall Street analysts predict that more acquisitions of health insurers will take place. This will further concentrate market share among the handful of super-sized health insurance companies that survive this process.
One consequence of further payer consolidation is that, from 2015 forward, it will be increasingly difficult for regional and community labs to negotiate favorable managed care contracts with the handful of supersized health insurers that emerge from this current round of consolidation.
Labs Step Up Efforts to Help Docs Utilize Lab Tests More Efficiently
In fact, 2015 is the year that it became common to find lab test utilization as a top priority in the clinical strategies of labs throughout the United States. Labs are spending money to expand their capabilities to help physicians improve how they utilize lab tests.
Leading the way on improving lab test utilization are labs in major health systems. At Cleveland Clinic, pathologist Gary Procop, MD, spearheads a multi-year effort to improve lab test utilization. Five related initiatives have produced more than $2 million in savings in this ongoing lab test utilization effort. (See TDR, June 1, 2015.)
It is a similar story at Henry Ford Health System in Detroit, where the lab team has developed 10 ways to add value by improving how physicians use lab tests. These 10 ways range from selecting the right diagnostic technology to reduce inpatient length of stay to decreasing unintended operating room testing. (See TDRs, August 24 and October 5, 2015.)
Surging interest in lab test utilization during 2015 comes ahead of the long-predicted end of fee-for-service payment for lab tests. That is why it is a timely strategy that positions labs to contribute value.
Innovative Labs Demonstrate Effective Role of Genetic Testing
Across the nation, children’s hospitals are among the leading innovators in the use of genetic tests to improve patient outcomes. This is true of Seattle Children’s Hospital, where pathologists have become more closely engaged with physicians to help them select the genetic tests that are the most appropriate, as well as interpret the results to determine the most effective therapy for patients.
This value added lab service was so successful that the lab team created a service called PLUGS (Pediatric Laboratory Utilization Guidance Services) that is used by more than 30 hospitals around the United States. This program improves physicians’ utilization of genetic tests while reducing the overall cost of this testing. (See TDR, April 20, 2015.)
Another example of progress in using genetic tests comes from Mayo Clinic. In support of pharmacogenomic testing, Mayo conducted a study of five genes associated with drug metabolization in 1,000 patients.
The study revealed that only 1% of the study participants had no variants in all five of the genes that were tested. This information is being used to advance patient care at Mayo Clinic. (See TDR, June 22, 2015.)
Next-Gen Gene Sequencing Moves Swiftly To Establish Clinical Value
NEXT-GENERATION GENE SEQUENCING proved to be the explosive trend during 2015. Not only did a large number of new lab testing companies enter the market, but a growing number of labs in academic centers and tertiary care hospitals found it feasible to acquire gene sequencing equipment and expertise and offer relevant tests for their client physicians.
How explosive is this growth? One company tracking the prices of genetic tests tells THE DARK REPORT that there are at least 60,000 unique genetic tests available for purchase from about 300 labs!
But what matters more than the increase in the total number of unique genetic tests being offered for clinical testing purposes is the ability of some of these tests to deliver improved diagnostic accuracy, guide the selection of therapy, and contribute to improved patient outcomes.
Sequencing exomes for clinical purposes is one good example. Over the past 18 months, several studies published in the Journal of the American Medical Association and other journals have documented the clinical value of exome sequencing for selected patients.
Another development during 2015 is that, because it is ever-cheaper, faster, and more accurate to use next-generation gene sequencing for clinical purposes, more patients are being tested. Next-gen gene sequencing represents the perfect opportunity for pathologists and PhDs to deliver more value—while improving patient care and leading the transition to precision medicine and personalized care.
Consolidation Continues to Swallow Private Practice Pathology Groups
THROUGHOUT THE YEAR and in most regions of the United States, smaller pathology group practices quietly gave up their independence by opting to sell, merge, or even become employees of the hospital or health system they served.
This consolidation of the anatomic pathology profession on a large scale is hidden from public view. That’s because many of these sales, mergers, or conversions to employee status are unpublicized and involve groups of just two to five pathologists.
Among the consistent buyers of pathology group practices are Laboratory Corporation of America, Quest Diagnostics Incorporated, and Aurora Diagnostics. Many of their pathology group acquisitions are unannounced, as the public lab companies consider them to be immaterial for investor disclosure.
Two recent examples of larger pathology groups giving up their independence are: 1) the sale of Consultants in Laboratory Medicine of Toledo (16 pathologists) to Aurora Diagnostics on October 29; and, 2) the pending sale of Pathology Inc. of Torrance, California (16 pathologists) to LabCorp. (See TDR, December 7, 2015.)
Consolidation of pathology groups does not mean fewer pathologists are working. Demand for experienced pathologists is strong. Consolidation means that fewer pathologists are practicing as partners or owners of their own groups.
Theranos Starts Year as Superstar, Ends 2015 Under Intense Scrutiny
NO LAB COMPANY HAS EVER CAPTURED the attention of pathologists, lab executives, and hospital/health system administrators the way Theranos has. But 2015 was the year that this lab company demonstrated the truth of the adage that, “what goes up, must come down.”
Theranos went “up” in 2013 when it was the subject of a complimentary profile in The Wall Street Journal. In the story, Theranos said it had an agreement with Walgreens to put its proprietary lab testing technology into Walgreens’ 8,400 pharmacies nationwide. Theranos suddenly had national media attention.
The “down” came in October 2015 and the irony is that it was The Wall Street Journal that published an exposé about the lab company’s problems on several fronts,including the allegation that Theranos had ceased using its fingerstick collection method for all but a handful of the clinical tests it offers to patients. (See TDRs, April 20 and October 26, 2015.)
Another news story disclosed that, based on an agreement it had with Theranos, Safeway had spent $350 million to build blood collection and blood test centers in 800 of its grocery stores. According to the news story, Theranos failed to deliver lab collection and lab test services to these Safeway stores.
Theranos has responded to these disclosures and posted statements about these matters on its website. It continues to conduct business and offer clinical lab testing services in Palo Alto, California, Phoenix, Arizona, and Harrisburg, Pennsylvania.