CEO SUMMARY: What makes 2010 a watershed year for the laboratory testing industry is enactment of the 2,700-page Patient Protection and Affordable Care Act (PPACA). Even if parts of this bill are repealed, the remaining parts of the massive legislation will trigger major changes to the healthcare system as it operates today. Other stories in 2010 point to a promising future for the lab testing industry, particularly in the field of anatomic pathology and molecular diagnostics.
FEW WOULD CHALLENGE ENACTMENT of health reform legislation as the most important lab industry story for 2010. Signed into law in March, it will cause far-reaching changes to the healthcare system as we know it today.
For that reason, THE DARK REPORT has ranked it number one on our “Top Ten Lab Stories for 2010.” However, the government’s role in a top ten lab industry story is not restricted just to passage of the health reform bill. At least three other stories on our list involve government actions that have the potential to greatly influence or alter the laboratory testing marketplace.
For example, our story number two centers around the fact that 480,000 physicians are poised to begin EMR adoption starting in 2011. This is a direct result of federal financial incentives and disincentives slated to take effect between 2011 and 2015. (See page 5.)
Our story number eight recognizes the importance of the FDA’s public statements that it is prepared to regulate laboratory-developed tests (LDTs). This summer, it began to hold public meetings to gather comment and input from the clinical laboratory testing industry and other interested parties. (See page 8.)
Similarly, story number 10 deals with the court ruling by a federal judge that invalidates seven of the BRCAI and BRCAII patents that underpin Myriad Genetic’s proprietary molecular assay. The case now goes to the appeals court and experts believe that it may reach the Supreme Court. (See page 9.)
Thus, during 2010, the federal government actions represent four of the 10 stories in our list. Compared to the 11 years that THE DARK REPORT has compiled a lab industry “top ten stories” list, this is quite unusual. Since 1999, each year’s list of top ten stories has seldom included more than two stories directly tied to an action or new policy by the federal government.
What else is new on this year’s top ten story list? The answer to that question is “anatomic pathology.” Four of the remaining 10 stories on the 2010 list involve major developments in the anatomic pathology sector of laboratory testing.
As you will read, pathologists at Beth Israel Deaconess Medical Center (BIDMC) in Boston have launched a research collaboration to sequence whole genomes of patient specimens, with the goal of identifying new ways to diagnose and treat cancer and other diseases. This story is ranked number 3. (See page 6.)
Big News in Anatomic Path
At number 5 is the news that Roche Holdings paid $100 million to acquire BioImagene, Inc., the digital pathology company. (See page 7.) Following at number 6 is General Electric’s acquisition of Clarient, Inc., for the princely sum (particularly if you were a Clarient shareholder) of $587 million! Clarient is a national laboratory company that provides pathology testing services, including its own proprietary molecular assays. (See page 7.)
Rounding out the four anatomic pathology stories on our top ten list is story number 9, which is the news that several private pathology group practices decided not to sell themselves, but to instead bring in private equity investors and partner with them to further develop their pathology group practices.
The first two pathology groups out of the gate in January, 2010, with this strategy were PathGroup, Inc., in Nashville, Tennessee, and Pathology, Inc., in Torrance, California. Based on news reports, they raised $100 million and $25 million, respectively. (See page 9.)
That doesn’t mean the clinical laboratory side of the lab testing industry was quiet in 2010. Our story number 7 is about the increased interest that hospital and health system CEOs are showing in building their laboratory outreach testing programs.
Hospital CEOs Take Action
Two news events that support this trend were the announcements this fall by Providence Health & Services of Burbank, California, and Centura Health of Denver, Colorado, that each would collaborate in a laboratory testing outreach joint venture with Pathology Associates Medical Laboratories, Inc., of Spokane, Washington. The health systems operate six and 12 hospitals, respectively, in their primary service regions. (See page 8.)
It is noteworthy that there is steady growth in the number of hospital and health system CEOs who now recognize and acknowledge the value that a profitable and productive laboratory outreach testing program has to the institution. It means that more resources are likely to be channeled to various hospital laboratory outreach programs. In turn, that will make them stronger when competing for the lab test referrals of office-based physicians.
Collectively, THE DARK REPORT’S “Top Ten Lab Stories for 2010” provide a good road map for understanding the current state of the laboratory testing marketplace and how it is likely to evolve in coming months.
It is recommended that laboratory administrators and pathologist business leaders use this list of top lab stories in 2010 as the basis for a strategic planning session within their laboratory organizations. This can be a useful step in updating strategic business plans so they take into account the need to respond to changing government regulations as well as new developments in the competitive marketplace. Contact Robert L. Michel at 512-264-7103 or at firstname.lastname@example.org.
TOP TEN OF 2010 STORY no.1
Passage of Health Reform Bill Sets U.S. Healthcare on Uncertain Course
REGARDLESS OF WHETHER YOU ARE FOR OR AGAINST the health reform bill called “Obamacare,” its passage by Congress last spring is a watershed event in American healthcare.
With its enactment, the healthcare system in the United States was propelled into an uncertain future. That uncertainty exists for two reasons. First, the 2,700-page legislation spells out numerous significant changes and creates a host of new commissions with the charter to study and change specific areas of healthcare.
Second, the voter displeasure expressed last election day makes it possible that foes of the health reform legislation might actually be able to repeal significant parts of the bill.
What is certain to occur is a reduction in fees for laboratory testing. For the five years of 2011 through 2015, Medicare Part B laboratory testing fees will be reduced by 1.75% each year. (See TDR, August 23, 2010.) Labs are likely to also be hit by the 2.3% tax on medical devices. This tax takes effect on January 1, 2012. (See TDR, March 29, 2010.) Repeal of either the specified Medicare Part B fee cuts or the medical device tax is uncertain at this time.
Enactment of the Patient Protection and Affordable Care Act (PPACA) must be considered the single biggest news story for the lab testing industry during 2010. In each succeeding year, consumers, hospitals, physicians, and labs will learn more about how this legislation changes today’s status quo.
TOP TEN OF 2010 STORY no.2
480,000 Physicians Poised to Adopt EMR Systems Starting Next Year
WIDESPREAD ADOPTION of electronic medical record (EMR) systems by virtually all the nation’s office-based physicians will forever change the way clinical labs and pathology groups provide lab testing services.
This summer, federal officials released the final draft of “meaningful use” criteria. These spell out precisely how the physician must use an EMR to qualify for federal incentives that will be paid during 2011, 2012, 2013, and 2014. (See TDR, August 2, 2010.)
During this four-year period, an individual physician can earn as much as $30,000 in total federal incentives for demonstrating meaningful use of the EMR. Starting in 2015, any physician not using an EMR will be paid less by Medicare as a penalty. This combination of incentives and dis-incentives is expected to motivate more than 480,000 physicians to adopt EMRs during the next 48 months.
This is a story that most pathologists and clinical laboratory executives fail to fully acknowledge. First, all clinical laboratories and pathology groups will be required to spend lots of money and resources to arrange interfaces between their lab information systems (LISs) and their client physicians’ EMRs. Failure to respond effectively means the lab could lose that physician’s account.
Second, this is a “one-time” transition. By 2015, the mass adoption wave will be over. That is why labs must be prepared to help physicians adopt an EMR.
TOP TEN OF 2010 STORY no.3
Beth Israel Pathology Opens Door to Whole Human Genome Sequencing
THIS FALL, THE PATHOLOGY DEPARTMENT at Beth Israel Deaconess Medical Center (BIDMC) announced that it was launching a research project to use whole human genome sequences for the study of cancer and other diseases.
What makes this possible is the fact that the cost of sequencing an entire human genome has fallen to about $8,000—and is expected to continue a steady decline into the foreseeable future. (See TDRs, October 15, 2010 and November 15, 2010.)
By all measures, this is a milestone event for anatomic pathology and the laboratory medicine profession. It represents one of the earliest research efforts to take patient specimens, particularly of cancer, and sequence the entire human genome. The resulting information will be studied to identify better ways to diagnose disease and select the best therapies.
The Chair of Pathology at BIDMC, Jeffery Saffitz, M.D., Ph.D., told THE DARK REPORT that, as it becomes quite cheap to sequence an entire human genome, pathologists are likely to find themselves in a primary care role. As the whole genomes of well adults and newborns are analyzed, it will be possible for pathologists to help develop health maintenance plans and participate in lifelong efforts to optimize health.
Should this come to pass, it would give pathologists the same important role in wellness management that they currently have in diagnosing disease.
TOP TEN OF 2010 STORY no.4
ISO 15189 Makes Further Progress among U.S. Clinical Laboratories
YOU CAN STILL COUNT THE NUMBER OF ISO 15189-ACCREDITED LABORATORIES in the United States on less than 10 fingers. But that won’t be true by the end of 2011.
Over the course of 2010, a number of first-mover clinical laboratories achieved accreditation to ISO 15189:2007 Medical Laboratories. A larger number of clinical laboratories during the year began the process required to eventually earn accreditation to ISO 15189.
Probably the largest laboratory organization to earn ISO 15189 accreditation during 2010 was Spectra Laboratories, Inc., of Rockleigh, New Jersey. A division of Fresenius Medical Care North America, Spectra typically handles 109,000 patient accessions weekly. (See TDR, June 25, 2010.)
ISO 15189 is gaining global favor as the quality management system (QMS) of choice for clinical laboratories. The ISO 15189-accredited laboratories in the United States report that adoption of a QMS has brought tangible benefits and positions them to deliver continuous improvements in quality and patient service.
This story makes THE DARK REPORT’S Top Ten for 2010 because it demonstrates how progressive laboratory organizations in the United States are working to raise the bar ever higher on patient quality and lab performance.
TOP TEN OF 2010 STORY no.5
Digital Pathology Gets Respect as BioImagene Sells for $100 Million
PROBABLY THE MOST SURPRISING ACQUISITION of an in vitro (IVD) manufacturer during 2010 was Roche Holdings’ purchase of BioImagene, Inc., for $100 million in August.
BioImagene is one of the early leaders in selling digital scanners and digital pathology systems. This is a field so new that probably less than 1,000 pathology laboratories worldwide own and operate a digital pathology system. (See Dark Daily, August 24, 2010.)
Thus, it is significant that Roche was willing to pay $100 million for a young firm selling products into an infant market. For pathology marketplace observers, this is an important confirmation that digital pathology has a bright future.
It should not be overlooked that another healthcare giant is also developing its own digital pathology solution. Omnyx, LLC, is General Electric’s joint venture with the UPMC Health System. Unlike Roche, which has both a large pharmaceutical business and a large IVD business, GE is big in radiology and molecular imaging.
Pathologists can expect to see both multi-billion-dollar healthcare giants develop digital pathology solutions that advance the respective interests of each company. In the case of GE, digital pathology applications that are integrated with molecular imaging are a likely outcome. In the case of Roche, it will be to use digital pathology solutions to support decisions about use of therapeutic drugs.
TOP TEN OF 2010 STORY no.6
GE’s $587 Million Purchase of Clarient Is Big Boost for Anatomic Pathology
WILL ANATOMIC PATHOLOGY and molecular diagnostics be a fast-growing source of profits in future years? General Electric just placed a $587 million bet that the answer to that question will be “yes!”
On October 22, GE announced an agreement to purchase Clarient, Inc., for $587 million. Based in Alieso Viejo, California, Clarient offers a menu of specialized testing services, including proprietary molecular assays.
Wall Street investors were surprised at the strong price that GE was willing to pay for Clarient. That’s because, for 2009, Clarient reported $91.6 million in revenue and posted a net loss of $6.1 million. Thus, GE’s purchase price of $587 million represents one of the largest premiums paid by a buyer for a laboratory testing company during the past 10 years. (See Dark Daily, October 22, 2010.)
It should be noted that General Electric is staking out a strong position in molecular pathology. It is a partner in Omnyx, LLC, its digital pathology joint venture with UPMC Health System. Now it owns a national pathology company with sophisticated expertise in molecular diagnostics.
GE’s acquisition of Clarient is a bold statement of its intent to become a major player in molecular diagnostics and anatomic pathology. It also hints at a strategy that GE may have of developing an integrated diagnostic product line that combines molecular imaging with molecular pathology.
TOP TEN OF 2010 STORY no.7
PAML’s New Hospital Outreach JVs Reflect More Interest in Lab Testing
DURING 2010, THERE WAS COMPELLING EVIDENCE that more hospital and health system CEOs are waking up to the immense value that a successful laboratory outreach program can deliver to their institutions.
Pathology Associates Medical Laboratories, Inc. (PAML), is one direct beneficiary of the increased interest of hospital CEOs. PAML entered into hospital laboratory outreach joint ventures with two multi-billion-dollar health systems just weeks apart this fall.(See TDR, September 13, 2010.)
On August 31, PAML and Providence Health & Services of Burbank, California, announced a lab outreach joint venture that will operate in the San Fernando Valley. Providence owns six hospitals in California.
Next, on September 7, PAML and Centura Health of Denver, Colorado, disclosed their plans to operate a laboratory outreach joint venture. Centura owns 12 hospitals in the region and reported revenue of $1.8 billion for 2010.
Each of these new joint ventures are an important sign that hospital laboratory outreach programs are a trend which continues to grow. This is true in both the growth in the number of hospitals which operate such programs, and growth in the market share of physicians’ office lab test referrals that are served by hospital laboratory outreach programs.
For pathologists who advocate that lab testing be performed near physicians and patients, this is a favorable trend.
TOP TEN OF 2010 STORY no.8
FDA Takes First Steps to Regulate Laboratory-Developed Tests (LDTs)
SEVERAL BREAKING NEWS STORIES during 2010 forced the FDA to put regulation of LDTs at the top of its action list.
Any potential FDA action that brings LDTs under direct FDA purview will directly touch every clinical laboratory and anatomic pathology group in the United States. That’s because a wide range of commonly-ordered laboratory tests are LDTs and are performed daily in literally every lab in the nation.
Although the FDA has rattled sabers for years about its right to regulate LDTs, it had not taken definitive action. Then, in the spring of this year, news headlines trumpeted how Walgreens Company was ready to sell genetic testing kits to consumers in 6,000 of its retail pharmacies, beginning on May 14, 2010. The FDA swiftly responded. It also sent letters to a number of Web-based genetic testing companies that targeted consumers. (See TDR, June 21, 2010.)
Next, the FDA announced that it wanted to broadly regulate LDTs. It convened a public meeting on July 19, 2010, to solicit public comments on its plans. An overflow crowd of laboratory professionals packed the meeting to express their opinions on the FDA’s intent to regulate LDTs. More meetings and public comment will take place in coming months.
Should the FDA decide to exercise tight regulatory control over all laboratory-developed tests, this will be a major development for the entire clinical laboratory testing industry.
TOP TEN OF 2010 STORY no.9
Anatomic Pathology Groups Tap Private Equity Funds for Capital
EARLY IN 2010, several of the nation’s larger private anatomic pathology groups accepted tens of millions of dollars from private equity investors.
The year opened in January with PathGroup, Inc., of Nashville, Tennessee, announcing a leveraged recapitalization which raised more than $100 million. Also in January, Pathology, Inc., of Torrance, California, raised capital, reported by some sources to be $24.65 million. (See TDR, January 25, 2010.)
In each case, pathologist-owners of the existing private pathology practice decided not to sell the entire business. Rather, the pathologists sold an ownership share to private equity investors, while retaining substantial equity for themselves.
These two private equity deals, along with several other similar transactions involving private pathology groups during 2010, signal a shift in the business thinking of some larger pathology groups. Until 2010, it was more common to see a buyer purchase the entire pathology practice, including the technical lab- oratory and professional service group.
Instead, these pathology practices are choosing to keep a significant equity share in their business, while tapping private equity investors for capital that can be used to fund expanded sales and marketing programs, along with other improvements to the business activities of the group. As other pathology groups need to cash out retiring partners, there is likely to be more of these types of deals.
TOP TEN OF 2010 STORYno.10
Federal Court Ruling Against Myriad May Change Gene Patent Protection
MANY PATHOLOGISTS AND LABORATORY SCIENTISTS believe that genes should not be patented. At least one federal judge agrees with that position and ruled against Myriad Genetics in a court case that is now moving to the federal appeals court.
It was March 29 when a federal judge’s ruling in New York invalidated seven patents related to the BRCAI and BRCAII genes. Now the action moves to the federal appeals court level and some legal experts believe the Supreme Court may end up accepting this case. (See Dark Daily, March 31, 2010.)
If true, it will be years before Myriad Genetics and the laboratory testing industry learn whether the federal court system will uphold patents on genes or overturn existing laws that support the patents Myriad uses to protect its proprietary molecular assays.
The twist in this story is that, in November, the Department of Justice (DOJ) filed an amicus brief with the appeals court. It argued that mere “isolation” or “purification” has never been enough for a patent. This position is contrary to earlier DOJ defenses of gene patents.
The stakes in this court battle are huge. Laboratory tests involving tens, hundreds, and thousands of genes are working their way toward clinical use. If labs had to pay patent licensing fees on every gene, this would be both expensive and time-consuming. It would hold back progress in genetic testing.