CEO SUMMARY: Not in recent memory has a single calendar year brought such a cascade of news stories that have the potential to affect nearly every clinical lab and pathology group in the United States. Blame it on the lack of money to fund healthcare and how it is motivating government and private payers to find effective ways to reduce what is spent on lab tests through price cuts and constraints on utilization. The biggest lab stories of 2014 will cause financial pain for labs for several years to come.
FROM SEVERAL DIRECTIONS, the status quo laboratory in medicine is threatened by this year’s events. THE DARK REPORT’S Top Ten Lab Stories of 2014 reflect major developments that will directly touch every clinical lab and pathology group practice in the nation.
The prime example is passage of the “Protecting Access to Medicare Act” (PAMA) on April 1. Enactment of this new law tops our list of 2014’s most important news stories.
Congress not only used the law to extend the SGR fix for 12 more months, but it included language in the bill that revises or reforms six different elements of the lab testing marketplace and how Medicare officials are to address these matters. (See story 1 here.)
What quickly caught the attention of pathologists and lab administrators who looked at the language of the new law is the section that requires “applicable laboratories” to report the prices paid by each health insurer and the test volumes for each type of laboratory test. This reporting requirement will commence in 2016.
PAMA’s language requires the Centers for Medicare & Medicaid Services to use this market data to determine the weighted median prices for tests on the Medicare Part B Clinical Laboratory Fee Schedule. These weighted medians will be the Medicare rates that are effective beginning January 1, 2017.
Critics of this section of the new law point out that there is probably not one laboratory organization in the United States today that could assemble that information from its existing laboratory information systems. Yet, the law specifies heavy fines for any laboratory that fails to meet this requirement.
FDA to Regulate LDTs
Another major story with equal potential to engage nearly every lab operating in the United States today involves the plans by the Food and Drug Administration to regulate laboratory-developed tests (LDTs). The federal agency has issued draft guidance for LDT regulation and the public comment period is open until February 2, 2015.
Several national lab associations have expressed strong objections to the FDA’s move to regulate LDTs. In particular, some experts believe that the FDA does not have the statutory authority to regulate LDTs in the manner it proposes. There are signs that at least one lab industry group may be ready to file a lawsuit in federal court to challenge the FDA’s actions. (See story 2 here.)
Theranos, the lab testing company based in Palo Alto, California, is the number three story on our top ten list for 2014. It claims to be have developed unique diagnostic technology which allows it to perform most common lab tests on small specimens (collected with a fingertip needlestick) and report the results in just four hours at a price to patients that is 50% of Medicare Part B lab test fees.
Theranos Is Secretive Firm
The highly-secretive lab company has an agreement with Walgreens, the national pharmacy chain, to use its stores as specimen collection sites. Currently one Walgreens store in Palo Alto and about 30 stores in Phoenix, Arizona, offer Theranos testing. Although it has just entered the clinical testing market, the company has said it is worth $9 billion, based on the $400 million of private equity money put into the company through last June. (See story 3 here.)
Several of the other stories on our top ten lab industry stories for 2014 center on actions by health insurers and government health plans to reduce the money they pay for lab testing services. Most labs felt the pinch during 2014, as they got less money per accession and it took longer to receive payment from health insurers. (See stories 4, 6 and 6 here.)
It has not gone unnoticed during 2014 that the nation’s largest lab companies have become more effective at working with major health insurance companies to craft managed care contracts that favor them and disadvantage the labs that compete with them.
One tactic bigger labs used more frequently during 2014 was to encourage health insurers to exclude competing labs from their networks in exchange for better pricing terms on lab testing services by the labs that win the contract. (See stories 5 and 6 here.)
Cost-Cutting Is Big Story
Given the financial pressure from declining lab test reimbursement and restricted access to patients due to narrow networks that exclude many local labs, it should not be a surprise that one of the big stories of 2014 is the priority labs are making of controlling their costs and developing new ways to deliver more value. (See story 7 here.)
Similarly, the larger number of private pathology group practices that lost their independence in 2014 (through acquisition, merger, or conversion to employees of hospitals) is one of the year’s big stories. This is the overdue consolidation of pathology groups in the 2010s that did not happen in the 1990s, when HMO contracting practices motivated most medical specialties to undergo regional consolidation. (See story 8 here.)
Collectively, this year’s top ten lab industry stories demonstrate the powerful market forces that are transforming healthcare, while also exerting strong pressure on the lab industry.