State of Clinical Lab Industry Likely to Be Mixed in 2016

Review of healthcare’s macro trends shows why labs must prepare for rapid pace of change

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CEO SUMMARY: Over the next 24 months, it will be essential for every clinical laboratory and anatomic pathology group to develop clinical and financial strategies that meet the changing needs of health insurers, hospitals and health systems, physicians, and patients. THE DARK REPORT provides its assessment of key macro trends for 2016, along with comments about how first-mover lab organizations are delivering more value to stay ahead of these macro trends.

WITH 2016 JUST A FEW WEEKS AWAY, most clinical laboratory organizations face what may be the most challenging and complex market for healthcare and lab test services since the advent of managed care plans in the early 1990s.

These challenges complicate the strategic planning underway at many labs as they prepare for 2016 and lock down budgets, plans for capital spending, and business development goals. To assist in this effort, THE DARK REPORT offers its perspectives about the current state of the clinical laboratory industry, along with several key developments to expect during 2016.

Before reviewing this assessment, it is important to note that 2016 and beyond will be a time of accelerating change, particularly when compared with the 1990s and 2000s. Perceptive lab administrators and pathologists already understand this fact and are prepared to act decisively.

Macro trends within the American healthcare system involve several primary elements. Trend one is the shift toward integrated care delivery organizations, such as ACOs and patient-centered medical homes (PCMHs). Such entities assume total responsibility for the health of all beneficiaries for which they are responsible.

Leavitt Partners, in a study published in May, reported that 744 ACOs are in operation. This is an increase from 490 ACOs at the end of 2013.

There has been a similar growth in PCMHs, but no recent national numbers are available. However, Michigan illustrates the progress of PCMHs. In 2015, Blue Cross Blue Shield of Michigan stated that its network included 4,340 physicians in 1,551 practices who met the criteria of a PCMH.

Rapid growth in the number of beneficiaries enrolled in ACOs and PCMHs creates a challenge for clinical labs and pathology groups that want access to these patients. Integrated care organizations, to fulfill their mission of total care, need more from labs than simply a timely test result at the lowest price. They need labs to step forward and contribute to improving patient outcomes while lowering the overall cost per episode of care.

Trend two is the goal of delivering proactive care. Integrated care organizations are expected to reach out to beneficiaries and engage them to keep them as healthy as possible. This means ensuring that patients get screening services as appropriate, that patients with chronic diseases get the ongoing clinical care needed to effectively man- age their conditions, and that early diagnosis, accompanied by active intervention, is accomplished whenever possible.

Labs Poised to Contribute

As ACOS and PCMHs work to achieve these goals, labs are positioned to make significant contributions. To do so, labs will need to become much more consultative with clinicians.

In the past year, THE DARK REPORT has profiled the efforts of the labs at the Cleveland Clinic (TDR, June 1, 2015) and Henry Ford Health System (TDR, August 24 and October 5, 2015) to deliver more value. Clinical pathologists at both institutions engaged physicians to improve lab test utilization while improving patient outcomes and saving money.

Trend three involves changes in healthcare payment models. “Volume to value” is the overused term, but it is particularly apt for the clinical lab profession. When labs are paid on a fee-for-service basis, more specimen volume has always meant lower average cost-per-test while optimizing profit margins.

But the Medicare and Medicaid programs have declared a timetable to move away from FFS payment. (See sidebar below.) Similarly, private health insurers are negotiating more budgeted (capitated) payment agreements with hospitals, physicians, ACOs, and PCMHs. Often these agreements mean that the providers accept full utilization risk in exchange for a fixed per-member-per-month payment.

Provider Payment Reforms

The coming reforms to provider payment will have a substantial financial impact on clinical laboratories and pathology groups. Labs serving integrated care organizations will need to accept budgeted payment while doing much more than simply reporting accurate, timely test results.

Two of the first pathology groups in the nation to sign contracts with ACOs were profiled by THE DARK REPORT. In Milwaukee, North Shore Pathology is working with Integrated Health Network of Wisconsin (TDR, March 30, 2015). Similarly, in Alabaster, Alabama, CytoPath, PC, contracted with the Baptist Physician Alliance (TDR, March 9, 2015). Both pathology groups reported successes in reducing unnecessary lab test utilization in ways that produced significant cost savings to the respective ACOs while improving patient safety.

Payment for Reference Tests

Despite the shift toward new forms of value-based reimbursement, some reference and esoteric testing may continue to be paid as fee-for-service. This will be a result of client-billing arrangements reference labs have with hospitals, integrated delivery systems, and other labs.

But in trend four, even this segment of lab testing will be under extreme pricing pressure. Hospital clients—themselves getting paid a budgeted amount per patient—will pressure their reference labs to slash prices. They might even ask reference labs to do all testing under capitated payment arrangements. Lab executives should anticipate these requests from accounts that use client billing arrangements.

Managing reference send-out testing to specialty genetic testing labs on client bill arrangements was covered by THE DARK REPORT in our issue of April 20, 2015. At Seattle Children’s Hospital, the lab reported that it was being reimbursed, on average, about $350,000 for every $1 million of genetic tests it paid to its reference labs.

To improve utilization of genetic tests, the lab hired a genetic counselor and helped physicians understand, at time of order, which genetic tests would be most appropriate. In the first eight months of the program, there was an average reduction of $463 per order on the cost of tests ordered using this management program.

Managed care contracting is the fifth macro trend and it has much in common with the integration of care, proactive care delivery, and new payment models as described above. That is because health insurers must alter their contracting practices in order to support these changes in healthcare delivery.

Narrow Provider Networks

Expanding enrollment in the ACA’s health insurance exchange plans directly affects labs in two primary ways. First, exchange plans are narrowing networks in order to exclude high-priced hospitals, physicians, and clinical labs. The goal is to keep costs down so their premiums are competitive.

Second, the migration of Medicare Part B patients—16.8 million in 2015—to Medicare Advantage plans has major consequences for community labs. That’s because Medicare Advantage plans typically have exclusive contracts with the national labs. As a result, local labs are steadily losing access to Medicare patients because of this shift.

Every lab that wants access to patients enrolled in Medicare Advantage and the ACA exchange plans must have a price and service strategy that appeals to these payers while delivering patient-centric services.

Trend six involves high deductibles in managed care plans. By design, patients are being asked to pay as much as $5,000 and $10,000 per year out-of-pocket to meet individual and family deductible requirements. Clinical labs must be prepared to quote prices before serving these patients, then have the capability to collect 100% of the cost of testing when the patient shows up for service. Few labs in the United States have either capability.

One success story, however, is Counsyl, Inc., a clinical lab and technology company in South San Francisco. In our August 3, 2015, issue, THE DARK REPORT explained how Counsyl uses a web-based tool that enables patients to calculate how much they will pay for their genetic tests— before the physician orders their test. Payers like this patient-friendly feature too. Counsyl has managed care contracts that cover 80% of the commercial lives in the United States.

An equally significant trend in managed care contracting involves tougher hurdles for labs to gain favorable coverage and reimbursement decisions for new lab tests from both government and private payers. The Medicare MolDx program is one example that THE DARK REPORT has covered extensively in recent years.

Additionally, both Medicare and private insurers are seeing explosive growth in certain segments of lab testing. The increase in genetic tests is one example. The abusive billing practices in some areas of proprietary cardiology testing and pain management/drugs-of-abuse testing—as revealed by a growing number of successful federal lab whistleblower lawsuits against such labs—are among the reasons payers have become aggressive at denying coverage and rejecting more out-of-network lab test claims for these tests. (See TDR, August 24 and September 14, 2015.)

PAMA Market Price Reporting

THE DARK REPORT will address the issues involving PAMA market price reporting and the FDA’s proposed regulation of laboratory-developed tests on pages 7-8. It is anticipated that these developments will have a negative financial impact on most clinical laboratories.

Not to be overlooked on this list of macro trends is the accelerating growth in the use of personalized and precision medicine. This macro trend will be addressed in an upcoming issue of THE DARK REPORT.


Reminder: Medicare Program Has Aggressive Timetable to Shift Away from Fee-for-Service

MANY PATHOLOGISTS AND CLINICAL LAB MANAGERS ARE UNAWARE of the aggressive timetable the federal government has announced for replacing Medicare fee-for-service payments with alternative reimbursement models. On January 26, 2015, the federal Department of Health & Human Services announced this timetable.

It issued a press release titled “Better, Smarter, Healthier: In historic announcement, HHS set clear goals and timeline for shifting Medicare reimbursements from volume to value.” The federal agency said it was publishing these “measurable goals and a timeline to move the Medicare program, and the health care system at large, toward paying providers based on the quality, rather than the quantity of care they give patients.”

Two Ambitious Goals

HHS described two goals, with an ambitious timetable for implementation. About the first goal, it wrote that “HHS has set a goal of tying 30% of traditional, or fee-for-service, Medicare payments to quality or value through alternative payment models, such as accountable care organizations (ACOs) or bundled payment arrangements by the end of 2016, and tying 50% of payments to these models by the end of 2018.”

Clinical labs and pathology groups should expect that, when CMS issues a draft of its annual Medicare Physician Fee Update in July 2016, a significant number of lab testing services will be covered in proposed bundled-payment arrangements. This will be done independently of the actions by CMS to set Part B clinical laboratory test fees using the market data reporting mandated by the Protecting Access to Medicare Act.

On the second goal, the press release stated that “HHS also set a goal of tying 85% of all traditional Medicare payments to quality or value by 2016 and 90% by 2018 through programs such as the Hospital Value Based Purchasing and the Hospital Readmissions Reduction Programs.”

As a consequence of these plans, hospital laboratories and pathology groups serving community hospitals will want to anticipate these new value-based Medicare payment models with strategies for their labs to add value. Hospitals—including those participating in ACOs—face entirely new payment models based on improving patient outcomes and will be motivated to consider how their clinical labs and pathology groups can contribute to better patient care at lower cost.

HHS also called attention to a another noteworthy aspect of its press release. “This is the first time in the history of the Medicare program that HHS has set explicit goals for alternative payment models and value-based payments,” it said.

A reason why the Medicare program declared its timetable to move away from fee-for-service is significant is that private health insurers will emulate what they like about these new provider payment arrangements. This is why lab executives should factor these developments into their lab’s strategy planning activities.


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