1. CMS Sticks by Decision to Deeply Cut Medicare Part B Lab Test Fees

SHORT OF A MIRACLE, the clinical laboratory industry is less than three weeks from the single most financially-disruptive event of the past 30 years. On Jan. 1, the federal Centers for Medicare and Medicaid Services will impose deep cuts to Part B clinical laboratory test fees.

CMS officials say these fee cuts will produce savings of $670 million in 2018 and will be followed by additional fee cuts in the following years 2019 through 2022. (See TDRs, Oct. 9, Oct. 30, and Nov. 20.)

Across the nation, labs of all sizes are bracing for the coming financial storm. It is widely recognized that the most vulnerable will be community lab companies, particularly those serving nursing homes almost exclusively and those laboratories that are in small and rural hospitals. These labs face bankruptcy, sale, or outright closure.

But even the nation’s largest lab companies face significant vulnerability. For the past two decades, they have given health insurers deeply-discounted lab test prices in exchange for exclusive or near-exclusive provider status. While taking less from commercial payers, these labs subsidized operations with fee-for-service payments from Medicare.

For this reason, observers believe that, once Medicare fee cuts bite into their revenue, the billion-dollar lab companies will need to go back to the big health insurers to win higher prices through renegotiations. But it’s not likely that tight-fisted health insurers will be receptive to such overtures.

2. Lab Companies Decide to Sell, Exit Because of Medicare Test Price Cuts

IT’S OBVIOUS TO EVERYONE who understands the clinical lab marketplace that the severe lab test price cuts soon to be imposed by Medicare officials will financially devastate most sectors of the clinical laboratory industry.

In fact, even in early 2017—almost a year in advance of implementation of these fee cuts—owners of clinical laboratories took steps to exit the business and sell or shut down their labs.

That was certainly the case when Peace Health of Eugene, Ore., offered for sale last winter its Peace Health Laboratories. At the time, Quest Diagnostics eagerly snapped up the assets and began closing some of PHL’s lab facilities and patient service centers in many smaller communities in Oregon and Washington, according to what PHL’s CEO told THE DARK REPORT. (See TDR, Feb. 21, 2017.)

Another example happened last month, when Vista Clinical Diagnostics of Clermont, Fla., sold the part of its business that serves office-based physicians, while keeping its nursing home business. Laboratory Corporation of America was the buyer. (See TDR, Nov. 20, 2017.)

In discussing his owner’s decision to sell, PHL CEO Ran Whitehead stated, “our best projections indicated that we would experience about a 20% reduction in revenue just in the first two to three years of the PAMA Medicare fee cuts… There is no way smaller labs and hospital lab outreach programs have a profit margin sufficient to absorb a 20% reduction in lab test fees.”

3. FDA Clears Digital Pathology For Use in Primary Diagnosis

FOLLOWING YEARS OF DEVELOPMENT, the still-nascent field of digital pathology and whole slide imaging gained a significant victory. On April 12, the Food and Drug Administration cleared the first digital pathology system and whole slide imaging for use in the primary diagnosis of most types of tissue.

The honor of first regulatory clearance went to Philips and its Philips IntelliSite Pathology Solution (PIPS). Experts believe that other vendors of digital pathology systems now have a road map to follow to obtain FDA clearance for their digital pathology products. (See TDR, Apr. 24, 2017.)

There is still much uncertainty as to how quickly other DP systems can gain regulatory clearance and whether a critical mass of anatomic pathology laboratories throughout the United States will rapidly accept DP systems.

What is clear is that digital pathology and whole slide imaging is disruptive to a medical specialty that still relies on the same light microscope technology that Rudolf Virchow and other pathology pioneers used in the 19th century.

Further, at a time when the world is going digital, the power of whole slide images is in how it gives pathologists the capability to move cases in real-time from the histology lab that processed the tissue to a subspecialist pathologist located anywhere in the world.

Now that the FDA has signaled its readiness to clear one product for market, it would be timely for every anatomic pathology lab to develop strategies for when and how they will use DP systems.

4. Prior Authorization of Genetic Tests Goes Mainstream During 2017

THIS DEVELOPMENT MAY NOT BE EQUALLY AS DISRUPTIVE as others on the list of the lab industry’s Top 10 lab stories of 2017. Major health insurers’ actions to impose prior-authorization requirements for genetic tests have introduced significant challenges to any lab company or hospital lab performing molecular and genetic testing.

Since the summer, Anthem and UnitedHealthcare instituted prior-authorization requirements for genetic tests. Anthem’s program took effect July 1, and UnitedHealthcare’s started on Nov. 1. Collectively, the two insurers have 80 million beneficiaries, so these actions affect many—if not all—of the nation’s lab companies.

In the weeks following the launch of these prior-authorization programs, numerous lab companies reported serious problems when working with their client physicians and the payers to obtain timely preapproval. One consequence of these developments is that many labs performed genetic tests to support patient care while knowing that they would not be paid for these claims. (See TDRs, June 26, Aug. 7, and Aug. 28.)

More prior-authorization should be expected from such companies as Avalon Healthcare Solutions, LabCorp’s BeaconLBS, and InformedDNA that already have contracts with health insurers to manage lab test utilization.

5. Lab Test Fraud Is Growing Problem, Scammers Now Recruiting Hospitals

A NEW WAVE OF LAB TEST FRAUD is costing Medicare and private health insurers multiple billions of dollars annually.

Federal and state prosecutors are failing to stay up with the flood of fraudulent operators who use overpriced, medically-unnecessary clinical laboratory tests to suck billions of dollars out of the U.S. healthcare system.

This fall, THE DARK REPORT published the lab industry’s first description of an arrangement often called HOPD, for Hospital Outpatient Department. This strategy is a new variant on the long-established “pass-through billing” scheme. (See TDR, Oct. 30, 2017.)

Simply described, the fraudulent operator will persuade a hospital to enter an agreement whereby the operator will generate lab specimens from the outreach market; as an in-network provider, the hospital will bill for all these lab tests and then will split the proceeds collected from health insurers with the operator. Typically, most or all lab tests involved in this arrangement are performed by the operator’s lab companies and not within the hospital lab.

In 2017, at least three health insurers filed lawsuits against all parties involved in an HOPD arrangement. Defendants in these cases will include the organizers of the scheme, the hospital that submitted the bills, and the independent lab companies that performed the tests.

UnitedHealthcare, Blue Cross Blue Shield of Mississippi, and Aetna filed these lawsuits during 2017. Pathologists and managers at hospital labs need to be aware of these developments.

6. Clinical Lab 2.0 Is Way for Labs to Add Value with Lab Tests

IF THERE IS A GOOD NEWS STORY on this year’s list of Top 10 Lab Industry Stories, then Clinical Lab 2.0 is it. This is a clinical and operational model for how laboratories can deliver added value that payers recognize and reward with value-based reimbursement.

Clinical Lab 1.0 is the classic transactional model of lab services that has served fee-for-service healthcare for decades. In this model, labs strive to increase the volume of specimens tested. The resulting lower average-costs-per-test expand the profit margins from fee-for-service pay- ments. But how do lab 1.0 labs get paid when health insurers replace fee-for-service payments with value-based payment?

That’s where clinical lab 2.0 becomes important. As the new, integrative model for lab testing services, lab 2.0 is designed to serve the needs of integrated healthcare systems. It supports the delivery of precision medicine and helps physicians gain more value from lab testing services. As a result of such benefits, the clinical lab 2.0 organization earns reimbursement based on that added value. (See TDRs, Jan. 30, May 15, and June 5, 2017.)

Clinical Lab 2.0 was developed by the lab leaders participating in Project Santa Fe. They conducted a public workshop in Albuquerque, N.M., last month to teach this lab model and they plan more such educational events.

7. Paths of Hospital Labs Diverge from Paths of Independent Labs

THERE IS NOW STRONG EVIDENCE that the paths of hospital and health system labs are diverging from the paths of independent lab companies. It is too early, however, to understand how this change will affect the status quo in the clinical laboratory marketplace. (See TDR, Nov. 20, 2017.)

For decades, hospital labs and independent labs tended to be organized and operated in a similar fashion. Whether it was a hospital lab or a commercial lab company, the instrumentation, workflow, and test menus had much in common. The major operational differences involved the need for hospital labs to serve inpatients.

That service model was a response to the reactive, siloed, fee-for-service-based healthcare system of the past 70 years.

What is changing—and what now puts hospital labs on a different path—is the growth of integrated delivery networks and ACOs. It is generally accepted today that value-based reimbursement will dominate, that clinical care must be integrated, and that precision medicine will be the way to improve patient outcomes while reducing healthcare costs.

These developments put hospital labs at ground zero for all the clinical care activities within the communities they serve. These integrated delivery networks provide inpatient, outpatient, and outreach care. They find it valuable, if not essential, to have a full, longitudinal record of a patient’s lab test data that has the same test methodologies and reference ranges.

8. Payers Get Tougher with Lab Audits, Some Lab Firms Put into Bankruptcy

TOUGHER PAYER AUDITS are the talk of the lab industry these days. Some audits are aggressive enough to push the audited lab companies into bankruptcy.

The Medicare program has initiated several different types of audits. Most are conducted by private contractors who often can be awarded a portion of the funds recovered from the lab or other provider as a consequence of these audits.

Private health insurers also have increased the number of audits they conduct and the rigor and detail of those audits. Payers are asking labs to provide full documentation to show medical necessity for test claims. Documentation as to how they bill patients and collect the amount owed from patients is another subject of these audits.

One example is Pharmacogenetics Diagnostic Laboratory (PGxL), of Louisville, Ky., which was hit by a $26 million recoupment demand after a federal Zone Program Integrity Contractor (ZPIC) audit. PGxL filed bankruptcy because the amount of the recoupment demand equalled about three years of the lab’s annual revenue.

A second pharmacogenomics lab company told THE DARK REPORT that a Zone Integrity Program Contractor conducted an audit in circumstances similar to those of PGxL. The recoupment demand totaled tens of millions of dollars. (See TDRs, Jan. 9 and Jan. 30.)

Labs can expect more frequent and more rigorous government and private payer audits.

9. FDA Sidetracks Its LDT Regulation as New Administration Takes Office

RECOGNIZING THAT WASHINGTON, D.C., had a new administration and a different Congress, earlier this year, the Food and Drug Administration decided to set aside its declared plan to regulate laboratory-developed tests (LDTs).

On Jan. 13, FDA officials issued a discussion paper stating that the federal agency would defer its plans “to issue final guidance on the oversight of laboratory developed tests.”

After this paper was issued, members of Congress released a draft bill that addresses LDTs. The bill was sponsored by representatives Larry Bucshon (R-Ind.) and Diana DeGette (D-Colo.) and is titled, the “Diagnostic Accuracy and Innovation Act.”

Many in the clinical laboratory industry welcomed these developments. Since the FDA launched itself down this path in 2012, many laboratory professionals voiced valid objections to FDA regulation of LDTs.

In response to draft LDT guidance that the FDA issued in 2015, some in the clinical lab industry organized a response known as the Diagnostic Test Working Group.

A variety of players have common interest in preventing regulation of LDTs. Included in this group are labs with proprietary LDTs, investors in lab companies, the large national labs, and academic centers. For this reason, the last chapter in this story has yet to be written.

10. Japanese Companies Invest, Divest in Two American Lab Companies

DURING 2017, TWO DIFFERENT JAPANESE COMPANIES made noteworthy and expensive deals involving lab testing companies. One deal was an acquisition worth as much as $1 billion to the seller. In the other deal, the seller lost $670 million.

The first transaction was the sale of Miraca Life Sciences by its owner, Miraca Holdings of Tokyo, to Avista Capital Partners. When the deal was announced on Sept. 22, the sale price was $176 million. But, only weeks later, the buyer and seller agreed to a further discount. When the deal closed on Nov. 20, the purchase price had been reduced to just $54.9 million. That is a 92% loss of value in just six years. (See TDR, Nov. 20, 2017.)

The second transaction was the acquisition of Ambry Genetics by Konica Minolta. The purchase price was $800 million with another possible $200 million to be earned, based on performance. Ambry’s annual revenue was not disclosed. (See TDR, July 17, 2017.)

It is unusual to have two Japanese companies come to the United States and pay strong prices to acquire two specialty laboratory testing companies. From one perspective, these deals show that investors outside the United States believe there is the opportunity to purchase lab testing companies in this country.

From another perspective, the ability of these investors to harvest actual profits can be questioned. In the case of Miraca Life Sciences, that investment was a loss to the buyer. The outcome from the Ambry acquisition has yet to be determined.

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