Much Disruption for Labs In 2016’s Top 10 Stories

Events set in motion during this year will cause big cuts to Medicare Part B fees beginning in 2018

CEO SUMMARY: Within THE DARK REPORT’S list of the Top 10 Lab Industry Stories for 2016 is one story of disruption that might have been one story of disruption about to happen. The disintegration of Theranos during 2016 is the big story about a self-proclaimed disruptor of the lab industry that finds itself struggling just to survive. The big story about impending financial disruption involves the final rule for PAMA private payer lab test price reporting that CMS issued last June.

IT WAS A YEAR DOMINATED BY TWO BIG LAB INDUSTRY STORIES! One was about Theranos, Inc., the now-discredited lab testing company that said it wanted to disrupt the clinical laboratory industry.

The other big story was about the PAMA final rule that the Centers for Medicare & Medicaid Services published on June 17, 2016. Implementation of this final rule is expected to lead to a significant reduction in Medicare Part B lab test fees in 2018 and will thus be financially disruptive to most of the nation’s clinical laboratories.

Theranos is one of the big stories on THE DARK REPORT’S list of the Top 10 Lab Industry Stories for 2016 because this was the year when the much-vaunted lab company found itself in deep trouble on multiple fronts. Consequently, it will not be disruptive to the clinical lab industry as it regularly predicted during the years 2013 through 2015.

One reason Theranos was a top 10 story among lab administrators and clinical pathologists is that it was a high-interest story for their hospital and health system CEOs from 2013 through 2015. During that time, Theranos caught the attention of nearly every hospital CEO with its claims that it could perform clinical laboratory tests at half the price of Medicare fees, use a capillary blood specimen collected by finger stick, and return results in four hours.

Hearing these benefits, hospital CEOs regularly asked their lab administrators and clinical pathologists about Theranos and, in some cases, asked these lab professionals to identify ways the hospital could do business with Theranos to lower the cost of clinical lab testing.

Most lab administrators and pathologists were skeptical that Theranos had the technology and capability to deliver on its claims. They pointed to the fact that Theranos had not shared its scientific data nor published its data in peer-reviewed journals.

PAMA market price reporting

The other big story on this year’s top list is about the final rule for PAMA market price reporting. Every laboratory that does testing for Medicare patients will see a substantial reduction in the prices of Medicare Part B lab test fees in 2018. THE DARK REPORT concurs with a number of lab industry experts that these Medicare fee cuts may be the single most disruptive event to hit the clinical laboratory industry in 40 years.

Each of the other eight stories on this year’s list of the major lab industry stories represents a significant development that influences how lab executives and pathologists will operate their clinical labs and pathology groups.

The outcome of this year’s federal elections and Republican control of the presidency, the Senate and the House is one of this year’ big stories, for a simple reason. The electorate has sent a message to both political parties that the political processes of the last 30 years must be left behind and a new sense of purpose and public service should be the hallmark of the new Congress.

Why this matters for the lab industry is that Congress will consider repeal of the Affordable Care Act and additional reforms to healthcare. The new administration gives the clinical laboratory industry an opportunity to educate this new crop of lawmakers about the value of lab testing and the importance of allowing community labs and hospital labs to have access to patients.

The election outcome is also an important element in our number three biggest story of 2016: the Food and Drug Administration’s decision to defer going foward with its draft guidance for regulating laboratory-developed tests (LDTs). This is another opportunity for the lab industry to educate federal lawmakers about the complexities of developing LDTs and gathering clinical data necessary to demonstrate the accuracy and clinical value of these assays.

Payment for clinical laboratory tests make up two of the stories on 2016’s top 10 list. During the year, THE DARK REPORT identified several molecular and genetic testing companies that had revamped the prices of their proprietary tests. These lab companies decided that they would be more successful if they priced their genetic tests so that patients could afford them. In some cases, these genetic testing labs stopped billing any payer for any test. Instead, they are billing patients and collecting a high percentage of these bills.

‘Not’ on Top 10 Story List

It is helpful to call attention to some major healthcare trends that have been on past top 10 story lists, but do not appear on this year’s list. One such story is EHR implementation by hospitals and physicians. This is a mature trend and, in fact, EHR adoption and use is about to be incorporated into Medicare’s physician incentive/penalty programs under the Medicare Access and CHIP Reauthorization Act (MACRA).

The other story that is not on this year’s list is the integration of healthcare through such care models as ACOs and medical homes. This process continues, but other stories during 2016 had greater precedence for the clinical lab industry and thus made the top 10 list.

Contact Robert L. Michel at 512-264-7103 or at

» CMS Publishes PAMA Final Rule, Prepares for Medicare Lab Fee Cuts

ALL THE PIECES ARE IN PLACE for the federal Centers for Medicare & Medicaid Services to begin accepting private payer lab test market price data from certain labs, starting on January 1, 2017, as mandated under the Protecting Access to Medicare Act (PAMA).

CMS will use this data to establish a new Part B clinical laboratory fee schedule that takes effect on January 1, 2018. CMS has said that the new fees will cut Medicare spending on lab tests by as much as $400 million during 2018.

THE DARK REPORT and others have predicted that implementation of the final rule—as currently written—has the potential to be the most financially-disruptive event to hit the clinical laboratory industry in 40 years. (See TDRs, Nov. 7 and Nov. 28, 2016.)

Moreover, lab executives and consultants who have compared the final rule to the PAMA statute believe that CMS is not following the language of the law nor the intent of Congress. At stake are fee cuts that CMS and OIG say will total $5.4 billion over the next 10 years. This amount is double the fee cuts that were predicted when Congress passed PAMA in 2014.

The next move is up to the clinical laboratory industry. Avenues of redress would be to file a lawsuit against Health & Human Services, file an administrative appeal, or get the new Congress to amend the PAMA statute.

» Theranos Implodes during 2016: Sanctions, Investigations, Lawsuits

IT WAS A BUSINESS REVERSAL of stunning proportions for the once high-flying Theranos, Inc., of Palo Alto, Calif. In February, news outlets reported that a CLIA inspection of the Theranos lab facility in Newark, Calif., had identified serious deficiencies with the potential to cause “patient harm.”

Next came revelations in April in The Wall Street Journal that Theranos was under investigation by the Department of Justice and the Securities & Exchange Commission. That was followed by the decision of the Centers for Medicare & Medicaid Services in July to impose the toughest CLIA sanctions against Theranos, including a two-year ban on Theranos CEO Elizabeth Holmes owning or operating a clinical laboratory.

At the American Association of Clinical Chemistry meeting in August, Holmes was to make a much-ballyhooed presentation about the Theranos technology and scientific data. Instead, she showed a new instrument and some assay validation data that use conventional methods and venous blood. The lab scientists in the audience and nearly all the major media outlets that were present panned her presentation.

In the months that followed, Theranos announced that it was laying off hundreds of employees and closing its clinical laboratory operations in California and Arizona. It also said it would concentrate on developing instruments and assays that use its diagnostic technologies.

» FDA Announces Delay in Issuing Guidance for Lab-Developed Tests

OH WHAT A DIFFERENCE ONE NATIONAL ELECTION CAN MAKE! Following the Republican sweep of the presidency and both houses of Congress, the Food and Drug Administration made an unexpected decision.

FDA officials began to quietly tell selected stakeholders that it would delay finalizing its draft guidance for laboratory-developed tests (LDTs). This was welcome news for the clinical laboratory profession.

On November 18, reported that the FDA had sent it a statement, saying, among other things, that it realizes “just how important it is that we continue to work with stakeholders, our new Administration, and Congress to get our approach right [on LDT regulation].”

Apparently, FDA officials recognized that the new Congress and new administration would probably have different ideas on how the FDA should execute its regulatory responsibilities. Thus, attempting to push forward with its draft guidance for LDTs as currently written might run counter to the views of incoming legislators and the president.

Many in the clinical lab industry who have legitimate concerns about the role of the FDA in regulating LDTs welcomed this news. There has been much criticism of the language in the draft LDT guidance.

Because the FDA has put a hold on further development of its draft LDT guidance, the lab industry now has the opportunity to educate the new Congress about this issue and work more closely with FDA officials to craft a regulatory scheme that works best for all parties.

» Genetic Testing Labs Find Success In Use of Consumer-friendly Prices


tests at price points considered reason- able and attractive to consumers. In some cases, these labs have ceased to bill any health insurers. Instead, they send 100% of their bills directly to their patients.

During 2016, THE DARK REPORT identified several laboratory companies offering genetic tests that adopted this approach to pricing their tests. They generally report good response by patients and their physicians. More significantly, these lab companies say they enjoy increased revenues, along with decreased costs associated with coding, billing, and adjudicating rejected claims for their genetic tests. (See TDRs, May 2 and July 5, 2016.)

This is a significant development in the clinical lab marketplace. Until now, the popular wisdom said that a genetic testing lab with a proprietary test should put a high price on the assay because most payers would reimburse much less for the test—if the payer sent any money to the lab at all.

But the difficulty of getting payers to reimburse for these test claims is what motivated these labs to decide to adopt a much lower, patient-friendly price for their tests. In so doing, patients were now willing to pay directly for those tests because they saw value in the genetic test at that lower price.

» Payers Get Tougher with Audits, Guidelines Due to Lab Fraud/Abuse

FRAUD AND ABUSE WITHIN THE CLINICAL LABORATORY INDUSTRY continues to be a serious problem. As a consequence, payers are tightening down on practices they consider to be illegal or unethical.

One trend reported by THE DARK REPORT is how more payers are auditing labs to determine if these labs are collecting the full amount due from patients. Another trend is for health insurers to simply refuse to pay claims coming from labs that are out of network.

THE DARK REPORT has provided extensive intelligence briefings about cases of lab fraud and abuse that have become public. One high-profile case involving cardiology testing is the ongoing federal whistleblower lawsuit that named, as defendants, Health Diagnostic Laboratories (HDL), Singulex, and Berkeley HeartLab. Separately, Aetna and Cigna each sued HDL to recover tens of millions of dollars in claims paid to HDL that are alleged to be fraudulent or medically unnecessary. The other sector of the lab industry that has become associated with a high rate of fraud and abuse includes labs providing toxicology and pain management testing services.

The extent of this illegal activity is deemed to be significant enough that both government and private payers are implementing restrictive coverage guidelines for many types of tests as one way to limit fraudulent claims. Unfortunately, this action punishes all labs—even those labs that are making extra efforts to fully comply with all federal and state laws.

» More Hospitals, Labs Implement ISO’s Quality Management System

ADOPTION OF THE QUALITY MANAGEMENT SYSTEM (QMS) built into ISO 9001 and ISO 15189 still happens at the rate of one hospital and one lab at a time. Yet, in recent years, that has been enough to create a critical mass of hospitals and labs that consider QMS to be essential to their ongoing clinical and financial success.

One benefit of implementing this QMS is that hospitals certified to ISO 9001 and labs accredited to ISO 15189 find it much easier to sustain efforts to improve quality, cut waste, and boost staff productivity.

Hospitals and health systems interested in adopting ISO 9001 are most frequently using the services of DNV Healthcare, of Cincinnati. DNV has hospital deeming authority from CMS since 2008. Today, more than 500 hospitals in the United States use DNV for both Medicare conditions of participation and ISO 9001 certification.

For clinical labs, along with CLIA accreditation, the College of American Pathologists offers CAP 15189 and the American Association of Laboratory Accreditation (A2LA) offers ISO 15189. Between the two organizations, they have accredited 46 labs in the United States. (see TDRs, Feb. 29 and Sept. 26, 2016.)

The important element of this story is that the momentum continues to build. Time and the experience of hospitals and labs are proving the value of a quality management system.

» Safeway Uses Reference Pricing to Drive Down Lab Test Costs by 32%

REFERENCE PRICING IS A NEW TOOL for helping employers and health  insurers drive down healthcare costs. For that reason, labs and pathology groups can expect to see more use of reference pricing in the years to come.

What should be considered a sentinel event for this trend is the publication of a study in JAMA Internal Medicine last July that documented the results of a pilot reference pricing project initiated by Safeway, the grocery store chain, that involved clinical lab tests.

Reference pricing is designed to reduce the variability in the cost of a healthcare service, such as a lab test. In its pilot project, Safeway set the reference price for lab tests at 60% of the median. If the patient selected a lab with a higher price, the patient paid for that test. If the patient selected a lab with a price at or less than the 60th percentile, he or she could apply the full benefits of their health plan.

The results should catch the full attention of all lab executives and pathologists. In the 24-month study involving 15,000 employees, Safeway and these patients paid 32% less for lab tests! Further, the number of patients using higher-priced labs dropped from 45.6% to just 15.6% during that same time. (See TDR, September 6, 2016.)

At a time when employers and health insurers are scrambling to cut costs, reference pricing is a powerful tool that can help them quickly achieve that goal.

» HDL’s Bankruptcy Trustee Proves More Aggressive than Federal DOJ

MISCREANTS IN THE CLINICAL LAB INDUSTRY should take notice! You may not fear the federal Department of Justice and its relatively toothless enforcement of federal anti- kickback laws. But there’s a new enforcer ready to get tough with lab fraudsters.

The precedent set this year happened in the bankruptcy case filed by Health Diagnostic Laboratory, Inc., of Richmond, Va., that was originally filed in the summer of 2015. The bankruptcy trustee is using every legal tool at his disposal to collect as much money as possible from all parties associated with HDL’s allegedly fraudulent practices.

Thus, in September, the bankruptcy trustee announced a $20 million settlement with LeClairRyan, the law firm that provided legal advice and legal opinions to HDL that the lab used to convince physicians that various forms of alleged payments were not in violation of federal and state laws. LeClairRyan denied guilt.

Also in September, the bankruptcy trustee announced a $600 million lawsuit that included 76 counts against 100 defendants, including HDL shareholders, officers, and sales consultants, among others. This followed a separate action in which the bankruptcy trustee engaged a law firm to send letters to hundreds of physicians who accepted alleged inducements from HDL demanding full repayment of those inducements.

This case is a stunning example of how an aggressive bankruptcy trustee can bring to account all the parties who participate in lab testing schemes that skirt the law.

» New Crop of Republicans in Capital Certain to Change Status Quo

IT WAS A FEDERAL ELECTION LIKE NO OTHER! Americans elected an unorthodox and unlikely candidate to be president. They also voted to allow Republicans to control both houses of Congress.

Thus, all bets are off on how the new administration and new Congress will deal with the problems of healthcare in this country—not to mention the Affordable Care Act. At this moment, no political pundit can say what will happen inside the beltway.

Most observers believe the Republicans will repeal Obamacare. One scenario has Congress voting to repeal the ACA, but setting the expiration date two or three years into the future. That would create a deadline that would force Republicans and Democrats to work together to craft a replacement bill and pass it before the expiration of the ACA.

When the new administration and Congress take office next month, it will present the clinical laboratory industry and anatomic pathology profession with an opportunity to educate lawmakers and HHS officials about the value of lab testing. The time may also be opportune for labs to make their case on a host of troublesome issues.

The list of such issues is long. Probably at the top of the list is the CMS final rule for PAMA market price reporting, which most labs would like amended. Another priority would be to improve the FDA’s plan to regulate laboratory-developed tests.

10 » UnitedHealth Prepares to Launch LabCorp’s BeaconLBS in Texas

IN OCTOBER, UnitedHealthcare quietly let it be known that it would introduce its controversial laboratory benefit management program in Texas, with Jan. 1, 2017, as a start date and March 1, 2017, as the date when claims impact will begin.

As was true in Florida, the program in Texas will be administered by BeaconLBS, a wholly-owned subsidiary of Laboratory Corporation of America. Also, as was true in Florida, UHC is pushing to implement this on a fast time line, thus leaving physicians and laboratories serving them with little time to understand the details of the program.

UHC is implementing the program for the 500,000 patients enrolled in fully-insured commercial plans in Texas. Based on the Florida experience, most labs in the Lone Star State will lose some or all of their access to these patients. (See TDR, October 17 and pages 11-13.)

Further, the Texas Society of Pathologists has sent letters to its mem- bers calling attention to the fact that any lab that agrees to be in the “laboratories of choice network”—UHC’s network- within-a-network, must accept prices that are at or below the 25th percentile, as calculated by UnitedHealthcare.

UHC announced the introduction of this program in its October Network Bulletin. Thus, most physicians, patholo- gists, and labs are unaware of the require- ments of the program and how they are to use the BeaconLBS system to obtain pre- notification or pre-authorization when ordering any of 79 tests.


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