Several Big Surprises in 2018’s Top 10 Lab Stories

Actions by federal government, judges, payers require attention from every lab to stay compliant

CEO SUMMARY: This year’s list of the Top 10 Lab Industry Stories for 2018 is dominated by new directives from Medicare and private health insurers, as well as significant decisions by federal courts. Collectively, these developments create new compliance risks for all clinical laboratories and anatomic pathology groups. What is more notable about these top 10 lab industry stories is that, during 2018, several long-standing lab business practices may now be illegal, based on one new federal law and several federal court decisions.

IN MORE THAN TWO DECADES of preparing The Dark Report’s list of the Top 10 Lab Industry Stories for the year, there has never been a list that was overwhelmingly dominated by government and private payer actions.

That changed in 2018. Of the 10 stories selected for this year’s list, six stories involved one of three things:

1) Actions of the federal government;
2) Decisions in federal courts; and,
3) Tougher audits by private payers.

There is another major difference in the stories that make up this year’s Top 10 list. To a greater degree than ever before, multiple stories on this list will directly create new audit, compliance, and legal risks—and a need to respond—for every clinical laboratory and anatomic pathology practice in the United States.

Two factors are among those used to identify the stories selected to make each year’s list of the Top 10 lab industry stories. One factor is whether the story affects the larger proportion of clinical labs and anatomic pathology groups in this country.

A second factor is if the immediate the consequences of a story will require a response by a majority of labs. For example, in this year’s story number one, CMS now defines hospitals using the CMS-1450 14x claim form for outreach lab test billing as applicable labs. These hospitals will be required to submit private payer price data as of Jan. 1, 2020. That is one way that story number one requires an immediate response by hospitals meeting this criteria.

By contrast, story number three, which describes how pharma and private equity companies want to acquire and hold propietary diagnostic biomarkers that will be companion diagnostics for specific therapeutic drugs, is a development that will take a number of years to play out.

Lab executives and pathologists should assess each of these developments and craft an appropriate strategy and compliance policy to protect their lab from enforcement actions by the federal government and tougher audits by private health insurers.

One issue of concern to all clinical laboratories in the United States is how the Centers for Medicare and Medicaid Services uses the coming reporting period for private payer lab test prices to set the Medicare Part B Clinical Laboratory Fee Schedule for 2021, 2022, and 2023. This is why the American Clinical Laboratory Association’s (ACLA) lawsuit against the Department of Health and Human Services is on this year’s list at number five. However, it is unlikely that this lawsuit will produce a timely judgement in ACLA’s favor, which addresses the critical flaws in how CMS is defining and implementing the requirements of the PAMA law.

Ramifications of Fraud

One interesting theme that emerged from compiling the 2018 list of the lab industry’s Top 10 stories was the ramifications of fraud and abuse among certain sectors of the clinical lab industry. At least four stories are related in some way to the efforts of government and private payers to curb fraud and abuse.

The quick overview is tougher compliance requirements (Support Act and federal court rulings: stories one and eight); rigorous audits that use extrapolation and statistical sampling (story four), and more private payer lawsuits filed against hospitals and labs using pass-through billing schemes.

Most pathologists and lab administrators in hospital and health network labs are unaware of the extent of fraud and abuse, particularly in lab testing sectors, such as toxicology, pain management, and specialty testing, like cardiology. Both government and private payers have found themselves paying substantial amounts of money for medically-unnecessary testing, often billed at prices that are 10 times or more greater than the competitive price of any lab company that is an in-network provider for most major health plans.

Limited Tools, Resources

To stamp out this fraud, payers have limited tools and limited resources. Thus, it is much easier to implement restrictive coverage guidelines and slash reimbursement for the lab tests that are most often involved in fraud and abuse schemes. However, that punishes those long-established lab organizations that are diligent with compliance and truly deliver value to the physicians and patients they serve.

A comparison of the 2018 list of the lab industry’s Top 10 stories to the 2017 list shows that the issues of compliance and fraud are not new developments. Several stories relating to payers’ efforts to control fraud and excessive utilization of lab tests made the 2017 list.

In 2017, the FDA’s decision to approve the first digital pathology system for use in primary diagnosis was number three on the list. (See TDR, Dec. 11, 2017.)However, 2018’s list has no comparable example of new diagnostic technology. The closest example to a new technology advance is story number 6, how several pioneering health networks are first to use genetic tests in primary care settings.

Unfolding Industry Trends

When viewed collectively, The Dark Report’s list of the Top 10 Lab Industry Stories for 2018 reflects the current state of the profession. It is under stress. Some stress is from declining reimbursement for lab tests. Other stress comes from tough compliance requirements and audits.These are signs that the times will remain challenging for labs going forward.

1. Labs, Pathology Groups Face More Challenges with Federal Compliance

As 2018 comes to an end, three serious new compliance threats confront the nation’s clinical labs and anatomic pathology groups. All three emerged in the last quarter of the year.

The first threat is a federal judge’s ruling on Sept. 21 that claims involving a lab’s payment to physicians for packaging specimens, and the lab’s waiver of patient co-pays and deductible, are violations of the federal Anti-Kickback Statute and could go forward to trial. (See TDR, Oct. 1, 2018.)

The second threat emerged on Oct. 24, when the President signed the “Support for Patients and Communities Act.” This new law makes it illegal for providers—including labs—to pay commissions to sales reps for generating referrals from physicians.

Lab industry lawyers were quick to point out that this law conflicts with the safe harbors in the federal anti-kickback law. It is uncertain whether any federal agency will issue guidance about conflicts between the two federal laws. (See TDR, Dec. 3, 2018.)

The third threat is the final rule for PAMA lab test reporting. Issued by Medicare officials on Nov. 2, the rule includes a requirement that hospitals using the CMS-1450 14x claim form to bill Medicare must submit their private payer lab test data to Medicare officials. Few hospitals have the information systems required to gather this data and may have to do it manually. Federal penalties are $10,000 per day for failure to submit data, or to submit inaccurate or incomplete data. (See TDR, Nov.13, 2018.)

2. UHC, Aetna, Horizon Sign Deals to Have Both Quest, LabCorp in Network

This year marked the end of a decade-long strategy by three of the nation’s major health insurers to only include one national lab company in their respective networks.

For UnitedHealthcare, Aetna, and Horizon BCBS of New Jersey, it means that both Laboratory Corporation of America and Quest Diagnostics will be network providers for all three insurers, effective Jan. 1, 2019. (See TDR, July 30, 2018.)

For the past 10 years these three health insurers liked the strategy of including one national lab in their network and excluding the other. It is a significant development that all three, within a period of weeks, announced that they were ending that strategy so as to contract with both national lab firms.

Certainly competitive forces were one factor in this development. But regional labs and hospital lab outreach programs will be watching closely to see if the three health insurers decide to exclude more labs from their networks. In recent weeks, UnitedHealthcare began sending notices to regional labs that their network status with the insurer will not be renewed.

Another reason why these three health insurers restored both national lab companies to network status is likely to be access to lower prices for lab testing (compared to existing regional lab network providers) and the ability to get more complete and uniform sets of their beneficiaries’ lab test data from the two national lab companies.

3. Pharma, Private Equity Want Control of Diagnostic Technologies, Lab Tests

For decades, pathologists and their allies generally controlled the development and ownership of new diagnostic technologies and laboratory tests. After all, they were closely involved in much of the research that identified and validated new biomarkers and assays.

That is no longer true. The Dark Report was first to analyze and describe the emerging trend of pharmaceutical companies and private equity investors taking ownership of new diagnostic technologies and lab tests. (See TDR, Mar. 26, 2018.)

This is a development that has serious long-term strategic consequences for the entire clinical laboratory industry. For example, if a pharma company has the patents for the diagnostic biomarkers that go with its therapeutic drug, might be that pharma company license only one lab to perform those companion diagnostic tests? Or would that pharma company be willing to allow a larger number of labs to perform that companion diagnostic test?

Seen from this perspective, if pharma and private equity were to end up controlling most of the intellectual property and patients for valuable diagnostic markers, it may be that they choose to only license these technologies to the very largest lab organizations in the United States. Were that to happen, it would be another negative factor for regional and independent clinical laboratories. This trend involves a strategic shift in the market that will take years to gather momentum. That gives regional labs time to develop an effective response.

4. CMS, Private Insurers Expand Use of Audits with Extrapolation, Sampling

Government and private payers increased their use of extrapolation and statistical sampling as tools during audits of the nation’s clinical labs and pathology groups. This is a major problem, for several reasons.

First, in recent years, at least three genetic testing companies went out of business following federal audits that used extrapolation and then hit each of these labs with substantial recoupment amounts of tens of millions of dollars. This shows the dangers to a lab when auditors sample a small number of lab test claims, then extrapolate those audit findings across a large proportion of the audited lab’s total claims.

Second, attorneys with experience representing labs that challenged audits that used extrapolation and statistical sampling say these methods are frequently not done correctly by the payers’ auditors. They recommend that clinical lab executives and pathologists retain experts who understand extrapolation and statistical sampling. These experts can help ensure that the auditors sent by payers correctly understand and apply these methods. (See TDR, Sept. 10, 2018.)

Attorneys also advise that use of extrapolation and statistical sampling is established for the Medicare and Medicaid programs. But that is not yet true when private payers use these methods.

5. Federal Judge Rules Against ACLA, ACLA Files Appeal in PAMA Case

On Dec. 11 of last year, a lawsuit against the federal Department of Health and Human Services (HHS) was filed by the American Clinical Laboratory Association (ACLA).

The primary claim by ACLA was that HHS, and its Centers for Medicare and Medicaid Services (CMS), failed to comply with the requirements of the Protecting Access to Medicare Act of 2014 (PAMA). In particular, ACLA claimed that CMS disregarded the requirement that CMS have all applicable laboratories report relevant market-rate data.

The clinical lab industry has much riding on this lawsuit. It has repeatedly pointed out to CMS and to members of Congress the many flaws in how CMS is interpreting and implementing PAMA requirements.

One criticism is how CMS defined “applicable laboratories,” the term used in the PAMA statute. Less then 2,000 of the nation’s tens of thousands of labs provided data in the first collection period.

However, on Sept. 21, the judge issued a ruling against ACLA. Judge Amy Berman Jackson wrote that ACLA’s claims lacked “subject matter jurisdiction.” But she also noted that the “plaintiff’s arguments on the merits raise important questions.” (See TDRs, Jan. 22, and Oct. 1, 2018.)

The next chapter in this unfolding story came on Dec. 4, when ACLA filed an appeal in its case against HHS. Attorneys representing ACLA believe that the federal court needs to review the merits of the plaintiff’s arguments that were not addressed by Judge Jackson in her earlier ruling.

6. Important Steps for Genetic Testing to Be Used in Primary Care Settings

This is the first year that at least two nationally-respected health network officially made genetic testing part of their primary care offerings. It is a sentinel event in the acceptance and use of genetic testing by family practice physicians.

Of course, two health networks does not represent a broad trend. But it is an important development for every clinical lab and anatomic pathology group that wants to be an added-value contributor—and be paid for that added value.

This spring, Geisinger Health of Danville, Pa., announced it would begin offering DNA sequencing to patients as part of routine preventive care. Such genetic testing services would commence during the summer.

Also in the spring, Sanford Health of Sioux Falls, S.D., stated that its primary care clinics would offer patients a $49 genetic test panel. (See TDR, July 9, 2018.)

Geisinger’s program is a pilot and will target 1,000 patients in this first phase. Exomes will be tested at a cost of about $500, but patients will not be charged. Funding will come from grants and Geisinger. Sanford’s genetic test panel will include markers for 60 diseases and 30 prescription drugs. It is designed to be a practical test that generates clinically-actionable results.

7. New Examples of Laboratory Errors That Caused Significant Patient Harm

During 2018, systemic diagnostic errors were discovered at three locations. Two sites involved anatomic pathology errors and one site involved cytology errors.

In February, officials from the federal Centers for Medicare and Medicaid Services (CMS) inspected 885-bed Wake Forest Bapitist Medical Center. The inspectors identified serious deficiencies in histopathology and put the hospital on notice that its Medicare license was about to be revoked. Errors in breast cancer diagnoses by a former chair of pathology had cased severe harm to several patients. (See TDR, Apr. 16, 2018.)

In Ireland, starting in March, there were news stories about multiple women whose cervical cancer screening results were inaccurate or never reported to their physicians. Each of these women had learned that they had cervical cancer that was untreatable, even though they had undergone cervical cancer screening in earlier years. Named in the news coverage were Quest Diagnostics and Sonic Healthcare, the two labs contracted by the Irish Health Service to perform all cervical cancer screening tests for the nation. Source of the errors has not yet been reported publicly. (See TDR, July 9, 2018.)

Then, in early summer, a series of news stories reported on the discovery that the head of pathology at Veterans Health Care System of the Ozarks in Fayetteville, Ark., was believed to have misdiagnosed patients for several years. At least three patients died and 11 had serious consequences. The VA was reviewing 33,000 cases that this pathologist had handled. (See TDR, Oct. 1, 2018.)

8. HDL’s Mallory, BlueWave, Lose Federal Case of Lab Fraud, Abuse

If it was justice long overdue, it was justice, nonetheless. On Jan. 31, 2018, a jury in federal court found several principals of the once-high-flying Health Diagnostic Laboratories, Inc. (HDL), of Richmond, Va., to be guilty of violating the federal False Claims Act (FCA).

The jury found Tanya Mallory, the founder and former CEO of HDL, guilty of violating the FCA. Also found guilty of violating the FCA were Floyd Calhoun Dent III and Robert Bradford Johnson. Dent and Johnson had served as sales representatives for HDL while working for their company, BlueWave Healthcare Consultants, which was HDL’s former marketing partner.

In the sentencing phase, the judge ordered the three individuals to pay a total of about $54 million. This included restitution and treble damages, as allowed under the FCA. A portion of this amount was associated with BlueWave’s marketing of lab test services for Singulex, another specialty heart testing lab. (See TDR, Feb. 12, 2018.)

The outcome of this trial was welcomed by many clinical lab executives, pathologists, and their attorneys. It was evidence that when federal prosecutors press charges against those individuals who operate lab testing companies in violation of federal law, they can recover substantial recoupment and penalties.

9. Private Payers File More Lawsuits Against Tox Labs, Rural Hospitals

Pass-through billing schemes were a common theme of the many lawsuits filed this year by different private health insurers against small hospitals and the lab testing companies that used the hospitals to bill for the toxicology and pharmacogenomic tests they performed.

During 2018, a growing number of health insurers filed lawsuits generally alleging fraud and overbilling in contractual arrangements where lab companies offering tox and PGx testing used agreements with community hospitals as a way to access the hospital’s in-network contract status for submitting laboratory test claims to the payers.

The Dark Report investigated one such scheme, based on the lawsuit that UnitedHealthcare (UHC) filed against Next Health, LLC, of Dallas. UHC claimed it had paid Next Health $100 million for what it said were fraudulent clinical laboratory test claims. (See TDR, Jan. 22, 2018.)

During the year, TDR reported on similar lawsuits claiming fraud from pass-through billing arrangements involving lab companies and community hospitals. The toxicology and PGx sector of clinical lab testing has seen widespread fraud and abuse in recent years. It seems that 2018 was finally the year when a number of health insurers were ready to take legal action against these entities. (See TDRs, Mar. 5, May 7, and Aug. 20, 2018.)

This widespread fraud has consequences. Payers often enact onerous coverage requirements to stamp out fraud, or enact deep cuts in reimbursement for CPT codes involved in these scams. That makes it tough on compliant labs.

10. Theranos Goes Out of Business, Former CEO Faces Criminal Charges

This was the year that federal officials piled on to the now-defunct Theranos, a lab testing company that was once the darling of Wall Street and the media.

On March 14, the federal Securities and Exchange Commission charged Theranos, ex-CEO Elizabeth Holmes, and ex-COO Ramesh “Sunny” Balwani with “massive fraud.”

Next, on June 14, prosecutors from the federal Department of Justice announced criminal charges against Holmes and Balwani. Each faces two counts of conspiracy to commit wire fraud and nine counts of wire fraud.

In what was the final curtain for the company itself, on Sept. 5, David Taylor, the firm’s CEO and General Counsel, announced that Theranos would be dissolved later that week and its remaining cash on hand of $5 million would be distributed to unsecured creditors. (See TDRs, Mar. 26, Jun. 18, and Sept. 10, 2018.)

All that remains is for federal regulators and prosecutors to pursue their respective cases against Holmes and Balwani. Meanwhile, there are two last acts for Theranos yet to come. First will be a documentary of Theranos that will be shown at the Aspen Film Festival in January. The second is a movie about Theranos and Holmes, titled “Bad Blood.” The screen play is being written and production of the film will start when the script is ready.

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