California Clinical Laboratory Association Annual Conference Washington Update November 3, 2011 Dennis Weissman, President Dennis Weissman & Associates, LLC and Founder & Executive Editor, G2 Intelligence

The Big Picture Weak economic growth combined with DC political gridlock has created deep sense of pessimism within U.S. population Cutting federal budget deficit by reining in entitlement programs is driving political debate at national level Implementing federal healthcare reform law & related market reforms has not reduced efforts to repeal ACA via legal & political initiatives 2012 presidential & congressional elections driving decisions by national elected officials

Budgetary & Political Landscape Deep economic recession began in 2008 with fears of a “double dip” downturn still possible given unsettled world markets Political brinksmanship surrounding raising US debt ceiling results in lower credit rating Congress at loggerheads to deal with soaring federal budget deficits Lawmakers & White House unable to agree to “grand bargain” of entitlement cuts and added revenues to bend deficit curve

Budget Landscape Avoiding a default on the $14.3 trillion federal debt, a last-minute bipartisan deal called for trading two rounds of spending cuts for two matching increases in the debt limit Immediately enacted 10 year discretionary spending caps generating more than $900B in deficit reduction, $350B coming from defense spending President authorized to increase the debt limit by $2.1T which takes timeline thru 2013

Budget Landscape Entitlement cuts excluded from first rounds of spending reductions Congress forms a “super” committee (6 each from each party) to identify a minimum of $1.2 trillion in additional cuts with both entitlement cuts & tax reform on the table Balanced budget amendment vote allowed Special committee must approve a plan by Nov. 23 and Congress must vote it up or down without amendments by Dec. 23 Part B co-pays including lab & overhauling physician payment policy in play

Budget Landscape If super committee fails to reach agreement, a “trigger” mechanism is automatically activated which cuts $1.2 trillion, half coming from defense spending and the rest from domestic programs Social Security, Medicaid & other programs for poor are exempted under trigger as are Medicare beneficiary cuts Medicare provider cuts are allowed up to a maximum of 2% President’s latest plan to trim federal deficit would cut Medicare/Medicaid by $320 billion

Market Update Market forces unleashed by reform initiatives at Federal, state and private insurance level Hospitals/heath system buy up thousands of primary care physician practices nationwide Providers will be increasingly held more accountable for costs and performance under a revamped healthcare market For clinical lab market, fastest growing segment is specialty testing including genetic and molecular testing

State Update Severe strain on state budgets result in cuts in Medicaid programs including lower payment levels to providers States cutting lab payments include Indiana and California where up to a 10% reduction is on the table Florida moves to use private insurers for Medicaid managed care Vermont enacts a single payer system

M&A Update M&A activity was robust in 2010 with most interest in specialty testing & pathology labs More than a dozen pathology organizations have been sold since 2010 Largest acquisitions: LabCorp buys Genzyme Genetics for $935M and GE purchases Clarient, Inc. for $585M AP labs sold for an average of more than 2.0 times annual revenue

2011 Health Reform Changes Expand Part B preventive service benefit to cover and pay for comprehensive health risk assessment plus creation of a personalized prevention plan to include written schedule for screening tests Eliminate cost-sharing for Medicare preventive services Support comparative effectiveness research via start-up of non-profit Patient-Centered Outcomes Research Institute

2011 Reform Changes Create a Center for Medicare and Medicaid Innovation within CMS Start-up of Medicare demo projects by CMS to test innovative payment & delivery models including July 1 start-up of 2-year project to pay for highly complex tests Require insurers to spend 85% of large group & 80% of small group and individual plan premiums on healthcare or to improve healthcare quality, or return difference

Reform Implementation Regulatory Guidance: HHS/CMS publishes rules on key reform provisions such as ACOs, consumer protections & state exchanges Policy Waivers & Changes: White House gives states greater flexibility via reform waivers while Congress repeals certain onerous reporting requirements Legislative Stalemate: House votes to repeal ACA while Senate refuses; GOP seeks to withhold funding for implementation

Legal Challenge to Reform Law Divided 11th US Circuit Appeals Court struck down individual mandate in the ACA but ruled rest of law could stand 6th Circuit Appeals Court upholds the law in a divided 2 to 1 opinion Key issue is whether Congress can regulate interstate commerce to compel individuals to buy health insurance White House won’t appeal court decisions Supreme Court to hear case with a final ruling due prior to 2012 election

2011 Medicare Payment Clinical laboratory services paid via Medicare fee schedule cut 1.75 per cent in 2011 Reduction based on new formula under ACA law in calculating annual payment update: CPI minus productivity adjustment (PA) plus an extra 1.75 percent cut from 2011 - 2015 For 2011, CPI is 1.1% while PA is minus 1.3%. Since PA can never reduce update below zero, a t.75% reduction is applied Marks only 2nd negative update since 1984

Lab Fee Update All lab services paid on reasonable charge basis including blood products, transfusion medicine and reproductive medicine are increased by 1.1 percent in 2011 Minimum national payment for cervical & vaginal smears cut this year to $14.87, down from $15.13 in 2010 and $15.42 in 2009 No change in specimen collection fee which remains set at $3.00 per draw Travel allowance up effective July 1: $1.005 per mile on trip basis (P9603) and $10.50 flat rate (P9604)

Higher Lab Spending Medicare part B spending on lab services reached $8.424 billion in 2010, an increase of 4.4% over the 2009 total of $8.049B Despite increase, Part B spending remains a constant 1.6% of total Medicare spending Total 2010 Medicare program spending was $522.8B, an increase of 2.7% over 2009 Of the top 88 Medicare allowed services and charges in 2009, average allowed charge per procedure was $12.11, up from 11.36 in 2008

Projected 2012 Lab Fees Medicare lab fee schedule is slated to rise slightly by 0.65% under the ACA formula Estimated CPI for 2012 is 3.60% minus the PA of -1.20 = 2.40 Additional cut per ACA of -1.75% = +0.65 Official update will be published in the 2012 lab fee schedule this fall Final result could vary from the above by a tenth of 1 percent, depending on final PA

Regulatory Hotspots HHS proposed rule would give patients direct access to clinical pathology test results Proposed 2012 Medicare Physician Fee Schedule CMS Bundled Payment Demo Oversight of Lab-Developed Tests Repeal of Cytology Proficiency Testing Rule CPT Coding for Molecular Pathology Tests

2012 Proposed Medicare Physician Fee Schedule Pathology fees would be cut 29.5% as of Jan. 1, 2012 resulting in a conversion factor 0f $23.9635 (opposed to $33.9764 this year) CPT 88305 would drop 31% from the current $36.35 to $25.16 next year Eliminate pathology “grandfather” protection Add 3 new pathology quality measures: Barrett’s Esophagus, Radical Prostatectomy Pathology Reporting & Immunohistochemical (IHC) Evaluation of HER2

Proposed Physician Fee Schedule Review potentially misvalued codes under the physician fee schedule CMS has selected 88112, Cytopath, cell entrance tech, 88312, Special stains group, and 88342, Immunohistochemistry CMS also seeks review of 88305 and situ hybridization codes, 88365, 88376 & 88368 CMS will send these to the AMA’s Relative Value Committee for review & possible revisions in the 2013 fee schedule

CMS Bundled Payment Demo CMS has invited providers to apply to help test 4 different models of bundling payments with lab testing included in at least 2 models Groups of providers would join together and submit a proposal and target price for a healthcare service Once an episode of care takes place, providers get a first payment based on a discounted Medicare fee-for-service price Total payments would be compared to the target price and if Medicare saved money, then providers would share in those savings Rollout of separate national bundling pilot

Laboratory-Developed Tests FDA expected to soon release draft guidance to expand its regulation of laboratory-development tests (LDTs) LDTs are in vitro diagnostics manufactured by and offered in the same CLIA certified lab FDA future oversight will be based on level of risk associated with the test In devising a regulatory framework, FDA to focus initial scrutiny on tests posing high risk Concern is that lengthy approval process for LDTs would delay introduction of new tests, stifle innovation & raise development costs

More Regulatory Hotspots HHS proposes rule on Sept 12, 2011 that would supersede current CLIA & HIPPA language to allow patients gain access to their test results reports directly from labs CMS drops proposed cytology proficiency testing rule but will implement most of CLIAC endorsed PT recommendations CMS delays adding new molecular pathology codes to the Medicare lab fee schedule (but not physician fee schedule) until 2013

Dennis Weismann dennisatg2@aol.com Contact Information Dennis Weismann dennisatg2@aol.com