CCLA 2016 Annual Conference Washington Update for Labs: Political & Policy Trends Shaping the Industry The Westin San Diego San Diego, CA November 3, 2016 Dennis Weissman, President Dennis Weissman & Associates LLC Washington, DC

Today’s Presentation 2016 Election Forecast & Impact Medicare Reimbursement Update Key Regulatory Initiatives Implementation of Medicare’s New Market-Based Payment Syste Q & As

2016 Presidential Election First woman nominee of major US political party First outsider business candidate since Wendell Willkie to take over major political party Record negative favorability ratings for both major candidates More support for third parties Campaign like no other: unprecedented, toxic race where policy differences took back seat to personal charges

2016 Election Forecast Virtually all current polls, political pundits, forecast models & betting markets show a tightening race with Clinton still maintaining an advantage in the electoral college after recent FBI letter to Hill Can Trump build new momentum during final week of campaign? Key bellwether states to watch: FL, OH, PA, NH, NV & NC Republicans now have a 4-seat majority in the Senate and 60-seat bulge in the House Clinton narrow win still gives Democrats only a 50-50 chance of taking over Senate while consensus is that GOP will maintain majority in House even with losing some seats

Post-Election Policy Impact Initial emphasis on broad areas of policy consensus such as national infrastructure program and criminal justice reform Little political support for entitlement reform Look for fixes to Accountable Care Act including stabilizing the ACA’s struggling insurance exchanges (possibly by adding a public option) Implementation of the new, complex Medicare physician payment system

Policy Impact (cont.) Accelerate the use of value-based payment in Medicare Finds ways of controlling rising prescription drug costs Promote Medicaid expansion and reforms through negotiations with states Implement the precision medicine and cancer “moonshot” initiatives Implement PAMA’s market-based payment system for labs for start-up in 2018 Move ahead with or modify FDA’s regulatory initiative on laboratory-developed tests (LDTs)?

Molecular Testing Payment Cuts Medicare paid 44% less for all molecular tests in 2015 than in 2014 CMS published interim gap fill prices in June for16 new CPT codes for molecular tests introduced earlier in 2016 for inclusion in 2017 CLFS Most tests had their preliminary prices cut as much as 85% compared to their prior regional prices Industry groups comment against proposed rates with final decision by CMS due later this year

2017 CLFS Payment Update No final word yet by CMS on lab fee update in 2017 under Medicare Clinical Lab Fee Schedule (CLFS) Depends on whether CMS applies productivity adjustment and CPI update in 2017 - both were axed by the 2014 Protecting Access to Medicare Act (PAMA) If agency applies CPI update in 2017, labs would receive 1% increase to CLFS though sequester cut of 2% still applies to lab and all other provider claims Next year marks final year for CLFS due to PAMA

Pathology Payment Cuts 2017 proposed Medicare Physician Fee Schedule rule includes cuts to key pathology procedures Technical component of CPT 88305 reduced by 15% to $29.34 CMS also finalized major TC reductions to16 other path codes including 88302, 88304, 88307, 88309, 88323, 88325 88364-69, 88373-4, 88377 & G0416 Flow cytology codes cut 15% (88184, 88185 & 88189)

Revised Physician Payment Structure Under Medicare Final Physician Payment rule implements new physician payment program under the Medicare Accountability & CHIP Reauthorization Act (MACRA) Eligible physicians will be paid for the quality of care they deliver via Medicare’s new Quality Payment Program (QPP), which replaces the Sustainable Growth Rate (SGR) for physician reimbursement MACRA aims to create a more modern, patient-centered program by promoting quality patient care while controlling escalating costs through the Merit-Based the Quality Payment System (MIPS) and incentive payments for Advanced Alternative Payment Models (Advance APMs)

MACRA Impact on Pathologists Pathologists and all other physicians will receive a 0.5 update in their Medicare fees during both 2017 and 2018 Pathologists will have to decide which QPP track to select with only a limited number able to qualify under the Advanced APMs Many pathologists will likely participate in the more flexible MIPS track for their first performance period which begins Jan 1, 2017 Pathologists will be able to transition at their own pace by choosing to report to MIPS for either a full 90-day period in 2017 to avoid getting hit with negative payment adjustments starting in 2019 or for a full year to maximize their chances to qualify for a positive adjustment

FDA Regulation of Laboratory Developed Tests FDA releases draft guidance, Framework for Regulatory Oversight of Laboratory-Developed Tests (LDTs) Agency asserts authority to regulate LDTs as “medical devices” under FD&C Act Proposes risk-based approach that would exempt “low-risk” (Class I devices) LDTS and those intended for rare diseases & unmet needs from almost all regulation High and moderate-risk LDTS would be subject to more rigorous regulatory requirements Release in 2016 still in doubt due to higher priority FDA regs

New Lab Payment System Starting Jan. 1 2018, payment rates for existing tests to be based on rates from private payers Payment rates will be updated every three years using current data Creates single national fee schedule with no geographic adjustment, annual update, budget neutrality adjustment Creates new category of lab tests — advanced diagnostics laboratory tests — with different pricing schedule

PAMA Overview For lab tests furnished on or after Jan. 1, 2018, payment is equal to weighted average of median private payer rates determined for tests Private payer rates are based on data submitted by applicable labs Starting in 2018, there is a six-year phase-in of any payment cut From 2018-2020, no more than 10% reduction per year For each year from 2021-2023, no more than a 15% reduction per year

PAMA Timeline Apr 1, 2014 - Congress passes Protecting Access to Medicare Act of 2014 (PAMA) Sep 25, 2015 - CMS releases PAMA proposed rules Jun 17, 2016 - CMS publishes PAMA final rules Second half of 2016 - CMS issues sub regulatory guidance Jan 1 - Mar 31, 2017 - applicable labs report pricing and volume data to CMS

PAMA Timeline (cont.) Apr 1 - Aug 2017 - CMS develops new CLFS rates based on applicable data received from labs Sep 2017 - CMS publishes preliminary CLFS rates Nov 2017 - CMS publishes final CLFS rates Jan 1, 2018 - PAMA’s new Medicare Part B payment system for labs takes effect

What Is An Applicable Lab? Final rule makes major changes Lab that receives more than 50% of its total Medicare revenue from payments under Medicare CLFS and Medicare Physician Fee Schedule, based upon its NPI, rather than TIN Labs that received less than $12,500 under CLFS during data collection period may be excluded Low expenditure threshold does not apply to any ADLT that a lab provides Lab reporting entity is based on TIN

Are Hospital Labs Included? Hospital outreach labs with their own NPI may be considered applicable lab if at least 50% of its Medicare revenues are from CLFS and PFS Also, their Medicare revenues from the CLFS are at least $12,500 during the data reporting period In order for hospital outreach labs to turn over data to CMS during first reporting period, they must have had an NPI during the initial data collection period of Jan. 1 to June 30, 2016

Data Collection & Reporting Periods for Lab Tests Initial collection period: Jan 1, 2016 to Jun 30, 2016 First reporting period: Jan. 1, 2017 to Mar 31, 2017 Thereafter, reporting every 3 years, with collection period constituting the first 6 months of the year prior to reporting Example: For collection period Jan 1, 2019 - June 30, 2019, the reporting period is Jan 1, 2020 to Mar 31, 2020

Lab Reporting Requirements Must report final allowed amount paid for each private payer for each test during data collection period Must report corresponding volume of tests paid at each private paid rate (including all changes in rate during period) Includes any patient cost-sharing amounts, if applicable Collection of co-pay, deductible, coinsurance is not a factor in reporting Provide specific HCPCS code for each test on CLFS, excluding unlisted/NOC codes

Reporting Requirements (cont.) Report tests furnished on both a contracted or non- contracted basis (e.g., out-of-network) Does not include any discounts, rebates and chargebacks - all price concessions must be reflected in reported prices Does not include information about denied payments (no- zero payments) or partially paid claims still in appeal Does not include any test for which payment is made on a capitated or similar payment basis

What is an Advanced Diagnostic Laboratory Test? Covered under Medicare Part B Offered and furnished only by a single lab Not sold for use by a lab other than the lab that designed the test or a successor lab Meets one of the following three criteria: 1- Cleared or approved by the FDA 2- meets other criteria that may be established by CMS

ADLT Definition 3- The test: * Is an analysis of multiple biomarkers of DNA, RNA or proteins, and * When combined with a unique algorithm, yields a patient specific result, and * Provides new clinical diagnostic information that cannot be obtained from any other tests to combination of tests, and * May include other assays Distinction between existing and new ALDTs which have differing reporting requirements and payment calculations

Existing ADLT Reporting & Payment Calculations Data collection period is same as for other lab tests, Jan 1 to Jun 30, 2016 Reporting for ADLTs occurs every year Reporting period is Jan 1 to Mar 31 of each year for the prior year’s 6 month data collection period Payment is calculated on the weighted median test for most recent data period, based on weighted median of all private payer rates for such test Subject to the same phase-in of payment cuts as existing tests

Certification and Penalties President, CEO, CFO or designee who reports to one of these officials and who has appropriate delegated authority must certify all data provided to CMS Data provided must be accurate, complete, and truthful, and meet all reporting parameters If CMS determines applicable lab has failed to report, or made a misrepresentation or omission in reporting, applicable information, a civil monetary penalty of up to $10,000 per day per violation may apply

CMS Data Reporting Template Applicable labs are required to submit required private payer payment and volume data for each test on the CLFS during Jan1 to Mar 31, 2017 Labs must use a CLFS reporting template developed by CMS that provides data fields for reporting applicable information for CLFS private payor rate-based system Data must be reported through the Fee-For-Service Data Collection System (FFSDCS) CLFS System at https://portal.cms.gov The FFSDCS is undergoing final stage of testing and will not be accessible to the public until sometime in November

Navigating the Template The template file is named “CLFS-Lab Data-Collection- Final.csv. It can be assessed in the Downloads section on the the Clinical Laboratory Fee Schedule web page “Comma Separated Value” (.esv) is the available format for data submission through a file upload process The template may be opened using a test editor, such as Notepad or a spreadsheet application such as MS Excel

Template Requirements Do not add additional columns to the template Do not add, remove, or otherwise change column or column headings within the template Do not submit blank rows between data entries. All data must be submitted in contiguous rows Four required fields must be completed for each test: HCPCS code, Payment Rate, Volume & NPI

Template Constraints Template may be populated through system generated content or manually via online interface Do not manipulate the Header (Row 1) Report data in order specified by the template A comma must separate each value CLFS System will not recognize any formatting or manipulation in Excel CLFS System will validate data fields as defined by “Field Definition” in Table 1

For More Information For detailed guidance on data collection and reporting, refer to Medicare Part B Clinical Laboratory Fee Schedule: Guidance to Laboratories Collecting and Reporting Data for the Private Payor Rate- Based Payment System

CMS Projects Medicare Savings Under PAMA CMS estimates Medicare savings of 5.6% of CLFS spending in first year of PAMA - $390 million Projected 5-year savings (2016-25) is $2.3 Billion Projected 10-year savings (2016-25) is $3.9B Note: savings will be lower since start-up of market- based rates delayed until 2018

Lower Savings Possible Under PAMA Says OIG* OIG says the absence of certain private payer pricing data from data that CMS will get could limit decreases in Medicare lab testing rates (most hospital labs will not report data) CMS does not plan to independently verify whether all applicable labs report their private payer data CMS does not plan to independently verify the completeness or accuracy of submitted data *HHS Office of the Inspector Genera, Changing How Medicare Pays for Clinical Diagnostic Laboratory Tests: An Update on CMSs Progress, September 2016

OIG Report on PAMA* Medicare could pay more for certain lab tests when it switches to a single national fee schedule — median pricing in the private market could be higher than Medicare’s current rate for some tests Medicare may pay more for specific sets of lab tests because under the new payment system it will no longer be able to pay using “bundled” rates * HHS Office of the Inspector General, “Changing How Medicare Pays For Clinical Diagnostic Laboratory Tests: An Update on CMS’s Progress, Sept 2016

MDx & Drug Test Pricing Be Higher Under PAMA Many molecular diagnostics and toxicology tests could see substantial price increases under PAMA’s new market-based payment system according to limited sampling of market pricing XIFIN analyzed 2016 pricing data from150 lab clients on specific lab procedure codes and calculated weighted-average pricing for each code using the same method as CMS Based on XIFIN data, top 20 molecular tests by dollar volume would increase by +27.3% and top 20 pain/tox lab tests would increase by +50.4 % In contrast, for the top 20 tests based on Medicare Part B 2015 payments, XIFIN data shows a -19.6 reduction under PAMA

PAMA Advisory Panel Options for Panels PAMA advisory panel recommended two options for replacing the Automated Test Panel (ATP) Code System in 2018 and beyond: Option 1: Stop using ATP Code System and pay CPT panels and single test CPT codes using PAMA data Option 2: Use PAMA data for CPT panels and create G codes for additional analytes based on number CMS will make final decision on payment for panels