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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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
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

15. 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)

16. 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 in 2008

17. 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 = 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

18. 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

19. 2012 Proposed Medicare Physician Fee Schedule
Pathology fees would be cut 29.5% as of Jan. 1, 2012 resulting in a conversion factor 0f $ (opposed to $ this year)
CPT 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

20. 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 and situ hybridization codes, 88365, & 88368
CMS will send these to the AMA’s Relative Value Committee for review & possible revisions in the 2013 fee schedule

21. 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

22. 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

23. 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

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