Big changes are coming Disruption in Healthcare and

Big changes are coming… Disruption in Healthcare and Lab Testing Marketplace: What’s Ahead ROBERT L. MICHEL Editor In Chief THE DARK REPORT Spicewood, Texas rmichel@darkreport. com CCLA 2017 Annual Conference 2 November 2017 Costa Mesa, California

Atomic Bombs for 2018 and 2019 Medicare to Pay Differently n Labs to be hit first, on Jan. 1, 2018! (PAMA) n Physicians to be hit second, during 2019. (MACRA / MIPS)

A Word on MACRA… Understanding MIPS & APMs n Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). n Replaces SGR formula. n New payment model for physician professional fees; data baseline is 2017. n Merit-Based Incentive Program (MIPS). n Advanced Alternative Payment Models (APMs). n Speeds transition away from Fee-for-Service.

A Word on PAMA Lab Market Price Reporting n Protecting Access to Medicare Act of 2014 (PAMA). n Medicare Part B lab spend: $7 billion in 2015. n On Friday, September 22, CMS published 2018 Medicare Part B Clinical Laboratory Test Fees. n CMS now says fee cuts will total $680 million just in 2018! (That’s up from the $400 million estimate. ) n Less revenue from lab services that have CPT code reimbursement from 2018 forward.

Are Medicare Clinical Lab Fees Going the Same Way as Medicare Radiology Fees? Medicare fees drop 35% in 10 years! 100% The red line charts the impact on global outpatient payments, 65% over 10 consecutive years, of Medicare reimbursement cuts for medical-imaging services performed at the outpatient imaging centers of Southwest Diagnostic Imaging Ltd. The amount collected as a percentage of global billing in 2004 was defined as 100 percent. Courtesy of Rodney Owen, MD, FACR. http: //www. radiologybusiness. com/topics/healthcare-economics/growth-strategies-thin-times

Will Medicare Clinical Lab Fees Go the Same Way as Medicare Radiology Fees? 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 100% 95. 1% 92. 7% 90. 2% 80. 5% 75. 6% 70. 7% 2014 65. 9% n Percentage of 2004 Medicare payments for global charges involving imaging. n Southwest Diagnostic Imaging, Scottsdale, AZ. n “The healthcare inflation rate has been running at 3% over the past 10 years. Factor in 10 years of a 3% inflation rate in terms of 2004 dollars, and we are probably approaching 50% [reduction in fees]. ” — Rodney Owen, MD, FACR, Co-President, SDI http: //www. radiologybusiness. com/topics/healthcare-economics/growth-strategies-thin-times

Impact of Fee Cuts on Labs Is Huge n Lab economics recognizes value of economies of scale when payment is fee-for-service. n As fee-for-service disappears, clinical labs will be paid according to how they add value to physicians and help improve patient outcomes. n Big change for clinical labs and physician labs, since higher volume no longer guarantees success.

Ticking Time Bomb for Entire Clinical Lab Industry Emerging Wave of Lab Fraud n New forms of lab fraud and abuse emerging in recent years. n Remember Health Diagnostics Laboratories and Millennium Health whistleblower fraud cases? n Organizers of these schemes typically not trained in laboratory science, but come from outside the medical laboratory profession.

HOPD n Hospital outpatient department (diagnostics). n New form of passthrough billing scheme. n Organizers targeting hospitals and health systems across the nation

n Five types of federal or state laws that these HOPD agreements could violate, including: n The False Claims Act. n The Anti-Kickback Statute (if the hospital or lab might be receiving referrals in return for remuneration that reflects the volume and value of referrals. There is no safe harbor if the hospital and the management company are doing a percentage split. ) n The Stark Law (if the hospital or laboratory is physician owned. ) n The shell lab rule.

n On May 4, 2017, Blue Cross & Blue Shield of Mississippi filed a lawsuit in the U. S. District Court for the Southern District of Mississippi. n Named as defendants were: • Sharkey-Issaquena Community Hospital • Sun Clinical Laboratory, LLC • Mission Toxicology Management Co. , LLC • Mission Toxicology II, LLC • 10 unnamed “John Does” n The 29 -bed hospital is located in Rolling Fork, Miss. (population 2, 500). Hospital had revenue of $6. 7 million in 2014. Miss. Blue Cross said hospital billed it for $34 million in outpatient lab tests in just 90 days!

Don’t Forget Genetic Test Prior-Authorization n Anthem launched on July 1. n United. Healthcare launched on November 1. n Two insurers have 80 million beneficiaries. n Labs report prior-auth systems not working well.

How Healthcare is Changing New Clinical Care Paradigms n Keep patients out of hospitals! n Detect disease early, when easier to treat. n Actively help patients manage their chronic diseases. n Use incentives to encourage positive lifestyle choices and activities. n Support these goals with molecular and genetic knowledge as it is developed.

What’s Changing for Labs? n Pressure to cut costs, boost productivity. n New standards of quality. (Think Six Sigma quality. ) quality n Adoption of ‘System of Prevention. ’ n Payment based on value. n More intense use of information technology and data analytics. Coming to a lab near you… Cultural transformation in the operation of Medical Laboratories

Powerful Healthcare Trends Attributes of ‘New’ Healthcare n Integrated healthcare networks that deliver seamless, integrated clinical care. n Payment based on value, not fee-for-service. n Personalized or precision medicine, (requiring more diagnostic testing). n Proactive care, not reactive care. n Healthcare big data, informed by clinical lab test results.

Understanding Volume to Value n Old: hospitals, physicians, labs paid by fee-for-service. n More tests = more revenue. n New: payment for value n Now, more tests = higher costs, less profit. n Labs must demonstrate that their lab test services contribute to improved patient outcomes and lower cost of care. 17

Aligning Labs with Healthcare’s Needs Attributes of ‘New’ Lab n Speedier work flow, shorter cycle times. n Attacks non-value added processes. n Continuously improves. n Sophisticated use of informatics. n Collaborates with providers to deliver more value from lab test data. n Contributes to measurable improvement in patient outcomes, lower cost of care.

Key Attributes for Labs n ONE: Achieve operational excellence via adoption of quality management systems. n TWO: Develop mastery of information technology to sustain lab’s operational performance and contribute to improving patient outcomes. n THREE: Engage in effective collaborations with physicians in care settings outside the lab. 19

Big Trend in Medicine Proactive Care, Not Reactive Care n No longer will providers “wait” for patients to show up at doctors’ offices and A&Es. n Concept is to keep an eye on patients, keep them healthy. n Ideal is true “managed care” with full access to early diagnosis, preventive services, chronic disease coaching. n POLs, local labs should benefit because of immediate access to lab test results while patient is present. 20

Big Trend in Medicine Keep People Out of Hospitals n Hospitals are the most expensive places to provide healthcare. n Hospital inpatients are at risk for hospitalacquired infections, medical errors, falls, and similar events. n Easier to get better outcomes at a lower cost per episode of care by treating patients in outpatient settings. 21

47. 4% -19. 5% U. S. is shifting care away from hospitals. Source: Med. Pac Report to Congress: Medicare Payment Policy, March 2017 Inpatient procedures shrinking by single digits each year. 22

Big Trend in Medicine Integration of Care Delivery and Clinical Care n New paradigm of proactive care requires integration of physicians, hospitals, nursing homes, pathology labs, ancillary service providers. n Examples of fully-integrated delivery organizations emerging, particularly in United States and Canada. n Accountable care organizations (ACOs). n Patient-centered medical homes (PCMHs). 23

ACO Growth in U. S. Hospital Systems and Physicians jockeying to control care via their own ACO. 24

Sources: Accenture analysis, Bureau of Labor Statistics, the Federation of State Medical Boards,

Patient-Centered Medical Homes Also Growing in U. S. Almost 15% of Primary Care Physicians Now Practice in PCMHs! 26

10 70 15 5 12 66 16 51 21 17 7 12 27

Big Trend in Medicine Personalized, Precision Medicine n During your career: reactive medicine and acute care. n Shift is away from “practicing to the average’ based on clinical trials. n Coming soon to a provider near you: u Proactive Medicine. u Personalized Medicine (Precision Medicine). u Genetic and molecular analysis; whole human genome sequencing. 28

Big Trend in Medicine Patients Expect Better Quality n Patients have higher expectations. n Expect fewer errors. n Expect better quality. n Expect services that are personal and top-flight. (Think n Lab vendors know service, know how to teach it; can thus help their lab customers. Amazon. com. ) 29

Cultural Transformation But Changes Needed for Labs to Deliver Value n Future success for labs requires changes in lab operations; plus… n …a working culture where lab staff and pathologists can recognize value. n Shift from “system of inspection” to “system of prevention” teaches lab team to recognize value-added vs non-value added. n Use of modern quality tools and practices.

Attributes of Lab 1. 0 vs. Lab 2. 0 Clinical Lab 1. 0: Transactional SICK CARE • Receive Test Sample • Result Test Sample DISEASE SCREENING • Protocol-driven • Scheduled by Treating Physician • Lab is derivative Clinical Lab 2. 0: Integrative HEALTH CARE • Population Health using Lab data • Total Cost-of-Care leveraging Lab data • Time-to-Diagnosis • Optimization of: diagnosis, therapy, monitoring • Care Optimization • Screening Optimization RISK MANAGEMENT • Identification of Risk • Real-time tracking of Risk • Escalation/De-escalation of Acuity Source: Improving American Healthcare Through “Clinical Lab 2. 0”: A Project Santa Fe Report, Academic

Attributes of Lab 1. 0 vs. Lab 2. 0 Clinical Lab 1. 0: Clinical Lab 2. 0: WELLNESS PROGRAMMING • Managed by Treating Physician • Lab is Derivative WELLNESS PROGRAMMING • Gaps-in-Care closed using Lab data • Outcomes of program using Lab data Transactional PAYMENT MODELS • Lab is a Commodity • Value is Cost-per. Test Integrative Predictive Analytics • What will happen? Why? PAYMENT MODELS • Value of Lab for Total Cost -of-Care Source: Improving American Healthcare Through “Clinical Lab 2. 0”: A Project Santa Fe Report, Academic

Timely, accurate information needed in real time for Operational and Clinical Success Healthcare Big Data, Lab Informatics n Labs must regain control of information technology. n Real-time analytics for managing work processes. n Database capabilities to assemble lab test data with other relevant clinical data. n Ability to analyze large amounts of data to identify opportunities to improve value of lab test results by helping physicians improve patient outcomes.

Informatics, Big Data, & Labs n Healthcare big data will address two ends of the care spectrum: u Analysis in support of population health management. u Analysis in support of personalized medicine; diagnosis and treatment of individuals. n Lab test data is essential in support of both activities. n Lab test data comprises 70% or more of the average patient’s health record.

Delivering More Value with Lab Testing § Accurate lab results reported on time won’t be good enough! § Labs must help hospitals, physicians use lab tests more efficiently… § …to produce better patient outcomes while lowering overall cost of care

Big Data Led by the Lab n Example of Tri. Core Reference Laboratory in Albuquerque, New Mexico. n Formed in 1998 by University of New Mexico Health Sciences Center and Presbyterian Healthcare Services. n Produces 85% of patient lab results in New Mexico. n Has access to patient clinical data electronic health record (EHR) systems.

RSV Influenza A H 3 RSV: Respiratory syncytial virus

Tri. Core 1. 0 Infectious Disease Report Features • Published weekly • >1, 500 subscribers • Easily modifiable to understand outbreaks Disadvantages • Lacks location identification • Latent period: Up to a week 42 Unpublished work © 2017 Khosrow Shotorbani / Do Not Share

Lab and Pathology Trend More Multi-Analyte Testing n Time to recognize a fact little-noted in scientific literature or news media. n Medicine and healthcare about to be overwhelmed by tsunami of useful biomarkers. n Such biomarkers, when incorporated into multiplex laboratory tests, will give pathology lab amazing tools to diagnose disease earlier and with more precision. n Clinical labs and anatomic pathology groups will have “monopoly” on such testing. 43

Genomics n Genomics: 20, 000 -25, 000 human protein-coding genes. n Proteomics: 250, 000 to one million estimated in human cells. n Microbiomics: 10, 000 species in humans so far n Transcriptome: tens of millions? (est. ). n Metabolome: 40, 000 annotated metabolite entries. have more than 8 million genes. 44

But Don’t Forget! n There are 320 million Americans who continue to need clinical lab tests. n Someone will do this work. n Message is for your laboratory to get out ahead of these trends. n Be one of the providers that do this work… by delivering clinical value.

Final Thoughts on Opportunity… “Change is the law of life. And those who look only to the past or present are certain to miss the future. —John F. Kennedy -30 - 46