MGMA 2013 Annual Conference

MGMA PathologyManagement Preconference

Industry UpdateOctober 5, 2013

Dennis Weissman, PresidentDennis Weissman & Associates, LLC and

Founder & Executive Editor, G2 Intelligence

Learning Objectives

• Describe the top industry trends that will most likely affect your practice• Recognize how key developments

surrounding healthcare reform will impact group practices

Learning Objective 1

Describe the top industry issues that will most likely affect your proactive

Describe the top industry trends that will most likely affect your practice

• Changing AP Market Dynamics• Physician Practice Trends• Medicare Reimbursement • Legislative & Policy Hotspots• Macro Healthcare Trends• Pathology Market Trends

AP Market Dynamics

AP Market Dynamics*• Total anatomic pathology market up an estimated 4.5% in

2012 to total of $17.5B• This represents a slowdown from the previous 6 years (2006-

2011) when the market grew by an estimated 7.9 percent• Main reason for lower market growth is slowdown in Pap

testing market due to extended testing intervals due to DNA-based HPV and new vaccines

• Pap test volume are now declining by an estimated 3% to 5% per year

* The U.S. Anatomic Pathology Market: Forecasts & Trends 2013. Laboratory Economics

AP Market Size Segments*• For 2012, outpatient market segment comprised 56%

or $9.8 billion of the total • Services are performed by independent labs and

pathology groups for physician office labs• Remaining 44% or $7.7 billion involves services

provided to hospital inpatients or outpatients, mostly by hospital-based histology labs and pathology groups

• Market remains highly fragmented with Quest Diagnostics and LabCorp still having less than 10% share each of the overall market

*2013 U.S. AP Market Report, Laboratory Economics

National AP Market by Volume*• Hospital-based labs hold a 49% share• Quest Diagnostics has a 7.1% share and LabCorp has 5.3%• Independent labs and pathology groups have a 24% share• Physician office-based pathology labs have an 8% share• Other labs including ambulatory surgery centers, public health labs , tissue banks, etc. have a

4.5 % share *Data from CLIA Provider Survey Files, Jan. 2013, Laboratory Economics

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Histology Labs Distribution*• Nationwide, there are about 9,000 CLIA

certified histology laboratories which include: --4,100 physician office-based histology labs --3,100 hospital-based histology labs --1,500 independent histology labs• By test volume, Quest & LabCorp own 7 of the

10 largest histology labs with So. Cal. Permanente Medical Group Lab (HMO), Poplar Healthcare & Miraca (formerly Caris Diagnostics) rounding out the top list

* Data from CLIA Provider Survey Files, Jan. 2013, Laboratory Economics

Specialty AP Market Share*• Non-hospital patient pathology market at $9.8

billion in 2012• Percentage breakdown as follows -- Cervical cancer screening -- 23% -- Skin cancer – 19% -- Urology (prostate & bladder) – 16% -- Colorectal cancer -- 15% -- Lymphoma/leukemia -- 9% -- Breast Cancer -- 8 % -- Other cancers -- 10% * 2012 AP Market Report, Laboratory Economics

Subspecialty Revenue Estimates*

• Cervical Cancer Screening: $2.325 Billion• Skin Cancer: $1.815 B• Colorectal Cancer: $1.452 B • Prostrate Cancer: $1.210 B• Lymphoma/Leukemia: $ 860 Million• Breast Cancer: $ 780 M• Bladder Cancer (UroVysion)$ 325 M• Other Cancers: $ 1.0 B

*2013 AP Market Report, Laboratory Economics

Slowdown in 2013 AP Growth *

• After years of 5-10% annual growth, AP market is slowing down in 2013

• LE survey of 218 AP labs this April shows expected 2013 volume growth of 2.6%

• Higher growth of 3.3% expected in 2013 for clinical lab test volume

• Pap testing is weakest market segment with volume expected to decline by 1.6% for 2013

2013 Laboratory Economics Anatomic Pathology Market Trends Survey

Pathologist Compensation*• In 2012, pathology average total cash

compensation (includes both salary & bonuses) was $355, 371 according to MGMA data

• This represented a 2.5% decrease from 2011 according to MGMA

• 2012 pathology compensation varied from $250K to $381K based on data from seven recruiting firms and professional organizations

• Of 23 specialties tracked, more went up than down during the 2011-2012 period

* Modern Healthcare, July 15, 2013

Estimated New Cancer Cases*• Estimated 577,000 people in U.S. dies from

cancer in 2012• Number of new cancer cases in U.S. grew by

an average annual rate of 3.5% between 2009 and 2012, whereas it was only 2% per year growth in the age 65 and over population

• Fastest growing number of new cancer cases in 2009-2012 period are in thyroid cancer (up 14.9% per year); liver cancer (up 8.3%) and prostate cancer (up 7.9%)

*American Cancer Society

Pathology M&A Overview*• Over 300 clinical & AP pathology lab M&A

transactions completed since 1996• Record $3.8 billion spent in 2011 but little after• Total of 5 pathology lab deals in 2012 including -- Miraca Holdings acquired Aloha Labs and Oncodiagnostics Labs -- OPKO Health acquired Pros-tData/OURLab -- PathGroup buys Atlanta Dermatapathology -- Ascend Clinical LLC acquired PathCentral Lab * 2013 AP Market Report, Laboratory Economics

M&A Overview• Few transactions so far in 2013: InCyte Pathology

acquires Eastside Pathology and Access Genetics buys OralDNA Labs

• Several novel partnerships: Pee Dee Pathology sells its Pap testing & related infectious disease testing business to Labcorp; PAML buys stake in CellNetix Pathology and Labs

• Aurora Diagnostics has $115M write-off and hires “crisis management” expert as President & CEO

• Between 1993-2012, independent path groups have a median revenue multiple 1.5x*

*2013 AP Market Report, Laboratory Economics

Physician Practice Trends

Physician Practice Trends• Practices were damaged by the recession and

aftermath but are slowing coming back• Physicians weigh options to help shield them

from market forces• Emerging practice models will vary by

geographic area – one size will not fit all • Shifting nature of private practice with growing

numbers of physicians becoming employed as they sell to hospitals/health systems

Practice Trends• Physician care remains highly fragmented even

with the expansion of hospital employment• More than 40% of physicians still practice is

groups of fewer than five even in more competitive urban markets*

• Group practice membership grew by 17% from 2003 to 2010 and appears poised to continuing growing*

e The Future of Medical Practice, The Physicians Foundation, 2012

Practice Trends

• Acceleration of variety of value-based payment models requires physicians to learn how to negotiate in new payment climate

• Practices are increasingly seeking out and adopting health care technology solutions

• Physicians are more proactive in streamlining their practice operations

• More desire for work-life balance particularly for younger physicians – generational change

Medicare Reimbursement

2013 Path Reimbursement• Pathology fees remain frozen in 2013 under the

Part B Physician Fee Schedule following congressional action to block a 26.5% cut under the sustainable growth rate formula

• To help pay for the one year fee fix ($25.2B over 10 years) clinical lab fees under Medicare were cut by 2% in 2013

• All Medicare providers including pathologists and labs were cut 2% starting March 1, 2013 under budget sequestration as required by the 2012 deficit reduction law

2013 Path Reimbursement

• The technical component of 88305, the single most important AP code – was slashed by 52% to $33.70 (unadjusted) by Medicare

• Professional component for 88305 rose by 1.9% to $36.76

• Global rate for 88305 reduced 33% to $70.46• Reduction in TC for surgical pathology partially

offset by higher rates for other procedures

2013 Path Reimbursement • Following deep cuts last year, Medicare raised

2013 payment for the global rate of UroVysion (88120) by 31% to $621.87. TC increased by 34% to $565.36, PC up up 9.2% to $56.50.

• Likewise, the UroVysion (88121) global rate jumped 37% to $559.58. TC exploded up 41% to $510.22 and PC rose 7.4% to $49.35

• Immunohistochemistry (88342) global rate hiked by 9.7% to $115.73. TC up 13.7% to $73.52 while PC rose by 3.3% to $42.21

2013 Reimbursement Impact*• Based on Medicare allowed charges of

$1.378B in 2011, its projected that the cut to the 88305 global rate will translate into a $460 million dollar revenue loss in 2013

• When offset by higher rates for flow cytology, immunochemistry and UroVysion Fish testing, the overall cut in pathology spending by Medicare amounts to $358 million or 14%

• More damage is expected when commercial third-party insurers adjust their rates in future

Laboratory Economics, November 2012

Medicare Lab Reimbursement*• Medicare Part B lab spending rose 9% to

$9.741 billion in 2012• Hospital lab outpatient and outreach

accounted for $4.661B of Part B spending• Independent labs and POLs accounted for

$5.080B of spending• Part B labs services represent 1.7% of overall

Medicare spending in 2012 and 4.1% of Part B expenditures

*National Intelligence Report, June 10, 2013, G2 Intelligence

2013 Lab Reimbursement• The Medicare Clinical Laboratory Fee Schedule

is cut 2.95% with an additional 2% reduction applied starting March 1 under the budget sequestration policy applied to all Medicare providers and suppliers

• Labs are subject to a 1.75 percentage point reduction to the fee schedule through 2015 plus a productivity adjustment applied to the annual update under the ACA

• Third time in last four years for lab fee cuts

2013 Lab Reimbursement• National minimum payment for Pap smears was

cut to $14.53 from $14.97 last year • Medicare pays the lesser of the local fee

schedule or national limitation amount but never below the payment floor

• An update of 1.7% was made for laboratory costs subject to reasonable charge payment, including blood products, transfusion medicine, and reproductive medicine procedures

2013 Molecular Reimbursement

• Using gap-filling methodology , CMS published interim pricing in May from Medicare Administrative Contractors (MACs) for some 114 molecular diagnostic test codes now paid under the Clinical Laboratory Fee Schedule

• Specific codes vary widely by MAC such as CPT 81226 (CYT2D6) ranges in price from $50 to $505,76 while CPT 81265 (STR markers specimen analysis from $123 to $470.24.

2014 Molecular Reimbursement• Final 2014 national Medicare rates for

molecular testing codes for will be set by CMS by this November at a percent of the median rates submitted by all 12 MACs

• Without changes to the interim rates, the national rates would be set, on average, some 25% below rates labs received last year under the old code stacking method of billing

• Pathology & lab groups argue to CMS that MACs pricing setting method was not valid

2014 Path Reimbursement• CMS is seeking as much as 50% or more in

payment reductions for many high-volume pathology TC services provided by an independent lab under its proposed 2014 Physician Fee Schedule

• CMS proposes to link pathology payment to the rates paid under Medicare’s hospital outpatient prospective payment system

• CAP & ACLA fighting CMS on proposal with final 2014 rule due out this November

2014 Path Reimbursement

• 88305-TC for surgical pathology would be cut an additional 7% following a 52% hit in 2013

• Most PC rates little changed except 88305 would be cut 1% to $36.40

• Biggest losers are flow cytology (88185-TC) slashed by 76% to $12.93 and special stains group I (88312-TC) down 67% to $23.82

• Overall, CMS proposal would cut pathology codes by an astounding 26% in 2012

2014 Path Reimbursement• The technical component of pathology services

provided in hospital outpatient settings would be subject to bundling under Medicare’s ambulatory payment classifications under a proposed rule

• Under the July 8 proposal, CMS says pathology services would be considered ancillary services and packaged when performed with another service but would continue to be paid separately when performed alone

2014 Path Reimbursement• Some 50 AP codes would be bundled under

the CMS proposal including the TC’s for high volume codes including 88112, 88185, 88305, 88307, 88312, 88313, 88342 & 88367

• Payment for certain pathology procedures described by add-on codes including 88177, 88185, 88311, 88314, 88332, 88334 and 88388 would be unconditionally packaged under the proposed CMS rule

2014 Path Reimbursement• Pathology professional fees won’t be bundled• Also excluded from outpatient bundling are

molecular diagnostic tests (81200-81383, 81400-81408 & 81479) though CMS warns these tests may be be packaged when they become routine

• Surprisingly, CMS also proposes major increases for most pathology TC codes under a separate OPPS fee schedule – some 2x higher compared to those on Medicare Physician Fee Schedule

2014 Lab Reimbursement• Part B laboratory fee change depends on the

final productivity adjustment, whether legislators blocks the 2% sequestration cuts for next year and any further statutory changes made by Congress in 2013.

• Unlikely but not impossible that Congress would retain the one-time 2% cut to help pay for a physician payment fix next year

• Given all these variables, a more modest cut for labs is likely for 2014 compared to this year

2014 Lab Reimbursement• Under the proposed 2014 Physician Fee

Schedule, CMS is seeking to reduce payment for lab tests under the Clinical Laboratory Fee Schedule due to technological changes

• CMS is proposing a five-year process under which it would systematically review amounts established under the CLFS if changes in technology for the delivery of that service warrant an adjustment to the fee amount

• Look for a final decision on this proposal when CMS publishes a final PFS rule this November

Legislative & Policy Hotspots

Physician Payment Reform

• Congress making progress on physician payment reform

• H.R. 2810 which repeals the current Medicare physician payment system and creates new incentives for physicians to deliver quality care passed the full House Energy and Commerce Committee July 31 by a 51-0 vote

• Senate Finance Committee promises to produce its own separate plan by this fall

Physician Payment Fix• House bill would repeal the SGR and create a

fee-for-service system in which physicians would report quality measures

• Physicians would have the ability to to leave fee-for-service and opt for new ways of delivering care, such as medical homes

• Physicians would receive a 0.5% annual increase for each of the first five years under the new system and variable thereafter

• House measure not paid for ($139B over 10 yrs)

Pathology Self Referral• Legislation to prohibit physician self-referral of

anatomic pathology and other designated health services under the Stark law introduced in the House in early August

• H.R. 2914, Promoting Integrity in the Medicare Act of 2013 would also prohibit exclude advanced diagnostic imaging, physical therapy and radiation services from the IOAS exception to the Stark law

• Pathology groups applaud bill as physician specialty groups oppose it – no Senate bill yet

GAO Self-Referral Report• A July 16 GAO report concludes that financial

incentives for self-referring providers were likely a major factor driving increase in anatomic pathology referrals

• For 2010, GAO says that in providers who self-refer made an estimated 910,000 more referrals for AP services that cost Medicare an extra $69 million

• GAO has 3 recommendations: 1) implement a policy to ensure the appropriateness of biopsies performed by self-referring physicians

GAO Recommendations• 2 - GAO also calls for an AP policy that would limit

the financial incentives related to referring a higher number of specimens per biopsy procedure

• 3- The agency recommends that CMS insert a red-flag on Medicare Part B claim forms and require providers to indicate whether the AP service billed for are self-referred or not

• In response, CMS says it agrees with GAO recommendation #2 but disagrees with #3

Meaningful Use Exemption for Pathologists

• CAP is asking CMS for a full 5-year exemption from meeting meaningful use requirements of electronic health records (EHRs) and related penalties

• CMS has given pathologists an exception for 2015 but can extend it annually up to 5 years

• Legislation (H.R. 1309) is pending in Congress that would exempt pathologists from the program and protect them against penalties

Supreme Court Rules On Gene Patent Case

• Supreme Court rules that genes naturally found in the body cannot be patented

• But the Court also says that synthetically created genetic material can be patented

• Ruling ends Myriad Genetics two-decade monopoly on offering BRCA 1 and BRCA 2

• Immediately following the ruling, a score of independent and medical center labs said they now plan to offer competing tests

Legislative Outlook• GOP House leadership strategy is to avert

government shutdown this fall by passing a short terms continuing budget resolution that would keep the sequester cuts

• GOP leaders favor having a broader fiscal fight over raising the debt limit including possiblly defunding health care reform later this fall.

• Democrats and White House favor doing away with the sequester cuts as part of a larger budget package that could include more Medicare provider cuts

Macro Healthcare Trends

Macro Healthcare Trends• Changing U.S. demographics with a more

diverse and older population having large income disparities that are placing new demands on the healthcare industry

• Downward pressure on medical inflation due to growth of high performance networks, ratcheting down of hospital readmissions, employers selecting more high deductible plans and elements of Affordable Care Act

Healthcare Trends• Healthcare spending growth projected to be

lower in 2014 compared to 2013• Accelerated healthcare consolidation in an era of

constrained resources requires the need for a bigger platform especially to achieve sustainability and scalability

• Analytics emerges as a critical data tool to provide actionable information to clinicians as big data separates winners from losers in healthcare

Healthcare Trends• Health care technology becomes more critical

to achieve care integration & to reduce costs• An increase in individual and high deductible

health plans means that consumers will control more of their healthcare dollars as they assume a great decision-making role

• Providers will continue to be financially challenged by new payment models and lower reimbursement rates

• U.S. healthcare companies make strategic moves to expand overseas for future growth

Healthcare Trends• Federal and state health insurance exchanges

go live October 1, 2013 with the official start-up on Jan. 1, 2014 – target of 7 million new enrollees over the first year

• Insurance industry business model is moving from a wholesale approach mainly focused on group insurance to a retail approach focused on serving the growing individaul market

• Health insurers forming partnerships with providers as part of an overall shift to payment models rewarding quality and efficiency

Pathology Market Trends

Pathology Market Trends• Pathology market contraction likely in 2013

due to the fallout from the major Medicare reduction to the TC of 88305

• Laboratory Economics forecasts a 9% market decline to $15.9 billion in 2013*

• Once market has adjusted to reimbursement changes, modest growth should again resume beginning in 2014

2013 U.S. AP Market, Laboratory Economics

Pathology Trends• Biggest challenge remains lower pathology

revenues with both actual and proposed payment cuts by Medicare the leading factor but also look for private insurer initiatives starting to take hold under market reforms

• Pathology in-sourcing by specialty physician groups remains a drain on pathology revenues but there are moves by both government and private insurers that may stem future growth if not turn it around altogether

Pathology Trends• Though reimbursement is being reduced for

specialized testing including molecular and pharmacogenomic testing, these high end procedures remain important growth areas

• Under emerging new delivery and payment models, pathologists are beginning to create added value by reducing unnecessary testing, working with clinicians to improve & optimize testing protocols, making their labs more cost effective and offering personalized diagnostic guidance for medical decision-making

Pathology Trends• Market competition remains strong in most

geographic areas with both strong regional players and national labs vying for business

• Automation takes on greater importance with the emergence of automated PCR and histology tissue processing

• In the era of big data, informatics becomes a critical element of pathology practice since it will ultimately separate the market winners from losers

Recognize how key developments surrounding healthcare reform will impact group practices

• ACA Update & Outlook• Health insurance exchange marketplace• Health market reforms• Pathology and value-driven practice

models

ACA Update & Outlook

ACA Update & Outlook• More than three years after passage, ACA

remains highly controversial and politicized• The public remains skeptical and opponents

fear a government takeover of the healthcare system and a slippery slope toward socialism

• Virtually unanimous GOP opposition including some 40 votes by the House for repealing the ACA law and ongoing efforts to defund it

• Yet ACA has survived all challenges to date and remains on track for full implementation

ACA Provisions in 2014• Establishes the Health Insurance Marketplace• Requires individuals who can afford to obtain

basic health insurance coverage or pay fine• Raises small business tax credit up to 50% of

employer’s contribution for worker coverage• Tax credits for individuals from 100% to 400%

of the property line• Prohibits insurance companies from denying

coverage due to pre-existing conditions or charging more due to gender or health status

ACA Provisions in 2014• Prohibits insurance companies from dropping

or limiting coverage due to an individual choosing to participate in a clinical trial

• Prohibits new plans and existing group plans from imposing annual dollar limits on amount of coverage an individual may receive

• People who earn less than 133% of the poverty level are eligible to enroll in Medicaid

• States will receive 100% federal funding for the first 3 years to support expanded coverage

Essential Health Benefits• ACA requires health insurance plans to provide

Essential Health Benefits effective January 1, 2014

• Clinical laboratory services are one of the ten categories services required

• Though lab services are not defined, HHS has stipulated that genetic counseling and routine breat cancer susceptibility testing gene (BRCA) testing must be covered as a preventive service with no cost sharing by the patient

Health Exchange Marketplace

Health Insurance Exchange Formation

• A health insurance exchange is a marketplace for purchasing insurance

• Exchanges can be run in three different ways: states can build their own, partner with one or more other states or the federal government or have the feds run it

• Total of 14 states and DC are building their own exchanges, 19 are having the feds operate the exchange and remaining ones are partnering

Health Exchange Timeline

• October 1, 2013 – Exchanges must be operational in each state to begin enrollment for the 2014 plan year

• January 1, 2014 – Exchanges begin providing coverage for individuals and small businesses with 50 or less employees

• March 1, 2015 -- Open enrollment ends for 2014 plan year

Health Exchange Projections

• Estimated 7 million people expected to shop for individual coverage on health insurance marketplace

• Additional 2 million expected to seek coverage through the ACA’s small business program

• White House goal is to sign-up 7 million people on the health insurance exchanges by March 1, 2014

What To Watch For• Three states – California, Florida and Texas

have about one-third of the total 48 million uninsured nationwide

• Success of exchanges could hinge on how well enrollment goes in these states

• USA Today survey of 19 states provided estimates higher than the 7 million estimated by the government for all all states

• At least 8.5 million will use exchanges concludes USA Today, with California alone saying it would sign up 5.3 million

Health Market Reforms

ACA Health Market Reforms• Medicare Share Savings Program and ACOs• Medicare Bundled Demonstration for Care

Improvement• CMS Innovation Initiatives -- The Pioneer ACO Model -- The Advanced Payment ACO Model -- The Comprehensive Primary Care Initiative -- The Independence at Home Demonstration -- The Health Care Innovations Grants -- Innovations Advisors Grant Program

Private Market Reforms• Private payors and purchasing employers are

moving towards payment models based on performance and efficiency rather than a volume-driving payment system

• Experimenting with variations to ACOs – Cigna has already launched 56 ACOs

• Coalition of large employers and other health care purchasers are targeting a goal to have 20% of payments valued-based by 2020 and estimates that 10.9% of all commercial in-network payments are already value-baed

Pathology and Value-Driven

Practice Models

Value-Driven Practice Model

• Diagnostic business must help to deliver value – i.e., better clinical outcomes per unit of resources expended

• Transition from fee-for-service to bundling, shared savings – reimbursement cuts

• Emphasis on information technology with focus on quality & financial measures

• Growth of integrated networks (ACOs) driving hospitals to acquiring physician groups

• Pathologists at Montefiore Medical Center are working to create value in their risk-based syst

• Working with clinicians to improve and optimize testing protocols

• Reducing unnecessary diagnostic testing• Offering personalized diagnostic guidance for

medical decision-making• Building laboratory systems that enable data

mining for both pathologists and clinicians• Making their laboratories more cost-effective.

Pathologists Must Create Value

Lab Involvement in ACOs• College of American Pathologists studied three

labs and their involvement with ACOs• They found common threads in services these

labs are offering including: • Developing protocols for laboratory test ordering• Population health management tools for

identifying and managing chronic disease • Improving physician access to actionable

laboratory data• Increasing collaboration with physicians .

Learning Objectives

• Describe the top industry issues that will most likely affect your practice• Recognize how key developments

surrounding healthcare reform will impact group practices

Contact Information

Dennis Weissman, President Dennis Weissman & Associates, LLC and

Founder & Executive Editor, G2 Intelligence

E-mail: dennis@weissmanassociates.com