Advantages and Disadvantages Confronting Labs in a Post-PAMAgeddon WorldLâle White, Executive Chairman and CEO, XIFIN Inc.

How Did We Get Here and What’s Next?

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PAMA ?

Historical Rates In 2014 PAMA Industry Impact What’s Next?− Based on lab charges

in 1984–1985, adjusted annually for inflation

− 57 local fee schedules

− Congress imposed across the board reductions to pay for SGR

− CMS proposed further reductions to reflect “Technical Adjustments”

− No cuts 2014-2017− Reductions capped at

10% each year 2018-2020

− Repeal CMS authority for “Technical Adjustment” cuts

− 75% of codes on CLFS decreased;10% increased

− Elimination of ATP payment provides increase in AMCC tests

− OIG estimates 2018 impact at $670M vs. pre-PAMA estimate of $390M

− Fiscal leadership = insight on contractual process reviews and reimbursement due diligence

− Operational Efficiency− Options post dismissal

of ACLA suit− Getting ready for the

next PAMA data collection period

PAMA & 2019 PFS Impact by Sector (Cumulative)

Segment

Medicare/Medicaid

% of Revenue

2018 PAMACLFS

Impact

2019PAMACLFSImpact

2020 PAMA CLFSImpact

No Cap CLFS

Impact

2019PFS

IMPACTPathology 35% -1.50% -2.88% -4.07% -5.32% 0.57%

Molecular 26% 0.03% -0.16% -0.31% -0.61% -0.01%

Clinical 31% -2.00% -3.77% -5.33% -7.04% -0.04%

Pain/PGx 40% -0.63% -0.12% -0.15% -0.73% 0.00%

Hospital 12%* -0.82% -1.55% -2.18% -2.81% 0.02%

Nursing Home 51%** -3.59% -6.75% -9.44% -12.06% 0.00%

** Excluded Part A* Excludes test included in OPPS

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Independent Labs…

Hospital Labs27%

POLs23%

Facility Type Break Down Impacts Analysis

Lab Type Percent of Total

Weighted Avg Impact %

Big Labs 28% (44.8%)*Rest of Ind. Labs 28% 8.0%*Hosp. Outreach Labs 44% 32.1%*Total 100% 3.8%Source: XIFIN analysis based on XIFIN PAMA data set

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Proportion of Total Lab Market Proportion of CLFS Volume

% CLFS Volume

Applicable Data %

Over/Under Representation

Ind Labs 50% 90.1% 40% over

Hosp Labs 27% 1% 26% under

POLs 23% 7.5% 15.5% under

CMS Seeks Comments on Potential Changes to PAMA Reporting in PFS Rule

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Expect more: Independent Labs Doctor’s Offices

While CMS is seeking comments, support for current methodology suggests no inclination to change

P R O P O S E D C H AN G E S T O T H R E S H O L D S

Majority of Medicare revenues threshold New calculation methodology (excludes Part C from total) CMS suggests that 43% more labs may be included in

the “applicable lab”

Low expenditure threshold• Proposed changes to $12,500 collection period revenue• CMS seeking comments on impact of both lowering (to

$6,500) and increasing (to $18,750) threshold

NPI definition of applicable lab• CMS considers identifying “applicable lab” using Form

CMS-1450 14x bill type or CLIA vs. NPI

CMS Posture• CMS tone in seeking comments reflects changes unlikely

NPI definition the most significant impactthat requires industry call to action.

Comments were submitted to CMS bySeptember 10th, 2018

Potential expansion in number of reporting labs – though smaller in size

Status of ACLA Suit Challenging HHS

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Current StatusACLA Claim

• Feb 14: ACLA motion for summary judgement• Mar 23: HHS submitted cross-motion, claims:

• Definition of “applicable lab” challenges fees; expressly not allowed by PAMA

• ACLA fails to show economic injury caused by definition of “applicable lab”

• ACLA did not exhaust administrative remedies required by Medicare statute

• Sept 21: District Judge Amy Berman dismissed ACLA’s motion for summary judgement for lack of subject matter jurisdiction• Legislative efforts continue

• Oct 19: ACLA files and appeal• “While the District Court ruled on narrow procedural grounds, its

opinion acknowledges that ACLA’s ‘arguments on the merits raise important questions,’ about HHS’s actions

• CMS exceeded their authority to establish market pricing by deliberately excluding hospital labs that make up the largest portion of the market and collecting data from less than 1% of labs

Injunctive Relief Sought• Bar CMS for implementing the 2018 CLFS• Does not challenge rate calculation• Order CMS to obey PAMA by revising its pricing formula

to include hospital labs as “applicable labs” for purposes of calculating market rates

Private Payor Reimbursement vs. 2018 CLFS

Payor GroupLab NPI

Hospital NPI Service Specialties

Lab NPI

Hospital NPI

Blue -23% 426% Therapeutic Drug Analysis -27% 163%

Aetna -20% 60% Panels -22% 213%

Cigna -22% 95% Tier 1 Molecular -18% 206%

Humana -36% 93% Tier 2 Molecular -15% 342%

UHC -25% 0% Microbiology -29% 140%

Source: XIFIN analysis based on XIFIN data

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8

Private Payor Pricing Erosion in 2018

• Average Allowed for Private Payors Decreased from 2017 to YTD 2018

– Hospital -3.5%– Independent -2.9%

• Trends– Aetna, Cigna, Blues, UHC offering

20-25% below 2018 Medicare rates– Multiplan cutting their fee schedule

in half in some regions– Increasing number of beneficiaries

in high deductible health plans

% of Privately Insured Persons Under 65 Enrolled in High-deductible Health Plans

2010-March 2018

18.020.0 20.0

22.024.0 23.4 23.9 25.5 25.78

9 1112

13 13.315.5

18.221.3

0

5

10

15

20

25

30

35

40

45

50

1 2 3 4 5 6 7 8 9

Series1 Series2Percentage of persons under age 65 enrolled in a high-deductible health plan without a health savings account or in a consumer-directed health plan, among those with private health insurance coverage. CDHP is consumer-directed health plan, which is a high-deductible health plan (HDHP) with a health savings account (HSA). HDHP no HSA is a high-deductible health plan without an HSA. Source: NCHS, National Health Interview Survey

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Upcoming Timeline for CMS and Laboratories

CMS Develops New Rates

Data Collection Period Reportingperiod New

Rates

CMS Publish

Draft Rates

CMS Publish

Final Rates

Jan 12019

Jun 302019

Jan 12020

Sep 12020

March 312020

Jan 12021

CMS makes FFSDC

S availabl

e for testing

Extension

Jan 12022

Jun 302022

Jan 12023

Sep 12023

March 312023

Jan 12024

PAMA Data Collection – Round 2

Solid reporting from labs is the key to mitigate future price cuts Report on actual allowables vs. payments Validate accuracy of payments Optimize appeals activity to avoid reporting

under payments

R E P O R T I N G PAMA statute allows penalties of

$10K/day for each failure to report, error in reporting or omission in reporting applicable information.

Correct contracting problems prior to reporting period− Eliminate coupled contracts− Evaluate fees for each CPT to

determine outliers that need to be re-negotiated

Establish financial systems with appropriate reporting capabilities and retain source documents

Second round of PAMA may cut individual test payment rates by up to 15%

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Strategies for Labs to Offset PAMA Impact

Private Payor contract negotiations– Leverage hospital to negotiate better lab pricing– Leverage regional presence and value based pricing

concepts

Diversify testing menu and expand specialty testing capabilities

Cost reduction efforts– Workflow automation to remove clerical decision

making and achieve labor efficiencies– Reduce total cost of billing to below 4% while

achieving bad debt targets

Update technology infrastructure Web based systems - WS integration

capabilities for real time bi-directional connectivity

“Service based architecture” that allows functionality to be used at point of need

Select accounting based billing software Financial integrity (GAAP, SOX compliant) Referential integrity Enterprise BI reporting capability

Patient engagement automation High deductibles now for 50% of beneficiaries Patient portal, IVR, Electronic secondary

insurance filing

5-20% POTENTIAL A/R COLLECTIONS

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Evolving Market TrendsReimbursement Changes Shift Segment Focus

• Decline in number of labs offering full testing menus

• Growth in specialization (Pain, PGX, Cardiovascular, Genetic)

• Decline of rural labs with high Medicare/Medicaid mix and shift of business to hospital labs with higher routine testing margins

• Growth in esoteric reference testing labs and tighter partnership with hospitals

• Continued industry consolidation• Independent labs pursue hospital

JVs

Clinical Lab

• POL menus expand• Shift of commodity testing to

point of care with analyzer miniaturization & increased waived testing

• Physicians strive to achieve early diagnosis to manage chronic disease and hospitalization

• Quality reporting requirements align physicians with hospitals for integrated healthcare

• Greater physician specialization encourages alignment with specialty labs

Physician Office Lab

• Post PAMA pricing stabilizing bringing back investment to specialty genetic labs

• Specialty labs fighting to maximize specialty physician referrals

• Companion diagnostics drive therapeutic drug sales

• Data provides new revenue stream for labs and efficiencies for Pharma R&D

Molecular Diagnostics

• Hospital labs less impacted by PAMA cuts

• Health Systems focus on lab efficiencies: profit center vs. cost center

• Outreach business optimizes lab utilization

• Rural lab business shifts to higher margin hospital labs

• Creating complementary Reference Lab Partnerships

• Bringing lab, device & rad together

Hospital / Outreach

• Post PAMA pricing stabilizing• PGX coverage advancing in 2018 • Menu diversification extended

to adjacent specialty areas, such as wound care

• Consolidation in market to drive economies of scale

• High demand created by opioid crisis

• Growing diagnostic Device Market

• New technology challenges for coverage & reimbursement

Pain Management & Device

• Lab is an actionable data provider• Value based pricing negotiations • Data supports coverage/reimbursement• Quality reporting

Data Analytics

• Technology Infrastructure • Connectivity to facilitate clinical integration• Scalability• Operational efficiency

Infrastructure

• Financial system• GAAP/SOX/FASB• Referential Integrity• Business intelligence and analytics

Financial Integrity

Technology needs to align with increasing Segment needs

Hospitals & Physician Offices Are Consolidating into Health Systems

Source:Health Advances interviews and analysis, SK&A 2016, Kane 2015 AMA, Kane 2013 AMA, Singleton 2015 Family Practice Management, AHA, Laboratory Economics.

Total US Hospitals by # beds2012-2016 CAGR: -0.3%

0

1,500

3,000

4,500

6,000

1 2 3 4 5

Hos

pita

ls

Series1 Series2 Series3 Series4

14% 17% 19% 26%

0%

20%

40%

60%

80%

100%

1 2 3 4

US Hospital Ownership of Physician Office Practices

3,811 3,884 3,936 4,004 4,056

0

1,000

2,000

3,000

4,000

1 2 3 4 5

Hos

pita

ls

US Hospitals in Health Systems

“Our biggest priority right now is dealing with how to integrate the new hospitals that are joining our system – we’ve had three in the last year.” – Director of RCM, Hospital Outreach Lab

Hos

pita

l Ow

ned

Prac

tices

Laboratory M&ALarge national reference labs are increasing their M&A activity, with specific focus on hospitals Labswith specific focus on Hospital Labs.

0

1

2

3

4

5

6

7

8

9

1 2 3 4 5 6 7

Ref

eren

ce L

ab A

cqui

sitio

ns

of H

ospi

tal L

abs Series4

Series3Series2Series1

Note: Sonic acquired or made deals with 11 European academic reference labs in 2011-2016.Source: Health Advances interviews and analysis, company materials, ThomsonOne, King 2013 Dark Daily, Lee 2014 Modern Healthcare, Rubenfire 2016 Modern Healthcare,

Haverford 2014.

Acquisitions of US Hospital Labs by Major Reference Labs

“Smaller hospital labs send most of their test volumes out; we have been considering more acquisitions because they are often amenable and we would rather just have them as part of our system.” – VP Revenue Strategy, National Reference Lab

Quest currently owns or manages over 65 hospital labs, and has cited further acquisitions as a core component of future growth strategy

Claims Review Outsourcing Examples

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Insurers Turn to Automated Prior Authorization Programs to Rein in Genetic Testing UseAugust 21, 2017

Insurers worried about the overuse of genetic tests are increasingly employing automated systems to help them keep track of a rapidly growing industry and standardize the enforcement of CPT codes and coverage policies.

Even when prior authorizations aren't required for a particular genetic test, it can take multiple rounds of appeals for the lab to convince the payor to cover it. In Cancer Genetics' experience, it can be anywhere from a few days to nine months from the time a claim is filed and when it is paid.

Prior Authorization Policy Changes Help Grow Genetic Counselor Roles in Lab ReimbursementApril 25, 2018

UnitedHealthcare, through its relationship with Beacon Laboratory Benefit Solutions, stopped allowing labs to complete the prior authorization process for a member or ordering care provider on Nov. 1 2017, High confirmed. The impact of UnitedHealthcare's move followed that of Anthem BlueCross BlueShield, which made a similar move on July 1 in partnership with its own lab benefit management subsidiary, AIM Specialty Health.

BCBS NC/SC

Payors Out-Sourcing Lab Claims Management

Avalon LBM

BeaconAIM

FL 1st, TX 2nd,

ExpandingUHC

Anthem

BCBS HCSC

EviCore(CareCore)

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Major Change in Premier Exclusive Payor AgreementsDoes the end to UHC and Aetna’s sole source contracts with LCA & Quest provide opportunities for OON labs?

• Did not improve patient outcomes

• Did not obtain value based pricing

• Did not optimize utilization and lower the overall cost of care

• Generating member limitations to access and choice

• Resulting in shift to higher cost hospital & leakage costs for OON labs

UHC & Aetna got 10 years of lowest cost at the expense of patient satisfaction

• Both have more convenient patient access, better T-A-T, community interrelationships

• Competition needed to improve patient care and the patient experience

• May be able to leverage non exclusivity to obtain lower fees from hospitals

• Regional labs need to understand the gaps in coverage payors need to fill (test data, price, comprehensive menu)

• Payors remain under pressure to keep administrative costs down (MLR with narrow networks)

• Regional and hospital providers need to determine how they can deliver greater value

Opportunities with payors for regional & hospital labs

Healthcare Data Remains Largely in Difficult-to-Access Silos

INACCESSIBLE

DATA ISOLATEDTO PROVIDER OR DEVICE

DATA ISOLATED TO DEPARTMENTS W/IN HEALTH SYSTEM

Medical Record ResearchCare Team PayorFamily

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Diagnostic Information Empowers All Constituents and StakeholdersImproving Outcomes and Reducing Costs Requires Coordination of Data

Patient Engagement

Provider Engagement

Payor Engagement

Diagnostic Value

Proposition

• Informed Consumer• Personalized Therapy• Better Outcomes • Lower costs

• Population Management• Clinical Information• Decision Support• Patient Satisfaction• Reimbursement

• Population Management• Risk Management• Plan Design• HEDIS and STAR Ratings

The Evolution of Diagnostics: Climbing the Value Chain

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• Three necessary components– Financial Data– Clinical Data– Business Intelligence / Analytics

• Three elements that can change how medicine is practiced and optimize the economics of healthcare– Clinical decision support tools– Collaboration across MDTs– Patient centered coordinated care

• Laboratory’s position of strength– Diagnostics influence 70% of medical

decisions & represent 80% of EHR– Rich set of financial & clinical data– Value of Lab to total cost of care

Diagnostics 1.0• Manual–MD’s Five Senses• Is there disease?

Diagnostics 2.0• Basic Tools Introduced• What disease?

Diagnostics 3.0• Automation & Medicinal

Value• What subtype? Is therapy

working?

Diagnostics 4.0• DX as Standard of Care• Knowledge Mgmt Is Core• Identify risk? Proactively

target?

Pace

of c

hang

e

Increase in value

150 Years Ago

50 Years Ago

Today

Tomorrow

Source: Mara Aspinall

Macro Healthcare Trends – Industry DisruptersConsumerism and Data Analytics Shape the Future of Healthcare Delivery

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Amazon – Chase –Berkshire Hathaway

Alliance

Already obtained licenses for DME distribution in 48

states

Could partner with PBMs

Amazon and Echo capabilities (schedule

office visit; virtual house calls)

AI based in-home healthcare & diagnostics

CVS – Aetna Merger Cigna/ Express

Scripts

Both mergers designed to control rising medical

costs and provide data analytics

CVS has 9700 pharmacies & 1100 walk in clinics• Minute Clinic vs. ER option or

Physician visit

3 largest PBMs become vertically integrated with

insurers (UHC/Catamaran)

Walmart – Humana

Combining retail pharmacies with a PBM

Data analytics building a 360 view of consumer

Medicare Advantage growth – better care at

lower cost

Delivering care close to consumer

Pharma Invests in Labs (Novartis, Roche, Opko)

Companion Dx drive therapeutic drug sales

Big Data (NGS) identifies cancer related DNA

Big Data helps physicians optimize test orders and

treatment choices

Big Data helps manage population health and control medical costs

• Integrate virtual care with Alexa

• Facilitate healthcare information and transactions

• Incorporate in-home health services through Uber network of professionals and care givers

• Leverage Alexa to help consumers manage healthcare more broadly• Bring Amazon-era decision support

to help customers find the best value care

• Expand the scope of drug products through PBM/payor partnerships

• Start with low hanging fruit like OTC, devices/supplies, and cash pay generics

• Amazon IT team (1492) focused on interoperability of EHRs

• Apple health working on personal health record integration into Apple IOS for iPhone, iPad

• Microsoft working on analytic tools & data storage

• Google working on data processing & storage

Amazon’s Strategy to Enter HealthcareConsumerism and Data Analytics Shape the Future of Healthcare Delivery

Step 3: Become the New Front Door to Health by Owning the

Consumer $500+ BNStep 2: Make it Easy to Manage

Health $100-$500 BN

Step 1: Provide the Best Consumer Experience

$50-$100 BN

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Impact on Incumbents: Amazon is another participant in a consolidated space creating pressure on certain business lines, but it is not game-changing

Impact on Incumbents: Drug retailers begin to lose strategic control and market share, but other stakeholders (pharma, payors) partner with Amazon

Impact on Incumbents: Game over when Amazon owns patient data and influences consumer choice of where to access care

Amazon, Apple, Google, Microsoft Plan to Enter

EHR/EMR Market

Patients Are so Frustrated They’re Hacking the System

Source: Dexcom

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It’s Not Just About the Data; It Is a Change of MindsetCommonality of products that succeed: Quality of life solutions - Improve the Human Condition – Make lives better

-Outdated, unscalable data technologies-Data Silos-Incomplete “cloud strategy”-Lack of data engineering/science talent-Rationalizing data platform roadmap to evolving business models-Driving organizational alignment

-Establish a vision for the role of Data in your organization-Leadership commitment and organizational alignment -Adopt best-in-class technologies throughout the organization that align with your data needs-Develop easy to convey use cases that demonstrate thought leadership-Develop a plan of execution and align all resources behind the plan

Stum

blin

g B

lock

sStrategic R

oadmap

Thank You

Lâle White, CEO XIFIN Inc.