Today’s Presentation

1. CCLA2014 Annual ConferenceUpdate from Washington:Key Reimbursement & Regulatory DevelopmentsWestgate Hotel San Diego, CA November 6, 2014Dennis Weissman, President, Dennis Weissman & Associates, LLCWashington, DC

2. Today’s Presentation • Politics of Healthcare and Mid-Term Election R • Reimbursement Pressure • New Part B Medicare Lab Payment Approach • 2014/15 Laboratory Fee Schedule Update • Lab & Pathology Reimbursement Changes • Federal Policy on Labs Providing Patient Test Results & FDA Guidance on LDTs • OIG Special Lab Fraud Alert & Federal Lab Probe

3. U.S. Political Climate • Frustration, disappointment and general dissatisfaction over direction of country • Both Congress and White House very unpopular as are both political parties • Its not just growing anti-government sentiment but public also distrusts other major institutions as well – corporations, banks/financial institutions, national media, labor unions & entertainment industry

4. Midterm Political Dynamics • Six-Year Curse for Presidents -- referendum largely on President Obama • Battle for control of Senate is being fought mainly in red states that voted against the President giving Republicans a major advantage • House map skewed toward Republicans • Demographics in off-year elections favor GOP • Anti-incumbent sentiment more potent than economic growth in non-presidential elections.

5. Current Congressional Lineup House: 233 Reps….199 Dems plus 3 vacancies Senate: 53 Dems…. 45 Reps plus 2 independents who caucus with Dems ********* --House is sure bet for Republicans – some gains expected for GOP --Senate up for grabs: Republicans need 6 Democratic seats to take majority --Dems have 21 seats up while Reps have 15

6. Battle to Control Senate • Going in Republicans have pathway to win 6 or more seats to become majority • Retiring Democrats in red states of West Virginia, Montana & South Dakota seen as lock for GOP • Current Democrat incumbents in red states Alaska, Arkansas& Louisiana face tough battle • Vacant Democratic seat in Iowa in jeopardy • Republican seats being targeted in Kentucky, Georgia & Kansas with Reps favored to win KY & GA but independent candidate having edge in KS

7. Midterm Election Scorecard • Projected House Lineup in 114th Congress: Republican Seats: ____ Democratic Seats: ____ Undecided: ____ • Projects Senate Lineup in 114th Congress* Democratic Seats: ____ Republican Seats: ____ * Seats in GA & LA will require runoff election if no candidate gets 50% of vote

8. Impact on Politics & Policy • Expect continuing legislative dysfunction, more so if Democrats maintain Senate control • Look for Senate GOP majority to push for ACA changes, SGR fix & major budget cuts • Anticipate jockeying over 2016 presidential sweepstakes to significantly influence legislative agenda and actions in 2015 • If GOP controls Congress, potential for striking alliances with centrist Democrats to pass some significant legislation - partisan divide too strong?

9. Reimbursement Pressure Points • Sequester cuts for Medicare providers to 2024 • Annual Medicare cuts under the Clinical Laboratory Fee Schedule (CLFS) • 2014 hospital outpatient prospective payment system (OPPS) final rule packages most clinical laboratory tests into OPPS (MDX tesst exempted) • 20% cuts on average under new molecular test codes while certain codes not covered • Key pathology codes cut plus proposed hospital outpatient rule would package pathology TC services starting in 2015

10. Reimbursement Pressure Points • Aetna sets it Market Fee Schedule for clinical lab and pathology tests applicable to out of network labs at 75% of local Medicare rates in Ohio, effective this September 1 • Commercial payers putting caps on new diagnostic test pricing • Congress requires that private insurance rates be used to set lab pricing on the CLFS starting in 2017

11. Protecting Access to Medicare Act of 2014 • Delays a scheduled 20%+ cut to the physician fee schedule by overriding the SGR thru 03/31/ 2015 • Delays implementation of ICD-10 coding by one year to October 1, 2015 • Repeals authority by CMS to make changes to the CLFS based on technological changes starting in 2015 • Enacts new process to use private insurance rates to determine CLFS payments beginning in 2017

12. Market-based Medicare Payment for Clinical Laboratory Tests • PAMA adds new section that would use rates paid to labs by private payors to determine Part B Medicare payment under the CLFS • Starting in 2016 and every 3 years thereafter, labs receiving revenue from Medicare are required to report to HHS the following: -- payment rates paid by each private payor during the specified reporting period -- volume of such tests for each payor for the period -- if labs have different rates for different payors for the same test, it must report all rates

13. Market-Based Payment for Labs • The data collection period is left to the discretion of HHS • The term “private payor” includes health insurance insurers, group health plans, Medicare Advantage Plans & Medicaid managed care organizations • Information reported would not include payments made on a capitated basis but reported rates must reflect discounts, rebates, coupons and any other price concussions

14. Market-Based Payment Process • Payment for lab tests furnished on or after Jan. 1, 2017, including those provided by hospital labs that are not bundled, would be equal to the weighted median for the test for the most recent data collection period • The weighted median would be calculated by arraying the distribution of all payment rates reported for the period for each test weighted by the volume for each payor and each lab

15. Market-Based Payment Implementation • For years 2017 through 2019, payment amounts could not be reduced more than 10 percent of the payment amount for the previous year • For years 2020 through 2022, the limitation is 15 percent reduction per year • No legislative language on limits beyond 2022 • Payment amounts are not subject to geographic or budget neutrality adjustments, annual updates or “other adjustments”(i.e., ends CPI updates)

16. Data Reporting Requirements • Requires an officer of each lab company to certify the accuracy and completeness of the information reported • Civil monetary penalties of up to $10,000 per day may apply for each failure to report or each misrepresentation or omission in reporting • Information reported by lab would not be disclosed in a way that identifies the payor or lab

17. Different System for Certain Advanced Diagnostic Tests • Establishes new system for establishing payment for “advanced diagnostic lab tests” that have not previously paid under the CLFS • Defined as test that is offered and furnished only by the developing lab (i.e, lab-developed test – mostly molecular procedures) • For the first three quarters, payment amounts for such tests would be based on the actual list charge (publicly available rate on the first day which the test is available by a private payor)

18. Market-Based Payment Details • HHS required to establish temporary HCPCS codes for new advanced diagnostic lab tests and new tests cleared or approved by FDA • New tests that are not advanced diagnostic tests are to be paid using the cross-walking or gap-filling process • After Jan. 1, 2015, MACs may issue a coverage policy for lab tests only in accord with process for making a local coverage determination – this does not apply to NCDs) • By Jan. 1, 2015, HHS will establish a lab advisory panel to provide input on payment rates for new tests including their coverage, and other matters

19. Higher Collection Fee For Patients in SNFs & Home Health Agencies • Raises the specimen collection fee for services provided to nursing home or home health patients from $3 to $5 per draw • Change is retroactive to April 1, 2014 but labs should bring such past claims to attention of Medicare Administrative Contractors (MACs) • Sample must be collected by lab technician who is employed by the lab performing the test and it must be from an individual located in either an SNF or HHA.

20. Impact of Market-Based Payment • Between enactment of new law and Dec. 31, 2016, HHS will use the methodologies for pricing, coding & coverage currently in effect • Provides stable Medicare payments for labs for 2015 and 2016 since law removed CMS authority to adjust CLFS payments based on technological changes beginning next year • Labs had been expecting potentially large cuts for certain high volume test codes under now repealed technology provision

21. Market-Based Payment Impact • CBO estimates that lower lab test prices paid by Medicare under new law would result in total savings of $2.5B between 2017-2024 • New method for setting lab prices on the CLFS could be dominated by price data provided by nation’s largest labs particular if data from hospital labs is not fully or under reported • Some independent analysts suggest new payment method could result in total cumulative cuts of 25% or more by 2024

22. 2014/2015 CLFS Update • For 2014, Medicare payment for lab tests reduced by 2.75 percent • This includes a -0.75% cut under the CLFS and a 2% sequestration reduction required for all Medicare providers • Marks the fourth time in last five years that lab fee schedule update was negative • National minimum payment for Pap smears in 2014 is reduced from $14.53 to $14.42 • 2015 update not finalized until later in November but comparable cut expected

23. Lab & PathologyReimbursement Changes • Pathology TC rates for most high volume path codes are increased by 2% to 5% while professional rates are mostly unchanged under proposed 2015 physician fee schedule • All ancillary services including nearly all pathology TC where the average cost is $100 or less would be packaged under Medicare’s Hospital Outpatient Prospective Payment System and no longer eligible for separate billing on the OPPS fee schedule

24. Reimbursement Changes • Medicare would continue to pay for such services if they are the only ones provided to an outpatient on a given day (i.e, outreach lab services) but not if they are provided as part of the overall stay for a surgical patient • Starting in 2014, Medicare bundled payment for nearly all outpatient clinical lab tests and a few add-on pathology technical services. • This change eliminated nearly $3 billion per year in payments that hospitals had previously billed under CLFS

25. Revised LCD Policy for Labs • CMS outlines a revised process for Local Coverage Determinations (LCD) for clinical lab tests published on or after Jan. 1, 2015under the proposed 2015 physician fee schedule • Process includes an analysis of the pilot project that CMS launched with Palmetto and addresses the LCD requirements in PAMA • Proposal allows 30 days of public comment for draft LCDs but leaves it up to MACs to determine whether public meeting is held before issuing final LCD

26. Patient Test Access Rule Now in Effect • Effective Oct. 16, 2014, labs have 30 days from receiving a request to provide patients with access to completed test reports upon request • When a test takes more than 30 days to analyze and complete, labs may have a 30-day extension • CMS says they expect labs to deliver results to patients who request them as soon as final report is available • Labs that fail to provide requested test results are subject to monetary penalties

27. Patient Access Rule Requirements • Labs are required to provide results in the form and format requested if a copy in that form and format is readily producible • CMS clarifies that if an individual declines to accept any of the electronic formats that the lab can produce, the lab must provide a hard copy as an option to fulfill the request • Limited exception provided in cases where a health care professional determines that access may endanger life or safety of patient with such decisions subject to review of unaffiliated health professional

28. FDA To Regulate Laboratory Developed Tests • FDA announces a risk stratification approach for laboratory-developed tests • The agency proposes a three-tiered system for LDT oversight with high-risk tests (Class III medical devices) receiving the most stringent regulation • High risk LDTs are subject to registration and listing (with option to provide notification) and adverse reporting to begin 6 months after FDA guidance is finalized

29. FDA Guidance on LDTs • Premarket review requirements to begin 12 months after guidance is finalized for highest-risk devices and phased in over four years for the remaining high-risk devices • Moderate-risk LDTs (Class II medical devices) must register & list and begin adverse reporting six months after final guidance • Premarket review requirements for moderate risk LDTs are phased in up to nine years after guidance is finalized

30. FDA Guidance on LDTs • FDA intends to exercise enforcement discretion for premarket review and quality review requirements but enforce registration, listing, and adverse reporting requirements for low-risk (class I devices) for rare diseases, and LDTs for unmet needs • FDA will continue to exercise enforcement discretion with respect to premarket review requirements for “traditional LDTs” (i.e., previously existing LDTs in use since 1976)

31. LDT Guidance Fallout • Lab interest express concern that FDA oversight is another layer of regulation that could stifle diagnostic innovation by increasing time and cost of new test development • FDA says there are currently 11,000 LDTs offered by 2,000 labs but some say numbers are higher • Medical device industry favors FDA oversight as a way of leveling the playing field • Independent analysts say it could take until 2016 before guidance is final with lab interests wanting FDA to follow a formal rulemaking process

32. OIG Special Fraud Alert for Labs • A June 25 special fraud alert by the HHS Office of Inspector General warns clinical labs and physicians that providing remuneration to physicians to collect, process and package patients’ specimens and/or establishing databases to collect patient test data could violate federal anti-kickback law • Alert reiterates longstanding OIG concerns about payment from labs to physicians in excess of the fair market value of the physicians’ services and payments that reflect volume or value for referrals of federal health care program business

33. Arrangements That May Violate the Anti-Kickback Law • Payment is made directly to the ordering physician, rather than to the ordering physician’s group practice, which may bear the cost of collecting & processing specimens • Payment is made on a per-specimen basis for more than one specimen collected during a single patient encounter or on a per-test, per-patient , or other basis that takes into account the volume or value of referrals, or

34. Anti-Kickback Violations • Payment is made to the physician or the physician’s group practice, despite the fact that the specimen processing is actually being formed by the phlebotomist placed in the physician’s office by the lab or a third party • OIG rules that such arrangements are not abated when they apply only to specimens collected from non-Federal health care program patients

35. DOJ Investigates Labs • Department of Justice is investigating labs that pay processing and handling fees to referring physicians meant to cover the costs that doctors incur for labeling and packaging patient specimens • DOJ believes such fees may constitute illegal remuneration designed to induce physician lab test orders

36. Justice Investigation • Justice probe focusing on several labs specializing in advanced lipid testing panels which can include 20 or more tests that are designed for early detection of heart attack, stroke and diabetes • Articles in Wall Street Journal and Forbes highlighted specific business practices of Health Diagnostic Laboratory (Richmond, VA) under scrutiny – HDL CEO & founder later resigned • Other labs being investigated include Berkeley Heart Labs, Singulex, Inc., Boston Heart and Atherotech and all confirm they have now stopped making suspect payments