R. Lewis Dark: Growth Conundrum Confronts Quest and LabCorp

AFTER MORE THAN TWO DECADES of buying up almost every attractive laboratory asset that came up for sale�and with few lab acquisition candidates left to buy�Laboratory Corporation of America and Quest Diagnostics Incorporated find themselves in an interesting conundrum. As public companies, any increase in the value of their shares is directly linked to growth rates in specimen volume, revenue, and net profit.

On the other hand, simply because of their huge size relative to the laboratory services marketplace, the ability of the two blood brothers to achieve sustained rates of growth of 10% and 15% per year is a major challenge. Let me explain why the numbers work against them.

By year�s end, Quest Diagnostics will post revenue of around $7.7 billion. Revenue at LabCorp will be in the range of $4.5 billion. Thus, for each lab company to grow revenue by 10% during 2009, Quest will require $770 million in new business and LabCorp will require $450 million. That�s the need for $1.2 billion in new business between them, and in just one year!

Thus, as you will read on pages 10-16 in this issue, each of the national lab companies havemultiple strategies to generate new specimens,more revenue, and greater net profits. The days of rapid growth in revenue and net profits because of acquisitions and conversion of conventional Pap smear business to thin-layer Pap tests are long past. Both national labs must successfully execute a series of business growth initiatives to generate additional revenues and increased net profit in today�s competitive lab marketplace.

This is why the laboratory services marketplace has seemed rather quiet over the past year. The two national laboratories are adjusting to a market where growth-by-acquisition is no longer the primary strategy to achieve increased revenue and net profit. Now each company must craft a long-term business plan to deliver sustained growth that satisfies investors.

That is why the conversation is shifting at both LabCorp and Quest Diagnostics to new opportunities in genetic and molecular testing. It is why there are plans to serve the developing wellness and prevention emphasis in healthcare. That brings employers onto the radar screen as potential customers. And, I predict that Quest Diagnostics and LabCorp will steadily increase their presence and activity in other countries. LabCorp�s new agreement in Abu Dhabi is one example of this. (See Page 18.)

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Medi-Cal Hits Pathologist For $6.4 Million Payment

Medi-Cal Hits Pathologist For $6.4 Million Payment

CEO SUMMARY: Once again, government health bureaucrats are overreaching in their efforts to reduce spending and collect money from any source. A California pathologist has been hit with a Medi-Cal demand for $6.4 million in repayments, simply because he served as laboratory director for two lab companies that Medi-Cal knew had closed before auditors requested records. Without a successful legal challenge to this Medi-Cal position, a dangerous precedent may be set.

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Cytology Lab Uses Lean to Simplify Processes

First Lean project improves staff productivity while cutting 132 work steps in histology to just 82

CEO SUMMARY: Like many labs today, the gynecologic cytology laboratory at the University of Iowa Hospitals and Clinics had a pre- and post-analytical work flow with many complex steps. This work flow�heavily influenced by a legacy of previous information systems�was inefficient, contained unnecessary redundancies, and lacked systematic measures for preventing errors. That all changed when the Department of Pathology did its first Lean project, greatly improving work flow and staff productivity.

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LabCorp And Quest Report 3rd Quarter Financial Performance

Siimiillarr Sttrrattegiies�Achiieved by Diifffferrentt Tacttiics

CEO SUMMARY: In third quarter earnings reports, both national lab companies posted modest gains in specimen volume, revenue, and net profit. More telling is the relative quiet in the current market for lab testing services. With no obvious opportunities to fuel double-digit rates of growth, the two blood brothers are pushing forward with similar business strategies. However, each lab company is pursuing those strategies with uniquely different tactics and emphasis. Here's an in-depth comparison of events unfolding with Quest Diagnostics and LabCorp.

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LAB BRIEFS:
MASSACHUSETTS LAW MANDATES CPOE USE BY HOSPITALS IN 2012
HCA AND PAML EXPAND LAB OUTREACH VENTURE IN SALT LAKE CITY
MOVE TO HIPAA 5010 PROPOSED FOR APRIL 2010
LABCORP INKS DEAL TO ESTABLISH LABORATORY IN EMIRATE OF ABU DHABI

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INTELLIGENCE: Late & Latent

MEDTOX REPORTS REVENUE GAIN FOR THIRD QUARTER

GENOMIC HEALTH GROWS RAPIDLY

Commentary by R. Lewis Dark:
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Genome Sequencing Promises to be Disruptive
EVERYONE SHOULD CAREFULLY READ OUR LEAD STORY ON THE FACING PAGE. Titled
“Rapid Gene Sequencing Predicted by Mid-2009,” it is a revealing look at the
declaration of California-based Complete Genetics that, in less than eight
months, it will begin delivering full human genome sequences priced at
$5,000 each to interested customers at a cost of only $1,000 to itself!
Complete Genomics’ announcement represents the same paradigm shifting
earthquake in genetic medicine that occurred back on May 11, 1998.

That’s the day when J. Craig Venter, Ph.D., and his partner, Perkin-Elmer,
announced their plans to map the entire human genome for a cost under
$300 million and do it in within three to four years. At the time, the Human
Genome Project was about halfway through a 15-year, $3 billion project to
complete the first full sequence of the human genome.

THE DARK REPORT predicted that Venter’s effort would succeed and, as it
did, it would accelerate both the accumulation of genetic knowledge and the
speed with which it was converted into clinically useful molecular diagnostic
tests.We wrote: “Those laboratories and pathology practices which flourish
in the year 2005 will be the ones which were early implementers of
emerging genetics-based diagnostics.” (See TDR, June 15, 1998.)

Venter achieved his bold goal in just 25 months. It was June 25, 2000,
when President Bill Clinton publicly announced the successful sequencing
of the human genome and recognized the roles of both Venter and Frances
S. Collins, M.D., Ph.D., who had led the Human Genome Consortium, in
this accomplishment. For the lab industry, by 2005, a host of new lab companies
had emerged to offer a growing menu of molecular tests. Molecular
assays for infectious diseases and certain cancers were transforming clinical
practices, giving truth to THE DARK REPORT’s 1998 prophesy.

Now THE DARK REPORT sees a parallel moment of disruption in genetic
medicine. Complete Genomics and a host of competitors are about to transform
human genome sequencing, dropping price and speed while opening the
doors to vast amounts of new knowledge about DNA, RNA, and the human
proteome. Pathologists and lab directors should prepare for an accelerating
flood of new insights about genes and proteins. Many of these discoveries will
rapidly lead to new laboratory tests that offer physicians and patients more precise
tools for diagnosis, therapeutic decisions, and patient monitoring.

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Genome Sequencing Promises to be Disruptive..............Page 2

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Rapid Human Genome Sequencing
Predicted by Mid-2009 ..................................................Page 3

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ICD-10 Conversion Costs
Underestimated by HHS.................................................Page 7

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Hospital Labs Have New Options
For Molecular Diagnostics..............................................Page 9

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Molecular Dx Update:
LabCorp’s Ovarian Cancer Test
Generates FDAWarning Letter ......................................Page 12

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Lab Briefs: Siemens, BioImagene, Clarient
University of Pennsylvania,Mayo Clinic .......................Page 13

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Pathology Administrators’ Boot Camp
To Address Three Trends ................................................Page 15

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Intelligence: Late-Breaking Lab News ............................Page 19

 

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	R. Lewis Dark: Lean Six Sigma Takes Root in Labs & Hospitals LAST WEEK, MORE THAN 300 ENTHUSIASTIC LAB AND HOSPITAL PROFESSIONALS from 11 different countries around the globe crowded into Atlanta for the Second Annual Lab Quality Confab. They were gathered to hear the latest success stories and breakthroughs in how laboratories and hospitals are using quality management methods like Lean and Six Sigma. If anyone remains skeptical about the value of Lean and Six Sigma to improve outcomes and workflow in healthcare, more than 50 presentations and case studies by some of America�s first rank laboratories, hospitals, and health systems demonstrated the remarkable gains that well-executed process improvement projects generated for their organizations. Evidently I am not alone in believing in the value of Lean and Six Sigma management methods to play a role in meeting the healthcare system's challenges of improving quality, reducing errors, and lowering costs. The demand for experienced Lean and Six Sigma professionals to work in the nation�s hospitals and health systems is so great that management recruiters are struggling to find candidates to fill these positions.Healthcare magazines are writing stories about this staffing gap. Our Editor, Robert Michel, tells me that this year�s speakers at Lab Quality Confab displayed much more sophistication as they discussed improvement projects in every area of clinical laboratory and pathology laboratory operations. I take that as an early warning for those laboratories and pathology groups which have yet to implement Lean and Six Sigma. The competitive bar is being raised by your peers and colleagues! Just as GeneralMotors, Ford, and Chrysler found themselves outcompeted by Japanese car manufacturers (using these quality management methods) in the 1970s and 1980s, so also will those labs and hospitals who are slow to understand the power of Lean and Six Sigma to lift their performance�and their profits�find themselves at competitive disadvantage in the laboratory services marketplace. Across the American healthcare system, the pace of change and reform seems to be intensifying. Adoption of Lean and Six Sigma by labs, hospitals, and health systems is playing a major role in this transformation. In coming weeks and months, THE DARK REPORT and Dark Daily will bring you "the best of Lab Quality Confab" so you and your management team can learn from these top-performing laboratories, hospitals, and health systems. iTunes Business Model For Digital Path Scans Things heat up in digital pathology market as BioImagene introduces 99� per slide pricing CEO SUMMARY: If BioImagene's CEO is to be believed, the company is ready to deliver a digital pathology system that is robust and affordable, even in settingswith just two or three pathologists. One key to the BioImagene strategy is �per scan� pricing that avoids the need for upfront capital to acquire its system. Confident investors just pumped $26 million into BioImagene and, as of this month, its new CEO is a 20-year veteran of Siemens,who was leader of its Image and Knowledge Management business. Illinois Pathologists Dodge Medicaid CP Payment Cut Illinois Medicaid Program was prepared to end payment for clinical pathology professional services CEO SUMMARY: Pathologists in Illinois acted swiftly to this month's announcement that the Illinois Medicaid program would cease to directly pay pathologists directly for clinical pathology professional services.The newpolicywas to take effect on October 1, 2008. As this issue of THE DARK REPORT goes to press, there is breaking news that educational efforts by the Illinois Society of Pathology have led the state's Medicaid program to rescind implementation of the announced cuts to CP professional services. LAB BRIEFS: MED TECH SHORTAGE CAUSES DEVRY UNIVERSITY TO OFFER MT DEGREE, VOLUME GROWTH IN MOLECULAR TESTING BOOSTS TWO PUBLIC LABS, CANCER LAB CLERK FACES CHARGES IN PATIENT ID THEFT Implementation Date For ICD-10 Is Proposed Department of Health and Human Services publishes ICD-10 launch date of October 1, 2011 CEO SUMMARY: Even though the transition from ICD-9 to ICD-10 will not be required until 2011, laboratories and pathology groups should have a transition plan in place. ICD-10�s 155,000 seven-digit codes will replace the 17,000 five-digit codes of ICD- 9. Because of major changes in the design of ICD-10, extensive training of laboratory coders will be necessary to ensure a smooth implementation. Referring physicians and their staff must also be trained and ready for ICD-10 if labs are to minimize denied claims. Phlebotomy Automation Likely To Be Next Trend Goal will be to reduce variation in outcomes and raise the quality of individual work processes CEO SUMMARY: Here's a prediction that automation of work processes for phlebotomy, specimen collection, and specimen transport may be the next trend. Unfolding developments in the United States are creating a situation parallel to what was seen in Japanese hospital laboratories more than two decades ago�and led to the world's first automated solutions for clinical laboratories. Another factor to enable this trend are recent advances in technology and miniaturization. INTELLIGENCE: Late & Latent NANO BIOSENSORS CAN DETECT MICROORGANISMS ADD TO: Biosensors

R. Lewis Dark: Two Healthcare Trends Collide on These Pages

THIS ISSUE OF THE DARK REPORT YOU NOW HOLD IN YOUR HANDS demonstrates the perfect intersection of two trends. One trend, transparency in health outcomes and a public expectation of reduced medical errors, is a direct threat to laboratories which fail to deliver high-quality and accurate lab test results. The other trend is the way quality management systems (QMS) are being “pulled” into laboratory operations and healthcare.

This first trend is analyzed on pages 16-18, where you will read how the widely-publicized deficiencies of several labs and pathologists in Canada has become a public issue. To bolster public confidence in laboratory testing, pathologists with the Canadian Association of Pathology (CAP) are creating a voluntary proficiency testing program. It is starting with breast cancer testing for estrogen receptors (ERs) and progesterone receptors (PRs). As an interesting side note, Canada’s single-payer model health system has yet to step forward and pay for this proficiency testing program.

The second trend—involving the use of quality management systems, including "ISO:15189 Medical Laboratories"—is assessed on pages 3-5. This is one of the lab industry’s first alerts to this emerging development. Our Editor, Robert L. Michel, considers it important enough that he has assembled an impressive panel of experts to speak on QMS at the upcoming Lab Quality Confab http://www.labqualitycofab.com on September 24-25, 2008. That promises to be a revealing series of presentations and I recommend that clinical labs and pathology groups already confronting use of quality management systems be present at this unique event. First, it is not likely that this same assemblage of experts on ISO:15189 and similar quality management systems will be gathered at one time and place again soon. Second, Robert has a knack for pulling together a spectrum of experts, who, collectively, deliver an amazing amount of information and unmatched strategic wisdom. That’s a lot of bang for your buck!

I will also step forward with another recommendation. I suggest that you use the two intelligence briefings referenced above as discussion points for a strategic session in your laboratory or pathology group practice. I’ll bet that, as your leadership team talks through the implications of trend one—outcomes transparency and public expectations—and contrasts that with trend two—use of QMS to continuously improve quality, productivity, and performance—it is going to agree on some surprising new directions for your laboratory.

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First U.S. Labs Nearing ISO:15189 Accreditation

ISO:15189 likely to influence upcoming reform and revisions to CLIA licensing requirements

CEO SUMMARY: Laboratories, hospitals, and other healthcare providers in the United States will increasingly be required to adopt quality management systems (QMS) as part of their regular operational routine. This is consistent with trends in other developed countries. Several U.S. laboratories are in the process of gaining accreditation under "ISO:1519 Medical Laboratories." These developments will be discussed at the upcoming Lab Quality Confab in Atlanta next month.

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Independent Labs Won't Get Medicare PQRI Bonuses

Independent labs learn they will not get same Medicare PQRI payments as other pathologists

CEO SUMMARY: Medicare does not intend to make bonus payments this year to independent labs currently reporting quality information for breast and colon cancer cases. The federal claims payment system is unable to pay independent labs for participating in the federal physician quality reporting initiative (PQRI). But physician pathology groups participating in PQRI will receive the bonus payments as expected. CMS has yet to formally acknowledge this problem, leaving labs with unanswered questions.

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MT/MLT Distance Learning Goal of Collaboration

ARUP and Weber State team up to make it easier for interested lab staff to advance skills

CEO SUMMARY: To encourage more students to pursue medical technology (MT) and medical laboratory technician (MLT) degrees, ARUP Laboratories and Weber State University (WSU) are collaborating to promote the distance learning programs offered at WSU. Online students can work any shift and take courses anytime (day, night, or on weekends), thereby making education more accessible to prospective students. Distance learning is likely to be an important source of education for new technical staff for labs.

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NEWSMAKER INTERVIEW: Successful Laboratories in the Future Will Brand Themselves, Add Value

CEO SUMMARY: At the most recent Executive War College(see http://www.executivewarcollege.com), Kerry Kaplan, President of Healthcare Connections in Natick, Massachusetts, discussed the results of his national survey of managed care executives. In part one of this interview, Kaplan described the results of his survey, along with advice on how laboratories can build a positive, ongoing partnership with local managed care plans. In part two, he explains what steps pathologists and lab directors can take to become partners with their health plan customers to improve the delivery of healthcare. He also explains how labs have an opportunity to work more closely with payers that are interested in saving money on complex, expensive cases. Kaplan ends by stressing the need for labs to have a branding strategy.

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Canadian Pathologists Start PT Testing for ER/PR

Voluntary proficiency testing program created in response to public disclosure of test deficiencies

CEO SUMMARY: Experts point out that widely publicized episodes of lab testing deficiencies in several provinces are signs that chronic underfunding of lab testing services is a key factor in these failures. To restore public confidence in breast cancer testing, the Canadian Association of Pathologists is developing a voluntary pro ficiency testing system for hospital labs to improve the accuracy and reproducibility of breast cancer markers, including estrogen receptor, progesterone receptor, and other clinical IHC tests.

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INTELLIGENCE: Late & Latent

NEW BLOOD TEST FOR COLORECTAL CANCER

CALIF. REGULATORS SEND COMPLIANCE LETTER TO DNA DIRECT

R. Lewis Dark: Lab Testing Hits Two Home Runs For Patients

MANY OF US POINT OUT THAT LABORATORY MEDICINE is an undervalued and under-utilized asset within the American healthcare system. Lab testing is generally a minimal cost relative to the total episode of care, yet lab testing provides essential knowledge to help clinicians make a quick, accurate diagnosis and confidently select appropriate therapies.

Like the late comedian Rodney Dangerfield,many lab directors and pathologists feel like "I don�t get no respect!", particularly when negotiating contracts withmanaged care plans. Seldomis the true value of laboratory testing acknowledged by payers, particularly in the form of adequate reimbursement.

However, this situation may be on the verge of changing. In this issue of THE DARK REPORT, we provide intelligence briefings on two important home runs hit by laboratories during the past 24 months. First up is our coverage about the explosion in vitamin D testing. Labs across the country are reporting that vitamin D test volumes have doubled and tripled over themost recent 12months! ARUP Laboratories tells us that about one-third of the vitamin D test results indicate that the individual is vitamin D-deficient. This fact is evidence that physicians are using the test appropriately. (See pages 3-5.)

That remarkable lab testing home run is followed by the story of another, even * more amazing lab testing home run. At Washington Hospital Center (WHC) in Washington, DC, a rapid PNA FISH test for bloodstream infections, combined with real-time results reporting to the attending physician, has contributed to an 83% drop in patient mortality in ICU settings�and a 53% overall reduction in patient mortality related to bloodstream infections! (See pages 6-9.)

The unique twist to the WHC experience is that these dramatic reductions in patient mortality only came after the procedure for reporting the PNA FISH tests was changed to incorporate a personal phone call to the attending physician, to ensure he/she got the results in real time. Now comes the next challenge for the lab industry. Will Medicare and private payers recognize this value provided by labs to their referring clinicians?

Will Medicare and private payers establish reasonable reimbursement for these testing services? Too often in the past, payers publicly promote the importance of patients getting these tests, while, in private, they excoriate labs for not controlling test utilization and financially penalize them for the higher volume of testing that was performed.

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Vitamin D Test Volumes Doubled in Past Year

Growing awareness about vitamin D deficiency causes patients and physicians to order more tests

CEO SUMMARY: Across the nation, labs report a near doubling in the volume of vitamin D tests they are performing. This is a success for laboratorymedicine and an appropriate use of diagnostics tests as physicians strive for early detection and early intervention of vitamin D deficiency. However, the next chapter in this story will be equally important. Will Medicare and private payers recognize that, per evidence-based medicine guidelines, this testing is justified and labs should not be punished for increased utilization?

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53% Drop in Mortality From Lab Report Change

Study links use of rapid molecular test and real-time results reporting to improved outcomes

CEO SUMMARY: At Washington Hospital Center, it was unclear if the use of a rapid molecular assay for blood infections was changing outcomes until a new, real-time lab results reporting protocol required the lab to deliver the test results personally to the attending physician in real time. A study with a control group provided convincing evidence that use of the rapid molecular test, in combination with real time test reporting,may be associated with dramatic reduction in mortality and improved patient outcomes.

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NEWSMAKER INTERVIEW: Labs Should Build Payer Relationships To Improve Commodity Pricing

CEO SUMMARY: At the most recent Executive War College, Kerry Kaplan, President of Healthcare Connections in Natick, Massachusetts, discussed the results of his national survey of health plan executives on their attitudes toward clinical laboratories. It will be no surprise that these managed care executives consider lab testing services to be a commodity. What will be a surprise are Kaplan�s recommendations on how laboratories and pathology groups should develop partnerships with selected payers, rooted in added value services that generate ample reimbursement. In this first of a two-part series, Kaplan also delivers a dose of reality to laboratories as he advises them on how to prepare for the marketplace changes coming in the next five years.

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CMS Anti-Markup Rules Target In-Office Ancillaries

Changes ahead for specialist doctors using TC/PC arrangements or operating AP labs

CEO SUMMARY: Medicare officials are again attempting to rein in what they consider to be potentially abusive forms of inoffice ancillary services, including anatomic pathology. Proposed new rules published this month would clarify and perhaps expand the application of the Medicare anti-markup for purchased diagnostic testing services and for diagnostic tests provided by an ordering physician or supplier, including the professional and technical components.

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INTELLIGENCE: Late & Latent

GENOME PROJECT ADDS 3 COMPANIES

MORE ON: UroPath

R. Lewis Dark: Era of Digital Pathology Steadily Approaches

IMMEDIATELY AFTER GENERAL ELECTRIC ANNOUNCED its partnership with the University of Pittsburgh Medical Center (UPMC) on June 5 to develop a fully integrated digital pathology system,we took a closer look at how some pioneering pathologists are using digital imaging systems in their daily clinical practice. What we found is that the technology is fairly well developed and, in some other countries, pathologists already use digital pathology images for primary diagnoses on a regular basis. That won�t happen in the United States until the FDA clears this type of technology for clinical applications.

To share what we learned with you, we provide an intelligence briefing on pages 12-13 about how pathologists at the University Health Network (UHN), in Toronto, Ontario, have used digital pathology for frozen sections with great success for several years.Using ScanScope, a digital imaging system from Aperio Technologies, Inc., the UHN pathologists have improved workflow and patient care. They now regularly use the system to transmit images over the Internet from surgical sites around the corner or from a hospital 400 miles north of Toronto. By allowing pathologists to work remotely, the system supports the pathology needs of hospitals where no regular pathologist is on-site.

To be sure, companies developing fully-integrated digital pathology systems face plenty of hurdles. That's the topic of our second intelligence briefing, found on pages 15-18. We interviewed two CEOs of companies that sell pathology imaging products and systems to learn their views about howthe pathology profession is likely to react to digital pathology technology which holds the potential to eventually move pathologists away from glass slides and microscopes.

Repeatedly over the past decade, THE DARK REPORT has reminded its clients and regular readers about the strategic implications of baby boomer demographics.As experienced pathologists begin retiring in significant numbers, it will be new technologies�including fully-digital pathology imaging systems�that will become useful tools for increasing the productivity of individual pathologists. These same technologies will also contribute to improvements in the clinical quality delivered by pathologists to physicians and patients. As you will read in this issue, the sustained success of Toronto's UHN pathologists in using fully-digitized, whole-slide pathology images for frozen sections offers some fascinating reasons why the era of digital pathology may be closer than we all think.

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NY & California Act to Stop Web Gene Testing Firms

Regulators in New York and California target certain Web-based genetic testing companies

CEO SUMMARY: Events in the past month indicate that a war is developing between Internet-based companies offering genetic tests to consumers and state and federal health regulators. New York state authorities have sent letters to at least 31 such companies in recent months. Then, on June 9, the California Department of Health sent cease-and-desist letters to 13 Web firms. Just days later, the Federal Trade Commission disclosed two investigations of genetic testing companies.

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Hospital Trends: Growth of Medical Tourism May Become Political Issue

Americans going overseas for healthcare mean fewer patients visiting hospitals in this country

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HealthPartners Promotes Same-Day Lab Test Results

In Minneapolis, walking urine collection cup educates consumers about speedy lab reports

CEO SUMMARY: Patient focus groups told HealthPartners that they had anxiety as they waited days for lab test results. That encouraged HealthPartners to redesign workflows in its pathology department. Once it could deliver same-day lab test results electronically,HealthPartners launched a uniquemarketing campaign to educate consumers about this benefit in early May.Already,HealthPartners reports a 28%increase in the number of patients going on-line to access their lab test results.

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Toronto Pathologists Use Whole-Slide Imaging

Digital pathology and whole-slide imaging increase concordance and pathology productivity

CEO SUMMARY: It was the �frozen section problem� and productivity issues that led pathologists at the three-hospital University Health Network (UHN) in Toronto to implement a fully-digital pathology system with whole-slide imaging in 2006. Use of digital, whole-slide images makes it faster to report results to the surgeon,while making it easier to involve colleagues in difficult cases. Now UHN's pathologists use the system to support hospitals 400 miles away.

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Is Digital Path Imaging Ready for Prime Time?

FDA clearance of digital pathology imaging is one factor that will encourage wider adoption

CEO SUMMARY: Digital pathology imaging systems are finding uses in all phases of drug discovery (discovery, preclinical, clinical trials), as well as education, research, and clinical. One hurdle to widespread adoption of fully digitized, whole-slide pathology imaging systems is FDA clearance that allows the use of this technology for primary diagnosis. Executives at two of companies offering digital pathology systems offer their predictions about how this market will evolve.

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INTELLIGENCE: Late & Latent

SPENDING CUTS ADVERSELY AFFECT CANADIAN LABS

CANCER-DETECTING MICROCHIP UNVEILED

R. Lewis Dark: Era of Digitized Pathology Systems Approaches

SURGICAL PATHOLOGISTS SHOULD GET READY! I predict that they will soon have the opportunity to purchase and use fully digital, automated pathology systems that can perform primary diagnosis.When that happens, it will mark the final cycle of the era when the principal method of diagnosing tissue was that of eyeballs fixed to microscopes, scanning cells as glass slides are pushed around the stage.

The introduction of digital pathology systems capable of primary diagnosis will likely be the single most disruptive event to anatomic pathology in the past two decades. That�s because automation of the primary diagnosis of tissue will upend current work flow and clinical practices in surgical pathology.

I make this prediction, based on two market developments in anatomic pathology. One development is the success of Aperio Technologies, Inc., in placing fully digital pathology systems in as many as 375 laboratories in 25 countries. This company is finding a ready market for its digital solutions that support existing pathology work flow and clinical practices.

The second market development is the long-awaited entry of General Electric into laboratory medicine. As you will read on pages 9-11, GE Healthcare is partnering with some of the best minds in digital pathology at the University of Pittsburgh Medical Center (UPMC) to create Omnyx, LLC. The aim is to develop digital pathology systems that can integrate the transmission and use of digitized pathology images across the care continuum, support improved workflow, and contribute to increased clinical quality� as well as automate primary diagnosis. The two partners estimate that the market for digitized pathology systems will be about $2 billion per year.

I suspect GE is making this move now because it believes it has digital and other technologies that can be transformational to anatomic pathology. It wants to leverage its experience at digitizing radiology and evolving radiologists into a fully digital work flow by doing the same in anatomic pathology. In the 1990s, such companies as NeoPath, Inc., and Neuromedical Systems, Inc., privately showed THE DARK REPORT how digital cytology systems and software algorithms could do accurate, automated primary diagnosis on a variety of tissue types. Now the question is: are surgical pathologists ready to accept digital pathology systems that can move them away from microscopes and in front of computer screens? GE's entry into thismarketplace is evidence that it believes the answer is: "Yes!"

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NPI Rules Slow Payments To Pathology Groups, Labs

Private payers and Medicare carriers kick out high volume of claims for incorrect NPI compliance

CEO SUMMARY: New rules requiring use of National Provider Identification (NPI) numbers took effect on May 23. Since then, Medicare carriers and payers nationwide have rejected claims from pathologists and other providers that do not comply with the new NPI rules. A missing NPI on just one claim will result in the front end rejection of the entire submission file to Medicare. Cash flow to some pathology groups and other physicians has dropped. It may be another month or more before normal cash flow is restored.

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GE, UPMC Create Company For Digital Path Imaging

Joint venture estimates market potential is $2 billion for fully-digitized pathology systems

CEO SUMMARY: It's a new joint venture with the potential to transform surgical pathology. General Electric Healthcare has extensive experience at supporting physicians' work flow with digitized imaging systems, plus ample experience with molecular biomarkers. The University of Pittsburgh Medical Center's pathology department is a world leader in whole-slide imaging and digitized pathology systems. Together, the two partners hope to gain FDA approval for a fully digitized pathology system in about two years.

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New Senate Bills Include Repeal of Competitive Bid

Bills would kill lab competitive bidding demo, eliminate cut to physician fees, and extend TC

CEO SUMMARY: One proposed Senate bill would repeal the laboratory competitive bidding demonstration project, replace the 10.1% cut to physician fees with a 1.1% increase, and extend the so-called technical component (TC) grandfather clause. Senator Max Baucus (D-Montana), Chairman of the Senate Finance Committee, is sponsor of the bill (called S 3101). Congress is under pressure to pass a Medicare funding bill before July 1, 2008, when the 10.1% reduction in physician fees will occur.

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ISO 15189 Work Advances At Meeting in Vancouver

Delegates to ISO Technical Committee 212 gathered for their annual working session

CEO SUMMARY: Laboring quietly out of the public eye, an international work team of professionals, including representatives from the CDC, the FDA, and global in vitro diagnostics (IVD) manufacturers, has spent the past 14 years developing an important series of quality and safety standards for medical (clinical) laboratories. Here�s a report on events at the most recent international assembly of ISO Technical Committee 212, which gathered earlier this month in Vancouver, British Columbia.

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CMS Expected to Revise Condo Lab & TC/PC Rules

Rule changes could come this summer and may also involve physician self-referral

CEO SUMMARY: Expectations are that the Centers for Medicare & Medicaid Services (CMS) will take further action to rein in anatomic pathology arrangements used by physicians to capture revenue from their patient referrals. This may happen as soon as next month, when CMS publishes the 2009 Medicare Physician Fee Schedule (MPFS) Update and requests public comment on proposed new rules. Attorneys tracking these developments believe that both anatomic pathology condo labs and TC/PC arrangements are likely to be the subject of these new rules.

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INTELLIGENCE: Late & Latent

GENOME PROJECT ADDS 3 COMPANIES

SONIC ACQUIRES GERMAN LAB FIRM

R. Lewis Dark: Customer-Focused Labs Are Successful

AS YOU READ THIS ISSUE, YOU WILL BE AMONG THE FIRST in the laboratory industry to learn that more than 50% of the nation's hospitals are financially deficient and "technically insolvent or at risk of insolvency." That's according to Alvarez & Marsal of New York City, which analyzed the financial performance of 3,900 hospitals and released a report on its findings. (See pages 10-14.)

Certainly for hospital-based lab directors and pathologists, this may be one of the most significant intelligence briefings we bring you this year. It is a sobering fact that, by Alvarez & Marsal's estimate, "2,044 hospitals, or 53% of the sample, had negative patient care profitability." That means revenues from treating patients are not enough to cover expenses at these struggling hospitals. Alvarez & Marsal observe: "A 'flight to (perceived) quality' is occurring by both physicians and patients—creating a bigger gap between the fiscally strong and fiscally weak hospitals in a given market." Why are successful hospitals consistently profitable and capturingmarket share from weaker hospitals? Experts such as Alvarez & Marsal and McKinsey & Co. say the better hospitals succeed because they are close to their customers and offer quality care, an attractive facility, and customerfocused personal service to patients.

Success from a customer-facing and customer-focused business strategy is one common theme heard in many of the presentations delivered at this year’s Executive War College on Lab and Pathology Management, which took place in Miami earlier this month. As you will read on pages 3-6, lab industry leaders, innovators, and healthcare experts from such diverse, respected companies as Microsoft, Cerner Corporation, and DNA Direct all had a common element in their strategic recommendations to lab directors and pathologists. It was that providers and laboratories must be close to their customers to survive and thrive as ongoing reforms alter and transform the American healthcare system.

If you askme, it’s not a coincidence that, in two different intelligence briefings in this issue of THEDARK REPORT—and within two entirely different segments of healthcare and laboratory medicine—the “customer-focused” strategy is identified as a critical success factor. Observant lab executives and pathologists will want to act upon this highly useful insight. It can play a vital role in contributing to clinical excellence and financial viability in the coming, tough years.

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War College 2008 Theme: Get Close to Customers!

What's hot in laboratory and pathology is customer-facing organizations and integrated IT

CEO SUMMARY: Over the course of two days, pathologists, lab directors, and other laboratory professionals repeatedly heard speakers urge them to work hard to ensure that customers are the top priority for their laboratory organization. Another theme is the need for labs to organize their data so that they can send actionable information to referring physicians and other partners in the healthcare system. Forward-looking labs and pathology groups are already forging ahead with enriched consultative services for client physicians.

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Lab Industry’s First Mergers & Acquisitions Day Reveals Lots of Interest, More Lab Sales Ahead

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Cerner's Market-Driven Employee Health Program

Meet "Healthe", Cerner's innovative effort to motivate employees to improve their health

CEO SUMMARY: Cerner Corporation is using a variety of strategies to reduce the cost of health benefits and improve the quality of care for its workers and dependents. Gluing the entire effort together is an integrated patient health record (PHR) and a host of electronic services, ranging from real time eligibility verification and claims adjudication for physicians to preventive and wellness programs for employees. Last year, Cerner tracked $2.6 million in savings from this Healthe initiative. It also began selling this innovative health benefits program to other corporations.

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New Report Says Half Nation's Hospitals Have Financial Woes

Not Enough Patient-Care Revenue to Cover Costs

CEO SUMMARY: In a groundbreaking study just released, consulting firm Alvarez & Marsal determined that as many as half of the nation's hospitals are failing to generate enough patient revenue to sustain expenses! With a median occupancy rate of 43%, these hospitals are likely to experience a wave of bankruptcies, financial restructurings, and forced mergers. This is the second major report in 24 months to describe how and why many hospitals are failing to compete effectively against physician-owned facilities and why consumers are voting with their feet.

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Ruling Against UroPath Signals More Fed Action

Expect CMS to develop new anti-markup regs, based on federal court ruling in UroPath case

CEO SUMMARY: It was a signal win for federal healthcare officials when a federal district court judge in Washington, DC, dismissed a case brought by UroPath, LLC. UroPath had sued HHS Secretary Michael Leavitt seeking to challenge the physician fee schedule final order and the anti-markup rule. The judge’s decision provides Medicare officials with useful guidance on how to craft new regulations to possibly further limit the way anatomic pathology condominium (pod) labs operate. Two lab industry attorneys offer insights about what may happen next in this case.

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Federal Court Rules on Specimen Ownership

Growing research value of human specimens leads to lawsuit between physician and university

CEO SUMMARY: Recently, a federal appeals court affirmed a district court ruling concerning who owns human tissue specimens that are stored for research and other uses. While most clinical laboratories routinely discard many types of human specimens after use, any research facility or IVD manufacturer that retains specimens should review the new legal issues raised by this court decision. The case of Washington University versus Catalona demonstrates how legal battles over ownership and control of human specimens may lead to significant new legal precedents.

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INTELLIGENCE: Late & Latent

MORE ON: Cell Phones Aid Diagnostics

RFID TO TRACK LAB SPECIMENS

R. Lewis Dark: Battles Continue Over Doctor Mark Up of Lab Tests

FROM THE SHADOWS OF A PARKING GARAGE, Deep Throat suggests to reporter Bob Woodward, "Follow the money." In this scene from the movie, All the President�s Men, Woodward gets the right advice he needs from an unnamed source to pursue the Watergate case, a huge political scandal of the 1970s.

"Follow the money" is also good advice for lab managers and pathologists tracking the battles over physician mark-ups of clinical laboratory testing and anatomic pathology (AP) services. Efforts of the federal Centers for Medicaid & Medicare Services (CMS) to implement proposed rules preventing physicians from marking up certain laboratory, pathology, and radiology services have been widely publicized. Now legislators in Missouri are considering changing state law to prohibit physicians from marking up fees for pathology services."In some medical practices across Missouri, doctors are turning a profit from lab work done by other doctors. And most patients and their insurance companies don�t know about it," says an article in the Springfield News Leader in Missouri on April 30."It�s called 'indirect billing' or 'pass-through arrangements,' and a bill in theMissouri legislature would outlaw the practice."

The sponsor of Senate Bill 817 is Missouri state Senator Jack Goodman (R Mount Vernon). He believes it�s unethical for physicians to mark up fees for work performed by other physicians. A similar measure, House bill 1990, is expected to be assigned to a committee. Two earlier efforts to pass such bills failed. Missouri physicians have testified in favor of retaining the ability to mark up test fees, saying it allows them to negotiate discounts with labs and guarantees their patients a set package price for in-office tests and lab work. They claim this can allow them to pass on discounts to low-income and insured patients. But no one has stepped forward with evidence documenting that physicians do, in fact, pass these discounts along to self-paying patients.

I suspect federal officials will prevail in their efforts to prohibit physicians from marking up laboratory tests, anatomic pathology services, and radiology procedures not performed in their offices by board-certified physicians who are partners/employees of the medical group. As that happens, private payers will fall into line with similar anti-markup requirements. After all, if you follow the money, Medicare, Medicaid, and private health insurers have much more to lose than office-based physicians have to gain from banning mark-up arrangements.

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Lab Automation Advocates Gather in Kobe, Japan

Sixth Biannual "Cherry Blossom Symposium" provides look at the cutting edge of lab automation

CEO SUMMARY: CEO SUMMARY: Everything relating to automation in clinical laboratory operations was the theme of the sixth "International Conference of Laboratory Automation and Robotics," conducted last month in Kobe, Japan. Because laboratories in Japan, Korea, and Taiwan have two and three decades of experiencewith extensive automation, presentations at this gathering are quite sophisticated and reveal that these laboratories are continuing to push forward in their use of automation.

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University of Tokyo Hospital Lab Has Plenty of Automation

Phlebotomy is supported by extensive automation, most interesting is the automated urine transport line

CEO SUMMARY: In Japan, many clinical laboratories are in their third decade of using automation. At the University of Tokyo Hospital, total laboratory automation (TLA) was first implemented in 1991. Now on its fourth generation TLA system, this laboratory was worked upstream to automate specimen collection and urine collection, transport, and specimen preparation. The result is automation solutions not seen in the United States.

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Technology Update: Healthcare Has First Standards for Use of Bar Codes and RFID

ANSI and two healthcare groups collaborate to develop standards to support these technologies

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Managed Care Update: Cell Phones to be Used to Report Patient Self-Test Results

CareFirst Blue Cross Blue Shield of Maryland ready to launch diabetes management service

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Implementing Best Practices Across 27 Hospital Labs

Management Strategies to Share "Best Practices" Across All Lab Sites

CEO SUMMARY: It is always challenging to ensure consistency and high productivity across the different labs in a consolidated lab organization. To help staff focus on quality and efficiency, Alverno Clinical Laboratories LLC uses Lean methods to improve quality and timely delivery of lab results in its regional core laboratory and the labs in the 27 affiliated hospitals in Illinois and Indiana. This strategy helped Alverno save almost $11 million last year while turning out 14 million billable tests.

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PhyTest Assists Doctors With Lab Testing Revenue

Georgia-based company has exclusive focus to help doctors with laboratory testing programs

CEO SUMMARY: PhyTest, Inc., created a unique business model upon its founding in 1998. It primarily specializes in handling laboratory test billing and collection services to office-based physicians. It also provides evaluation, consulting, and implementation services to help physicians in client-bill states establish discounted billing relationships with reference laboratories. To avoid Stark Law issues on physician self-referral, these arrangements do not involve laboratory testing done for patients covered by Medicare or other federal health programs.

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INTELLIGENCE: Late & Latent

JAPAN�S HEALTH SYSTEM TACKLES PREVENTIVE CARE

MEDICAL JOURNAL HITS MISDIAGNOSIS

	R. Lewis Dark: Courts Uphold Labs' Challenges on CMS' Rules SINCE MARCH 31, THE FEDERAL CENTERS FOR MEDICARE & MEDICAID SERVICES (CMS) has lost two decisions in two different U.S. district courts. Though each case addressed fundamentally different issues, the rulings were remarkably similar. In both cases, the courts questioned CMS� failure to properly use federal procedures.We provide analysis on both cases in this issue. Each case has been widely reported. One involves the three San Diego-area laboratories which went to federal district court and filed suit to prevent CMS from moving forward with the Medicare Laboratory Competitive Bidding Demonstration Project in the San Diego-Carlsbad-San Marcos metropolitan statistical area (MSA). (See pages 3-7.) The second case was filed in the U.S. District Court inWashington,DC, by anatomic pathology condo/pod lab company UroPath, LLC, and its affiliates, seeking to delay and overturn implementation of the anti-markup rule that became effective on January 1, 2008. (See pages 8-9.) Since March 31, judges in both federal court cases have ruled in favor of the plaintiff laboratory organizations. This is instructive on several points. For one, every time labs seek redress through CMS� administrative procedures, invariably the administrative judge rules against the laboratory and in favor of CMS. Thus, it is significant that two federal district court judges, in courts 3,000 miles apart, both slapped the government on the hand and granted the request for injunctions by the plaintiff labs. Next, each judge's ruling has a common theme: In the San Diego case, the judge ruled that CMS was required to follow the notice and comment requirements of the Administrative Procedure Act (APA) of 1946 as it developed the Medicare Laboratory Competitive Bidding Demonstration Project. In the Washington, DC, case, the federal judge ruled that CMS was required to follow the notice and comment requirements of the APA when it proposed regulatory changes using the 2008 Medicare Physician Fee Update process. These two federal judges have delivered justifiable setbacks to the bureaucrats at CMS. It is amessage to CMS that it is not above the law! Further, as you will read elsewhere in this issue, these two federal court cases may establish a welcome precedent that CMS must follow APA requirements on every competitive bidding demonstration that it wants to implement. Be forewarned, however: neither of these federal court cases is concluded and government attorneys have yet to respond to the injunctions in both cases. Three San Diego Labs Stop Competitive Bid Demo Federal judge issues injunction preventing CMS officials from proceeding with demo pilot CEO SUMMARY: Last Tuesday, a federal judge handed a big court victory to the three plaintiffs in their lawsuit seeking to delay or stop implementation of the Medicare Laboratory Competitive Bidding Demonstration pilot in the San Diego area. In his written opinion, the judge ruled in favor of the plaintiffs on three key points and issued a preliminary injunction. It is now up to federal attorneys to respond to the judge�s decision. April 4 Fed Court Ruling Opened Door to Injunction Three San Diego labs had to first prevail on three legal issues for their case to proceed CEO SUMMARY: Federal Judge Thomas J. Whelan's ruling on three key legal points on Friday, April 4,was the first court victory needed by three San Diego-area labs in their lawsuit to prevent the Medicare Laboratory Competitive Bidding Demonstration in San Diego from proceeding. Judge Whelan ruled that the three plaintiff labs: 1) did not have to exhaust administrative remedies before turning to court; 2) a judicial review of these claims is not barred by law; and, 3) standards for ripeness and standing are met. Litigation Update: Federal Judge to Look at CMS Rule-Making in Anti-Markup Case Hospital Lab Evolves Into A Consultative Resource Hospital-wide initiative to educate clinicians on lab test utilization leads to improvements CEO SUMMARY: Every laboratory recognizes it has the knowledge and expertise to become more of a consultative resource to its referring physicians. At 248-bed J.T. Mather Hospital in Port Jefferson, New York, the laboratory director took advantage of adminstration�s interest in improving laboratory test utilization by creating an enriched program of education and collaboration. The effort has paid off, as measured by changes in lab test ordering patterns for targeted assays. Lab Automation Viewed As Essential Solution Automated systems help lab boost efficiency as a strategy to meet lab workforce challenges CEO SUMMARY: A merger of three hospitals in Harrisburg, Pennsylvania, forced PinnacleHealth's lab director to find newways to increase efficiency. A lab automation project helped improve turnaround time and staff productivity and cut costs. The cost savings is about 50 cents per test, which means the lab automation project is savingmore than $1 million in annual operating costs.The key to getting the project approved was the savings on cost per test and having a proposal that matched the hospital's strategic plan. Notable People: Quality Guru Joseph M. Juran Dies Six Weeks Ago at Age 103 He recognized that a small number of problems generate most quality issues, coined "80-20 Rule" INTELLIGENCE: Late & Latent MORE ON: Mood Disorders TRANSITIONS