volume xxv, number 9 k monday, june 18, 2018

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kk Restricted information, see page 3 k Volume XXV, Number 9 k Monday, June 18, 2018 R. Lewis Dark: Theranos’ Elizabeth Holmes Prepares to Meet Justice...... Page 2 Elizabeth Holmes, Ramesh Balwani Indicted by Department of Justice ..................................................Page 3 Hospital Lab Outreach Programs Are Still an Effective Revenue Strategy ..........................................Page 7 In PAMA Lawsuit Against HHS, ACLA Has Strong Positions .............................................Page 11 Lab Billing Update: Inconsistent Billing Causes Patients to Find New Providers, including Labs ...........Page 15 Lab Acquisitions Update: Myriad to Buy Counsyl, to Gain Presence in NIPS Test Sector .............................Page 17 Intelligence: Late-Breaking Lab News .............................Page 19 INDICTED BREAKING NEWS! Elizabeth Holmes Ramesh ‘Sunny’ Balwani Ex-Theranos Executives each charged with 11 counts of fraud (See pages 3-6 inside.)

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kkRestricted information, see page 3

k Volume XXV, Number 9 k Monday, June 18, 2018

R. Lewis Dark: Theranos’ Elizabeth Holmes Prepares to Meet Justice......Page 2Elizabeth Holmes, Ramesh Balwani Indictedby Department of Justice ..................................................Page 3Hospital Lab Outreach Programs Are Stillan Effective Revenue Strategy ..........................................Page 7In PAMA Lawsuit Against HHS, ACLA Has Strong Positions .............................................Page 11Lab Billing Update: Inconsistent Billing CausesPatients to Find New Providers, including Labs ...........Page 15Lab Acquisitions Update: Myriad to Buy Counsyl,to Gain Presence in NIPS Test Sector.............................Page 17Intelligence: Late-Breaking Lab News.............................Page 19

INDICTEDBREAKING

NEWS!Elizabeth Holmes

Ramesh ‘Sunny’ BalwaniEx-Theranos Executives each charged with 11 counts of fraud

(See pages 3-6 inside.)

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2 k THE DARK REPORT / June 18, 2018

Theranos’ Elizabeth Holmes Prepares to Meet JusticeIT’S NOW CLEAR THAT TWO CLINICAL LABORATORY EXECUTIVES COMMITED one ofthe largest corporate fraud schemes in the past century.

Reading the federal indictments against Elizabeth Holmes and Ramesh“Sunny” Balwani unsealed Friday provides insights into the extensive scaleand wide scope of the alleged fraud the two Theranos executives perpetratedagainst patients, doctors, and investors.

When combined with the media reporting on Theranos, the informationin the federal indictments provides compelling evidence that Theranos wouldat least equal, if not exceed, most of the biggest business frauds, Ponzischemes, and accounting scandals that have occurred since 1900.

If we view who was hoodwinked in this dark story of deception andintrigue, the list is impressive. It starts with some of the smartest investors inthe Silicon Valley, who, after being among the first to invest in Theranos,noticed that the lab testing products Holmes was developing did not functionproperly, that Holmes was turning over staff and executives who challengedher with the reality of how these systems were failing, and that Holmes wasmisrepresenting the performance of these products when she presented themto potential customers and investors.

Then in 2013, there was the illustrious and ballyhooed board of directors.Comprised of multiple former cabinet officers, generals, and admirals fromthe highest ranks of the military, they lent their names to—and bet their rep-utations on—Theranos. Next were the executives of Safeway and Walgreens.Both companies made sizeable investments in Theranos without fully under-standing whether Theranos could deliver on its promises. During this time,many in the mainstream media were eagerly leading cheers for Holmes with-out seriously investigating her company’s representations.

Following the media hype, once-shrewd investors rushed to put hundredsof millions of dollars into Theranos. We should not overlook the thousands ofphysicians and their patients who trusted Theranos with their lab tests, onlyto learn months later that these test results were fraudulent.

Theranos is a business scam of unprecedented scope. It may not haveripped off billions as Bernie Madoff did, but Holmes and her company cer-tainly took advantage of wide array of people and institutions. TDR

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Holmes, Balwani Indictedby Department of JusticekEach defendant charged with two countsof conspiracy and nine counts of wire fraud

kkCEO SUMMARY: Federal criminal indictments were unsealedlast Friday in San Francisco against Elizabeth Holmes andRamesh “Sunny” Balwani for their actions as executives atTheranos, Inc., the once high-flying lab test company. Officials atthe Department of Justice said the counts against Holmes andBalwani are based on the alleged actions of each to defraudinvestors and to defraud both the physicians and patients whoordered clinical laboratory tests from their company.

THIS PRIVATE PUBLICATION contains restricted and confidential informationsubject to the TERMS OF USAGE on envelope seal, breakage of which sig-nifies the reader’s acceptance thereof.

THE DARK REPORT Intelligence Briefings for Laboratory CEOs, COOs, CFOs, andPathologists are sent 17 times per year by The Dark Group, Inc., 21806Briarcliff Drive, Spicewood, Texas, 78669, Voice 1.800.560.6363, Fax512.264.0969. (ISSN 1097-2919.)

R. Lewis Dark, Founder & Publisher. Robert L. Michel, Editor.

SUBSCRIPTION TO THE DARK REPORT INTELLIGENCE SERVICE, which includes THEDARK REPORT plus timely briefings and private teleconferences, is $15.27per week in the US, $15.27 per week in Canada, $16.05 per week else-where (billed semi-annually).NO PART of this Intelligence Document may be printed without written per-mission. Intelligence and information contained in this Report are carefullygathered from sources we believe to be reliable, but we cannot guarantee theaccuracy of all information. visit: www.darkreport.com • ©The Dark Group, Inc. 2018 • All Rights Reserved

TWO HIGH-PROFILE EXECUTIVES associ-ated with Theranos, Inc., wereindicted last week. Elizabeth Holmes

and Ramesh “Sunny” Balwani werearraigned before U.S. Magistrate JudgeSusan van Keulen on Friday in U.S.District Court for the Northern District ofCalifornia, San Jose Division. Each onewas charged with two counts of conspir-acy to commit wire fraud and nine countsof wire fraud.

If convicted, Holmes and Balwanicould face prison sentences that wouldkeep them behind bars for the rest of theirlives and fines totaling $2.75 million each,the Associated Press reported.

Under a federal grand jury indictmentreturned June 14 and unsealed Friday, thecharges stem from allegations Holmesand Balwani engaged in a multimilliondollar scheme to defraud investors, and a

separate scheme to defraud doctors andpatients. Both schemes involved efforts topromote the lab company Theranos ofPalo Alto, Calif., the federal Departmentof Justice announced.

In the indictment, the DOJ chargedthat Theranos, Holmes, and Balwani notonly defrauded investors, but alsodefrauded consumers who trusted andrelied on Theranos’ blood-testing technol-ogy that Holmes and Balwani claimed wasrevolutionary and would change the clini-cal lab testing business in significant ways.

“This indictment alleges a corporateconspiracy to defraud financial investors,”said FBI Special Agent in Charge John F.Bennett. “This conspiracy misled doctorsand patients about the reliability of medicaltests that endangered health and lives.”

The indictment contains at least onenew development in the alleged fraud

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4 k THE DARK REPORT / June 18, 2018

scheme that Holmes and Balwani perpe-trated. The indictment states Holmes andBalwani sent to patients and doctors testresults that they knew contained—or werelikely to contain—data that were inaccu-rate and unreliable, came from improp-erly adjusted reference ranges, and weregenerated from improperly validatedassays. Also, the indictment states, theresults contained or were likely to containimproperly removed ‘critical’ data.

kPrison, Fines, RestitutionIf convicted, Holmes, age 34, and Balwani,53, face a maximum sentence of 20 years inprison, and a fine of $250,000, plus restitu-tion, for each count of wire fraud and foreach conspiracy count, the DOJ said.

The DOJ’s indictment follows by threemonths charges the federal Securities andExchange Commission filed March 14 inthe same court. The SEC charged thatTheranos, Holmes, and Balwani raisedmore than $700 million from investorsthrough an elaborate, years-long schemethat involved exaggerating or making falsestatements about the company’s technol-ogy, business, and financial performance.The SEC’s charges are similar to those inthe DOJ’s indictment.

k‘Deceived Investors’In the SEC case, the federal agency saidTheranos, Holmes, and Balwani deceivedinvestors into believing that the com-pany’s portable blood analyzer could docomprehensive laboratory blood testsfrom drops of blood collected via a finger-stick. (See TDR, March 29, 2018.)

In fact, the company’s proprietaryanalyzer could complete only a smallnumber of tests while the company con-ducted most patients’ tests on modified,industry-standard commercial analyzers,the SEC said.

To settle the SEC’s charges, Holmesagreed to pay a $500,000 fine and sheagreed to surrender almost 19 millionshares of Theranos stock and voting con-

trol of the company, the SEC said. Also,she was barred from running a publiccompany for 10 years. At the time,Holmes did not admit to nor deny thecharges. Balwani said he would contestthe charges.

After dropping out of StanfordUniversity at age 19, Holmes foundedTheranos in 2003 with the idea that thecompany would revolutionize medical lab-oratory testing through allegedly innovativemethods for drawing blood and testingblood and for interpreting the resultingpatient data, the DOJ said. At one time,Theranos was valued at more than $9 bil-lion and because Holmes owned almost50% of the company’s stock, her personalwealth was valued at more than $4 billion,making her the youngest self-made femalebillionaire, the AP said.

kBalwani’s Role at TheranosFrom 2009 through 2016, Balwani servedthe company in several roles, including aspresident, chief operating officer, and as amember of the board of directors.

The Wall Street Journal’s JohnCarreyrou reported Friday night thatHolmes had stepped down as CEO andthat the indictments were the culminationof a 30-month investigation by the U.S.attorney’s office in San Francisco that wassparked by Carreyrou’s reporting onTheranos since October 2015. (See “WSJReporter Tells All About Downfall ofTroubled Theranos,” TDR, May 29, 2018.)

Sara Ashley O’Brien at CNN reportedthat minutes before the charges weremade public, Theranos announced thatHolmes stepped down as CEO and thatthe general counsel, David Taylor, wouldassume the role of CEO. Holmes will stayon as chair of the company’s board.

The indictment explained in detailhow Holmes and Balwani used advertise-ments and solicitations to doctors andpatients to get them to use Theranos’blood testing services, even though bothHolmes and Balwani knew the technology

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was incapable of producing accurate andreliable results for certain blood tests con-sistently and that the tests were likely tocontain inaccurate and unreliable results,the DOJ said.

kDefrauded Potential InvestorsAlso, the indictment alleges that Holmesand Balwani defrauded potential investorsthrough direct communications, market-ing materials, statements to the media,financial statements, and other means.“Specifically, the defendants claimed thatTheranos developed a revolutionary andproprietary analyzer that the defendantsreferred to by various names, including asthe Theranos Sample Processing Unit(TSPU), Edison, or minilab,” the DOJsaid. Holmes and Balwani claimed theTheranos analyzer could perform a fullrange of clinical tests using only small fin-gerstick samples of blood and that theanalyzer could produce results faster,more accurately, and more reliably thanconventional testing methods could pro-duce, the DOJ explained.

In their presentations to investors,Holmes and Balwani knew that theirstatements about the analyzer were false,the indictment alleged. “For example,allegedly, Holmes and Balwani knew thatthe analyzer, in truth, had accuracy andreliability problems, performed a limitednumber of tests, was slower than somecompeting devices, and, in some respects,could not compete with existing, moreconventional machines,” the DOJ said.

kDoctors, Patients DefraudedDoctors and patients were defraudedbecause Holmes and Balwani made falseclaims about the ability of Theranos’ test-ing systems to provide accurate, fast, reli-able, and low-cost blood tests and testresults, the DOJ said. Also, Holmes andBalwani failed to disclose the limits of thattechnology and the problems they haddeveloping those testing systems, the DOJexplained in its announcement.

“The defendants knew Theranos wasnot capable of consistently producing accu-rate and reliable results for certain bloodtests, including the tests for calcium, chlo-ride, potassium, bicarbonate, HIV, HbA1C,hCG, and sodium,” the DOJ said. “Thedefendants nevertheless used interstateelectronic wires to purchase advertisementsintended to induce individuals to purchaseTheranos blood tests at Walgreens stores inCalifornia and Arizona.”

IN ITS PRESS ANNOUNCEMENT about theindictments of Elizabeth Holmes and

Ramesh “Sunny” Balwani, the federalDepartment of Justice outlined how itwill pursue cases against those whomisrepresent the technology they aredeveloping.

That announcement for the DOJ’sdistrict office in San Francisco servesas a warning to companies in SiliconValley where Theranos is based, as wellas to clinical and genetic testing labs.

In addition, lab directors and pathol-ogists should note that the federal Foodand Drug Administration’s Office ofCriminal Investigations assisted the FBIand DOJ in its pursuit of fraud chargesagainst Holmes and Balwani.

“This district, led by Silicon Valley,is at the center of modern technologicalinnovation and entrepreneurial spirit;capital investment makes that possible.Investors large and small from aroundthe world are attracted to Silicon Valleyby its track record, its talent, and itspromise,” the DOJ said. “They are alsoattracted by the fact that behind theinnovation and entrepreneurship arerules of law that require honesty, fairplay, and transparency.

“The conduct alleged in thesecharges erodes public trust in the safetyand effectiveness of medical products,including diagnostics,” the DOJ added.

Indictments Are a Warning to Silicon Valley and All Labs

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In its advertisements, the companyexplicitly represented that Theranos’blood tests were cheaper than blood testsfrom conventional laboratories, the DOJsaid. As a result of Holmes and Balwani’smisrepresentations and omissions, manyhundreds of patients paid for blood testsand test results or had their health insur-ers pay for blood tests and results follow-ing referrals from their “defraudeddoctors,” the DOJ said.

kScheme to Mislead InvestorsHolmes and Balwani also used variousschemes to mislead investors, the DOJ said.“For example, with respect to investors,defendants performed technology demon-strations during which defendants intendedto cause potential investors to believe bloodtests were being conducted on Theranos’proprietary analyzer when, in fact, the ana-lyzer really was running a ‘null protocol’and was not testing the potential investor’sblood,” the DOJ said.

“Similarly, defendants purchased andused commercially-available analyzers totest patient blood, while representing toinvestors that Theranos conducted itspatients’ tests using Theranos-manufac-tured analyzers,” the DOJ explained.

k‘Negligible’ RevenueIn addition, Holmes and Balwani misrepre-sented Theranos’ financial condition andits future prospects, the DOJ said. Thedefendants claimed Theranos would gener-ate over $100 million in revenue and breakeven in 2014, the DOJ said. Also, the defen-dants claimed that the company expectedto generate $1 billion in revenue in 2015.“In truth, the defendants knew Theranoswould generate only negligible or modestrevenues in 2014 and 2015,” the DOJ said.

In addition to making false claimsabout how the DOD was using its tech-nology, Holmes and Balwani also misrep-resented to investors its relationship withWalgreens, the DOJ said. “The defen-dants represented to investors that

Theranos would soon dramaticallyincrease the number of Wellness Centerswithin Walgreens stores when, in truth,Holmes and Balwani knew by late 2014that Theranos’ retail Walgreens rollouthad stalled because of several issues,including that Walgreens’ executives hadconcerns with Theranos’ performance,”the DOJ explained TDR

—Joseph Burns

TWO OFT-TOUTED BENEFITS of the propri-etary Theranos lab test technology

were that it needed just a tiny amount ofblood as a specimen and that blood couldbe collected with a finger stick, thusavoiding a venipuncture. Nearly allpathologists and clinical laboratory sci-entists recognized the dubious nature ofthese claims.

In his book about Theranos—”BadBlood: Secrets and Lies in a Silicon ValleyStartup”—that was published last month,author John Carreyrou, The Wall StreetJournal reporter who exposed the fraud atTheranos, wrote about the origin of thesetwo benefits. On page 19, he wrote:

The main difficulty stemmed fromElizabeth’s insistence that they usevery little blood. She’d inherited fromher mother a phobia of needles; NoelHolmes [Elizabeth’s mother] faintedat the mere sight of a syringe.Elizabeth wanted the Theranos tech-nology to work with just a drop ofblood pricked from the tip of a finger.She was so fixated on the idea thatshe got upset when an employeebought red Hershey’s Kisses and putthe Theranos logo on them for a com-pany display at a job fair. TheHershey’s Kisses were meant to rep-resent drops of blood, but Elizabethfelt they were much too big to conveythe tiny volumes she had in mind.

Holmes and Her Mother Both Had Fear of Needles

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Hospital Lab Outreach StillEffective Revenue StrategykWhen payment rates decline, hospital laboratoryoutreach programs help bring in needed income

kkCEO SUMMARY: Despite the challenges hospital and healthsystem laboratory outreach programs face today, there are manyways they can remain viable, according to an outreach expert fromMayo Medical Laboratories. By taking specific steps to increasevolume and the value they provide, lab outreach programs cankeep their costs down while bringing in more revenue and stayingrelevant to their parent hospitals, health systems, and clients atthe same time.

HOSPITAL AND HEALTH SYSTEM LABORATO-RIES running outreach programs faceunprecedented challenges today as

payers cut reimbursement levels and excludemany local labs from their networks.

Despite these challenges, however,outreach programs can remain viable bytaking specific steps to increase volumeand the value they provide to hospitalsand health systems, said Jane M.Hermansen, MBA, MT(ASCP), Managerof Outreach and Network Developmentfor Mayo Clinic, in Rochester, Minn. Shemade her remarks at THE DARK REPORT’SExecutive War College in New Orleansearlier this month.

Hermansen made her assessment thatoutreach programs can provide signifi-cant value to hospitals and health systemsbased on her experience working forMayo Medical Laboratories, which con-sults with some of the best hospital laboutreach programs in the nation. Sheoffered examples from many of thesebest-in-class outreach programs andfound they shared three similarities.

“All of these programs want to do oneof three things,” she said. “First, they want

to save money. Second, they want to makemoney, and third, they definitely want tostay relevant in the lab testing servicesthey provide to referring physicians.

“Another important benefit is that laboutreach programs can help hospital labskeep costs down by adding volume to thehospital’s laboratory that the hospitalmight otherwise not have,” she added.(See sidebar, page 9.)

kSupport for Care Continuum One way clinical labs can remain relevantto parent hospitals or healthcare systemsis to do testing that supports the entirecontinuum of care. “Doing so means theclinical laboratory will have clinical labtest data on every patient in the healthcaresystem—whether inpatient, outpatient oroutreach,” stated Hermansen. “This com-plete and longitudinal record of patientlab test results is a critical component forlabs today.

“To support the entire continuum ofcare, every hospital and health system labshould consider it essential to perform100% of the testing ordered within its par-ent organization,” she advised. “Once a

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lab achieves that level, the lab and thehealth system will own the clinical labdata on those patients. That creates acompetitive advantage over health sys-tems that do not have that same data.

“In addition, your lab will own thatpatient interaction, which is importantbecause—compared with other clinicalservices in the healthcare continuum—laboratories have four to five times moreinteractions with patients than does anyother clinical service,” she said.

“What’s more, much of the medicalrecord data on each patient comes fromclinical lab data,” Hermansen added.“That means hospital labs have an oppor-tunity not only to deliver results, but alsoto manage that patient’s impression of thehealthcare system. Further, if their inter-action with the hospital lab is favorable,they’re more likely to remain as patientsin the system.”

kNursing Home OpportunitiesSupporting the entire continuum of caremeans lab directors at hospitals andhealth systems now serving nursing homesmay need to rethink any ideas they mayhave about abandoning that business.

Understandably, lab directors areworried about the deep cuts in paymentthat the Medicare program established inthe 2018 Clinical Laboratory FeeSchedule, implemented Jan. 1 under theProtecting Access to Medicare Act.However, even before those low paymentrates went into effect, many labs servingnursing homes considered exiting thenursing home business.

Leaving that business would be a criti-cal mis-step, despite the inherent chal-lenges, Hermansen advised.

“Hospital labs should think aboutserving nursing homes as respecting andsupporting the continuum of care,” sheexplained. “If your lab provides integratedtest results across the continuum, yourparent hospital’s chances of caring for thatpatient effectively are much better. But if

your lab stops serving nursing homes,your hospital could lose access to thatpatient’s continuum of care data.

kBig Value in Big Data “Then, if that patient is readmitted, thehospital would be on the hook for thecosts of care and for any readmission,” sheadded. “Doing a cost-benefit analysis thatcompares the cost of a laboratory test withthe cost of a readmission would clearlyshow the benefit of having the hospital labcontinue to serve its nursing homepatients.”

Instead of leaving the nursing homebusiness, hospital and health system labsshould analyze their contracts with thesefacilities to ensure that payment for thesetesting services reflects the lab’s actualcosts, Hermansen suggested.

“When one East Coast hospital lab didthis analysis, it found that it had dis-counted contracts for some work underMedicare Part A for patients in skillednursing facilities,” explained Hermansen.“Under those discounted contracts, thelab was getting paid about 50% of whatMedicare would normally pay for thosetests—meaning the lab was barely cover-ing its costs.

“In addition, those contracts hadexpired, but this hospital lab had contin-ued to operate under those expired pay-ment rates,” she said. “At that point, thehospital lab had to raise its rates, and thenursing home accepted that change.

“That example suggests that hospitaland health system labs have an opportu-nity to renegotiate their contracts withnursing homes in this payment environ-ment,” Hermansen said. “In addition, itmight be time to renegotiate with otherpayers as well.”

In any negotiation, a hospital’s laboutreach program should consider theinherent strength it has in negotiationswith nursing homes today because thelarge national lab companies are unwill-ing to serve nursing homes, she said.

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“Managers of hospital labs need cre-ative ways to work with their customersbecause nursing homes need laboratoryservices for this population. If the localhospital lab doesn’t serve nursing homes,who will?” Hermansen asked. “Are thereother laboratories pounding on theirdoors, begging at the opportunity? No.

kCovering Phlebotomy Costs “At Mayo Medical Laboratories, we workwith a hospital lab that had two nursinghome clients recently offer to cover thelab’s phlebotomy costs,” she reported.“One nursing home offered to pay $500per month if the hospital lab would do thephlebotomy draws and bill separately forthe testing.

“A second, larger nursing homeoffered to pay $1,000 a month for thephlebotomy service,” Hermansen added.“The hospital laboratory is no longer onthe hook for those phlebotomy costs andcan still do the testing.

“At a third health system lab we know,a nursing home offered to do the phle-botomy draws if the lab would train itsnursing staff to do so,” she said. “Then allthe laboratory needed to do was pick upand transport those specimens.”

kAdd Tests; Cut Send-OutsAnother way hospital lab outreach pro-grams can increase revenue is by changingthe type of testing the lab does. “Some healthsystem lab outreach programs are expand-ing their test menus and thereby reducingthe number of send-out tests they do,”Hermansen suggested. “Doing so meansgoing through the make-versus-buy processto justify not sending some laboratory testsout, but it’s a relatively easy calculation.

“When your lab shifts its test mix cor-rectly, it will likely add more esoteric tests,”she said. “That means your lab may nolonger be doing mostly $10 CBCs. Instead, itmay be doing many more $30 esoteric tests.

“A hospital lab also can make it a pri-ority to do more work for other hospi-

ONE OF THE LARGEST EMPLOYERS in CentralFlorida is the Walt Disney Company,

which has a well-earned reputation foraggressively seeking the best healthcaredeals for its 70,000 workers.

In February, Naseem Miller reportedfor the Orlando Sentinel that the Disneycompany introduced a health insuranceplan for its Central Florida employees thatbypasses insurance companies andinstead relies on two local hospital sys-tems. Disney contracted directly with thearea’s two largest health systems,Orlando Health and Florida Hospital.

By eliminating the insurance middle-men, Disney jettisoned the contracts thoseinsurers had with large national labs.Cigna, for example, has a contract withQuest Diagnostics, which stood to losesome of that lab test business it had pre-viously, said Jane M. Hermansen, MBA,MT(ASCP), the Mayo Clinic’s Manager,Outreach and Network Development.

“This is the perfect example of howhospital lab outreach programs can beincluded in these types of arrangements,”she added. “Do you think Disney got thevery cheapest laboratory testing it couldget? Probably not, but they are supportingthe local community and creating anopportunity for the clinical labs of thosehospitals.

“Now those 70,000 Disney employeesand other covered lives under that healthinsurance plan will be using the hospitallaboratories because Quest is carved out,”she said. “Other employers are likely to beinterested in doing so as well.

“If your hospital lab has a localemployer sending testing out of yourcommunity, you should do whatever youcan to bring that testing into the commu-nity,” she urged. “Other employers arelikely to be interested in following Disney’sexample.”

Hospital Labs Could ServeLarge Local Employers

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tals,” Hermansen recommended. “In thatway, your lab will shift more testing to ahospital-client bill, which means it wouldbe easier to send out and collect whencompared with an insurance bill.”

kMarshfield Clinic’s Lab One stellar example is the lab that is partof the Marsh field Clinic in Marshfield,Wis. “This lab has three lines of business,two of which are outside of traditionalinsurance billing,” explained Hermansen.“One line of business is the typical clinicallab testing for outreach patients. The sec-ond is for veterinarians, for which the labhas dedicated equipment and veterinarypathologists on staff.

“The third line of testing is for industryclients such as organizations involved inbiotech, medical devices, animal health,pharmaceutical companies, universities, andcontract research organizations,” she said.

“Adding pathologists who specializein veterinary work may not be possible,but hospital and health system labs cer-tainly can add sub-specialist pathologists,such as hematopathologists,” Hermansenadvised. “If your hospital lab hashematopathologists on staff, you canreach out to oncologists in the communityto bring in those additional samples.

kOpportunities with Mass Spec“Mass spectrometry MALDI-TOF isanother example of lab testing that canhelp expand market share, particularly ifyour lab serves rural areas,” she said.“With the right equipment, your lab couldbecome a regional core laboratory formicrobiology.

“This strategy can be effective in ruralcommunities, especially in highly-regu-lated states such as New York,”Hermansen commented. “In those statesit’s difficult to find technologists to domicrobiology testing.

“But if your hospital lab has the rightequipment, and is within an hour or so

drive by courier, your lab could offer coremicrobiology testing and deliver thoseresults quickly,” she concluded. “Thatcould be a differentiator in a rural marketand contribute to greater market shareand larger outreach lab revenue.”

These examples of how hospital andhealth system lab outreach programs aresucceeding using different strategiesdemonstrate that opportunities still existfor hospital and health system labs. TDR

—Joseph BurnsContact Jane Hermansen at 800-533-1710or [email protected].

AS VALUE-BASED REIMBURSEMENT METHODSbecome more common, managers in

hospital and health system labs must be onthe alert to demonstrate that a cost centeranalysis of their labs may fail to capture allthe revenue they produce, said Jane M.Hermansen, the Mayo Clinic’s Manager,Outreach and Network Development.

For this reason, hospital laboratoriesneed to know how much they generate inrevenue and how much it costs the lab toproduce that revenue. “Knowing thesenumbers is incredibly important,” sheadded.

A study Mayo Medical Laboratoriesdid showed that removing outreach test-ing from a hospital laboratory had a sig-nificant effect on the lab’s overall costs.“For example, at one particular hospital,our study showed there was a 24%increase in costs if the outreach volumewas removed from the laboratory coststructure.

“Stated differently, these economicfacts support the strategy of buildinghospital laboratory outreach programs,”noted Hermansen. “The additional out-reach volume brings down the averagecost per test for the entire laboratory,even as it brings in additional revenue.”

Economics of SuccessfulHospital Laboratory Outreach

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In Lawsuit Against HHS,ACLA Has Strong PositionskCase hinges on data collection process,and whether ACLA has a legal right to sue

kkCEO SUMMARY: Rulings from Judge Amy Berman Jacksonof the U.S. District Court in Washington, D.C., are expected soonin the ACLA’s lawsuit against HHS concerning the PAMA finalrule that set the course for the new Medicare CLFS rates imple-mented in January 2018. One lawyer following the lawsuitexplains that ACLA has presented strong arguments. Howquickly the case will move beyond the initial motion stages isunknown.

CLINICAL LABORATORIES NATIONWIDEare coping with the financial conse-quences of the new lower payment

rates the Medicare program imposed onJan. 1. Meanwhile, the civil case that theAmerican Clinical LaboratoryAssociation (ACLA) brought against thefederal Department of Health andHuman Services (HHS) puts forth rea-sonably strong arguments in its favor, saysa lawyer following the case.

Late last month in U.S. District Courtfor the District of Columbia, federal JudgeAmy Berman Jackson denied a requestfrom the ACLA to schedule oral argu-ments in its case against HHS SecretaryAlex M. Azar. In response to the ACLA’srequest, Jackson wrote, “The court is wellaware of the parties’ interest in expeditionand will set a hearing if and when it deemsit necessary to do so.” Jackson also is hear-ing arguments in Special Counsel RobertMueller’s investigation into Russian med-dling in the 2016 election.

For clinical laboratories, any delaymay mean more clinical labs will close, asACLA argued in its request to move thecase to oral arguments. While ACLA

awaits a court date for oral arguments,clinical lab directors may want to knowthe strength of the ACLA’s case. Toaddress this issue, THE DARK REPORTturned to Charles C. Dunham, IV, a part-ner in the Houston and New York officesof the Health Care and Life Sciences prac-tice of the national law firm EpsteinBecker Green, PC.

kStatutory Bar in Question Dunham acknowledged that both sides inthe case have good legal arguments. WhileHHS has the strength of agency discretionand favorable case law on its side, theACLA, however, has strong positions onat least two of the most important issuesin the case, he said.

First is a preliminary issue of whether theACLA is precluded from seeking judicialreview of the actions HHS took based on lan-guage in the Protecting Access to MedicareAct (PAMA) of 2014. The act specificallyprecludes “administrative or judicial reviewof the establishment of payment amountsunder Section 216 of PAMA.”

ACLA argued that the statutory bar islimited and does not preclude the right to

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challenge HHS acting outside of its statu-tory authority, Dunham explained. Inrebuttal, HHS argues that the ACLA’s chal-lenge is nothing more than a challenge tothe payment amount, and the reporting ofthe private payer rates is integral to theestablishment of the payment amount.

kHHS Authority Questioned In legal terms, this first issue revolvesaround whether ACLA has legal standingto challenge what HHS calls its PAMA finalrule that resulted in the 2018 CLFS rates. Inhis analysis of the case, Dunham said thatthe legal arguments, as presented, favor theACLA. (See sidebar, next page.)

The second significant issue involveswhether HHS has the statutory authorityand followed the intent of Congress whenit essentially redefined the term “applica-ble laboratory” by defining the terms “lab-oratory” and “revenue.”

HHS argues that the agency was taskedwith crafting a definition for applicable lab-oratory because it believes the “statute leftunspecified the precise meaning of a labo-ratory and how to determine its receivedrevenue,” Dunham explained. ACLAargues that there is no ambiguity in thestatute with regard to these terms, andinstead of clarifying any questions concern-ing how to calculate the Medicare revenue alaboratory receives, HHS effectivelyrewrote the statutory definition in contrastto the statute’s plain text and inconsistentwith Congressional intent, added Dunham.

kReview of Legal Briefs After reviewing the legal briefs on bothsides of this issue, Dunham said the legalarguments more favor ACLA but HHSdropped the ball on its approach to argu-ing its position.

“There is no disagreement that theterm ‘laboratory’ under PAMA was meantto include all laboratories—hospital,physician, and independent,” Dunhamexplained. “The statute even makes refer-ence to hospital labs in clarifying that

Medicare payments to hospital labs will beaffected when a hospital lab provides testservices that are paid for separately.

“Clearly, there was congressionalunderstanding of the distinction and howhospital labs in particular were paid,” hesaid. “The logical conclusion would bethat a laboratory is any entity licensedunder CLIA. That’s very clear.

“Then, the real question HHS facedwas: How does a laboratory calculate theMedicare revenue received from activitiesthat labs perform, especially for hospitaland physician office labs,” Dunham said.“HHS admittedly struggled to addressthese issue, but instead of providing aframework for hospitals to attributeMedicare bundled payments under PPS tolaboratory services, it chose to redefine alaboratory by its NPI.”

kCongressional Intent Debate “Doing so affected which labs are deemedan ‘applicable laboratory’ and required toreport the private payment-rate data thatHHS collected, and, in fact, HHSacknowledged in its analysis that it haddata from some labs but not from others,”noted Dunham. “For example, more than90% of all hospital labs were not includedwhen HHS collected the payment-ratedata. Given that health insurers and thefederal Medicare program pay hospitallabs more than they pay independent labsfor the same tests, leaving out hospitallabs skews HHS’ results.”

How HHS attributed revenue to hos-pital labs may have been part of the prob-lem. “Because HHS pays for laboratoryservices in many different ways, how doyou attribute payments under theHospital Outpatient Prospective PaymentSystem (OPPS) or other bundled paymentarrangements?” Dunham acknowledged.“And how do you pull out the lab portionof those payments? Do you define it by apercentage, for example?”

HHS’ decision to argue that the statutewas ambiguous and required HHS to

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PAMA Language Precludes Review, But LawyerSays ACLA Can Proceed with Its Legal Case

ONE ARGUMENT the federal Department ofHealth and Human Services (HHS)

raised in this case is whether the AmericanClinical Laboratory Association (ACLA) hasstanding to bring the case at all.

“In this case, Congress included lan-guage in PAMA that precludes a challenge tocertain HHS actions, and Congress wasexplicit on what was barred,” stated CharlesC. Dunham, IV, of Epstein Becker Green.“The statutory bar removes the ability tochallenge HHS’ establishment of paymentamounts. HHS cited supporting case lawthat reinforces the concept that Congresscan prevent judicial review, including theability of the federal agency to define a pay-ment formula and choose specific data.

“In my opinion, however, that’s not whatACLA is challenging in its case,” he noted.“ACLA points out there is a differencebetween the process of making rules that areinconsistent with the statute and the processunder PAMA of HHS taking the informationthat’s received and calculating it based uponthe weighted median formula to establishpayment rates based on those calculations.For example, whether HHS received all appli-cable information available to calculate theMedicare rate would likely not be challenge-able based on the statutory bar.

“What could be challenged is the fact thatHHS didn’t receive all the informationrequired under statute to make an accurateassessment of payment rates because itredefined statutory definitions and therebyaltered Congressional intent,” Dunham said.

“In addition to those questions, ACLA isarguing that HHS didn’t follow the statute,”he added. “That’s an important distinction:whether, in fact, HHS acted beyond itsauthority in promulgating these final rules,and in doing so, may have excluded data inconflict with PAMA. That’s what ACLA issaying, and that’s a point that should cer-tainly be subject to challenge.”

After he explained the judicial reviewissue, Dunham added two additional legalpoints, both of which appear to favor theACLA’s case, he said. “First, I would add thatHHS had minimal discretion in what labora-tory was an ‘applicable lab,’” he explained.“In other words, the formula for determiningan applicable laboratory was defined in thestatute except for the ability of HHS to definethe minimum threshold of Medicare rev-enues from CLFS and PFS.

kHospital Labs Carved Out“In the way it promulgated the rules underPAMA, HHS did, in fact, carve out almost allhospital labs,” he said. “That’s the issueACLA is challenging, and it’s a decent legalargument.”

Dunham’s second point related towhether ACLA has legal standing to bringthis case, and HHS has argued that ACLAdoes not have such standing. “Standing isthe ability of ACLA to bring a suit on behalfof its association members,” he explained.

“HHS has argued that there has been noinjury to labs and no demonstration thatMedicare rates are impacted because manyhospitals were not required to report,” hesaid. “Oddly enough, HHS also argues thatadministrative remedies were notexhausted, which contradicts what HHS hasbeen saying: that the establishment of thepayment amounts could not be challengedunder the statutory bar.

“Therefore, the standing issues are morein favor of the ACLA,” he said. “HHS doesn’thave strong arguments on lack of standing.

“ACLA made it clear by stating bluntlythat HHS didn’t cite any case in which acourt concluded an association lackedstanding,” he said. “ACLA also said it wasnot aware of any such case. So on thestanding issue, this is not likely to be ahurdle that will stop ACLA from movingforward.”

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14 k THE DARK REPORT / June 18, 2018

define the terms ‘laboratory’ and ‘revenue’may prove to be harmful to its case,Dunham suggested. Instead, HHS mayhave been better served to refocus theargument, not on whether the statute wasambiguous, but on the practical problemsthat required HHS to establish a frame-work for calculating Medicare revenuesrelated to lab services, he said.

“ACLA did a nice job arguing thispoint when it said that, instead of clarify-ing the term ‘laboratory,’ HHS effectivelyreplaced the term ‘laboratory’ with ‘anyentity within an NPI that has at least onecomponent that is a laboratory,’”Dunham commented. “The problem withthis method is that hospitals get so muchMedicare revenue and if that’s how HHSis defining a ‘laboratory’ for calculating‘revenue’, then HHS is not actuallyfocused on the laboratory portion of thatrevenue.

“That’s a very strong argument onACLA’s part,” he added. “ACLA arguesthat, essentially, HHS has now redefinedthe term ‘laboratory’ from what theCongressional intent was. In addition,ACLA should be able to challenge the factthat HHS did not have the statutoryauthority to redefine the term ‘laboratory’and thus change the whole construct.

kA Weakened Argument “HHS could have easily resolved thisproblem with an adjustment factor,”Dunham suggested. Hospitals could haveattributed payments from Medicare OPPSfor lab services using a formula thataccounts for the share of payments thatshould be apportioned for lab testing, heexplained. Doing so likely would havebeen an easier task than following thereporting obligation under PAMA.

“That was an available option and noneof the case law that HHS cites in its motionpapers indicates HHS was precluded fromdoing so,” Dunham explained.

“These calculations can be performedwithout the need to redefine what ‘labora-

tory’ and ‘revenue’ mean under PAMA,” headded. “That is ACLA’s argument: that thiscan be done without carving out significantportions of laboratories in the market.

“HHS asserts that its data-collectionefforts resulted in fair representation fromall clinical labs, and in doing so, HHSweakens its case, because HHS’ own datashow that only 21 out of 7,000 hospitalsreported to CMS,” Dunham suggested.“HHS might have a stronger argument ifit established an equitable process for col-lecting data from all or most laboratories,”he concluded.

THE DARK REPORT provided these legalperspectives from Dunham to helppathologists and clinical lab executivesunderstand that the plaintiff, ACLA, hasseveral points to argue in support of itsposition in this lawsuit. TDR

—Joseph BurnsContact Charles Dunham at 713-300-3211or [email protected].

IN HIS REVIEW OF THE LAWSUIT FILED by theAmerican Clinical Laboratory

Association against the Secretary ofHealth and Human Services, attorneyCharles C. Dunham, IV, identified twomore issues of relevance in this case.

Along with the issues of StatutoryBar and Standing discussed in theaccompanying story, Dunham men-tioned two other underlying issues.

First, did HHS violate its statutoryauthority in promulgating the final rules(ultra vires)? Second, if HHS did not,should HHS be afforded agency discre-tion (Chevron case) in its approach todefine how a laboratory calculates itsMedicare revenues by its NPI? Spacelimitations prevented THE DARK REPORTfrom providing Dunham’s detailed com-ments on these two legal issues in thislawsuit.

Other Important Issuesin ACLA vs. HHS Lawsuit

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Inconsistent Billing CausesPatients to Find New Providers

High deductibles, confusion over paymentsare reasons why patients leave providers of care

THERE IS A NEW SOURCE OF LOST BUSINESSfor physicians, clinical laboratories,and others. Patients are losing

patience with confusing bills from theirproviders and opting to find new providerswho offer simple, clear, and consistent bills.This turnover in patients was one key find-ing in a recently-published report.

The report, issued by InstaMed, anational payment network based inPhiladelphia, determined that, as health-care costs rise and there is increased confu-sion about what patients owe, consumersbecome dissatisfied and increasingly arewilling to choose new providers.

“The consumer voice will becomeharder to ignore as dissatisfaction takesthe shape of customer attrition and lostrevenue for providers,” wrote the authorsof InstaMed’s “Trends in HealthcarePayments Eighth Annual Report: 2017.”

For clinical laboratories, the InstaMedreport made four points. (See sidebar onpage 16.)

1. Consumers are unhappy;2. Digital transactions have consequences

in healthcare;3. Using paper creates friction; and, 4. Security is a growing concern.

Two factors influencing how providers,including labs, bill and collect from patientsare the sustained rise in healthcare costsand the growing number of consumersenrolled in high-deductible health plans(HDHPs). It is smart business for clinicallabs and pathology groups to acknowledge

that the steady increase in patients withhigh deductibles means it is necessary toupdate and increase the accuracy of the labcoding, billing, and collections process. Ofequal importance, labs need to rework theirbilling procedures in ways that improve thecustomer experience.

kAn Experience-Revenue LinkThe InstaMed report states that patientswho have a poor, confusing, or frustratingexperience [with how they are billed bytheir providers] will move to otherproviders, leading to “damage to health-care brands and ultimately lost revenue.”

“Consumer loyalty is increasingly tiedto the healthcare payments experience, as65% of consumers would consider switch-ing healthcare pro viders for a betterhealthcare payments experience,” thereport said.

Consumers are attracted to HDHPsbecause the premiums for these plans arelower than they are for other health planoptions. However, HDHPs require con-sumers to pay more at the point of care,including when they need clinical lab test-ing and other services. Therefore, clinicallabs would do well to make payments eas-ier and less confusing whenever possible,the report showed.

“For provider organizations, there is adirect connection to patient collectionsand their bottom line as payers cover lessof the amount due for services rendered,”the report states. “As consumer responsi-bility and frustrations increase, that con-

Lab Billing Updatekk

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16 k THE DARK REPORT / June 18, 2018

nection, and the [financial] impact toproviders, becomes more prevalent.”

In 2016, hospitals delivered $38.3 bil-lion in uncompensated care. “This couldbe why 58% of providers report their toprevenue cycle concern is related to patientcollections,” the report said.

Medical bills from providers confuse70% of consumers, and the explanation ofbenefits that health insurers send to mem-bers confuse 72% of consumers, thereport showed. What’s more, only 9% ofconsumers can define such commonterms as a premium, deductible, co-insur-ance, or out-of-pocket maximum.

For evidence of the depth of consumerconfusion, the report states 73% ofproviders say it takes a month or more tocollect a patient payment, while 80% ofconsumers report they pay their billswithin three weeks.

kCauses of DissatisfactionAmong the experiences that cause dissat-isfaction are: More than 50% of con-sumers received a bill for an amount theyexpected their health plan to cover or hadan amount due for more than wasexpected. And, more than 25% of con-sumers had a medical bill turned over to acollection agency last year.

“These experiences could be why con-sumers not only feel healthcare does notdeliver good value, but are also becomingfearful and frustrated with the industry,”the report states. “Indeed, 40% of con-sumers fear the costs associated with anillness. That is more than the percentageof consumers who fear an illness itself.”

InstaMed made four recommenda-tions. One, consumer demands must be atop priority. Adopt best practices fromother industries so providers can reducefriction in the consumer experience.

Two, resisting the digital world willbackfire. “The data is clear: Consumerswant automated and electronic paymentoptions while clearly understanding whatthey owe and how to pay,” the report said.

Three, retire paper and embrace digitalpayments so providers can reduce over-head and collect more from consumers.

Fourth, security and compliance mustbe a priority. Providers need to recognizethat the issue with data breaches is not if,but when. “Any organizations unsure iftheir data is at risk should assume theworst,” the report states. TDR

—Joseph Burns

TODAY’S HEALTHCARE CONSUMERS are dissat-isfied with the lack of value they get

from healthcare. This is one key finding inthe reported issued by InstaMed. As health-care costs rise, consumers want providersto offer more electronic transactions, elim-inate paperwork, and beef up security, thereport said. In the report, InstaMed high-lighted the following four points.

First, consumers are not happy. Whileconsumers spend more on healthcareevery year, education and outreach to themabout these payments have not kept pacewith the rise in payment responsibility,leading to frustration and fear among con-sumers. “The consumer voice will becomeharder to ignore as dissatisfaction takesthe shape of customer attrition and lostrevenue for providers and payers alike,”the report states.

Second, it is time to fully embrace dig-ital transactions. Consumers demand con-venient, frictionless payments and will turnto social media when experiences do notmeet their expectations.

Third, paper is like sandpaper inhealthcare. Overwhelmingly, healthcareremains loyal to paper, especially for pay-ments. Heavy use of paper costs all indus-try stakeholders.

Fourth, security concerns aren’t goingaway. Compromised data causes financiallosses, reputational damage, and customerattrition.

Consumers Are Unhappywith Unclear Provider Bills

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Myriad to Buy Counsyl, to GainPresence in NIPS Test Sector

In women’s health testing market, MyriadGenetics will have a commanding presence

LATE LAST MONTH, Myriad GeneticsInc. announced a definitive agree-ment to acquire Counsyl, Inc., an

innovative genetic testing company inSouth San Francisco, Calif., for $375 mil-lion. In a deal that is expected to close byearly next year, Myriad will use a combi-nation of cash and common stock.

Founded in 2007, Counsyl offers car-rier and non-invasive prenatal screening(NIPS) tests. Over the past 12 months, thecompany did 280,000 reproductivegenetic tests, generating $134 million ofrevenue, the companies said.

Counsyl has three products inwomen’s health: Foresight, an expandedcarrier screening test; Prelude, an NIPStest; and Reliant, a hereditary cancer test.

“Over Myriad’s last three fiscal years(ending June 30), Counsyl has reported a22% revenue compound annual growthrate—largely driven by volume,” wroteAmanda Murphy, an analyst and partnerwith William Blair and Company.

For Myriad, the deal allows the labora-tory testing company in Salt Lake City toposition itself as a leader in genetic testingfor women’s health, expanding the cus-tomer base for Counsyl’s reproductivetests by almost 300%, the companies said.

The deal also gives Myriad an innova-tive company that has commercial insur-ance coverage for its genetic tests, androom for more insurance coverage of itsForesight test for expanded carrier screen-ing and its Prelude test for non-invasiveprenatal testing, Zacks reported. THE

DARK REPORT has covered the story aboutCounsyl’s patient-friendly innovations.(See “How Price Transparency IncreasedLab’s Revenue,” TDR, Aug. 3, 2015.)

By combining sales forces, the twocompanies will have a total of more than300 sales professionals calling on thenation’s 40,000 ob-gyns, the companiessaid. Myriad said it has a women’s healthsales force of about 225 representativesand Counsyl has about 80.

kStrong Market Potential In her analysis of the market potentialbehind Myriad’s acquisition of Counsyl,Murphy wrote, “In aggregate, Counsyl isapproximately 13% penetrated in the totalwomen’s health market for reproductivetesting. Each additional 5% gain in marketshare translates to $50 million in revenueand $25 million in incremental earningsbefore interest, tax, depreciation, andamortization (EBITDA).”

Genetic testing labs serve only about25% of the full market potential for repro-ductive health testing, a market that couldgrow at a compound annual rate of 15% toeight million tests annually, Murphy pre-dicted. Counsyl’s three tests represent a $5billion market, she added.

In addition, there is strong potentialfor growth if health insurers cover moreof these tests, she said. Most patients whoget carrier screening tests do so for a lim-ited number of genes, such as those forcystic fibrosis (CF), spinal muscular atro-phy (SMA), and Fragile X, Murphy wrote.

Lab Acquisitions Updatekk

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18 k THE DARK REPORT / June 18, 2018

While health insurers do not broadlycover expanded carrier screening tests,the American College of Obstetriciansand Gynecologists (ACOG) last year rec-ommended universal screening for CFand SMA, she said.

kValue in Payer Coverage“In addition, the [ACOG] committeepointed to use of expanded carrier screen-ing panels as an acceptable strategy forprenatal screening,” she wrote. “Finally,the use of non-invasive screening is mov-ing into the average-risk market, whichcould further accelerate growth.”

To bolster this point, she wrote thatone of the strengths of the deal is Counsyl’sstrong relationships with health insurers.The company is in-network with about90% of the nation’s commercial payers.What’s more, several professional organi-zations representing physicians providingwomen’s health have guidelines thatstrongly support expanded carrier screen-ing and non-invasive prenatal screeningtests, Murphy said. Among these organiza-tions are ACOG and the Society forMaternal-Fetal Medicine.

kExpanded Carrier Screening“Given that these guidelines have increas-ingly moved toward recommendingexpanded carrier screening and NIPS asthe standard of care tests recommendedfor patients, management believes it ispossible that the ACOG could strengthenits endorsement of NIPS in its 2018 pro-fessional guidelines,” commentedMurphy in her report.

In addition, although Medicaid paysfor about half of all births in the UnitedStates, more than 90% of Counsyl’s rev-enue comes from commercial insurance.“Thus, there is significant potential toexpand Medicaid reimbursement,” sheexplained. TDR

—Joseph BurnsContact Amanda Murphy at 312-364-8951 or [email protected].

TWO FINANCIAL ANALYSTS see an emergingtrend involving genetic lab companies.

In a report issued by Adam Abramowitzand Jonathan Bluth of Intrepid InvestmentBanks, Myriad Genetics’ plan to acquireCounsyl exemplifies a possible trend inconsolidation among diagnostic testingcompanies, such as Konica Minolta’sacquisition last year of Ambry Genetics for$1 billion. (See TDR, July 17, 2017.)

The two analysts noted that Myriad isan established company that has been dis-ruptive in the market for noninvasive prena-tal screening (NIPS) tests, thus providing“a strong entry point and foothold in thelarge NIPS market with well-establishedreimbursement to fill out its test portfolio.”

In addition, Abramowitz and Bluth saidthe purchase price represents about 2.8times Counsyl’s revenue of the previous12 months. What Myriad is paying toacquire Counsyl is at the same dollar valuethat Laboratory Corporation of Americapaid when it acquired Sequenom less thantwo years ago, they added. In September2016, LabCorp spent $302 million toacquire Sequenom, a competitor toCounsyl in the NIPS testing market.

In their report, Abramowitz and Bluthcharacterized the 2.8-times-revenue num-ber as being a “relatively low” multiplewhen contrasted with that of Invitae,another genetic testing company thattrades at a revenue multiple of more thanfive times its last 12 months’ revenue, theysaid. They added that Invitae forecasts sub-stantial revenue growth that translates intoa revenue multiple of 2.9 times over thenext 12 months, which, they added, is sim-ilar to the valuation of Counsyl.

“But, for other genetics diagnosticsbusinesses, does this deal suggest that anearly three-times-revenue multipleshould be the new threshold for a flat rev-enue company in this sector?” they asked.

Buyers Pay Good Multiples toBuy Genetic Test Companies

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THE DARK REPORT / www.darkreport.com k 19

That’s all the insider intelligence for this report. Look for the next briefing on Monday, July 9 , 2018.

In New Jersey last week,David Nicoll, 44, the for-

mer owner of Biodiagnos-tic Laboratory Services (BLS)of Parsippany, N.J. was sen-tenced to 72 months in a fed-eral prison. On the same day,his brother, Scott Nicoll, 37,who also worked at BLS, wassentenced to 43 months inprison. Both had previouslypled guilty to U.S. District Judge Stanley R. Chesler. Eachdefendant was charged withone count of conspiracy to violate the Anti-KickbackStatute and the Federal TravelAct, and one count of moneylaundering.

kk

MORE ON:Biodiagnostic LabFraud CaseBiodiagnostic LaboratoryServices received more than$100 million in paymentsfrom Medicare and privatepayers. The federal attorney inNew Jersey has successfullyconvicted 53 defendants,including 38 physicians. TheParsippany Focus said that “Itis believed that this is thelargest number of medicalprofessionals ever prosecutedin a bribery case.”

kk

WORLD HEALTHORGANIZATION’SLIST OF ESSENTIALDIAGNOSTICSThere is now an internationallist of “Essential In Vitro Diag-nostics (EDLs).” This list waspublished by the WorldHealth Organization (WHO).The list has two tiers: Tier I forprimary healthcare and Tier IIfor healthcare facilities withclinical laboratories. Includedin the last are about 50 tests forthe detection and diagnosis ofcommon conditions, and over50 tests for the detection, diag-nosis, and monitoring of pri-ority diseases. Priority diseasesinclude HIV, tuberculosis,malaria, hepatitis B and C(HBV/HCV), HPV, andsyphilis infections.

kk

TRANSITIONS• Lisa-Jean Clifford is the newCOO and Chief Strategy Offi-cer at Gestalt Diagnostics ofSpokane, Wash. Clifford hasheld executive positions withPsyche Systems, IDG, Math-Soft, Ebusiness Technologies,McKesson HBOC, and IDXSystems.

• Cancer Genetics, Inc.,of Rutherford, N.J.,announced the appointmentof Michael McCartney as itsChief Commercial Officer.McCartney has previouslyserved at SciKon Innovation,Carolina Life Sciences,BioAgilytix Labs, RocheDiagnostics, Siemens, andAbbott Laboratories.

DARK DAILY UPDATEHave you caught the latest e-briefings from DARK Daily?If so, then you’d know about......the news that, for the firsttime, less than half of allhealthcare practices in theUnited States are owned byphysicians. The informationwas based on co-research byPhysicians Advocacy Insti-tute and Avalere Health.

You can get the free DARK Dailye-briefings by signing up atwww.darkdaily.com.

TDR-06-18-18_Layout 1 6/19/18 12:45 PM Page 19

kkNew National Contracts by UnitedHealth, Aetna:Will Quest Diagnostics and LabCorp Both Benefit?

kkProtect Your Hospital Lab’s Financial Stability:Using Cost-Per-Test Studies to Guide Cost-Cutting.

kkHow Retiring Baby-Boomer Medical TechnologistsAre Causing Labs to Rethink Staffing, Workflow.

UPCOMING...

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