Medicare Laboratory Payment Policy

Now and in the Future

Dianne Miller Wolman, Andrea L. Kalfoglou, and Lauren LeRoy, Editors

Committee on Medicare Payment Methodology for Clinical Laboratory Services

Division of Health Care Services

INSTITUTE OF MEDICINE

NATIONAL ACADEMY PRESS
Washington, D.C.



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Medicare Laboratory Payment Policy: Now and in the Future Medicare Laboratory Payment Policy Now and in the Future Dianne Miller Wolman, Andrea L. Kalfoglou, and Lauren LeRoy, Editors Committee on Medicare Payment Methodology for Clinical Laboratory Services Division of Health Care Services INSTITUTE OF MEDICINE NATIONAL ACADEMY PRESS Washington, D.C.

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Medicare Laboratory Payment Policy: Now and in the Future NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. Support for this study was provided by the Health Care Financing Administration (Contract No. 500-99-0023). International Standard Book No. 0-309-07266-2 Medicare Laboratory Payment Policy: Now and in the Future is available for sale from the National Academy Press, 2101 Constitution Avenue, N.W., Box 285, Washington, DC 20055. Call 800–624–6242 or 202–334–3938 (in the Washington metropolitan area), or visit the NAP online bookstore at www.nap.edu. The full text of Medicare Laboratory Payment Policy: Now and in the Future is available on-line at www.nap.edu. Copyright 2000 by the National Academy of Sciences. All rights reserved. Printed in the United States of America. The serpent has been a symbol of long life, healing, and knowledge among almost all cultures and religions since the beginning of recorded history. The image adopted as a logotype by the Institute of Medicine is based on a relief carving from ancient Greece, now held by the Staatliche Museen in Berlin.

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Medicare Laboratory Payment Policy: Now and in the Future “Knowing is not enough; we must apply. Willing is not enough; we must do.” —Goethe INSTITUTE OF MEDICINE Shaping the Future for Health

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Medicare Laboratory Payment Policy: Now and in the Future THE NATIONAL ACADEMIES National Academy of Sciences National Academy of Engineering Institute of Medicine National Research Council The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M.Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A.Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I.Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M.Alberts and Dr. William A.Wulf are chairman and vice chairman, respectively, of the National Research Council.

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Medicare Laboratory Payment Policy: Now and in the Future COMMITTEE ON MEDICARE PAYMENT METHODOLOGY FOR CLINICAL LABORATORY SERVICES LAUREN LEROY (Chair), President and Chief Executive Officer, Grantmakers In Health HOWARD BAILIT, Professor, University of Connecticut Heath Center CHRISTOPHER BLADEN, Independent Consultant WILLIAM HSIAO, K.T.Li Professor of Economics, Harvard School of Public Health WILLIAM KERR, Senior Vice President, The Hunter Group J.STEPHEN KROGER, Chief Executive Officer, COLA JOHN MATSEN, Professor Emeritus, University of Utah STEPHEN T.MENNEMEYER, Professor, Health Care Organizations and Policy, University of Alabama at Birmingham DAVID SMALLEY, Professor, College of Medicine, University of Tennessee-Memphis EARL P.STEINBERG, Senior Vice President, Resolution Health Strategies, Inc. BRUCE STEINWALD, Independent Consultant, Washington, D.C. ELEANOR TRAVERS, National Clinical Advisor, Medical Cost Effectiveness, Department of Veterans Affairs Headquarters Study Staff DIANNE MILLER WOLMAN, Study Director ANDREA L.KALFOGLOU, Program Officer NICCI T.DOWD, Senior Project Assistant KRYSTAL JONES-FOY, Senior Project Assistant Auxiliary Staff JANET M.CORRIGAN, Director, Division of Health Care Services MIKE EDINGTON, Managing Editor JENNIFER CANGCO, Financial Advisor Consultants KATIE MERRELL, University of Chicago ZACHARY DYCKMAN, CHPS Consulting (Center for Health Policy Studies) HENRY MILLER, CHPS Consulting (Center for Health Policy Studies) Copy Editor FLORENCE POILLON

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Medicare Laboratory Payment Policy: Now and in the Future REVIEWERS This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Research Council’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the Institute of Medicine in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and the draft manuscript remain confidential to protect the integrity of the deliberative process. The committee wishes to thank the following individuals for their participation in the review of this report: M.DESMOND BURKE, Director of Laboratories, Weill Cornell Medical College, Director of Clinical Laboratories, New York Presbyterian Hospital SHELIA G.DUNN, President and CEO, Quality America Incorporated RAY GAMBINO, Executive Vice President and Chief Medical Officer Emeritus, Quest Diagnostics TERRY HAMMONS, Senior Vice President for Research & Education, Medical Group Management Association LOUISE B.RUSSELL, Research Professor of Economics, Institute for Health Care Policy, Rutgers, The State University of New Jersey Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations nor did they see the final draft of the report before its release. The review of this report was overseen by George D.Lundberg, Editor in Chief and Executive Vice President, Medscape, appointed by the Institute of Medicine, and Christopher A.Sims, Professor, Princeton University, Department of Economics, appointed by the National Research Council’s Report Review Committee, who were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final contents of the report rests entirely with the authoring committee and the Institute of Medicine.

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Medicare Laboratory Payment Policy: Now and in the Future Preface Laboratory tests play a major role in clinical care, providing practitioners with the tools to diagnose disease, treat illness, and monitor the condition of patients. Technological innovations have enhanced the scope, quality, and sophistication of laboratory services, to the very real benefit of health professionals and patients alike. With new scientific advances, laboratory tests are likely to play an even greater role in the coming years. Yet bringing these advances to patients depends not only on science and technology, but also on the policies we have in place to provide coverage and payment for laboratory tests. As the largest payer for clinical laboratory services in the nation, Medicare covers inpatient and outpatient testing for the elderly and disabled. Its system of paying for outpatient laboratory tests, however, has remained largely unchanged since it was established in 1984. It is structured so that key decisions regarding coverage, payment, and medical necessity are sometimes made nationally and sometimes by local private contractors who administer the Medicare program across the country. Constraints on payments have led to a decline in actual Medicare expenditures for clinical laboratory tests, while those for most other medical services have continued to rise. Concerns about how well Medicare’s payment method reflects current costs of laboratory testing and about the ability of the system to keep up with anticipated changes in technology prompted the Congress to direct the Health Care Financing Administration (HCFA) to commission this study. HCFA asked the Institute of Medicine (IOM) to assess the current payment system and investigate options to improve it against a backdrop of changes in

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Medicare Laboratory Payment Policy: Now and in the Future laboratory testing over the past 20 years and expectations for future innovation and use of laboratory services. The committee appointed by the IOM to carry out this study embraced the opportunity to assist HCFA and the Congress, but quickly recognized the complexity of its task. Clinical laboratory tests are performed in a variety of settings, from physicians’ offices to large, sophisticated regional facilities. Like other sectors of the health system, the laboratory industry has been buffeted by changes in the financing and delivery of medical services. Yet despite decreases in payment rates for laboratory services, this dynamic and resilient industry continues to grow. The committee found no simple way to characterize it. The committee was also surprised by the paucity of data on the clinical laboratory industry, its financial health, and the costs of performing laboratory tests. A profile emerged from the information that IOM staff and consultants gathered with the help of both industry and government experts, but the committee was often frustrated by the lack of evidence to corroborate its considered judgments. Designing a payment system for medical services requires balancing the interests of Medicare beneficiaries, providers of clinical laboratory services, and taxpayers who help support the Medicare program. The committee was encouraged that beneficiary access to outpatient clinical laboratory services generally appears to be good. At the same time, the lack of data to measure the extent of distortions in current payments or to determine how well the system will absorb new technological changes in laboratory testing was a source of considerable concern. This study provided the opportunity both to systematically review what is known and to chart a course for reform. Based upon analysis of available information, the committee concluded that timely action can avoid serious problems in the future. Guided by a set of goals for Medicare payment policy adopted early in its deliberations, the committee found both the need and the opportunity for improvements in the current payment system. It concluded that there is no basis for assuming that current payment levels accurately reflect the costs of providing laboratory services. Whatever distortions exist can provide incentives for inappropriate use of laboratory tests, making the creation of a more rational method of payment imperative. To build a system that will stand the test of time, however, requires improvements in the ways tests are approved for payment and described for billing purposes, as well as valued for payment. This report sets out the committee’s findings and recommendations for improvements in Medicare policy related to payment for outpatient clinical laboratory services. The committee was concerned that sustaining the current, out-moded payment method would ultimately have an adverse effect on beneficiary access to laboratory services. It considered concerns raised by the laboratory industry but was also struck by the comfort level many expressed with fundamental aspects of the existing payment method. This was good news, because it provided a clear path to improving the Medicare payment system—one that first

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Medicare Laboratory Payment Policy: Now and in the Future simplifies the system by creating a single national fee schedule based on current national payment limits and then promptly begins a process of moving toward payment levels that more reasonably reflect the resources required to provide each laboratory test. Through its recommendations, the committee seeks to reduce administrative complexity and ambiguity, foster more efficient and appropriate use of laboratory tests, and create a more open and understandable system for establishing payments. The committee favors processes that allow meaningful input by those who have a stake in the outcome of Medicare payment policy decisions. It sees such involvement as an important element in maintaining the credibility of the payment system. It also sets its sights on a system that can efficiently accommodate future progress in laboratory science and technology. The committee’s recommendations are directed to both HCFA and the Congress, since both legislative and administrative actions would be necessary to implement them. The committee could not have accomplished its goals without the excellent staff work of Dianne Wolman, study director, and Andrea Kalfoglou, program officer, in both informing our discussions and synthesizing the outcome of our deliberations. Their tireless efforts to bring useful information and structure to the committee’s work enabled us to be both focused and productive. The staff and I greatly appreciate the commitment and hard work of the committee members. They openly shared their views, provided timely feedback on staff work, and made every effort to work toward consensus while respecting the differences among them. Finally, this study was undertaken at a time of considerable uncertainty and potential. We have great expectations for scientific breakthroughs in the detection and treatment of disease. At the same time, we cannot foretell how continued changes in the financing and delivery of health care may affect the availability of new or existing services. It is incumbent upon us to prepare for the future by designing systems that can adapt as circumstances change. It is in this spirit that the committee offers its recommendations for improving Medicare payment for outpatient clinical laboratory services. Lauren LeRoy, Ph.D. Chair

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Medicare Laboratory Payment Policy: Now and in the Future Acknowledgments During the course of the study, the committee and staff were assisted by many individuals who generously shared their expertise. In addition, many organizations, associations, and government agencies contributed to our understanding of the clinical laboratory industry, the professionals who work in it, and the public programs that regulate it. We especially want to thank those private organizations and federal agencies that presented testimony at the committee’s open meetings and via its Web site: AdvaMed (formerly the Health Industry Manufacturers Association), the American Association of Bioanalysts, American Association for Clinical Chemistry, American Clinical Laboratory Association, American Medical Association, American Society for Clinical Laboratory Science, American Society for Microbiology, American Society of Clinical Pathologists, Clinical Laboratory Management Association, and College of American Pathologists, the Food and Drug Administration, Centers for Disease Control and Prevention, Office of the Inspector General, and our sponsor, the Health Care Financing Administration (HCFA). HCFA made this study possible through both its financial support and the technical assistance it provided. HCFA’s clinical laboratory payment methodology is not easy to understand; this study would have been impossible without HCFA’s help. The project officer at HCFA, Anita Greenberg, Medicare Health Insurance Specialist, and Tom Gustafson, director of HCFA’s Purchasing Policy Group, Center for Health Plans and Providers, greatly facilitated our data collection efforts. Many others at HCFA (see Appendix A) helped tremendously by answering our endless questions.

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Medicare Laboratory Payment Policy: Now and in the Future The committee was fortunate to have input from expert consultants. Katie Merrell, Center for Health Administration Studies, University of Chicago, provided a background paper on a “Framework for Describing and Assessing Policy Options,” analyses of the impact of the National Limitation Amount (see Appendix B), and ongoing guidance and clear thinking on payment issues. She was ably assisted by Geri Brennan, University of Chicago. In addition, the Institute of Medicine (IOM) commissioned background papers from CHPS Consulting on “Recent Developments and Trends in the Clinical Laboratory Industry” and “Technology Trends in the Clinical Laboratory Industry.” We thank Zachary Dyckman, who was assisted by Bonnie Bisol Cassidy and Sarah Grantham, for the preparation of these papers. Under the leadership of Henry Miller, CHPS Consulting also conducted surveys and research on costs of and payments for clinical laboratory services. The report of the payment study by Zachary Dyckman is included in Appendix C. During preparation of this report we benefited from technical reviews of particular chapters by Medicare payment experts: George Greenberg, executive advisor, Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services; Peter Kazon, attorney, Mintz Levin; and Charlie Spalding, retired senior technical advisor, HCFA, currently senior functional analyst, Computer Sciences Corporation. We thank them for their comments and advice. We take sole responsibility for any remaining factual errors. The committee also received assistance from several individuals at IOM. Janet Corrigan, director, Board on Health Care Services, provided guidance throughout the study. Linda Kilroy and Kim Thomas, Office of Contracts and Grants; Jennifer Cangco and Kay Harris, Office of Finance and Administration; Claudia Carl, Mike Edington, and Jennifer Otten, Office of Reports and Communication; Sally Stanfield, National Academy Press; and Michael Reilly, National Academy of Science intern, also provided strong support. Because so many people gave willingly of their time and expertise to assist the committee and staff in our search for data and understanding, we have included their names in Appendix A.

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Medicare Laboratory Payment Policy: Now and in the Future Contents     SUMMARY   1 1   INTRODUCTION   18     Origins of This Study,   18     Statement of Task,   19     The IOM Study Process,   20     Goals for a Payment System,   21     Clinical Laboratory Services Covered by Medicare,   24     The Medicare Program,   25     Organization of the Report,   27 2   BACKGROUND AND ENVIRONMENTAL TRENDS   29     Background on the Clinical Laboratory Industry,   30     Medicare Part B Clinical Laboratory Trends,   36     Environmental Trends,   39     Minimizing Fraud, Waste, and Abuse,   48     Payment Trends,   50     Response from the Industry to Environmental Trends,   53     Summary,   54 3   TECHNOLOGY TRENDS IN THE CLINICAL LABORATORY INDUSTRY   58     Automation,   59     Information Technology,   63

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Medicare Laboratory Payment Policy: Now and in the Future     Laboratory Measurement and Testing Technology,   64     Technology’s Effect on Site of Service,   67     Effect on Clinical Laboratory Staff Requirements,   70     Summary,   71 4   DESCRIPTION OF THE CURRENT MEDICARE PAYMENT SYSTEM AND ITS HISTORICAL ROOTS   75     Introduction,   75     The FDA Approval Process,   76     Coding Policy,   76     Claims Processing,   78     Medicare Coverage Policy,   79     Medicare Payment Policy,   84     Development of the Current System,   85     Elements of a Payment System,   87     Effect of Laboratory Spending on Physician Payment,   98     Conclusion,   98 5   THE CURRENT SYSTEM: HOW WELL DOES IT WORK?   100     Beneficiary Access,   100     Flexibility,   103     Transparency,   105     Value,   106     Administrative Simplicity and Efficiency,   107     Other Issues of Concern,   111     Conclusion,   114 6   ALTERNATIVE PAYMENT METHODOLOGIES   116     Introduction,   116     Elements of a Payment System,   117     Other Issues in Payment Systems,   131     Making Improvements a Reality,   137     Conclusion,   141 7   RECOMMENDATIONS   144     Introduction,   144     Conclusion,   160     ACRONYMS AND GLOSSARY   163     APPENDIXES     A   Acknowledgments,   173 B   Medicare Clinical Laboratory Payments: The National Limitation Amount and Its Relationship to Payment Amounts,   177

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Medicare Laboratory Payment Policy: Now and in the Future C   Study of Fees and Payment System Characteristics for Clinical Laboratory Services,   184 D   Annual Volume of Laboratory Tests by Laboratory Type and Waived-Nonwaived Test Status, 1996–1998, 1999–Early 2000,   215 E   1998 Medicare Carrier Denial Rates,   225 F   Committee Biographies,   237 TABLES, FIGURES, BOXES, AND EXHIBITS Tables 1   Number of Laboratories by Type of Facility; 1999–Early 2000,   4 2   Test Volume by Type of Facility; 1999–Early 2000,   5 2.1   Number of Laboratories by Type of Facility, 1999–Early 2000,   31 2.2   Test Volume by Type of Facility, 1999–Early 2000,   31 2.3   Part B Clinical Laboratory Spending by Type of Laboratory,   38 2.4   Part B Laboratory Payments per FFS Beneficiary, 1995–2002,   40 2.5   Waived versus Nonwaived Test Volume, 1999–Early 2000,   42 2.6   Hospital Laboratory Outpatient­­­­-Outreach Test Volume as a Percentage of Total Hospital Testing, Selected Years,   54 3.1   Point-of-Care Test Expenditures, 1999,   69 3.2   Home Testing Market by Sector, 1999,   70 4.1   Medicare Laboratory Fee Schedule Updates and National Limitation Amount Percentages, 1984–2002,   86 4.2   Panel Tests: Automated Chemistries,   92 B.1   National Limits and Updated Carrier Base Rates, Selected Laboratory Services,   179 B.2   Illustrative Regional Fee Schedules and National Limitation Amounts,   180 B.3   Service Volumes,   180 B.4   Population by Region and Spending by Service,   182 B.5   Service Payments and NLA Ratio,   182 C.1   Characteristics of Surveyed Payers,   189 C.2   Laboratory Procedure Codes Included in the Payer Survey,   191 C.3   Number of Laboratory Fee Schedules by Benefits Plan Type for the Ten Surveyed Payers,   192 C.4   Comparative Indemnity Plan Fees for Selected Clinical Laboratory Services, 2000,   196 C.5   Comparative PPO and POS Plan Fees for Selected Clinical Laboratory Services, 2000,   197

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Medicare Laboratory Payment Policy: Now and in the Future C.6   Comparative Private HMO Plan Fees for Selected Clinical Laboratory Services, 2000,   199 C.7   Comparative Medicare HMO Plan Fees for Selected Clinical Laboratory Services, 2000,   200 C.8   Comparative Medicaid HMO Plan Fees for Selected Clinical Laboratory Services, 2000,   201 C.9   Average Ratio of Private Payer Fees to Medicare Fees Across Different Benefit Plans,   203 C.10   Characteristics of Clinical Laboratory Service Capitation Programs, 2000,   204 C.11   Summary of Laboratory Service Payment System Characteristics for PPO Plans, 2000,   208 D.1   Estimated Annual Volume of Laboratory Tests by Laboratory Type and Waived-Nonwaived Test Status, 1996,   216 D.2   Estimated Annual Volume of Laboratory Tests by Laboratory Type and Waived-Nonwaived Test Status, 1997,   218 D.3   Estimated Annual Volume of Laboratory Tests by Laboratory Type and Waived-Nonwaived Test Status, 1998,   220 D.4   Estimated Annual Volume of Laboratory Tests by Laboratory Type and Waived-Nonwaived Test Status, 1999–Early 2000,   222 E.1   1998 Medicare Carrier Denial Rates for Top 100 CPT Codes,   226 E.2   1998 Medicare Carrier Denial Rates for the Top 20 Clinical Laboratory Tests, by State,   230 Figures 2.1   Laboratory industry revenue by segment, 1999,   33 2.2   Personal health care expenditures as a percentage of Gross Domestic Product: 1960–2008,   34 2.3   Trends in expenditures for health care services, 1993–1998,   35 2.4   Laboratory industry payer mix by percentage of revenue, 1999,   37 2.5   Part B spending on clinical laboratory services as a percentage of total Medicare spending, 1992–1998,   38 2.6   Medicare Part B spending (in millions) by laboratory type, 1998,   39 2.7   Medicare Part B market share trends, 1992–1998,   40 2.8   Waived tests as a percentage of total test volume, 1996–1999, early 2000,   44 2.9   Comparison of the growth in the number of waived laboratories and POLs, 1994–1999,   45 2.10   Physician office laboratories under CLIA by certification type, 1999,   46 B.1   Medicare laboratory fee schedules FY 2000 updated base amounts compared to median base amounts,   178

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Medicare Laboratory Payment Policy: Now and in the Future C.1   Average (mean) ratio of private payer fees to Medicare fees, 2000,   194 Boxes 1.1   Clinical Laboratory Services,   24 3.1   The Future of Technology,   59 3.2   Point-of-Care Testing,   68 7.1   Recommendations,   145 Exhibit C.1   Survey Instrument for Study of Payment Rates for Laboratory Services,   209

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Medicare Laboratory Payment Policy: Now and in the Future Medicare Laboratory Payment Policy

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