NEW YORK – After spiking during the COVID-19 pandemic, the formation of new CLIA labs has slowed dramatically, according to an analysis by 360Dx of data from the Centers for Medicare and Medicaid Services (CMS).
As of June 30, CMS had certified roughly 8,500 new CLIA facilities, a pace that would see the certification of around 17,000 new facilities in full-year 2024, or less than half of the peak of approximately 37,000 new CLIA certifications in 2021.
In part, the drop represents a return to a more normal pace of lab formations following the pandemic. It also likely reflects continued pressures facing the labs including declining reimbursement, staffing challenges and wage inflation, and heightened regulatory requirements.
"We're seeing a very small number of new labs opening, even less than were opening pre-pandemic," said Jon Harol, president of lab consulting firm Lighthouse Lab Services. "That is perhaps telling, a little bit, that it is not the most fertile marketplace for labs."
Looking back over the last decade, CLIA lab formation in the years prior to the COVID-19 pandemic ranged from a low of 16,216 new labs (in 2016) to a high of 17,684 new labs (in 2014). During the pandemic, those numbers jumped dramatically, with 29,634 new labs certified in 2020 and 36,954 new labs certified in 2021. In 2022, new certifications fell to 25,094, still well above the pre-pandemic average. In 2023, new certifications fell again, to 21,060. Halfway through 2024, 8,511 new facilities received certification. Assuming that pace continues, the year will see 17,022 new CLIA facilities, in line with pre-pandemic numbers.
Formation of new moderate- and high-complexity CLIA labs is lagging behind pre-pandemic averages, however. CLIA-waived facilities have traditionally accounted for the vast majority of new certifications, and their share of the market has grown in recent years. Between 2014 and 2019, an average of 1,530 labs per year received a CLIA certificate of registration, compliance, or accreditation (each of which permit labs to perform moderate- or high-complexity testing) and accounted for around 9 percent of new facilities. 2024 is on pace to see around 1,200 such labs formed, which would account for around 7 percent of new facilities.
A separate analysis by lab data firm Lab Prospects shows a substantial increase in the closures of CLIA labs since the third quarter of 2022, with closures consistently outpacing new CLIA lab openings since that time, a reversal of the general trend over the preceding decade. As of Sept. 9, 2024, there were 318,491 active CLIA facilities.
Harol attributed the downturn to a variety of factors, including what he called a "post-COVID hangover" in which downsizing and layoffs across the industry have perhaps discouraged new entrants. The threat of a final rule from the US Food and Drug Administration on laboratory-developed tests, and the final rule that came down in May, which will increase the regulatory burden for some labs, may also have been a factor, he said.
Harol also noted that labs' efforts to repurpose molecular testing instrumentation and infrastructure post-COVID has been less successful than hoped.
"Usually, there are sorts of waves inside the clinical lab industry where you see opportunity for profitability through new lines of testing or some new marketplace or disease state to address," he said. "I don't think we're in a space [currently] where there is a real obvious new business case or use case that labs are able to latch onto."
Pressures on small- to medium-size independent labs have been building for some time. The 2014 passage and 2018 implementation of the Protecting Access to Medicare Act (PAMA) squeezed CMS reimbursement levels for many lab tests. At the same time, many private insurers have moved to drive down lab pricing as well, both by renegotiating contracts with less favorable reimbursement rates and by incentivizing their members to use larger, lower-cost providers like Quest Diagnostics and Laboratory Corporation of America.
Federal surprise billing legislation that went into effect at the beginning of 2022 is also working to drive down reimbursement by limiting labs' abilities to remain out of network and balance bill (in which a provider sends the portion of a bill unpaid by an insurer directly to the customer) an insurer's members for testing — one of the major sources of leverage providers have with insurers in negotiations over reimbursement.
In a previous interview discussing the challenges facing small- and medium-size independent labs, David Nichols, president and founder of lab services consulting firm Nichols Management Group, suggested that many would not remain viable.
"There is no acceptable level of margin in small- to medium-sized laboratories," he said.
Given this environment, it is perhaps unsurprising that lab formation, and moderate- and high-complexity lab formation in particular is down. If anything, the surprise may be that so many are still coming to market.
Josh Kramer, founder and managing partner of healthcare and life science consulting firm Leap Consulting Group, said that physician office labs are one area where he is still seeing new lab formation. While formation of physician labs is down in 2024 compared to pre-pandemic times (around 6,250 new such labs projected for 2024, versus an annual average of 7,231 between 2014 and 2019), Kramer said he sees doctors bringing testing in-house to compensate for declining margins in other parts of their businesses.
Another area where Kramer said he is seeing lab formation is in testing aimed narrowly at specific diseases or clinical pathways.
"Disease-focused laboratories are popping up consistently and catering to a niche audience," he said. "They may not even have a unique assay. They may just have unique positioning and a unique service offering."
Kramer said he also continues to see molecular pathologists and cytopathologists launching their own laboratories, "taking that small percentage of a fragmented market that they can, and it's enough for them."
"We still see $25 million labs opening their doors," he said. "Even $6 million labs are opening their doors."
Harol added that despite the continued industry consolidation driven by lab giants like Quest and Labcorp, independent regional labs are still able to make a go of it in areas like esoteric testing and toxicology where they can often compete on qualities like turnaround time.
Industry consolidation also provides a potential endgame for some smaller players getting into the business.
"Some of the more traditional folks, the pathologists who are trying to run more modalities of testing under their small umbrella, are hoping to sell," Kramer said. "That [acquisition] market continues to be active … so people continue to open those shops and rinse, repeat."