NEW YORK – 2021 was another tumultuous year for clinical labs, as the industry scrambled to deal with fluctuating COVID-19 case numbers while also addressing longer-term trends like a tightening labor market and continued downward pressure on reimbursement.
Compared to 2020, however, business was strong during the past year, as evidenced by a recovery in routine testing volumes and increasing valuations both among large reference labs and smaller outreach and independent labs. In fact, some industry observers suggested that the COVID-19 pandemic has accelerated laboratories' shift into more high-priced areas like molecular diagnostics and genetic testing, driving lab spending upward even as private and government payors try to push down the cost of routine testing.
When the Protecting Access to Medicare Act (PAMA) passed in 2014, many predicted the industry would see a wave of consolidation as large players like Quest Diagnostics and Laboratory Corporation of America snapped up independent and hospital outreach labs struggling with the lower payment rates mandated by the law. While the market for acquisitions was busy in the lead-up to PAMA's implementation in 2018 (Quest, for instance, made or announced 12 lab acquisitions in 2017), the flow of such deals has been relatively slow since then.
National labs reiterated this year their plans to pursue growth through lab acquisitions, but it is currently "a seller's market," said David Nichols, president and founder of lab services consulting firm Nichols Management Group.
"Valuations remain high," he said. "People are searching for consolidation opportunities when they don't really exist. If you were looking at [national labs'] revenue situation and thinking that they could augment their revenue with acquisitions, there's very, very little left to acquire."
Nichols noted that many of the possible acquisition targets still out there are associated with academic medical centers that may be reluctant to sell out of fear of compromising the center's ability to provide care. Additionally, the COVID-19 pandemic both bolstered many of these labs' bottom lines while also demonstrating their value to the community.
That has made hospital systems "less likely to sell their outreach and less likely to have someone else come in and manage their laboratory," Nichols said.
Jane Hermansen, manager of outreach and network development at Mayo Clinic Laboratories, agreed, pointing to Quest's March acquisition of the outreach laboratory services business of healthcare system Mercy, as an example of rising valuations.
The deal's $225 million price tag was "much higher than I would have thought it would have been," Hermansen said, adding that, like Nichols, she believed the pandemic had driven up valuations by demonstrating the value of laboratories to their hospital networks.
"Organizations are starting to realize the importance of their laboratories," she said. "They couldn't have gotten through the pandemic without their laboratory."
Nichols said that some in the industry believe that acquisitions could see an uptick once COVID-19 volumes and revenues eventually decline, though he remains skeptical.
"When you're back with the high fixed costs of the laboratory and you don't have the COVID margins anymore… will some people then want to put their lab on the market?" he said. "I think there could be a little bit of that. But not a lot."
One reason to expect a continued slow rate of consolidation even after the boost from COVID-19 testing fades is that the reimbursement scenario is looking less bleak than it did a few years ago.
Congress once again delayed the reimbursement cuts called for by PAMA with the passage in December of the Protecting Medicare and American Farmers from Sequester Cuts Act. Many in the industry are also hoping Congress takes on more permanent reform of PAMA in 2022, with the primary emphasis being on a shift to use of random, representative sampling of lab data to calculate reimbursement rates, as opposed to requiring that all eligible labs report pricing data. This, industry representatives believe, would make for a dataset that better represents the higher reimbursement received by hospital labs, thereby producing rates more favorable to labs.
The Medicare Payment Advisory Commission's (MedPAC) report to Congress on PAMA, which was released this summer, found that Medicare lab spending has actually risen since the law went into effect.
While "overall utilization of [clinical laboratory fee schedule] laboratory tests remained relatively flat" after the implementation of PAMA, "aggregate Medicare CLFS spending increased" from $7.1 billion in 2017 to $7.6 billion in 2019, the report noted, adding that "this increase was predominantly driven by [a] spending increase for new, high-cost tests in the molecular pathology, multianalyte assays with algorithmic analyses, proprietary laboratory analyses, and genomic sequencing procedures categories."
Lâle White, executive chairman and CEO of lab data and revenue management firm Xifin, said that the COVID-19 pandemic had accelerated labs' shift into these more profitable testing areas.
"The huge capacity that labs have built… is not only addressing the needs of COVID testing but has also initiated new, innovative testing," she said. "As COVID volume declines, there is going to be excess capacity in these labs that they are now transferring to other types of testing, most predominantly infectious disease and prenatal testing. They are also bringing on more genetic testing."
She noted that this trend was apparent in Medicare spending data like that presented by the MedPAC report and suggested that the industry could be entering a lucrative stretch of the traditional test reimbursement cycle.
"Labs introduce new tests. They are very expensive when they are introduced. They get coverage as volume builds. They get semi-automated, then automated, and, finally, they become a commodity," she said. "That's the general cycle."
"I think the big difference today is that genetic testing is growing faster than any other types of testing did in the past," she said. "And essentially, that is lifting the boat, as it were, for labs in terms of reimbursement and coverage simply because they have higher-priced tests coming into the funnel faster than the commodity tests are going out. That trend will continue for a while, I think."
A recent report from the HHS Office of the Inspector General found a significant increase in Medicare Part B spending on genetic testing and in the number of laboratories that received more than $1 million per year in payment from the program for genetic testing.
White highlighted the rise of telehealth and consumer-driven testing as other 2021 lab trends accelerated by the pandemic.
It’s a view echoed by many in the industry. Speaking this year to 360Dx, for instance, Jay Wohlgemuth, chief medical officer and physician executive at Quest, noted that he was "in total agreement that the pandemic accelerated a focus on what I would call consumer-centric care," describing a consumer-centric model as one that "says that the first place testing and engagement with healthcare should be done is in the home, and then if you can't get it done in the home, maybe you go to a community-based location like a patient service center or a Walmart. And then you go into the hospital or health system when you really need an intervention."
Quest recently inked collaborators with telemedicine firms Catapult Health and 98point6 that incorporate self-collection for lab testing as part of employer-sponsored health screenings.
Opko Health subsidiary BioReference Laboratories, meanwhile, launched in 2021 its Scarlet Health product, a digital platform that allows patients to schedule phlebotomy or other specimen collection services at their home or office. Natalie Cummins, chief commercial officer at BioReference, said the company believes such services could move from being relatively niche offerings to a commonly used approach for sample collection.
Broadly speaking, 2021 was good for the lab industry. In addition to the aforementioned rise in outreach valuations, Quest and Labcorp's stock prices were, as of Dec. 22, up 39 percent and 49 percent, respectively, since the start of the year.
Nonetheless, there were difficulties — one of the foremost being staffing.
"The biggest challenge that I am seeing across the board is staff," Hermansen said. "Nationally, there is a staffing crisis, particularly in phlebotomy and entry level positions."
While staffing has long been a concern for the lab industry, labs are currently having the most difficulty finding workers for lower paid positions where they are competing with businesses across the economy broadly that have raised wages to recruit staff.
Hermansen said that particularly in the first half of the year she saw some outreach facilities close draw sites due to a lack of staff.
"Coming into the fall, organizations were able to start hiring more phlebotomy staff and start reopening those sites, but it continues to be a pretty tenuous balance," she said.
On the legislative front, another major question aside from the ultimate fate of PAMA is how certain details of the federal surprise billing law passed at the end of 2020 will be implemented. Slated to take effect at the beginning of 2022, the shape of the law has generally pleased the industry, but there are questions around its process for dispute resolution that could have a significant impact on labs.
Jonathan L. Myles, chair of the College of American Pathologists' Council on Government and Professional Affairs, said that his organization is particularly concerned about an interim final rule issued by the US Department of Health and Human Services that calls for the law's independent dispute resolution process to use the qualified payment amount (QPA) — a figure closely tied to payors' median in-network rates — as benchmarks for determining the appropriate payment for services.
Labs and other providers fear that a QPA-based approach will give too much power to payors in negotiations over reimbursement. One of the major sources of leverage a provider has with insurers is the ability to remain out-of-network and balance bill the insurer's members at higher, out-of-network prices. Were the No Surprises Act to resolve out-of-network billing disputes by requiring such bills be paid at the insurer's median in-network rates, it would likely undermine this leverage.
The American Hospital Association and American Medical Association filed a suit against HHS in December over the proposed rule governing the dispute resolution process.
"CAP strongly opposes this federal rule," Myles said, noting that the organization believes it gives insurers "the upper hand."
"We're very engaged and active on the issue," he said.