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Clinical Lab Consolidation Continues in 2023 While Key Policy Questions Go Unresolved


NEW YORK – The clinical lab business exited 2023 much as it entered it, with major questions facing the industry unresolved at the year’s close.

Perhaps most notably, the fate of laboratory-developed tests remains a live issue, though one that the US Food and Drug Administration (FDA) hopes to settle in early 2024.

Permanent reform of the Protecting Access to Medicare Act (PAMA) also remains a priority for laboratories after Congress declined last year to take up the Saving Access to Laboratory Services Act (SALSA) and instead passed the latest in a series of one-year delays to PAMA’s implementation.

At the same time, downward pressure on reimbursement and a tight labor market continued to buffet the industry in 2023, driving consolidation as big players like Quest Diagnostics and Laboratory Corporation of America acquired smaller independent and hospital labs — a trend that appears likely to persist in 2024.

Following the failure in 2022 of the Verifying Accurate Leading-edge IVCT Development (VALID) Act, which would have given the FDA authority over LDTs, the FDA announced in March of last year that it would take up the matter on its own and regulate LDTs through the rulemaking process.

The agency issued a proposed rule on LDT oversight at the end of September, putting forth a plan that would amend FDA regulations to make explicit that LDTs are in vitro diagnostics (IVDs) and that all IVDs are medical devices and therefore overseen by the FDA under the Federal Food, Drug, and Cosmetic Act (FDCA). The rule calls for a five-stage, four-year phase-out of the agency’s current LDT enforcement discretion policy.

The proposed rule offers carve-outs for certain categories of tests, including what the FDA terms "1976-Type LDTs," which it defines as tests that feature "use of manual techniques (without automation) performed by laboratory personnel with specialized expertise," and human leukocyte antigen (HLA) tests. Otherwise, the proposal was fairly limited in terms of exemptions.

"I didn't parse [the proposed rule] as [FDA] saying it is going to offer flexibility or allow for a lot of exemptions," James Boiani, an IVD, drug, and medical device life sciences attorney at Epstein, Becker & Green in Washington, D.C., told 360Dx following release of the rule.

He said that compared to previous attempts at LDT regulation like the VALID Act and the FDA's prior draft guidance on LDTs from 2014, the proposed rule was "basically the strongest approach possible."

Labs and industry groups came out against the plan, with, for instance, the American Clinical Laboratory Association (ACLA) reiterating its long held view "that FDA does not have the authority to regulate LDTs under its medical device authority."

Organizations including the Association for Molecular Pathology (AMP) and the Association for Diagnostics and Laboratory Medicine (formerly the American Association for Clinical Chemistry) also voiced opposition to the proposed rule, arguing that it would place financial and administrative burdens on labs, limit patient access to needed testing, and hamper test development and innovation.

Lab stakeholders also voiced concerns about whether the FDA would have the resources needed to handle the anticipated flood of LDTs requiring agency review.

Nonetheless, the agency pushed forward, maintaining a tight timeline. It aims to publish the final rule in April. Once the rule is published, it is widely expected to face legal challenges from the lab industry.

SALSA stalls again

The lab industry's other major business before the federal government — the PAMA reform bill SALSA — fizzled out once again as Congress declined to take up the bill and instead passed a one-year delay to implementation of lab cuts and price reporting requirements under PAMA.

SALSA, which failed to pass Congress in 2022, was reintroduced in March by bipartisan groups of legislators in both the House of Representatives and the Senate. The bill would institute a sampling-based approach to collecting lab testing pricing data that proponents say would both alleviate the administrative burden on labs and ensure that price data is collected from a more representative slice of the industry. Additionally, the bill would cap the amount a test's price could fall or rise under PAMA to 5 percent a year. It would also have stopped price cuts scheduled to go into effect at the start of 2024 and extend the time between price reporting periods from three years to four.

The year's congressional disarray, which left the House of Representatives without a speaker for an extended period of time, dampened the bill's prospects. The bill's price tag also presented, and will likely continue to present, a challenge. A preliminary score produced by the Congressional Budget Office (CBO) in 2022 projected that it would cost $6 billion over 10 years, which meant legislators would have had to make cuts elsewhere to fit it into that year's end-of-year spending package. At the same time, the CBO analysis projected that simply delaying the scheduled PAMA cuts by one year would save $730 million over 10 years, making that an attractive option for lawmakers.

ACLA, which is one of the main proponents of the bill, sought to address the price tag issue this year with its own internal analysis that President Susan Van Meter said put the cost of SALSA at less than $3 billion over 10 years, the difference between the two scores being due to what she said was ACLA's use of a more current, "more robust" lab price dataset.

Van Meter said that ACLA met with the CBO as well as congressional committee staff and bill sponsors to talk about its analysis. The organization's analysis was not, ultimately, sufficient to drive congressional action last year, but ACLA and other lab organizations like the National Independent Laboratory Association have said that passage of SALSA remains a main priority for them in 2024.

Consolidation continues

Meanwhile, industry consolidation continued apace, with large national firms making a number of lab acquisitions throughout the year. Years of declining reimbursement combined with challenges like inflation and staffing shortages have produced a difficult environment for hospital and smaller independent labs, leading many to explore selling their businesses. Quest and Labcorp have been the most eager purchasers of these operations.

According to data from lab consulting firm Accumen, between 2017 and 2022, the two lab giants combined completed 36 hospital laboratory deals, with Quest notching 20 and Labcorp 16.

In 2023, Quest acquired portions of NewYork-Presbyterian's lab services business for $275 million in an all-cash deal. The company also expanded its agreement with West Reading, Pennsylvania-based Tower Health to offer laboratory supply chain expertise, including the purchase of capital equipment, supplies, and reagents, as well as to continue performing reference testing for the hospital system.

Labcorp was particularly active on the acquisition front in 2023. During the year it acquired Enzo Biochem's clinical lab business for $113 million; assets of Philadelphia-based Jefferson Health's outreach lab business for $108 million; assets of Providence Oregon's lab business for $110 million; lab assets of Oregon-based Legacy Health for an undisclosed amount as part of a broader lab management agreement; Tufts Medicine's outreach lab business for $157 million; and the outreach lab business and lab service centers of Massachusetts-based Baystate Health for an undisclosed amount.

Both Labcorp and Quest said they expect to be active in the acquisition market going forward. During an October conference call following release of Labcorp's Q3 2023 financial results, Chairman and CEO Adam Schechter said that acquisition opportunities both for hospital labs and local and regional independent labs "remain extraordinarily strong."

During Quest's Q3 2023 call in October, Jim Davis, the company's chairman, president, and CEO, said that "acquisitions remain a key driver of our growth," adding that the company was looking in particular at "accretive hospital outreach purchases as well as smaller independent labs."

The FDA's planned oversight of LDTs, if it comes to pass, could be another driver of consolidation within the lab industry.

In a note to investors following the FDA's release of the proposed rule, BTIG analyst Mark Massaro said that while large national labs like Quest and Labcorp would likely see increased costs "to secure compliance" for the many LDTs they offer, these companies might also see opportunities "to acquire quality assets at potentially cheap valuations."

Robert Boorstein, medical director of Brooklyn-based Lenco Diagnostic Laboratory, likewise said he expects the FDA rule will push test volume to the large national labs.

"If it is necessary to get FDA approval [for a test], it will be much easier for them than for a smaller lab, whether they are academic or commercial," he said.

Smaller outfits with sufficient resources might also take advantage of such opportunities.

For instance, Robert Cardwell, chief strategy officer at Delray Beach, Florida-based Genetics Institute of America, said his company is on the lookout for lab firms and pathology groups to acquire.

"It could be that there is somebody who has [a valuable test] and doesn't have the capital to get it through FDA and becomes an acquisition target. There will probably be some consolidations in the market, which could be favorable to us," he said. "We are in acquisition mode."