NEW YORK – For clinical labs, 2024 will most likely be remembered as the year the US Food and Drug Administration finally made good on its decades-old promise — or threat, depending on your point of view — to regulate laboratory-developed tests (LDTs).
Yet, even as labs prepare to comply with the first round of FDA requirements on LDTs, due to go into effect this spring, lawsuits and the incoming Trump administration could overturn or undermine the agency's plans.
In any case, it seems unlikely that the FDA's rule on LDTs, which it issued last April to much consternation from clinical labs and many other quarters of the healthcare industry, will be the last word on the subject.
Meanwhile, several other industry trends continued along the lines of previous years. Notably, the pace of consolidation within the space remained brisk with Quest Diagnostics and Laboratory Corporation of America acquiring a number of independent and hospital lab businesses, including some foreign assets.
On the legislative front, clinical labs were once again forced to settle for a one-year delay in implementation of the Protecting Access to Medicare Act (PAMA), a development that had some stakeholders contemplating alternatives to the Saving Access to Lab Services Act (SALSA), which has been the industry's preferred vehicle for permanent PAMA reform.
The lab business also continued to shake off its post-COVID-19 hangover. After spiking during the pandemic, the formation of new CLIA labs slowed dramatically in 2024. Jon Harol, president of lab consulting firm Lighthouse Lab Services, noted, in fact, that CLIA lab closings outpaced lab openings, a trend he suggested was largely attributable to "COVID burn-off."
While this pendulum swing was perhaps inevitable given the dramatic jump in CLIA lab formation in 2020 and 2021, it nonetheless cast a certain gloom over the space, Harol said.
"It doesn't lend a lot of confidence to investing in innovation," he said. "There's more a 'hunker down and make it through it' type of feel out there."
Harol cited several factors driving this pessimism, including uncertainty around the incoming Trump administration, and, of course, the FDA's rule on LDTs.
The agency moved to regulate LDTs through the notice-and-comment rulemaking process following Congress's failure in 2022 to pass the Verifying Accurate Leading-edge IVCT Development (VALID) Act, which would have brought LDTs under FDA oversight while also reforming diagnostics regulation more broadly.
Few parties seemed happy with this route, including the FDA, which suggested on multiple occasions that it would prefer Congress to take the lead on diagnostic reform and LDT regulation. The lab industry was almost uniform in its opposition, and shortly after FDA issued the rule, the American Clinical Laboratory Association filed a lawsuit challenging it. Several months later, the Association for Molecular Pathology filed a separate suit challenging the rule.
At the same time, labs began to wrangle with the implications of the FDA rule and to prepare for the first stage of its implementation. The rule offered fairly broad carve-outs for several categories of tests, including LDTs on the market prior to the issuance of the rule, LDTs that have been approved by New York state's Clinical Laboratory Evaluation Program (CLEP), and LDTs offered by a lab within a healthcare system for treatment of patients within that system. Nonetheless, the industry remained concerned about its impact on patient care, and a number of lab organizations maintained that FDA had outstripped its legal authority.
Reflecting the broad dissatisfaction with the rule, several industry stakeholders and members of Congress began working to restart efforts to regulate LDTs through legislation. In November, the Coalition for Effective Diagnostics (CED), an organization composed of the College of American Pathologists (CAP), Mayo Clinic, Roche, Thermo Fisher Scientific, Alexion, and Friends of Cancer Research (FOCR), issued a letter to members of the House of Representatives and the Senate urging them to pass legislation that would halt implementation of the FDA rule on LDTs and establish "a regulatory framework at the [FDA] uniquely tailored to diagnostic tests."
Major industry players including the scientific society Association for Diagnostics and Laboratory Medicine (ADLM) remain opposed, however, to giving FDA authority over LDTs, whether through agency rulemaking or legislation.
How the LDT situation plays out will be a key storyline in 2025. ACLA President Susan Van Meter said her organization hopes the court will issue a judgment on its suit against FDA in the first half of the year. She added that ACLA hopes the incoming Trump administration will "indicate that they are not going to enforce compliance with the rule and will actually roll it back" and noted that ACLA has had discussions about the rule with advisors on Trump's transition team.
Many viewed a Trump administration as more likely than a Harris administration to roll back or weaken the FDA rule. Trump's election in 2016 effectively ended the FDA's efforts to regulate LDTs by guidance. In 2020, in the midst of the COVID-19 pandemic, his administration determined that the FDA would not require premarket review of LDTs without notice-and-comment rulemaking. (The recently issued final rule was produced through notice-and-comment rulemaking, however.)
Particularly for smaller labs, there are concerns that the LDT rule could accelerate the already rapid pace of consolidation within the industry. Quest and Labcorp continued to rack up lab acquisitions and management agreements throughout 2024. During Quest's Q3 2024 earnings call in October, Jim Davis, the company's chairman, president, and CEO, said it was on track to close eight lab acquisition deals in 2024. Acquisitions were also central to Labcorp's growth strategy as the company notched deals including the $237.5 million purchase of select assets of BioReference Health. At the beginning of the year, Labcorp raised its long-term guidance for inorganic growth to between 1.5 and 2.5 percent from a historic guidance of 1 percent to 2 percent due to its strong deal pipeline.
"There's no doubt that the acceleration of the hospital and local laboratory partnerships has enabled us to grow faster than we have grown in the past," Labcorp Chairman and CEO Adam Schechter said at the time.
Both companies also looked abroad for acquisitions in 2024, with Quest acquiring Canadian lab firm LifeLabs for roughly $985 million and Labcorp acquiring a 15 percent stake in European diagnostics and testing outfit SYNLAB for $190 million. Australia-based Sonic Healthcare, which is the third largest lab company in the US, announced in December that it is acquiring German firm Laboratory Group Dr. Kramer and Colleagues (LADR) for approximately $444 million.
While lab consolidation has been ongoing for years, Harol said the economic challenges facing many hospitals and healthcare systems in recent years have further fueled this trend. A steep drop in elective procedures and other services during the COVID-19 pandemic followed by labor shortages and wage inflation cut into profitability. This, Harol said, has led many systems to look to sell off their lab assets to bring in needed cash.
Kyle Fetter, COO of lab revenue cycle management and consulting firm Xifin, noted two other developments challenging labs in 2024 that also contributed to industry consolidation. The February 2024 cyberattack on claims processor Change Healthcare revived cybersecurity concerns across the healthcare space, adding to provider administrative costs, including for clinical labs.
Fetter also noted that Xifin observed levels of bad patient debt — essentially patient testing charges labs don't expect to be paid for — tick upward. He said it was difficult to determine the exact amount of the increase, but said that it had not been uncommon to see "somebody who is typically running 5 percent patient bad debt to be closer to 6 percent this year."
That might seem a small increase, but it can be an impactful one "in laboratory where the margins are going to be tight no matter what," Fetter noted.
Harol said that initiatives within the industry like the Clinical Lab 2.0 project have tried to demonstrate to the broader healthcare space the value of lab data, but he acknowledged that this "has been a hard sell."
"I don't think anybody has really embraced the value-based care model in a big way," he said.
This could change, though, Harol said, pointing to the Centers for Medicare and Medicaid Services' (CMS) goal, established in 2021, of moving 100 percent of original Medicare patients to value-based care by 2030. If this does come to pass, it could be "transformative" for the lab industry, he said, as it could help it move from the fee-for-service models labs have traditionally worked under to value-based care models where, Harol suggested, the actual value of lab data in patient care would come to the fore.
"This statistic is always thrown around, but 70 percent of medical decisions are based on laboratory data, and less than 3 percent of healthcare spend is spent on laboratory," he said. "I think there's a case to be made that laboratory provides the best bang for your buck … but it's not seen as a profit center, and until there is a model that really demonstrates [its value], I don't know that we will really see health systems invest in it."
So long as the fee-for service model persists, however, test reimbursement rates will be a key concern, and here 2024 saw the continuation of what many in the industry see as an increasingly untenable status quo as Congress once again declined to pass legislation permanently reforming PAMA.
In September, Congress passed another one-year delay to PAMA implementation, making the sixth year in a row it has passed such a delay. But while theses delays have prevented reimbursement cuts, they have also locked labs into Medicare payment rates determined by 2016 private sector payment data, meaning that even as test pricing has avoided cuts under PAMA, it has taken a substantial hit from inflation.
In the low inflation environment that persisted for much of the 2010s, this might have been less of a problem. The PAMA delays, however, have coincided with one of the largest spikes in inflation in decades. Since 2016, the cumulative rate of inflation has been roughly 32 percent.
Inflation presents a challenge to labs in another way. Holding lab prices at the 2016 rates reduces projected Medicare spending on testing as it avoids price increases due to inflation. This has meant that Congressional Budget Office (CBO) analyses of the one-year PAMA delays have scored them as a cost saving. On the other hand, SALSA — the likeliest legislative vehicle for permanent PAMA reform — has scored as an expense. This has made it easier for Congress to pass one-year delays, which provide savings lawmakers can use to pay for other priorities, than proceed with permanent reform via SALSA, which would likely require them to make cuts elsewhere. Adding to the challenge is the fact that each one-year PAMA delay exacerbates the issue as the total amount of inflation avoided grows, making the projected savings provided by another temporary delay even larger.
This bind led a number of industry stakeholders to indicate their openness to SALSA alternatives in 2024. Quest's Davis, for instance, noted that while the company had been "happy with the SALSA solution," he was no longer "sure that's the solution we're going to put forth on the table."
Joe Saad, governor of the board of the College of American Pathologists (CAP), likewise said the industry has begun to explore alternatives to SALSA, while Matthew Schulze, director of government relations at the American Society for Clinical Pathology (ASCP), said that even if the industry might prefer SALSA, a simpler fix like an annual inflation-rate adjustment "would be a lot better than nothing."
Looking ahead to 2025, ACLA's Van Meter said the organization plans to push for PAMA reform legislation once again. She also highlighted reform of prior authorization, which has become a pressing issue for clinical labs, as a priority for ACLA and the industry more generally.
Fetter said he will be watching for increasing use of machine learning and artificial intelligence as labs work to drive down their costs. It's a trend that is well underway in many parts of the lab business and beginning to yield fruit in others.
"People like us who support laboratories are looking for every advantage we can get through leveraging machine learning and AI," he said. "We are hyper-focused, and I think the industry is hyper-focused on those areas."