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Lab Industry Fears Consolidation and Further Price Erosion if PAMA Prices Stick


NEW YORK (GenomeWeb) – The lower-than-expected 2018 Medicare prices for lab tests released under the Protecting Access to Medicare Act last week could reshape the lab industry, as some labs would be hit harder than others by the drop in prices, some in the industry fear.

Smaller labs without diversified business models, lab industry insiders said, may see the biggest impact.

Robert Boorstein, medical director of both Lenco Diagnostic Laboratory in Brooklyn, New York, and Clinical Genomics in Bridgewater, New Jersey, expects hospital outreach labs to be among the hardest hit.

"I think hospital outreach labs are really going to be significantly challenged. I think they are probably the ones least able to absorb these kinds of cuts," he said. "They are already under tremendous pressure. There is a lot of consolidation activity and I think this is likely to accelerate those trends."

Boorstein noted that hospital outreach labs perform many of the basic lab tests that were hard hit by the Center for Medicare & Medicaid's PAMA cuts in lab test prices. The lower margin space where hospital outreach labs operate, he said, has little room to make up for cuts to test fees in other areas.

While the release of the proposed PAMA rates caused the stock prices of lab industry giants Laboratory Corporation of America and Quest Diagnostics to decline initially, they are likely to fare better than smaller labs long term. Lale White, executive chairman and CEO of health information technology firm Xifin, noted that LabCorp and Quest will face the full brunt of Medicare cuts because of their extensive clinical lab operations, but they have some insulation from the cuts due to their more diversified service portfolios.

"The bigger labs that have balanced portfolios will not take the hit across the board that the smaller labs will take," White said.

Both LabCorp and Quest declined to comment, but Boorstein said they will not only be insulated from PAMA by their size but will likely capture increasing opportunities for growth as smaller players feel the cuts to lab prices more acutely.

"My opinion has been that LabCorp and Quest will wind up becoming more dominant as a result of this, rather than less," Boorstein said. "The market has punished them pretty severely, especially Quest, but I think if other labs are hurt and can't get the work done, they are going to pick it up."

White noted that labs that will be hurt the most by the PAMA cuts are the ones with the biggest Medicare populations.

"Nursing home labs would fall into that category. Labs that serve only nursing homes are almost all Medicare and Medicaid, and they will definitely be so impacted that some are likely to go out of business," White said. The number of labs specializing in serving the nursing homes has already diminished in recent years because it is a low margin business that entails many associated services, she said.

In the months leading up to the release of preliminary PAMA prices, some labs serving nursing homes were vocal about the challenges in their market and the damage that sharp cuts in the Medicare Clinical Lab Fee Schedule prices could impose on their business. Pete Gudaitis, president of Aculabs, a lab serving nursing homes and assisted facilities in New Jersey, Maryland, Delaware, and Pennsylvania, noted in an article he wrote for McKnight's Long-Term Care News in August that 95 percent of his company's revenue is driven by Medicare. Much of his company's growth, he wrote, came from filling a void left as larger labs shifted away from services devoted to nursing homes.

"There is a misconception that all laboratories are the same, and that the void left by one will be taken up by the others. This is not the case," he wrote. "Labs servicing the [skilled nursing facility] and [assisted-living] populations are already the last line of defense in geriatric healthcare, and a drastic cut to the Medicare CLFS will create a hole that cannot be filled."

Another area of the lab industry potentially hard hit by PAMA prices are labs in the drug testing space, according to White. "G-codes," which were implemented by CMS a couple of years ago for drug testing panels, would see prices decrease for several years under the CLFS prices released last week. CMS puts market prices for G-codes between 23 percent and 59 percent below current Medicare rates.

Xifin's analysis however, showed that if CMS had calculated prices using a weighted average, instead of basing them on a weighted median, or midpoint, Medicare's prices would have been slightly lower than average payer pricing, suggesting the tests deserved price increases.

Cuts to drug panel prices are particularly painful for drug testing labs because the tests have gone through significant rounds of cuts already, White said. Many pain management labs have already shut their doors, White said, in response to the earlier, sharp round of cuts.

While Medicare PAMA cuts are limited to 10 percent per year for the first three years, and 15 percent a year thereafter, there is a bigger concern that the cuts to fees for lab tests could extend beyond Medicare.

"The other piece of the puzzle is that private payers do follow suit with Medicare, so when Medicare cuts come into play like this, private payers are likely to lower fee schedules also," White said. "So the impact is probably going to be greater than just what's happening in Medicare."

Boorstein noted that the ripple effect from PAMA could potentially be disastrous for the lab industry.

"If [Medicare cuts] do impact the private market, then you will get into this very negative spiral where it's really going to have a bad impact on the industry," Boorstein said. "If Medicare makes cuts, and then the private payers make cuts, and then Medicare comes in and says we want another round of cuts because you gave a discount to the privates, that's not going to end well."

Much of the lab industry is still grappling with how impactful the PAMA cuts might be.

"The impact of this on labs, and the effect this could have on patient care concern us. How will this impact our clients? Our healthcare system? Will this degree of cuts impact patient care?" said Sherrie Perkins, CEO ARUP Laboratories, in an emailed statement. "These are all questions we have and we are carefully reviewing what this proposal means with other laboratory leaders in our industry."

Meanwhile, as clinical labs weigh their next move, labs that provide advanced diagnostic tests emerged from the PAMA pricing relatively unscathed. That's because many of the newer tests introduced within the past 10 years have only recently established prices, according to White. As a result, their test prices are more uniform and market-based because they have not undergone decades of price adjustments and manipulations.

"Those are more market-based tests because the provider is establishing a price and a payer is paying based on that price," White explained. "A lot of these tests don't have a Medicare published fee schedule price to begin with, so it's really a market-based exercise."

It is significant, Boorstein noted, that two large parts of the industry were affected so differently by the proposed PAMA cuts.

"The category of labs that I call the national labs that are selling proprietary tests, the Myriads, the Genomic Healths , they didn't really face cuts and their business models withstood this pretty well," he said. "And those are not trivial companies."

The dichotomy in how different parts of the industry reacted to PAMA was clear in the reaction of industry groups. While the American Clinical Lab Association vowed to advocate before all branches of government, including the courts if necessary, for fairer, market-based pricing, the Coalition for 21st Century Medicine, a group that represents many of the advanced diagnostic lab companies put out a statement in support of PAMA.

"C21 supports the implementation of the PAMA market-based rates on January 1, 2018, following a one-year delay by CMS that allowed providers additional time to collect and report private payor rates," the organization's statement read.

The group further stated: "C21 believes the PAMA system will establish transparent, predictable, and market-based pricing for laboratory tests."

Meanwhile, the labs that will face sharp fee cuts to the tests they provide if preliminary PAMA rates remain, will likely look for ways to trim their own expenses, Boorstein said.

"If I, as a lab, am facing 10 percent a year in cuts, how am I going to make those cuts?" Boorstein asked. "Certainly, you are not going to ask employees to take salary cuts. You may lay people off, which you don't want to do."

Boorstein predicts many labs will begin to pressure test manufacturers to drive down prices.

"You are going to go back to your suppliers and ask for discounts. I think that's what's going to be happening," Boorstein said. "It's certainly a lot of what I've been doing over the last couple of days."