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Reference Labs Expect Industry Consolidation to Pick Up as Outreach Spending Lags


NEW YORK — While the COVID-19 pandemic slowed the trend toward consolidation within the lab industry, large national outfits like Quest Diagnostics and Laboratory Corporation of America have recently indicated they are again pursuing lab acquisitions.

The Medicare Payment Advisory Commission's recent report to Congress on the Protecting Access to Medicare Act, or PAMA, likewise points to continued consolidation within the industry as it revealed a growing gap between independent labs and the hospital outreach businesses that they have often targeted for purchase.

In March of this year, Quest entered an agreement with healthcare system Mercy to acquire the system's outreach lab services, picking up the business from 29 Mercy hospital labs and two independent clinic labs servicing patients and providers throughout Arkansas, Kansas, Missouri, and Oklahoma, a deal that Steve Rusckowski, Quest's chairman and CEO, said during the company's Q2 2021 earnings call would grow its base testing business by 2 percent this year.

Rusckowski also said during the call that Quest expected to make additional acquisitions in the second half of 2021.

Adam Schechter, Labcorp chairman and CEO, said during his firm's Q2 2021 call this week that it had agreed to acquire the outreach business of Minnesota-based healthcare system North Memorial Health, and that it will also provide management services to its in-patient lab.

Like Rusckowski, Schechter said Labcorp anticipated making additional acquisitions in the near term.

"We're going to look to do more hospital, regional, [and] local laboratory acquisitions," he said, citing the North Memorial deal as an example. "Those are the types of acquisitions we're going to continue to do."

"The [acquisition] pipeline is as robust as I have ever seen it," he said, adding that he "thought we would have a couple more [deals] close this quarter, but I feel confident that we are going to close more of those as we go through this year."

This activity reflects the struggles within the hospital outreach lab business. Outreach labs have typically received higher payment rates than large independent labs like Quest and Labcorp but have been under increasing pressure as both government and private payors have worked to drive down prices. PAMA is perhaps the most high-profile example of this, but private insurers have also exerted pressure by, for instance, tightening their networks and incentivizing patients to use lower-cost independent labs.

The MedPAC PAMA report offered evidence of this shift within the industry, noting that from 2017 to 2019, the number of lab tests per beneficiary billed by independent labs rose by 2.4 percent, while that same figure fell by 1 percent for outreach labs. During the same period, spending for independent lab testing rose by 16.1 percent, while spending on outreach testing fell 9 percent.

The report noted that this rise in independent lab testing was driven largely by newer, high-cost tests like molecular pathology, genomic sequencing tests, and multianalyte assays with algorithmic analyses, which saw substantial increases in payment even as payment for routine testing declined. According to the report, 93 percent of all clinical laboratory fee schedule spending on molecular pathology in 2019 went to independent labs, with just 6 percent going to outreach labs.

Spending at hospital outreach labs fell due to "small utilization declines and because their billings were concentrated in routine, low-cost tests that experienced payment rate reductions under the new private payor-based rates," established by PAMA, the report said.

But while independent labs have made these new, higher-cost tests key parts of their offerings, the typical outreach lab is unlikely to do the same, said Jane Hermansen, manager of outreach and network development at Mayo Clinic Laboratories. Their inability to do so could further drive consolidation within the space.

"You really have to have a very sophisticated infrastructure and very sophisticated scientists and a research and development-driven culture," to develop and implement such assays, she said. She noted that while the Mayo Clinic itself has these capabilities, "your standard community hospital … isn't going to be developing the proprietary genomic tests that are driving the Medicare payments up."

"There are probably around 4,000 hospitals that are doing outreach testing," Hermansen said. "Probably 500 of them, at the most, would have the capability to do some of these higher-level genomic tests, and that's being very generous."