This is an excerpt from a 1,500-word article in the Feb. 25, 2019 issue of THE DARK REPORT. The full article is available to members of The Dark Intelligence Group.
CEO SUMMARY: In their respective earnings reports for the fourth quarter and the full year of 2018, executives at both Laboratory Corporation of America and Quest Diagnostics told financial analysts that the Medicare fee cuts of 2017 and 2018 were reducing revenue and operating margins. THE DARK REPORT uses the numbers they reported to extrapolate how financially devastating the PAMA price cuts are to community labs serving primarily Medicare patients.
DURING THEIR LATEST QUARTERLY CONFERENCE CALLS with Wall-Street analysts, the nation’s two largest publicly-traded clinical lab companies reported this month that the effects of the federal Protecting Access to Medicare Act (PAMA) of 2014 are rippling through the clinical lab industry in four significant ways.
These earnings reports are a first look at how the Medicare Part B price cuts for lab tests are affecting the financial performance of the nation’s biggest lab companies.
Executives from Laboratory Corporation of America and Quest Diagnostics said the following:
- PAMA has cut into the earnings of the nation’s two largest clinical lab companies, LabCorp and Quest Diagnostics.
- PAMA will have a negative effect on earnings in 2019, this year.
- PAMA is having an even more adverse effect on the revenue of smaller labs and hospital labs, causing some to report no profit at all.
- Those smaller labs and hospital labs may be forced to sell out to larger labs, LabCorp and Quest reported.
In essence, this fourth effect is a silver lining for LabCorp and Quest because both reported that they expect to acquire more lab test volume by striking deals with these smaller labs and hospital labs.
Some deals may be an outright purchase of the lab organization. In other deals, the national lab may take over some of the testing those labs do now.
Drop in State Medicaid Rates
In addition to these four known PAMA effects, executives from Quest said PAMA could be causing a decline in payments from Medicaid plans. Medicaid payments dropped in 2018, they added, and they assumed that this reduction resulted from Medicaid payers following Medicare’s lead. Under PAMA, Medicare cut payments for many lab tests by 10% last year, by 10% again this year, and Medicare is due to cut what it pays labs by another 10% again next year.
One result of all these negative effects is the potential shift of lab market share away from smaller labs and hospital labs to larger lab companies, executives from LabCorp and Quest said.
To emphasize this point, Quest CEO Steven Rusckowski said the pressure that lower payments under PAMA put on all labs is a “catalyst for structural change in the lab business.”
“The impact of these [PAMA price] cuts will be more significant on smaller independent hospital outreach laboratories which we believe could eliminate the majority of their profit, and will provide a catalyst for market consolidation,” he added. “Most hospital CEOs and CFOs are still not fully aware of how PAMA impacts hospital outreach labs.
“We believe that as this impact of PAMA becomes increasingly more visible, hospitals will be more motivated to work with us on their laboratory strategy,” he commented. By harming all labs—particularly those that are not market-leading labs—PAMA will cause smaller labs to sell to larger ones, he said.
But as these smaller labs struggle, Quest could benefit by acquiring lab test volume from smaller labs to offset the decline in revenue from PAMA, he explained. “When you go through the math, we believe there’s an opportunity for us to pick up [market] share in 2019, and that will continue in 2020,” he said.
Financial Pressure Mounts
Later, Rucskowski returned to this theme. “Hospitals and health systems face unprecedented financial pressures, and are therefore motivated to discuss ways we can help them with their lab strategy,” he commented. “We recently signed two new professional lab services agreements in the Southeast region. In both relationships we will provide full lab management employing technical lab staff, providing operational lab oversight, and maintaining responsibility for the lab supply chain.”
Reporting on the PAMA price cut effect on finances, Rusckowski said revenue declined in the fourth quarter of 2018 by 1.4% to $1.84 billion versus 2017, reflecting what he called “increased reimbursement headwinds.” In all of 2018, revenue rose by 1.7% to $7.53 billion.
This year, Quest expects net revenue to rise by 1% to 3%. Much of this revenue will come from adding 43 million lives and about $1 billion in revenue as a result of being in-network with UnitedHealthcare, Horizon Blue Cross Blue Shield of New Jersey, and Blue Cross Blue Shield of Georgia. (See TDR, “Lower Prices, More Data in UHC’s New Lab Network?” TDR, Feb. 4, 2019.)
LabCorp’s PAMA Experience
While Quest reported extensively on the effects of PAMA, LabCorp’s CEO David King and CFO Glenn Eisenberg had similar comments, but LabCorp’s executives did not offer as much detail as Quest did.
“Although we continue to see judicial and legislative relief on the second round of PAMA price reductions, there is increasing industry-wide awareness about PAMA’s true impact,” King commented. “This presents us with a number of attractive tuck-in lab acquisition opportunities, which typically deliver significant synergies and high return on invested capital.”
Just as Quest reported a decline in fourth quarter 2018 revenue, LabCorp did too. LabCorp’s fourth quarter revenue was $1.84 billion, down 1.4% versus 2017 and full year revenue was $7.53 billion, an increase of 1.7% from 2017.
Medicaid Program Payments
LabCorp’s executives did not mention that Medicaid payers may be cutting payments for lab tests as a result of PAMA price cuts. But they did say that Medicaid plans have been more aggressive in denying payment for certain tests, such as those for vitamin D, cystic fibrosis, and for panels of tests. Also, Medicaid plans have added more prior authorization rules, which often lead to denials, they added.
Will your lab be able to survive the PAMA price cuts, or will it become one of the acquisition targets by a larger lab that the national labs are predicting? Please share your thoughts with us in the comments below.