PeaceHealth Outreach Laboratory Sells to Quest Diagnostics

How the rising cost of Medicare Part B is forcing hospital laboratory outreach programs to reconsider the economics of doing business

This is an excerpt from a 1,471-word article in the February 21, 2017, issue of THE DARK REPORT. The complete article is available for a limited time to all readers, and available at all times to paid members of the Dark Intelligence Group.

CEO SUMMARY: In Oregon, one of the nation’s more successful and long-established health system outreach laboratories will cease to exist following its sale to Quest Diagnostics Incorporated. The seller explained that the Medicare Part B price cuts coming as a result of the PAMA market price reporting rule would result in a 20% revenue decline in 2018–and with future revenue declines expected. This sale, and the reason for it, is first evidence of how the rule CMS crafted has the potential to disrupt the financial stability of community labs.

ANOTHER MAJOR HEALTH SYSTEM has sold its outreach laboratory business. On Feb. 15, 2017, Quest Diagnostics announced an agreement to acquire PeaceHealth Laboratories and to manage the inpatient labs of the hospitals PeaceHealth operates in three states.

One of the nation’s largest mid-size lab businesses, PeaceHealth Laboratories is widely respected for serving patients with efficiency and low-cost lab testing services. So why did this health system decide to sell its lab outreach operations?

In an interview with THE DARK REPORT last week, Ran Whitehead, President of PeaceHealth Laboratories, explained that the lab and health system’s leadership projected the effect that the Protecting Access to Medicare Act (PAMA) would have on clinical lab testing payments starting next year. From those projections, the administrators determined that—just as other similar mid-sized outreach laboratories have found—PeaceHealth Laboratories would see a decline in revenue reimbursement of 20%, starting in 2018 and continuing into future years.

Negative effects from PAMA

The decision of a major hospital system to sell its national lab company and thus exit the outreach laboratory business is early evidence that critics of CMS’ PAMA market price reporting rule may be correct. Those critics predicted that the nation’s community labs and hospital laboratory outreach laboratories will struggle financially and some may close. The beneficiaries of this market development would be the nation’s largest lab companies.

Has the PAMA market price reporting rule affected your revenue predictions? Are you making business decisions based on the Medicare Part B price cuts? Please share your thoughts with us in the comments below.

“There is no way smaller labs and hospital lab outreach programs have a profit margin sufficient to absorb a 20% reduction in lab test fees,” Whitehead said. “Not everyone’s fee schedule is tied to the Medicare fee schedule, but many labs like ours are paid either off the Medicare fee schedule or their insurance contracts pay some percentage of that fee schedule.

“The net effect is that these PAMA Medicare Part B fee cuts will have a sizable financial impact on most everyone, particularly those hospital outreach labs serving rural communities and that means small to mid-size laboratories such as ours,” he said. “These price cuts probably will not have such a significant effect on the big players.

Outreach Laboratory Business Sold

The search for a buyer began two years ago when lab and health system administrators acknowledged that their lab business faced increased competition and regulations and needed sustained capital investment for technology. At the time, PeaceHealth began to assess any national lab companies that might be a good fit as a partner or a buyer.

When the transaction closes, one of the nation’s oldest and consistently successful lab outreach programs will disappear. The lab has 906 employees working in 11 laboratories and 27 patient service centers. Its central outreach laboratory is in Springfield, Ore., next to Eugene and employs about 400 people.

Following the sale, buyer Quest Diagnostics intends to close the community labs that PeaceHealth Labs currently owns and send the specimens elsewhere. Thus, not only will loyal, long-serving lab employees be laid off, but physicians and patients, including Medicare beneficiaries in these communities, will lose access to lab testing performed locally.

Long-Term Solution Needed

“The aim was to determine the best way t0 provide laboratory services in the most appropriate, sustainable manner,” PeaceHealth announced. “In other words, a long-term solution was needed to meet the growing service and technological needs of our communities, as well as the caregivers and providers with whom we serve.” After meeting with a number of lab companies, PeaceHealth decided that the best long-term solution was to sell to Quest Diagnostics.

The sale of this respected health system outreach laboratory business has important implications for the clinical laboratory industry. For example, similar to the assessment at PeaceHealth, other lab executives and hospital lab administrators are acknowledging that the coming Medicare Part B fee cuts under the PAMA market price reporting rule will undermine the financial stability of their labs. At PeaceHealth, the financial consequences of the coming fee cuts played a significant role in the decision to sell the outreach laboratory business.

Click here to read the full article, PeaceHealth Labs Sold To Quest Diagnostics

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Comments

  • David Gee

    Hi Joe–I have some doubt that PAMA is the root cause here, especially with hospital outreach labs enjoying significantly higher levels of private payer reimbursement and general in-network status. I’d like to catch up with you on this topic informally when you have a minute.
    David (office: 206-757-8059)

    Reply
  • Lisa T.

    I am confused by the statement above that the CLFS will be reduced by 20% in 2018; the Federal Register indicates that for 2018, the max reduction will be limited to 10%. Of course, in 2019, another 10% reduction could be applied, and also again in 2020. But I don’t believe 20% for 2018 is an accurate statement.

    Reply
    • Editor

      It is correct that the PAMA statute specifies that in the years 2018, 2019, and 2020, CMS can only cut the price of a specific lab test by a maximum of 10% in each year (and a maximum of 20% in each of the years 2021, 2022, 2023). The figure of a 20% fee cut was provided dur9ing the interview with the CEO of PeaceHealth Laboratories and included projected reductions of revenue from all payer sources, not just the Medicare Part B program. In doing their financial planning, administrators at PeaceHealth estimated that their laboratory outreach business would experience a 20% decline in revenue during 2018, from all payer sources. So the Medicare fee cuts for 2018 are just one component of that financial planning exercise—Editor.

      Reply

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