CEO SUMMARY: In Pennsylvania, one of the state’s largest independent clinical laboratories, HNL Lab Medicine in Allentown, acquired a lab competitor last month, Northeastern Laboratory Medicine in Hazelton. The deal is a good strategic move for both labs because HNL will continue to serve NLM’s nursing home and at-home patients while adding NLM’s 20 clinical laboratory staff members to its employee roster at a time when many labs face a shortage of staff.
MEDICARE FEE CUTS TO CLINICAL LABORATORIES PLAYED A SIGNIFICANT ROLE in the demise of a respected community laboratory in Pennsylvania that served nursing homes and physician offices. Northeastern Laboratory Medicine (NLM) ceased business earlier this month when the owners agreed to sell the lab to HNL Lab Medicine (HNL) of Allentown, Pa.
Like most community laboratories, NLM operated on razor-thin profit margins before the deep, multi-year cuts in Medicare payments that the federal Centers for Medicare and Medicaid Services (CMS) imposed starting in 2018.
Lower payment for Medicare tests—which made up the majority of patients NLM served—left the lab company struggling financially. “Before the end of the first quarter this year, the coronavirus pandemic started to spread nationwide and this caused our lab’s client physicians and hospitals in Northeastern Pennsylvania to cut back on routine lab testing,” said Joseph Shiskowski, Principal and a co-founder of NLM.
“The reductions in routine lab testing exacerbated the financial problems many community laboratories were facing, including NLM.”
When HNL approached Shiskowski and his co-founder John Lazo about consolidating the two labs, Shiskowski was open to the idea. “We’ve experienced Medicare cuts for the past three years or more,” he said. “In addition, if competitive bidding for lab work ever goes through, that would be financially devastating for smaller independent laboratories like ours.
Retaining Loyal Lab Staff
“We were also concerned about losing some of the clinical lab scientists, pathologists, and support staff in our lab,” explained Shiskowski. “Many are approaching retirement age, and they were concerned about becoming infected. “The fact is that small community clinical laboratories like ours don’t have the volume and economies of scale,” he continued. “With smaller volumes of tests, our cost structure is so much higher than that of a much larger laboratory, such as HNL Lab Medicine. Those facts persuaded us that it was time to sell the business.
“I don’t think that laboratories are where the fee cuts should come from, but Medicare officials will continue to cut what they pay labs,” he commented. “That seems almost inevitable because of the political climate we’re in.”
Given this list of concerns, Shiskowski and the management team at NLM agreed to let HNL acquire the business. When the deal was announced on Sept. 30, financial terms were not disclosed.
Waiting for the ‘Right Fit’
“Over 37 years of running NLM, we’ve been approached numerous times by different entities and I never got the feeling that any of them would be the right fit,” Shiskowski said in an interview with The Dark Report.
“Some of those entities that approached us wanted to break up our lab or to divide up the assets in a piecemeal fashion, which we didn’t want to do,” he noted. “But after HNL approached us—and with the healthcare environment being what it is—it was the right opportunity for us to leave the business.”
First, however, Shiskowski wanted to know that HNL would be a good fit for NLM, its 20 employees, along with the physicians, nursing facilities, and patients it had served since its founding in 1983.
“Once we started talking with HNL, and I dealt with Dean Hoppes and the other executives there, I had a strong feeling that the acquisition would be for the best,” he commented. “It would be best not only for Northeastern Lab Medicine, but it would also benefit both parties and our client physicians, patients, and nursing facilities.” Hoppes is the Chief Financial and Administrative Officer for HNL, a much larger lab that has more than 1,000 employees and does some 60 million tests per year in nearby Allentown, Pa.
“Also, the two companies seem to be a good fit and we hope HNL can take what we started and expand the services we offer,” he added. “If our lab was to totally disappear, that would reduce the Medicare beneficiaries’ access to local, high-quality lab testing in these towns and rural areas.
“HNL and NLM share a common vision focused on serving healthcare professionals and their patients with comprehensive lab testing services, timely diagnostic insight, and convenient access for patients. This acquisition expands access to full-service laboratory diagnostics, while maintaining convenience and improving service for healthcare professionals and patients in Northern Pennsylvania,” Hoppes said.
HNL Will Retain Employees
Shiskowski will continue to have a role with HNL, while his partner and co-founder, John Lazo, decided to retire. HNL will retain all of NLM’s employees, he added.
NLM specializes in serving patients in nursing homes and other long-term care facilities, and those needing at-home specimen collections. It also provides a daily nursing home phlebotomy service and a house-call service for patients who need blood or other specimen collections at home. Among the roughly one million clinical lab tests NLM runs each year are genetic and molecular testing. This year,NLM has done as many as 2,000 molecular tests per day for COVID-19.
“About 40% of our patients are outpatients who simply walk into our lab here in Hazelton,” he reported. “That’s easy for our patients because we’re centrally located in the city. Another 40% of our work is for nursing homes and other long-term-care facilities. About 10% of our volume is for house calls. The remaining 10% is lab testing we do for home health agencies.
“Home health agencies in this area use us almost exclusively because we are local, we are very efficient, and we can report test results in just a few hours, if necessary,” he added. “Since they can drop off their samples at the laboratory, we can do the tests without sending the specimens out of town.”
Community laboratories that serve patients at home and collect specimens in nursing facilities have suffered the most under the cuts the federal Centers for Medicare and Medicaid Services (CMS) imposed under PAMA.
Even before PAMA went into effect in 2018, the business of collecting specimens from patients who were home-bound or in nursing facilities and running those tests was only barely profitable. The cuts from PAMA that NLM absorbed equaled about 4% to 5% of total revenue and were compounded each year.
Large national laboratories have absorbed those cuts and have continued to grow through acquisitions. But the large labs typically decline to serve nursing homes and patients at home because the high costs make this work unprofitable to them.
Since public labs left the nursing home sector in the 1990s, smaller community labs, such as NLM and HNL, have filled that void. (See TDR, June 2, 1997.)
“We’re confident that NLM’s sale to HNL Lab Medicine is a good fit and they will maintain the local lab testing services we’ve provided in this community with house calls and to nursing homes,” Shiskowski explained. “Serving the very elderly population in this area is part of our business model.
Deep Cuts to Medicare Fees
“Despite the deep cuts in Medicare payment that make it tougher for community laboratories—with their higher costs—to keep serving these suburban and rural areas, the team at HNL Lab Medicine is supporting us and we’ve not missed a beat service-wise.
“I hope that, in the long run, our nursing homes, physicians, and patients will continue to have access to high-quality, local lab testing,” he added.
HNL to Provide Services to NLM’s Existing Clients
WHEN HNL LAB MEDICINE REVIEWED THE FINANCIAL STATEMENTS of Northeastern Laboratory Medicine, HNL saw that the smaller lab with 20 employees had been gaining new clients even as three years of deep Medicare payment cuts eroded the lab’s financial stability.
“During our due diligence review, we could see that NLM had a significant reduction in revenue related to Medicare cuts due to PAMA,” said Dean Hoppes, the Chief Financial and Administrative Office for HNL, in Allentown, Pa. PAMA is the Protecting Access to Medicare Act that called for Medicare to cut what it paid labs 10% per year starting in 2018.
“Because of the high proportion of Medicare beneficiaries that NLM served, the PAMA price reductions caused its revenue to decline by about 4% to 5% each year,” recalled Hoppes. “But the quality service this local lab provided was bringing it new clients,” Hoppes said. “That’s because NLM has a great reputation for excellent customer service in Northeastern Pennsylvania.”
By combining the employees from both labs in the Allentown facility and continuing to serve patients in Hazelton with blood draws and other patient services, HNL will support what NLM has done since it was founded in 1983, Hoppes said. The two labs have a combined 1,100 employees. including 35 board-certified pathologists and scientific directors and more than 400 certified lab scientists and phlebotomists. Also, the labs have more than 60 patient service centers throughout Pennsylvania and New Jersey.
HNL will do house calls for patients who need that service and will continue to provide phlebotomists for specimen collection services at long-term-care facilities, he said.
Contact Joseph Shiskowski at josephs@NLMlabs.com; Dean Hoppes at email@example.com.