Lab Market Update

PAMA Price Cuts Now Delivering One-Two Punch to Labs’ Revenue

First punch is less revenue from Medicare; Second punch are Medicaid lab test price cuts

WHEN DISCUSSING THEIR EARNINGS with Wall Street analysts in February, executives from both Laboratory Corporation of America (LabCorp) and Quest Diagnostics explained that the lab test price cuts from the Protecting Access to Medicare Act of 2014 (PAMA) were not only reducing revenue, but that many state Medicaid plans are following Medicare’s lead and cutting their lab test prices.

LabCorp executives said they expect the company’s lab-testing revenue would be lower this year by about 1.6% as a result of two factors:

  • 1. Lower direct Medicare payments of some $85 million; and,
  • 2. An indirect effect from PAMA will reduce other payments, primarily from Medicaid-related plans, by $30 million.

Medicaid Cuts Lab Prices

Both fee-for-service and managed Medicaid plans have cut what they pay, and the rate reductions were consistent with the cuts Medicare made, LabCorp’s executives said, “This was not anticipated as part of the PAMA statute,” commented LabCorp Chairman and CEO David King. “It was not contained within the statutory language, which specifically applied to Medicare. But it has exacerbated the impact of PAMA.”

Later, King characterized the reduction in Medicaid payments as “administratively reducing rates,” and said, “These are not negotiated rate decreases.” As previously reported, the PAMA statute addresses Medicare reimbursement only and does not address the consequences of those cuts in reimbursement from any other payers, including Medicaid.

Executives from Quest also discussed lower payments from Medicaid plans but were less certain if the lower payments resulted from PAMA. Some Medicaid programs have reduced what they pay and those cuts in payment may be related to PAMA, said Quest CFO Mark Guinan.

“It’s hard to know whether these Medicaid rates are directly tied to PAMA,” he commented. “You can look across all the states, there seems to be potentially some direct relationship. Not all of them have changed the rates.”

While lower payments should concern all clinical laboratories, smaller and regional labs may feel the effects most keenly because they tend to get a higher percentage of their revenue from Medicare and Medicaid, the executives commented.

Conversely, large labs have a wider mix of payments from commercial and government payers. They generally do not feel the effects of lower payments as acutely. King said labs under pressure from reduced payments may consider partnering with larger lab companies “or find other ways they can optimize the cost side of their business.”

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