"Dark Index"

Two Blood Brothers Report Declines in Revenue-Per-Req

Expect the next bitter market share battle to involve BRCA testing as national labs push their BRCA tests

REIMBURSEMENT FOR CLINICAL laboratory testing has declined, particularly for molecular tests. As a consequence, the nation’s two largest laboratory testing companies are feeling the negative effect of lower lab test prices.

Both Quest Diagnostics Incorporated and Laboratory Corporation of America issued their third quarter earnings reports last week. Their respective performances provide insights into several unfolding trends in the laboratory testing marketplace.

Quest Diagnostics was first to report its financials. Last Thursday, it stated that revenue for third quarter was $1.78 bil- lion. This was a decline of 1.9% from Q3- 12, when revenue was $1.82 billion.

For Q3-13, specimen volume was up by 2% and revenue per requisition decreased by 4.3%. Quest executives said that 1% of the revenue decrease was attributable to its acquisition of Concentra, a toxicology testing company. The remaining 3.3% of the decrease was due to declines in lab test reimbursement.

LabCorp’s Financial Report

At LabCorp, the financial news it made public on Friday, the following day, was a bit brighter. Its Q3-13 revenue was $1.46 billion and that was an increase of 3% over the $1.41 billion revenue number for Q3- 12. Also for third quarter, LabCorp’s specimen volume increased by 5.1% even though its revenue-per-requisition declined by 1.9%.

LabCorp attributed the decline in revenue-per-requisition “due largely to previously-discussed government payment reductions, payment issues related to molecular pathology codes and strong growth in the company’s toxicology business.”

For the first nine months of 2013, Quest Diagnostics posted revenue of $5.4 billion. This was 3.9% below the revenue of $5.0 billion for the first nine months of 2012. For LabCorp, its nine-month revenue was $4.37 billion versus $4.26 billion for the first nine months of 2012, an increase of 2.5%.

Reimbursement Challenges

Both national laboratory companies have struggled to meet the expectations of Wall Street investors going all the way back to the start of the last recession in early 2009. These third quarter earnings reports show that it is a much tougher market environment for each company.

This fact was acknowledged in the statement made by Steve Rusckowski, President and CEO of Quest Diagnostics. “We are disappointed with our third quarter performance, particularly after generating revenues early in the period that were in line with our expectations. Healthcare utilization and reimbursement continue to be a headwind for our industry, and our results reflect that,” he said.

For his part, David P. King, Chairman and CEO of LabCorp acknowledged the same factors. “Government payment reductions and continued reimbursement challenges for molecular testing negatively affected our reported results in terms of revenue growth, price and margins,” he said in the company’s press release.

One trend which got little attention during the conference calls each company conducted with financial analysts is the impact of higher patient deductibles and out-of-pocket requirements. A growing number of Americans now have health plans which require them to pay 100% of the first $1,500 to $6,000 of their annual individual or family healthcare costs.

LabCorp’s King hinted at this development when he noted that, relative to the company’s days sales outstanding number of 50, that number remained elevated “due to our experience with the molecular pathology codes… increased utilization by uninsured patients and increased patient billing due to plan design changes. During the quarter, our bad debt remained 4.3%.”

It was a similar perspective at Quest Diagnostics. Its DSO for the third quarter was 48 days—unchanged from the same quarter last year. However, Mark J. Guinan, CFO at Quest Diagnostics, told analysts during the conference call that “bad debt expense as a percentage of revenues was 3.6% or 30 basis points higher than the prior year. The increase can be partially attributed to benefit plan design as patients shoulder an increasing portion of healthcare costs.”

Collecting from Patients

These comments about larger patient deductibles are useful warnings to pathologists and lab managers at independent labs and hospital outreach lab programs. It is both timely and smart for their lab organizations to begin collecting from patients at the time of service. This will be essential if patient bad debt is to be kept at manageable levels.

Will National Labs Find Riches in BRCA Testing?

BOTH OF THE NATIONAL LAB COMPANIES are targeting BRCA testing as a way to increase specimen volume and revenue. This will put them in direct competition with Myriad Genetics, Inc., of Salt Lake City, Utah.

Days before its third quarter earnings release, Quest Diagnostics announced the launch of its BRCA testing service, which it calls “BRCAvantage.” It intends to charge about $2,500, which is less than the $3,400 that the Medicare program reimburses Myriad Genetics for its BRCA test.

During its third quarter conference call, executives at LabCorp disclosed their plans to enter the market with their own BRCA test. They expect to launch this testing program during fourth quarter of this year.

Because of its patents and intellectual property, Myriad Genetics has had a lock on BRCA testing in the United States for almost

20 years. This year’s Supreme Court decision on the patenting of genes has opened the door for competing labs to bring their own BRCA tests to market.

Quest Diagnostics and LabCorp are each targeting a ripe plum. BRCA testing at Myriad was worth more than $450 million during Myriad’s last fiscal year that ended on June 30, 2013. Moreover, Myriad has seen specimen volume and revenue growth exceed 15% annually for several years.

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