Tougher Times Ahead as Labs React to Fee Cuts

Will biggest lab companies be forced to ask health insurers to increase contract lab prices?

Share on facebook
Share on twitter
Share on linkedin
Share on print
Share on email

CEO SUMMARY: Just as Nero is reputed to have fiddled while Rome burned, officials at CMS seem to be doing their own fiddling as their planned deep price cuts to Medicare Part B lab tests could begin driving lab companies out of business. In recent weeks, the owners of two lab companies decided to sell their labs before the fee cuts go into effect Jan. 1. One lab executive predicts the Medicare cuts will cause the national lab companies to ask health insurers for higher contract prices.

SOME LAB COMPANIES ARE NOT WAITING until Jan. 1, 2018—when the deep cuts to Medicare Part B lab prices take effect—to put themselves up for sale. Just in the last 60 days, the owners of two well established labs sold their companies. The first sale was on Sept. 22, when Avista Capital Partners, a private equity company, bought Miraca Life Sciences. This sale was notable because the price Avista paid was almost $500 million less than what Miraca Holdings paid for the lab company in 2011.

Retail Lab Assets Sold

In the second sale, on Oct. 31, Laboratory Corporation of America purchased the retail lab testing assets of Vista Clinical Diagnostics of Clermont, Fla. The terms were not disclosed.

The sale was significant because the owners of Vista will continue to provide lab testing services to 150 skilled nursing homes and more than 200 assisted living facilities in Florida and other states. Essentially, Vista is selling its most profitable clients while keeping its least profitable client accounts.

These could be the first dominoes to fall as Medicare’s lab test price cuts erode the revenue of independent lab companies and hospital outreach lab programs.

Big Price Cuts Coming

In September, the federal Centers for Medicare and Medicaid Services said it would cut what it pays clinical labs and pathologists by $628 million in 2018. This amount is just under 10% of the $7 billion that CMS pays for such testing each year.

Under the final CLFS for 2018, CMS intends to pay 20% to 28% less than it pays now for some of the most common lab tests. As a result of such steep cuts, one third of the nation’s independent labs could be forced to close, estimated Joe Plandowski, the cofounder of In-Office Pathology, a lab consulting firm in Lake Forest, Ill.

The proposed 2018 CLFS will slash what CMS pays to labs by $628 million in 2018. The reductions will continue in the following years as CMS can lower the price of specific lab tests by a maximum of just 10% per year in 2018, 2019, and 2020; and a maximum of 15% per year in 2021 and 2022.

CMS published the proposed 2018 CLFS prices in September and issued the final rates last week with some minor changes.

“During the next five years, if the lab test price cuts CMS is talking about come to pass, that would be disastrous for pathologists and clinical lab owners,” Plandowski said. “What’s going to happen is that—while Medicare rates come down—pathology groups and clinical labs will attempt to charge dramatically higher rates to commercial payers to make up for the Medicare cuts.

“But the market doesn’t work that perfectly,” he added. “As Medicare does its chop job on lab test prices, a number of labs will go out of business. It won’t surprise me if we see the number of anatomic pathology groups and independent lab companies shrink by 50% or more during the next three years.

Will CMS Regret Slashing Part B Test Prices If It Causes Small Labs to Go Out of Business?

FOR THE FEDERAL CENTERS FOR MEDICARE AND MEDICAID SERVICES, it may seem like good business to cut severely the prices it pays for Part B clinical lab testing. After all, CMS needs to be diligent about how it spends taxpayers’ money.

But what happens if the Part B clinical laboratory fee cuts are so deep that one third to one half of the nation’s small and mid-sized independent laboratory companies go out of business? Independent lab companies have already put themselves up for sale after they studied the negative financial effects that the 2018 Medicare price cuts would have on their labs.

Since September, two lab companies were sold. One was Miraca Holdings, a national pathology lab company. The other was Vista Clinical Diagnostics, in Clermont, Fla., a lab serving office-based physicians and nursing homes. In both cases, the Medicare Part B lab price cuts were a primary reason for the sales.

The nation’s larger lab companies are likely to fill at least some of that void, said Joe Plandowski, the co-founder of InOffice Pathology, a laboratory consulting firm in Lake Forest, Ill.

But the larger lab companies are not expected to take on all of the lab businesses that may come up for sale. That means CMS may not be able to serve the 55 million beneficiaries it currently cares for in the Medicare program as existing patient access to quality lab testing disappears in many communities and rural areas.

The other wild card associated with the Medicare lab test price cuts is how the lab industry might use a lawsuit to seek redress. The larger labs, meaning Quest Diagnostics and Laboratory Corporation of America, may be considering a legal challenge against CMS for cutting what it pays so deeply. Recently, in response to questions submitted by THE DARK REPORT, Quest, LabCorp, and BioReference Laboratories all said they were not considering filing or joining a lawsuit against CMS.

“It would be interesting to see what Quest, LabCorp, and other labs would do regarding a lawsuit, but I wonder why any of them would do that because a number of independent lab companies and hospital outreach labs will disappear,” predicted Plandowski. “When community labs and hospital lab outreach programs go out of business, Quest and LabCorp will selectively pick up some of that business.

“Therefore, they might be saying, ‘Let the market get rid of our competitors because if we sue, we’re only helping our competitors.’ For that reason, suing the federal government doesn’t make any sense,” he said. “If I were running one of the nation’s largest lab companies, I’d say, ‘Goodbye to all those small lab competitors.’ In the meantime, Quest and LabCorp would get bigger by gaining more market clout because there would be fewer choices in the marketplace.

“As small labs disappear, Medicare officials will discover that beneficiary access to lab testing in many regions has disappeared entirely. What will CMS do then?” he asked.

Asking Insurers To Pay More

Over that time, the remaining labs will hang on by attempting to boost the rates they charge to private payers,” Plandowski explained. “They have to do that because many of the nation’s largest labs have contracted with large health insurers to do lab testing at deeply-discounted prices, sometimes at or below the marginal cost to perform those tests.

UnitedHealthcare is a good example,” he continued. “It pays its biggest network lab companies just half the Medicare price for many lab tests. Those lab companies will be forced to say, ‘We can’t do this testing anymore because it’s not economical,’ and UnitedHealthcare will have to respond in some way.

“Honestly, I don’t know where UnitedHealthcare, Aetna, Anthem, and other big health insurers will get the testing done at the current fees their reference labs offer unless they open up their own laboratories, and they are not likely to do that,” he added. “Insurers might buy some labs and have them do their own testing if they think they can get it done cheaper, but no health insurers have done so yet.

“The problem for insurers is that there will be fewer labs to contract with,” Plandowski said. “Maybe that’s what they want. But look at it this way: labs are facing a cut in Medicare reimbursement of at least 20%—de pending on the tests they offer.

“Most community labs and hospital lab outreach programs already operate on very low profit margins,” he added. “So, if one-third of their business comes from Medicare and they get a 20% cut, that translates into a 6% reduction in total revenue. The year-end profit margins of small labs are generally under 10%—most labs are at just 2% to 6%. So, expect that profit margin to become an annual loss.

“It’s even worse for labs that have one-third of their business with Medicare,” stated Plandowski. “They will get hammered financially, particularly the smaller ones that have a high Medicare mix. That’s why I say those labs will be forced to close.

“One reason labs face such steep reductions in Medicare lab test fees is because the nation’s larger lab companies charged CMS rates that were much too high compared with the deeply-discounted lab test prices these same lab companies charged third-party payers,” he said.

Living Rich On Medicare

“The bigger lab companies did it to themselves,” he continued. “They were living rich on Medicare because Part B lab prices were relatively high. But at the same time, they discounted the prices they offered to all third-party payers to be the exclusive or semi-exclusive in-network laboratory providers.

“Of course, bigger lab companies simply could have charged Medicare less,” he mused. “But nobody in their right mind would do that because the Part B lab test prices Medicare paid brought a lot of profitability to the biggest lab companies,” he concluded. “After doing well with what they made from Medicare, those big lab companies aggressively cut the lab test prices they charged private payers. Once Medicare saw that, it was only a matter of time before Medicare would slash what they pay. So now, the day of reckoning has come!”

Contact Joe Plandowski at 847-840-3077 or


Leave a Reply


You are reading premium content from The Dark Report, your primary resource for running an efficient and profitable laboratory.

Get Unlimited Access to The Dark Report absolutely FREE!

You have read 0 of 1 of your complimentary articles this month

Privacy Policy: We will never share your personal information.