Value of Miraca Falls By 92% from 2011 to 2017

Variety of market forces push down lab’s value; is the same true at other independent lab firms?

CEO SUMMARY: Miraca Life Sciences amended its merger agreement with Avista Capital Partners after the lab lost value in the two months since the agreement was signed in September. Factors precipitating the revision were a significant decline in reimbursement rates, stiff competition from physician-office labs (POLs), and a loss of specimen volume to POLs and hospital labs, Miraca said. Also, MLS experienced what it called “lower profitability due to a change in product mix” and a limit to the number of tests that payers cover.

ONE BUYER OF AN INDEPENDENT LAB drove down the price it would pay to acquire the clinical laboratory company even further than it offered in September.

The sale of Miraca Life Sciences to Avista Capital Partners was announced in September 22. The press release issued that day stated that Avista would pay $175.6 million to purchase Miraca Life Sciences, the anatomic pathology company in Irving, Texas.

At the time, financial analysts were shocked that MLS’ value had dropped sharply from the $725 million that Miraca Holdings paid for the lab company (then known as Caris Life Sciences) in 2011. The current purchase price represented a loss of value of 75.8%—or $548 million. (See TDR, Nov. 20, 2017.)

Since September, the sellers have dropped the price even more. On Nov. 20, Miraca revised the sale price down to just $54.9 million. That is a 92% loss of value (about $670 million) in just six years.

In an amendment to its merger agreement with Avista, MLS explained the multiple factors that caused the loss in value from 2011 through 2015. Among these factors were:

  • A significant decline in reimbursement rates;
  • Stiff competition from physician-office labs (POLs); and,
  • A loss of specimen volume to POLs and hospital labs.

Also, MLS experienced what it called “lower profitability due to a change in product mix,” and a limit to the number of tests that payers cover. Despite these problems, operations would continue without disruption, Miraca said.

Competition from POLs

For context on these issues, THE DARK REPORT interviewed Joe Plandowski, a co-founder of In-Office Pathology, a consulting firm in Lake Forest, Ill., that specializes in helping physicians develop in-house clinical and pathology laboratories. “If you look at what MLS says about changes in its business environment, competition from POLs was a significant factor,” stated Plandowski. “There’s no doubt POLs took business from Miraca even though that was not the intent.

“In our business, it is typically larger physician groups that want to establish or expand in-office labs,” Plandowski added. “If those physician groups are gastroenterologists, dermatopathologists, or urologists, then they often refer their specimens to Miraca. That’s why MLS lost those referrals to physician office labs (POLs).

“But also, Miraca, in recent years, lost volume to hospital labs because hospitals acquired physician office practices,” he said. “Then, whatever work those doctors were sending to Miraca goes to the hospitals that own those practices.

Medicare Price Cuts

“When Miraca says product mix is a problem, that likely refers to urology testing for prostate biopsies,” Plandowski speculated. “The standard for a prostate biopsy is 12 cores, and each one gets billed under code 88305. In 2018, the Medicare fee will be $70.20 for each core. Assuming a non-Medicare payer reimburses at $70.20, the total will be $842.40 for 12 cores.

“The problem is that Medicare will be using a G code (G0416) for prostate biopsies,” he added. “That’s a bundled code, meaning it doesn’t matter how many cores a lab processes. Starting in January, Medicare will pay only $434.32 for that one bundled code, and that’s the national average global fee that Medicare will pay, meaning it’s not adjusted for geography.

“That bundled rate of $434.32 is only slightly more than half of what Medicare previously paid,” continued Plandowski. “When a service or product has such a steep rate cut, that’s called ‘product mix deterioration.’

“If I were running a lab paid just half of what they got previously for prostate biopsies, I wouldn’t do that work,” he commented. “I would send all of those prostate biopsies to Quest Diagnostics and Laboratory Corporation of America because smaller labs will struggle to make money on that work. Smaller labs would be better off letting the big labs do it.

“Some people will say that labs need to adjust to the marketplace by using Lean methods and strong leadership,” he added. “I would disagree because labs just can’t make money if Medicare cuts payment by 10% next year, and 10% in each of the next two years after that, and then by 15% in each of the following three years.

“If Medicare does that, then the typical reimbursement will be too low to continue operations,” he said. “Surely private third party payers will follow Medicare downward in reimbursement fees.

“Let’s say the typical payment from Medicare is $152.67 and you take away 10% in each of three straight years,” Plandowski explained. “That would be $137.40, then $123.66, then $111.30. Then, if the payment gets cut by 15% and then 15% percent again, then the average payment would be $94.60 and finally $80.41. That’s a reduction of almost 50%. Labs cannot absorb that kind of loss. They will have no choice but to close, particularly if they have significant amounts of Medicare work.

Unable To Cover Lab Costs

“When a lab loses half its revenue, it cannot cover costs,” he observed. “The only potential good news in all this is that the cuts of 10% in the next three years and then 15% in the following three years are the maximum by which Medicare officials can cut Part B lab test prices. There is no guarantee that Medicare will cut that deep, but they could.”

Another issue that Miraca raised involves a sharp drop in insurance payment in October, and then an insurance company cut reimbursement further in November.

“That insurance company could be UnitedHealthcare or Anthem, meaning one of the two biggest health insurers,” he said. “That’s a guess. I am not aware of any recent deep price cuts from insurers or why an insurance company would target only Miraca with that type of lab test-price cut.”

Contact Joe Plandowski at 847-840-3077 or iopathology@gmail.com.

Miraca Life Sciences Explains Market Forces That Caused Further Drop in Lab’s Sales Price

WHEN IT PURCHASED CARIS DIAGNOSTICS in November 2011, Miraca Holdings expected the acquisition would be the first step in its move to capitalize on the globalization of clinical lab testing. Miraca was betting that this factor would bring strong market growth. Instead, adverse market forces intervened.

To counteract those market forces, Miraca acquired PLUS Diagnostics in October 2013 from Water Street Healthcare Partners. At the time, PLUS was a cytology, histology, and molecular pathology lab that specialized in the same fields where MLS is strong: dermatopathology, hematopathology, gastrointestinal pathology, and genitourinary pathology. By adding PLUS Diagnostics labs in New Jersey and California, MLS became the nation’s largest independent anatomic pathology lab company, it said.

Other steps to counteract adverse market forces were a consolidation and optimization of MLS’ lab operations and an alliance with an information technology vendor. These steps were inadequate to the task, so that by last year, MLS reported that it had not fostered further growth and new investment was needed.

By September, MLS reached an agreement with Avista Capital Partners, a private equity company that specializes in healthcare. More bad news followed. In October, MLS said reimbursement declined and in November, it said an unnamed insurance company cut what it pays Miraca.

When it announced the new sale price on Nov. 20, MLS explained that, after the Avista deal was made public, “a significant decline of reimbursement from a major U.S. insurance company was recognized in early November. After a thorough investigation, it was identified that the insurance company had unilaterally cut reimbursement rates on certain pathology tests. The impact to MLS’ profitability was assessed and countermeasures were discussed with Avista; however, given the significant impact to MLS’ profitability, the merger agreement and basic enterprise value was amended.

Value Falls To $54.9 Million

“Based on the amendment, the basic enterprise value was revised to approximately $54.9 million (originally $175.6 million),” MLS said.

The result of these two factors was to change what had been an operating profit into a deficit, MLS. These new problems led to an amendment of the conditions in the sale to Avista and a downward “revision of basic enterprise value of $54.9 million,” the company reported in an explanation to shareholders. The new sale price became final Nov. 20.

In explaining the change to shareholders, MLS reported that it had revised its profit and loss forecast from $10.7 million (or 16.5 billion yen) on Sept. 22 to $5.2 million (or 8.0 billion yen) on Nov. 20. When the calculations were reported, MLS said it used an exchange rate of $1 for 111.35 yen. MLS also was forced to recalculate its initial profit forecast of $6.5 million (10 billion yen) to $5.2 million (8.0 billion yen).

MLS serves more than 5,500 patients each day with diagnostic services in breast health, dermatology, gastroenterology, hematology and urology, the company said. After Avista acquires Miraca Life Sciences, it will be given a new name.

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