New government regs threaten medical testing labs

Laboratories are ubiquitous in healthcare.  Comprising the most significant portion of a person’s medical record, lab results are critical in all diagnoses, essential to monitor chronic diseases.  They hold the key to unlocking the potential of personalized medicine and therapeutics.

From 1986 through 2010, laboratory fees paid by Medicare dropped by more than 15 percent in real dollars. From 2010 through 2016, Medicare laboratory fees are being cut by 12 percent. President Obama’s recent budget, proposed an additional 1.75 percent in annual cuts through 2024 that will bring the total of actual and proposed cuts to more than 30 percent in the next ten years.

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Worse still, on July 8, 2013, Medicare, without notice or industry consultation, proposed rules that would change the practice of pathology in this country and severely affect patient care - especially for patients with cancer. Medicare proposes changing payment for these services from the Physician Fee Schedule (PFS) - the current method - to the Hospital Outpatient Prospective Payment System (HOPPS), a method with no relation to clinical practice.  By Medicare’s own estimate, this would cut rates for these critical pathology tests by an average of 26 percent. However, the specific cuts for some of the most essential and basic tests for cancer patients - Flow Cytometry, FISH, IHC - would be cut by more than 75 percent.

All to reduce 2 percent of Annual Medicare spending.

Why is this small (2 percent) segment of healthcare services spending under such great pressure from Washington?

The laboratory industry is so ubiquitous it is seen as a commodity and not the service and science that is at the heart of all elements of patient care.

There is another reason.  Policymakers point to healthy profit margins of the two largest clinical laboratories, Quest Diagnostics and Laboratory Corporation of America - each 10 times the size of its nearest competitor - as evidence that Medicare is overspending on laboratories. These two laboratories grow primarily by acquiring other laboratories and folding them into their facilities; they achieve better margins but often at the cost of jobs.  They comprise only 20 percent of Medicare laboratory spending.  Nonetheless, they have clearly been the focus of attempts by Washington to cut the laboratories even more severely than ever before.

This is not about the 20 percent, this is about the 80 percent; it is about the vast majority of the laboratory industry that innovates, that provides service to seniors in nursing homes.  It is this 80 percent group that takes risks to introduce pioneering medicine and takes on the diagnostic services that return the least profit, but which are usually the most important for people suffering from chronic diseases.  In a rapidly expanding healthcare world where new discoveries are constantly being made that can change the treatment of disease, it is the 80 percent that assumes the risk to introduce new and promising testing modalities.  

The laboratory landscape is filled with great companies and institutions that service nursing home patients (the 20 percent don’t), provide breakthrough technologies that change medical practice and improve cost effectiveness, test for rare disorders that are not profitable enough for the larger laboratories. There are academic medical laboratories that lead us to new breakthroughs and promise. All of us are 80 percenters.

Nearly half of the nation’s small independent labs operate with a margin of 3 percent or less. What will happen to them? 89 percent of rural communities and 79 percent of urban communities are primarily served by small labs.  When these labs go out of business for beneficiaries, they go out of business for communities.

If these cuts are allowed as proposed, the only winners will be the 20 percenters.  They will use financial pressure to increase their market share when others will no longer be able to serve and innovate but cannot be expected to service the same needs. The laboratory industry cannot be defined by the two major laboratory consolidators and cuts can’t be rationalized by their hefty margins. Don’t think about the 80 percent, think about all the lives they touch and where this approach brings us in the coming years.

Grodman is the former chairman of the American Clinical Laboratory Association. He also serves as president, CEO and chairman of the Board at BioReference Laboratories, Inc., the company he founded 30 years ago.