Smaller community laboratories serve many of the nation’s nursing homes and long-term care facilities, and ongoing medical lab fee cuts are having major negative consequences
DATELINE: LAS VEGAS, NEVADA—Last week, the National Independent Laboratory Association (NILA), in conjunction with the Association of American Bioanalysts (AAB), conducted its annual conference here. It was a useful snapshot on the state of health for independent community lab companies, particularly given the different reimbursement environment for clinical laboratory testing.
NILA’s members are primarily community clinical laboratories. They generate revenue anywhere from $1 million per year to around $100 million per year. It is believed that there are between 150 and 200 of these types of lab companies across the United States. Further, within the towns and cities they serve, these are often the only medical laboratory organizations that fill important testing niches that were abandoned years ago by the national public lab companies.
Community Medical Lab Companies Serve Medicare Patients
One such market segment is made up of nursing homes and skilled nursing facilities (SNFs). It was the second half of the 1990s when Quest Diagnostics Incorporated (NYSE: DGX), SmithKline Beecham Clinical Laboratories (acquired by Quest Diagnostics in 1999), and Laboratory Corporation of America (NYSE: LH) made a strategic decision to essentially stop serving nursing homes. This abandonment of the nursing home business was based on the fact that a typical nursing home has special needs that make it much more costly for clinical laboratory test providers to serve.
Into the breach stepped these community laboratory companies. They were willing to deliver essential medical laboratory testing services to nursing homes, despite extra costs incurred by serving these clients. By all measures, over the last 20 years, the working relationships between independent clinical laboratory companies and the nursing homes in their communities has been productive and of benefit to the Medicare and Medicaid beneficiaries living in these institutions.
Neighborhood Clinical Laboratory Companies Hurt By Medicare Price Cuts
Thus, when assessing the state of health for the independent community laboratory sector in the United States, it will not surprise pathologists and clinical laboratory executives to learn that sequential and ongoing price cuts to the Medicare Part B Clinical Laboratory Testing Fee Schedule in recent years have been financially devastating to these small, but proud lab companies.
“Recent studies of the community laboratory sector have determined that the greater proportion of these medical lab companies earn net annual profits of just 3% to 6%,” stated Pat Lanza, Chair of NILA. “Thus, unlike the billion-dollar national lab companies that have been a favorite of Wall Street investors for many years, these community laboratories operate on the financial knife’s edge. Any cut in Medicare reimbursement of just a couple of percentage points can tip many of these community lab companies into bankruptcy.
“That is why the multi-year cuts in Medicare Part B Clinical Laboratory Test fees mandated by the Affordable Care Act of 2010—which extend from 2011 through 2015—have been heavy blows to the fiscal solvency of these community lab companies,” continued Lanza. “During our NILA conference last week, the impact of Medicare lab test fee cuts was the number one topic of discussion and analysis.”
In Las Vegas to deliver presentations on these topics were Julie Scott Allen and Erin Will Morton from Drinker Biddle, a lobbying and advocacy firm in Washington, DC, that works with both NILA and AAB to educate legislators and executive branch officials about issues of high concern to community laboratories. Allen and Morton represent both NILA and AAB.
In reviewing current developments within Congress and the federal government, Allen and Morton offered an informed perspective on several high-profile issues. Of those, the multi-year and ongoing cuts to the Medicare Part B Clinical Laboratory Price Schedule were front and center.
In its analysis, Drinker Biddle showed how adding the 2% fee reduction specified by the sequester to fee cuts mandated by the ACA means that the Medicare program will be pushing sustained fee reductions on lab tests upon all clinical laboratories. Because many of these community labs operate with an annual profit margin of less than 4%, they will experience negative cash flow.
If Community Labs Close, Then Less Access for Medicare Patients
In turn, these community labs will be forced to cut back lab-testing services, which will reduce access for Medicare beneficiaries. In the worst cases, independent community labs will be forced to go into bankruptcy or possibly sell themselves to the national labs—who, post-acquisition, would themselves probably cease providing testing to nursing homes, while consolidating any specimens referred by office-based physicians to their big regional lab facilities.
Your Dark Daily Editor, Robert L. Michel, was present at the NILA conference. After his speech, he had the opportunity to interact with speakers and attendees. It can be said that the owners of these independent clinical laboratory companies are sober in their assessment of the negative developments of recent years. They are equally alert to the threats and opportunities that are represented by accountable care organizations and evolving models of value-based reimbursement.
Tough Financial Times Ahead for Clinical Laboratory Companies
So the unexpected finding after two days of engagement with these independent community laboratory owners is that, as a group, they are determined to work through these tough times to maintain service to all their clients. Within the medical lab industry, these are entrepreneurs who are street-savvy and close to their customers.
It is precisely these strengths that make them resilient and tough competitors for hospital laboratory outreach programs and national labs within the communities they serve. One sign of this determination is the active lobbying and educational campaign that NILA organizes on their behalf. What is yet to be seen is how many of these laboratories may be forced to close their doors or sell themselves to competing labs as a result of sustained declines in Medicare and private payer reimbursement.
—By Robert L. Michel