News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

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News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

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Implementation of the proposed Medicare rules is likely to lead to the financial failure of many smaller medical laboratories, thus disrupting medical care in many communities across the United States

Three newly proposed Medicare regulations announced last month are major threats to the clinical laboratory testing industry. In fact, one medical laboratory industry executive asserts that implementation of the proposed Medicare rules could result to such an extent that only two large testing companies may be left if the proposed Medicare regulations become final.

Proposed in July, these Medicare rules, “would change the practice of pathology in this country and severely affect patient care—especially for patients with cancer,” wrote Marc D. Grodman, M.D., President and Chief Executive Officer of Bio-Reference Laboratories, Inc.  (NASDAQ: BRLI), of Elmwood Park, New Jersey. Grodman’s opinions were published in an op-ed article in The Hill newspaper in Washington, D.C.

The Hill is published daily when the U.S. Congress is in session. It is an influential publication and is widely read by elected officials, their staffs, lobbyists, and government officials.

Proposed Medicare Rules Would Lead to Lower Clinical Lab Test Fees

“Without notice or industry consultation, the Federal Centers for Medicare & Medicaid Services (CMS) proposed these rules on July 8,” wrote Grodman. “The proposal, ‘Revisions to Payment Policies Under the Physician Fee Schedule and Other Revisions to Medicare Part B for CY 2014,’  would shift how labs are paid from the current method under the Physician Fee Schedule (PFS) to the Hospital Outpatient Prospective Payment System (OPPS),.”Grodman further noted that the OPPS is a method that has no relation to clinical laboratory practice.

CMS Officials Estimate a Cut of 25% in Medical Laboratory Test Fees

“By Medicare’s own estimate, this would cut rates for these critical pathology tests by an average of 26%,” he stated. “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%.

Marc Grodman

In an op-ed published by The Hill, Marc Grodman, M.D., warned lawmakers and policymakers about why newly proposed Medicare rules are an immediate threat to the financial integrity of the clinical laboratory industry. Grodman is CEO of Bio-Reference Laboratories, Inc. (BRLI) and a past president of the American Association of Clinical Laboratories. The Hill is a daily publication widely read by members of Congress and policymakers.

“These cuts and others over the past several years will make it difficult for all but the two largest labs to continue to operate,” added Grodman. If the rules are approved as proposed, they typically become final in November and effective on January 1, 2014.

“Laboratories are ubiquitous in healthcare,” Grodman continued. “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. Yet these cuts and other cuts made in clinical laboratory testing since 1986 have affected the ability of labs to operate.”

New Regulations Will Do Substantial Financial Harm to Clinical Labs

Grodman specifically called attention to the fact that Medicare prices for clinical laboratory tests have not only failed to keep pace with inflation over the past 29 years, but have substantially decreased the money labs are paid in constant dollars. In his view, the financial stability of individual clinical laboratory organizations has reached a tipping point, and the proposed Medicare regulations could send many independent clinical laboratories into bankruptcy or liquidation.

“From 1986 through 2010, laboratory fees paid by Medicare dropped by more than 15% in real dollars,” wrote Grodman in The Hill. “From 2010 through 2016, Medicare laboratory fees are being cut by 12%. President Obama’s recent budget proposed an additional 1.75% in annual cuts through 2024 that will bring the total of actual and proposed cuts to more than 30% in the next 10 years.”

Spending on Medical Laboratory Testing Is Only 2% of Medicare Budget

Medicare spends $580 billion annually but only 2% of this amount is for clinical laboratory and pathology services, noted Grodman. “Why is this small (2%) segment of healthcare services spending under such great pressure from Washington?” he asked.

One reason the federal government has cut so much in clinical laboratory spending in recent years is because laboratory testing is viewed as a commodity “and not the service and science that is at the heart of all elements of patient care,” he explained.

But Grodman believes there may be another, more compelling reason. Publicly traded lab companies have reported large profits in recent years, Grodman said.

Policymakers Are Wrong to Focus on Two National Lab Companies

“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,” stated Grodman. “They comprise only 20%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.

While these two companies are large, most American healthcare consumers get their medical laboratory tests done by smaller, independent clinical laboratories and pathologists. Grodman described this much larger segment of the clinical laboratory testing industry as” the 80%.” Small labs serve most rural and urban communities, he said.

Profit Margins of 3% or Less at Small Clinical Laboratory Companies

“About half of small independent labs operate on a profit margin of 3% or less. What will happen to them?” asked Grodman.

“It is this 80% 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,” he said. “In a rapidly expanding healthcare world where new discoveries are constantly being made, that can change the treatment of disease, it is the 80% [of the clinical laboratory industry] that assumes the risk to introduce new and promising testing modalities.”

Grodman’s lab is considered the third largest in the United States, and yet he suggested that if the cuts as proposed are allowed, “the only winners” will be the nation’s two largest labs. “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 [clinical] laboratory industry cannot be defined by the two major laboratory consolidators and [Medicare price] cuts can’t be rationalized by their hefty margins,” concluded Grodman. “Don’t think about the 80%, think about all the lives they touch and where this approach brings us in the coming years.”

The Hill Is Raising Awareness of the Threat to Clinical Laboratory Industry

It is notable that The Hill found it worthwhile to publish Grodman’s comments on the impact that proposed new Medicare rules could have on the entire clinical laboratory testing industry. Medicare officials and members of Congress often overlook the essential role that nation’s clinical laboratory organizations play by serving patients who live in rural areas and smaller cities the two national laboratory companies deem as unprofitable to serve.

Grodman’s comments are a warning to government regulators and members of Congress that the lab industry’s financial breaking point is fast approaching. It would be timely for other industry leaders to publicly state their concerns and alert the American public to the irreparable damage that can result if these new Medicare proposals are implemented and take effect on January 1, 2014.

Related Information

New government regs threaten medical testing labs

New Analysis Finds Contradictions and Flaws in CMS Rationale for Cutting Anatomic Pathology Services for Medicare Beneficiaries

CMS Proposes Changes to Modernize and Update the Clinical Laboratory Fee

CMS Proposes Updates To Medicare Physician Fee Schedule, Other Part B Policies For CY 2014