Hospital & Independent Lab Testing in the Clinical Testing Market

Hospital & Independent Lab Testing in the Clinical Testing Market

The interplay between U.S. independent laboratories and hospital labs will heavily influence clinical lab testing in coming years. After seeing business contract by nearly 5% over the past five years, independent lab testing is projected by Kalorama Information to realize new growth in the healthcare services industry. The Affordable Care Act (ACA) will create opportunities to expand for all labs, though large independent labs are in the best position to secure new business. Hospital labs will be at a competitive disadvantage with typically higher test prices, but can expect to retain market share in Kalorama Information’s estimation.

Cuts to clinical lab reimbursement rates under Medicare have a profound impact on the U.S. lab industry not limited to the direct billings. Reimbursement cuts under the Clinical Laboratory Fee Schedule (CLFS) directly touch U.S. clinical labs that on average depend on Medicare for close to 20% of billings and in certain communities as high as 80% of business. Between 2010 and 2013, CLFS reimbursement rates were effectively cut by nearly 12%. The pain for clinical testing laboratories does not end there. Several molecular diagnostic tests have also seen coding changes and drastic reductions in reimbursement rates. Additional cuts between 2013 and 2022 will potentially total to over 20% for future CLFS reimbursements.

Medicare cuts for clinical lab tests have fallen the hardest on small independent or community labs. Revised reimbursement rates are unable to cover smaller laboratories' test costs, especially more complex diagnostics tests completed in small volumes. Reimbursement cuts have exacerbated independent lab testing's consolidation as smaller laboratory operators leave the industry or seek efficiencies in a greater network. Of longer-term consequence, fee schedule cuts have encouraged commercial insurers - the largest payer segment in the clinical lab testing industry - to seek similar savings.  Already illustrated in the case of molecular diagnostic test pricing revisions under the CMS, commercial insurers take their cue from government test pricing and seek consistent or similarly argued pricing reductions from labs. The aggressiveness of private insurers in seeking test price cuts is also motivated by the recent actions of hospital labs:

In the past, noted UMass’s O’Brien, hospitals could cope with declining reimbursement from Medicare and other government payers by shifting some of their costs to commercial payers and charging them more than Medicare. Now, commercial insurers are arriving at an inflection point, where premium increases are capped but costs continue their curve upward. As a result, payers have redoubled their efforts to extract savings from providers."

Pressure is coming to bear on hospital labs long able to maintain premium testing pricing through assured patient flow from the hospital itself and in-house or in-sourced physician practices. With restricted ability to increase premiums, however, private insurers are increasingly averse to hospital testing when lower-cost outsourcing is available. Network inclusion and managed care contracts with private payers are increasingly at risk for hospitals unable to cut testing prices.

Project Laboratory Industry Growth

Discusssed market trends and factors will direct business opportunities to independent labs that lost community clients over the past decade to hospital acquisitions and provider consolidation. Through the next five years, Kalorama Information expects hospital labs and independent labs to grow at the same rate and consistent with overall clinical testing market growth. Lack of hospital lab competitiveness on pricing will be mitigated by inevitable increased patient volumes, as newly insured will also represent clients of provider groups serviced by hospital lab outreach businesses. Hospital labs have also sought to address their emerging vulnerability to large independent labs such as Quest and LabCorp through joint venture and collaborative networks, management outsourcing, other professional and consulting services, and test outsourcing or testing specialization. Market shares in clinical testing for hospital labs and independent labs in the United States will remain largely unchanged five years from now - together representing 94% of the total market.

Neglected in recent attention to the performance of major independent labs such as Quest and LabCorp has been non-exclusivity of competition between independent and hospital labs. As LabCorp’s David King recently noted,

… the hospital changes that we are seeing with physician in-sourcing do lead many hospitals to send out more testing, because they’re bringing in more testing. And as they bring in complex testing, they can’t perform it themselves, so they send it out. So I do think that accounts for some of the trend, in terms of our growth in the hospital business.

In terms of the opportunity that you have there to increase your -- whether it be outsourcing work from hospitals or working with them on a partnership level -- is that market one that’s underserved at this point?”

LabCorp and Quest in recent remarks seem to view the cost crunch on the U.S. lab industry and rising profile of hospital labs as a confluence that offers unique opportunities, from marketing services to labs that need to cut costs to forming a more greatly interconnected industry and more united front across the table from providers and payers.