Reference Labs: Market At-A-Glance

Vertical: Diagnostics
Author: JC Lupis
Date: June 2020

The laboratory market is critically significant in today’s healthcare industry: while diagnostics only represent 2-3% of healthcare costs, an estimated 70% of decision-making is based upon lab results. Current provider trends are forcing changes to the lab business: whereas labs have traditionally served various siloed stakeholders, the rise of integrated healthcare delivery systems, as well as the shift to value-based care, will necessitate new lab business models.

The Protecting Access to Medicare Act (PAMA) has been a significant piece of legislation affecting laboratory services, and is positioned to continue to shake the market for years to come. The financial burden resulting from PAMA – which imposed payment cuts on about three-quarters of laboratory tests billed to the Centers for Medicare and Medicaid Services (CMS) – has led some labs to diversify into more specialty services. It has also spurred consolidation, as smaller labs struggle under the weight of PAMA cuts and others seek efficiencies from larger networks. The laboratory market remains very fragmented, with the leading providers Quest (8%) and LabCorp (7%) combining for only 15% market share. The number of laboratory acquisitions has steadily increased over the past 5 years and the outlook for acquisition activity remains positive as providers manage the COVID-19 pandemic.

Laboratory Service Tailwinds

  • Reimbursement rate pressures and declining margins due to PAMA are leading hospitals and health systems to increasingly outsource lab services.
  • Diagnostic information services – the practice of interpreting test results as opposed to just providing them – represent a growth area for reference labs. Other growth areas include new diagnostics such as molecular and genetic testing, and specialty labs not subject to PAMA cuts. Separately, the advent of the COVID-19 pandemic has resulted in greater focus on pharmaceutical products, such that specialty tests such as endotoxin testing (which verify that sterile pharmaceutical products can be safely used by humans) are likely to see increases in usage.
  • Although the COVID-19 pandemic led to drastic declines in lab testing volumes in late March as a result of canceled physician visits and elective procedures, they have since recovered. In fact, the pandemic is expected to boost lab testing volumes in the long term, not only due to demand for SARS-CoV-2 tests but also for respiratory panels.
  • Recent regulatory trends are favorable: the CMS’ reimbursement rate for coronavirus antibody tests is higher-than- expected and portends positive future rates for antigen testing. The CMS also recently doubled its reimbursement for high-throughput molecular diagnostics.

Laboratory Service Headwinds

  • The PAMA payment cuts are continuing to negatively impact labs. Although phase-in provisions have been updated such that payment cuts are capped at 10% this year, payment reduction caps are increasing to 15% in 2021, 2022, and 2023. Some independent labs serving community-based providers, particularly in rural areas, are forecast to go out of business, and national lab chains are not set up to serve those geographic areas.
  • A 17% decline in the number of pathologists in the United States from 2000-2017 has the potential to result in recruitment difficulties for labs.
  • Regulatory scrutiny of referral arrangements have resulted in severe fines and even jail times, and policies have made it more important than ever for labs to ensure their marketing and sales relationships are compliant.

Lab Market: Key Data Point

There were 20 lab acquisitions in 2018, up from 8 in 2014.

Source: Levin Associates, Kaufman Hall, September 2019

Lab Market: Key Chart

US Laboratory Market Share Breakdown