Market Disruption is the New Normal in the Diagnostic Industry
July 24, 2019The laboratory and diagnostics industry has experienced tremendous changes in recent years. Top of mind, of course, is PAMA. With cuts totaling up to 30% over the next three years underway, laboratories are operating in one of the most challenging environments seen to date. As had been predicted, labs have had to tighten up their operations to mitigate the lost revenues. Some labs have already shut their doors, while others have merged or restructured to stay competitive.
While PAMA has been (and will continue to be) a major disruptor in our industry, it is far from the only one. Now, more than ever, disruption is the new normal. Other industry trends such as continued industry consolidation, changes in working relationships with payors, rising consumerism, the entry of nontraditional competitors in the healthcare space, and the emerging focus on recognizing the intrinsic value of data, are all reshaping our industry and what we need to do to thrive in this dynamic environment.
In many previous blog posts, we have dissected PAMA’s effects and offered strategies to offset them, in this post we will focus on the other disruptors and trends laboratories need to be mindful of that may be in part driven by PAMA but sometimes fly under the radar.
Expect to continue to see a decline in rural labs, especially those with a high Medicare/Medicaid percentage, because the margins are no longer going to be sustainable. Some of the rural lab work has already begun to move over to hospital outreach labs in those communities.
Partnerships with hospital outreach labs and independent clinical labs are going to be more important and that relationship is going to be much tighter than it has been in the past.
Consolidation across the industry will continue and large independent labs will continue to either joint venture with or outright buy hospital outreach labs. At the same time, hospitals themselves are consolidating, with hospitals continuing to join large health systems. Again, hospital outreach labs generally have a higher private payor reimbursement rate, so they can sustain reimbursement cuts better than many independent labs. In addition, hospitals develop and grow their outreach business because it helps defray some of the cost of in-patient testing. It is often the outreach business that provides hospital labs the ability to achieve a profit margin, so we can expect to see more growth there, as well as a focus on improving the outreach lab’s performance as a tool to help contain costs overall for the health system. Recognizing that, many hospital outreach labs are standardizing their labs, centralizing some of their laboratory services and making sure that they’re in a strong position to compete in the industry. They will become much bigger competitors in the lab industry.
We’re seeing physician office labs (POLs) aligning more closely with hospital outreach labs because of the integrated healthcare that is offered to them through the outreach lab. Many POLs are expanding their menus. This is due to the miniaturization of analyzers and the fact that it costs far less for them to do so than it had previously. These, in turn, better enable physicians to manage disease – in particular chronic disease – quicker and avoid hospitalization. Such performance improvements are critical to improving quality and patient outcome, and essential for macro-reporting. This improvement in patient treatment is also important for preserving – and even increasing – their reimbursement. However, with the latest Medicare regulations favoring doctor-led ACOs over hospital-based ACOs, primary care physicians are likely to move away from the hospital partnership to create more lucrative independent businesses. A growth in physician-led ACOs bodes well for specialty labs, which can now form tighter partnerships with physicians by delivering enriched data and analytical services that achieve the quality reporting required for health economic analysis.
Payors are increasingly utilizing a third-party service for benefits management, from utilization control to claims adjudication edits and pre-authorization requirements.
With the continued move to value-based pricing, there is an increasing focus on financial integrity.
Looking for more on the diagnostic industry and disruptors to laboratories? Read our white paper: Diagnostics and Market Disruption: The New Normal