Clinical Lab Disruptors

Heading into the fall of 2018, the clinical lab industry continues to encounter and adjust to a number of foundational disruptions affecting reimbursement, technological changes and industry dynamics. IMV, a sister company of IBO’s publisher Strategic Directions International, commissioned a survey of over 100 clinical laboratory leaders to assess the impact of various disruptors. This article was prepared based on the survey and 10 interviews conducted on behalf of IBO.

The IMV survey highlights the impact of new molecular/genetic tests in centralized laboratories and Medicare Part B cuts as the most important disruptions to the clinical lab industry. Additional disruptions viewed as less impactful include (in descending order of importance from the IMV survey): point-of-care testing, industry consolidation including healthcare mega mergers, recent FDA laboratory test approvals, and Center for Medicare and Medicaid (CMS) National Coverage Decisions (NCDs) for next generation DNA and RNA sequencing (NGS).

From a volume perspective, there were 8.7 billion clinical lab tests completed in 2017.

According to the report “U.S. Clinical Laboratory Industry Forecast and Trends, 2018–2020” and the CMS CLIA Database, in 2017, the clinical laboratory industry in aggregate generated $97 billion in revenue. Clinical labs are a mature industry growing at approximately 3% per annum. Within that top-line number, drug testing and molecular/genetic testing is growing at low double-digit rates, while anatomic pathology and Pap/HPV testing is exhibiting a modest decline.

From a volume perspective, there were 8.7 billion clinical lab tests completed in 2017. The largest segment remains hospital laboratories as just under half of the market. Independent laboratories, including LabCorp and Quest, constitute just over 30% of the volume.

 

Genetic and Molecular Testing

Molecular and genetic centralized testing labs historically focused on discrete clinical questions. For example, Genomic Health developed the OncoType Dx assay, which produces a Breast Recurrence Score (RS) for informing adjuvant chemotherapy decisions in node-negative, estrogen receptor (ER)+, human epidermal growth factor receptor 2 (HER2)–negative early breast cancer assessed to be at intermediate risk of recurrence.

Increasingly, these laboratories are developing more complex tests that move beyond the technical capacities of many clinical laboratories. More importantly, they are increasingly relying on proprietary databases—manifested in reference populations—to inform treatment decisions in a wide range of diseases areas and therapeutics. Therefore, the centralized laboratories are the only providers that can deploy their proprietary reference populations, driving volume more than access to the technology, cost or other factors.

The IMV survey of clinical laboratories indicates that less than half of clinical labs are sending out to centralized laboratories today.

Cancer treatment decision support is an example of volume migrating to centralized laboratories. Some of the earliest approved cancer immunotherapies—the hottest area in cancer therapeutics today—were supported by an IHC screen that could be performed in the majority of clinical laboratories.

As immunotherapy expands and providers look for better predictors of therapeutic response, the diagnostic techniques are migrating to more complex assays, such as tumor mutational burden (TMB), microsatellite instability (MSI) and RNA gene expression. These assays are typically beyond the capacity of most laboratories, leading to more send-outs to centralized labs such as Foundation Medicine (Roche), Caris Life Sciences, OmniSeq and Tempus.

The IMV survey of clinical laboratories indicated that less than half of clinical labs are sending out to centralized laboratories today. Of the respondents that indicated they are currently sending out to centralized labs, over half of those respondents expect the volume they send out to increase over the next two years. Taken together, it appears there are opportunities for centralized laboratories to increase their volume within existing accounts and add new accounts over the next two years.

 

Medicare Part B

The second most important disruption as selected by the IMV survey is Medicare Part B cuts for laboratory testing. According to Lale White, CEO of Xifin, Medicare Part B cuts will be the most disruptive financial event in three decades for the clinical laboratory testing market.

The most likely canary in the coal mine for these cuts are likely to be nursing home laboratories. Medicare Part B lab tests make up 40%–80% of total revenue for most nursing home laboratories. Most nursing home labs or skilled nursing facilities operate with net profit margins of 2%– 4%, and the implied Medicare Part B cuts are likely to take some percentage of these labs into financial loss. According to David Nichols, president and founder of the Nichols Management Group, “CMS could create a real hole where labs cannot operate.”

The IMV survey asked clinical laboratory leaders what they intended to do to adjust to Medicare Part B cuts. Only 15% of respondents indicated they plan no changes. Sixty-four percent of respondents indicated that they plan to explore new technologies that will help them reduce costs. Forty-eight percent indicated that they plan to renegotiate supplier agreements for instruments and reagents. Many labs will be executing on multiple tactics to adjust to the new reimbursement reality.

For further information, including accompanying slides, please visit Clinical Disruptors.

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