Medicare is the biggest buyer of lab-based diagnostic tests in the U.S., and the program overpaid by about $910 million in 2011, according to a federal report, lining the pockets of companies like Quest Diagnostics ($DGX) and LabCorp ($LH).
Looking at 20 high-volume lab tests, the Inspector General found that other insurers paid between 18% and 30% less than Medicare for diagnostics, and the insurer could slash its test spending by 38% if it could pay the lowest established rate in each geographic area. In 2010, Medicare spent about $8.2 billion on lab tests, accounting for about 3% of all Part B payments, according to the report.
The problem, in part, is that Medicare doesn't account for things like competitor information and technology changes in setting payment rates, the report notes, allowing diagnostics companies to cash in on outdated price tags for lab tests. Now, the Inspector General is urging Centers for Medicare and Medicaid Services (CMS) to push for legislation that would allow it to tighten pricing policies and institute co-payments and deductibles for lab tests.
If CMS takes that advice, it could spell trouble for Quest and LabCorp, which each get more than 15% of their total revenues from Medicare, Bloomberg notes. Further cuts would compound the companies' already mounting Medicare problems, as Quest has already kicked off a diversification project designed to dull the blow of expected reiumbursement reductions, and LabCorp is expecting fairly flat sales this year thanks to the same pressure.
Last quarter, Quest's sales slipped 6.4% to $1.8 billion, while net income plummeted nearly 15% to $143.6 million. LabCorp fared slightly better, watching revenue grow 1.2% to $1.4 billion in Q1, but the company's profits slid 8.9% to $147.2 million thanks to ongoing restructuring costs. LabCorp figures Medicare cuts will negate as much as 5% of its 2013 earnings, while Quest has said declines in reimbursement will slash testing revenue by 3% this year and continue leeching profits through 2015.