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Why the medical testing biz is like Gucci handbags

Dan Gorenstein Jan 15, 2014

Why the medical testing biz is like Gucci handbags

Dan Gorenstein Jan 15, 2014

You’d think with millions of new patients coming on under the Affordable Care Act – many who haven’t seen a doctor in years, and need lots of tests – lab owners would be drooling over their microscopes.

There will definitely be more tests done.

Physicians like Penn Medicine internist Dr. Michael Cirigliano says he will order tests for cholesterol, kidney and thyroid function among others for a new patient

“Because you are like snow with no footprints in it. I don’t know where you are coming from. I don’t know where I stand with you,” he says.

But that doesn’t mean lab owners are hunting for second homes in Hawaii.

“It’s not a great time to be involved in this industry,” says Dennis Weissman, a medical lab consultant. “Laboratory revenues did see a decline in 2013, for the first time since I’ve been following this industry for 35 years.”

Even with a small bump from new ACA patients, a report from market research firm G2 Intelligence predicts the $75 billion industry will continue to slow down through 2015.

Why? Shrinking reimbursements from both the federal government and private insurers.

Dan Mendelson with consulting company Avalere Health,  says the industry’s economics are changing.

“It’s getting less expensive for lab companies to do the routine tests. And the federal government wants a part of that action,” he says.

To protect their businesses, labs like Quest and LabCorp are moving beyond that routine work. 

Richard Nicholson who runs West Pacific Medical Lab in southern California says the money is in the more sophisticated, specialized tests, like cancer tumor profiling and pediatric sequencing for genetic disorders.

“It’s like selling a Gucci purse vs. a purse at JC Penny. They sell less of them, but they make more money,” he says.

Dr. Eleanor Herriman – who did the G2 Intelligence industry analysis – says what’s happening with labs is what’s happening throughout healthcare: simple volume doesn’t drive business anymore.

The new healthcare currency she says is value, like a new DNA test for sepsis.

“Instead of it taking three days to figure out what the bug is, these new DNA tests are rapid so they move it to 12 hours. So these tests are lowering death rates and savings thousands of dollars per patient,” she says.

More and more doctors and hospitals must live within tight budgets to care for their patients.

Herriman says the future of the lab industry lies in finding tests that help the providers do just that.

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