PAMA Pain or Opportunity?

After completing the sale of Ambry Genetics in late 2017, our Healthcare team has been speaking with lab owners and operators about the impact of Protecting Access to Medicare Act (PAMA) on the marketplace. With several years of planning and analysis (much of which is under hot debate), CMS (the Centers for Medicare & Medicaid Services) finally determined PAMA pricing for lab tests late last year.  Based on initial market reactions, the following are some potential effects PAMA may have on dealmaking in the diagnostics sector in 2018.

Broader Impact of PAMA

While PAMA seems to be causing widespread angst, the silver lining is that the market, after much speculation, now has the much-needed visibility into how PAMA will reduce reimbursement for many of its routine diagnostics. Lab operators now can take a detailed review of their business and test portfolio to determine their responses. These reimbursement cuts will force labs of all sizes, but especially small- and mid-sized labs, to focus on process efficiencies and cost reduction, optimizing CPT (common procedural terminology) utilization along with the revenue cycle functions and expanding payor diversity to reduce reliance on Medicare. We think that labs that will choose to enact some or all of these challenging strategic moves may be rewarded in the long-run with a stronger business.

Consolidation Catalyst

PAMA might just be the catalyst to drive a new wave of M&A. Despite Quest and LabCorp loudly voicing opposition to PAMA and support for the ACLA’s lawsuit against CMS, it may not be all doom for them. Although PAMA certainly affects their pricing, we expect the big players to potentially benefit as consolidators buy up smaller labs without the scale or operational efficiencies to profitability compete under the new pricing regime. In addition, labs will look to alternative sources of revenue with more favorable reimbursement (like more advanced molecular tests with higher prices). M&A for diversification may be a good option for those with access to capital.

PAMA Bright Spot for Molecular?

Thus far, the consensus is that advanced molecular and genetic diagnostics did not experience as significant a pricing hit as legacy diagnostics—some tests even saw rate increases given the CMS sample data sets. Many high-growth, cash-strapped genetic diagnostics labs welcome the PAMA results even as they braced for potential cuts to their expensive tests. This PAMA outcome mitigates another potential landmine that genetic diagnostics labs must navigate on their growth trajectory. However, it is likely that the more favorable reimbursement for advanced molecular and genetic tests will entice many “general labs” to expand their menu into these tests, especially as the cost of entry into these tests types decline. This may make advanced diagnostics more attractive to traditional labs.

Driving Better Outcomes

Ultimately, the diagnostics industry needs to continue to deliver high-quality and actionable test results that help improve clinical treatment pathways. Labs that innovate with new tests and develop models that help promote more efficient patient treatments will be among the winners in the long run. We envision more “big data” plays with labs to help them achieve this mission and such activity will be a driver of more strategic partnerships and M&A.

These are interesting times for diagnostics labs, which remain a critical and necessary aspect of our healthcare economy. Can smart and proactive operators take advantage of challenging market developments? Will PAMA spark a wave of improved efficiencies and strong standalone businesses or difficult changes that lead business owners to pursue liquidity or outright exits? We are excited to keep a close watch and see how the industry responds.