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Morningstar | PAMA Cuts Apply Steady Pressure in 2019, but Could Ease in 2021

As a leading independent diagnostic laboratory, LabCorp participates in a highly attractive duopoly that offers bright prospects as healthcare moves toward reformed payment models, despite near-term Medicare headwinds. Even though hospitals still dominate the $72 billion diagnostic market, LabCorp has carved out a significant slice of the pie through serial acquisitions. The addition of Covance's drug-development expertise offers LabCorp an avenue to monetize its large patient database.Just as importantly, LabCorp has single-mindedly pursued greater efficiency, which translates to an ability to reduce costs more quickly than reimbursement cuts coming down the pike. The firm has invested in greater automation and systems that can decrease the number of employees involved in sorting and running the tests. LabCorp has also put significant resources behind beefing up its information technology capabilities. As a result, physicians can more easily access test information in a timely manner, and patients can schedule blood draws with increased convenience. We admire how the management team has consistently focused on these strategies over the long term, and we expect LabCorp's investments today will reap rewards in future years.LabCorp should take advantage of the long-term secular trends that bode well for the diagnostics industry, as the proliferation of new tests grows and new disease markers and genetic mutations with pharmacogenomic implications are discovered. New reimbursement models inspired by healthcare reform should lead more doctors and hospitals to send tests to lower-cost producers like LabCorp. PAMA reimbursement pressure from Medicare remains the strongest near-term headwind. However, we expect this could ease in 2021 once hospital-based labs (which are reimbursed at higher levels) are included in the recalculation of Medicare's clinical lab fee schedule. The question remains whether the hospital-based labs will be able to comply with the PAMA collection and reporting requirements in 2019. The lab industry has been advocating for a delay so that more hospital-based labs can meet reporting obligations, but thus far, CMS has not budged.