Reimbursement cuts on lab tests pressure U.S. lab firm shares

(Reuters) - A federal agency on Friday rolled out deep cuts to reimbursement rates for some lab tests under Medicare, a move that could save the government as much as $3 billion over five years, but hurt margins of U.S. laboratory companies.

The cuts, which are expected to save about $670 million in Medicare payments in 2018, were roughly in line with a preliminary proposal published by the Centers for Medicare and Medicaid Services (CMS) in September.

About three quarters of the more than 1,300 lab tests surveyed by the agency will be affected by the cuts, Canaccord Genuity analyst Mark Massaro said.

Shares of Laboratory Corp of America Holdings and Quest Diagnostics Inc were pressured on the news on Monday, falling about 1 percent and 2 percent, respectively.

However, the impact from the rate cuts on market leaders LabCorp and Quest for 2018 will not be as severe as previously expected.

“We estimate cuts (for these two companies) may hover around 6-8 percent, a slight improvement to our prior forecast as draconian as 9-10 percent,” Massaro said, referring to 2018.

Invitae Corp, GenMark Diagnostics Inc and privately held Cepheid Inc are also expected to take a hit from these cuts.

LabCorp and Quest have lobbied CMS for years to delay the implementation of the Protecting Access to Medicare Act (PAMA), which aims to establish a market-based pricing for certain lab tests including those for breast cancer and flu.

Analysts expect LabCorp and Quest to see Medicare cuts ranging from 6 percent to 10 percent in the next three years. Both companies had earlier said they may sue CMS over the cuts. Their shares have declined since the preliminary report in September.

CMS’s rate cuts are based on data submitted mainly by bigger lab owners such as LabCorp and Quest, skewing the market price on which PAMA is based, the companies have argued.

“We are continuing to work with Congress and with the administration on whether there is an administrative or legislative fix and obviously also evaluate the option of recourse to the court,” LabCorp Chief Executive David King told Reuters earlier this month.

However, some labs that offer gene-based and molecular diagnostic tests stand to benefit from CMS’s move as it raises reimbursement rates for such tests.

Genomic Health Inc’s breast cancer diagnostic, Veracyte Inc’s thyroid cancer test and CareDx Inc’s blood test for heart transplant patients are expected to see a jump of 12 to 14 percent in reimbursement rates.

The reimbursement rate for Vermillion Inc’s ovarian cancer diagnostic is expected to rise 54 percent, analyst Massaro said. The company’s shares were up 4 percent on Monday.

Shares of Genomic and Veracyte were flat on Monday, while those of CareDx were up 2 percent.

Reporting by Divya Grover in Bengaluru; Editing by Sayantani Ghosh and Anil D’Silva