Barclays on Health Care Facilities: Perspectives on Medicare Reimbursement for Molecular Diagnostic Testing

Barclays on Health Care Facilities: Perspectives on Medicare Reimbursement for Molecular Diagnostic Testing

Barclays analyst says, "The Bottom Line: We anticipate some noise around Medicare reimbursement for molecular diagnostic testing over the next year but ultimately do not expect much of an impact on LabCorp (NYSE: LH) or Quest Diagnostics (NYSE: DGX) for two key reasons. First, as long as labs are not taking advantage of the current billing mechanism (and we believe both DGX and LH are conservative with their billing practices and seek to only perform testing that is medically necessary), we believe there is little risk that they would face major reimbursement headwinds under the new Palmetto methodology. Second, we believe that molecular diagnostics represents less than 5% of total revenue at DGX and LH, and, given that Medicare represents around 15% of both company's revenue, Medicare reimbursement for molecular diagnostics likely represents less than 1% of total revenue, so, even if there is a major change in how Medicare pays for these tests, we would not expect there to be a significant impact on EBITDA or EPS."

"The concern over molecular diagnostics will come from two sources: the Palmetto changes in 2012 and the new CPT codes the Medicare program intends to introduce in 2013...Second, the American Medical Association has been conducting its own review of "code staking" over the past year and has proposed a new list of CPT codes for 2013 which will address some of the concern around code stacking..."

"Consistent with the feedback that Quest and LabCorp provided around code stacking earlier this year, we believe both companies are comfortable with their billing practices and do not expect potential changes from Palmetto or other payors around the reimbursement for molecular diagnostics to have a significant impact on their revenue or profitability. The concern, in our view, would be if labs were performing tests that were not medically appropriate in order to boost revenue, however, we do not believe this is occurring at either DGX or LH, so, any potential changes that are implemented by Palmetto or others to try to limit reimbursement to testing that is "reasonable and necessary" should not be an issue for DGX or LH, in our view."

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