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Sept. 26, 2017, 6:57 a.m. EDT

Medicare reimbursement cuts slam stocks of lab services companies

Proposed 2018 rates are ‘near the worst case’ and next year probably won’t be any better, one analyst said

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By Emma Court


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The Center for Medicare and Medicaid Services has released 2018 draft reimbursement rates for clinical lab tests and there are “few winners,” according to Canaccord Genuity analyst Mark Massaro.

The rates, released last week under the Protecting Access to Medicare Act (PAMA) , make greater-than-expected cuts to Medicare reimbursement for lab tests. Reimbursement was decreased for a vast majority — 75% — of the various lab test codes, with just 10% of the codes getting an increase, Massaro said.

The proposed “2018 industry cut is near the worst case, with 2019 likely not providing much relief,” said Raymond James analyst Nicholas Jansen.

Quest Diagnostics Incorporated /zigman2/quotes/201001842/composite DGX +1.00%  and Laboratory Corporation of America /zigman2/quotes/203174601/composite LH +1.63%  numbered among the PAMA losers, according to Massaro, with the two companies’ shares closing Monday down 7.4% and 3.1%, respectively, in heavy trade.

The selloff in Quest Diagnostic’s stock was the biggest one-day drop since October 2008.

Related: Amazon could push more pharmacies into offering lab tests

Cuts will make it more difficult for Quest to meet 2020 targets and though the company could lobby for changes, “we see Quest’s premium multiple impaired during the process,” said Raymond James analyst Nicholas Jansen, who downgraded the company to market perform.

Meanwhile, Genomic Health Inc. /zigman2/quotes/209522817/composite GHDX +2.28%   shares rose 0.8%, Veracyte Inc. /zigman2/quotes/201957513/composite VCYT +1.19%  shares rose 0.1%, CareDx Inc. /zigman2/quotes/200138382/composite CDNA +1.35%   shares lifted 8.1% and Vermillion Inc. /zigman2/quotes/208004633/composite VRML +21.76%  shares rose 10%.

In the long run, though, it’s likely that “the brunt of the cuts will impact ‘mom and pop’ small labs that lack scale,” Massaro said, allowing companies like LabCorp, Quest and Genomic Health “to consolidate weaker players.”

See: More U.S. workers are flunking their drug tests

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Companies are expected to appeal the proposed rates, especially Quest and LabCorp, both of which said they objected to the rates in press releases on Friday. Quest said it will “explore all available options, including the courts if necessary.”

However, Massaro said that his “best guess is that the vast majority of the proposed rates are more likely than not to turn final.”

One possible change: rates for Exact Sciences’ /zigman2/quotes/206653925/composite EXAS +4.97%  colon cancer test Cologuard, which previously was in the spotlight when short-seller Citron Research issued a report attacking the test.

Read: Analyst refutes ‘flawed’ Citron Research report on Exact Sciences

“We think CMS inexplicably cross-walked NSTG’s /zigman2/quotes/208164397/composite NSTG +0.46%  Prosigna, Myriad’s Prolaris, MDx Health’s SelectMDx and Agendia’s Mammaprint to EXAS’ Cologuard test,” Massaro said. “We expect those codes will be amended in the comment period.”

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Emma Court covers healthcare for MarketWatch from New York. You can follow her on Twitter @EmmaRCourt.

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