The House of Representatives may be single-handedly saving the lab companies in America on Wednesday. A bill was posted to propose a short-term fix to the sustainable growth rate, delaying cuts to Medicare reimbursement rates for lab tests until 2017. It also appears to cap the rate reductions to 10% per year until 2020.
Why this matters so much is that there has been a growing pressure to lower reimbursement rates on many tests. Some were considering cuts of 20% or more by next year. That makes a 2017 and a bleed-off to 2020 much more appetizing for lab and diagnostic companies.
Quest Diagnostics Inc. (DGX) shares were up almost 6% to $58.10, against a 52-week range of $50.46 to $64.10. This $8.4 billion diagnostic testing player still trades at 14 times expected earnings. Its mid-afternoon trading volume of 5 million shares is more than double a normal day's trading volume.
Laboratory Corp. of America Holdings (LH) was also up, with a gain of more than 5% to $99.70. Its 52-week range is $87.01 to $108.00, and the 3.2 million shares in mid-afternoon trading is almost three times a normal trading day. This $8.5 billion diagnostic testing company trades at just over 15 times expected earnings.
Cutting lab reimbursements is an interesting notion. It is obviously a huge part of medical expensing because doctors now run so many tests just to cover their liability exposure. Still, if you have unlimited health care spending on treatments, how can you treat medical issues without more and more tests?
As a reminder, proposals in the House or in the Senate are early indications. They often die or mutate.