How the federal government’s response to the COVID-19 pandemic created a perfect storm in which private laboratories can earn huge profits from PCR testing while potentially impacting health care premium costs, is described in a June 9 Journal of General Internal Medicine paper published by a team of researchers, including three economists from the University of Hawaiʻi at Mānoa College of Social Sciences.
Two major components of the U.S. government’s response to the pandemic are the Families First Coronavirus Response (FFCRA) and Coronavirus Aid, Relief and Economic Security (CARES) acts. While the acts require commercial insurance plans to cover COVID-19 testing costs without any cost-sharing for patients, they are silent on the prices that labs can charge.
“In many concentrated insurance markets such as Hawaiʻi, insurers have few incentives to negotiate lower prices. They can easily pass these costs onto premiums without losing market share,” said co-author Tim Halliday, economics professor in UH Mānoa’s College of Social Sciences and UH Economic Research Organization (UHERO) research fellow. “The financial consequences of high profit for testing providers are borne by plan sponsors and will likely result in higher insurance premiums other things equal, passing the burden to patients.”
Finding profit margins
Using unique Hawaiʻi taxation data on monthly sales, the group analyzed how the COVID-19 pandemic affected the revenue and profitability of independent laboratories. The results showed that private laboratories’ revenue followed the volume of PCR tests performed in the state in lockstep. Between May and December 2020, the monthly growth rate of revenue was 8% on average. The researchers estimate that profits per PCR test were at least $10, but the actual number is likely far greater.
“The COVID-19 testing pricing policies are as if designed to channel money from taxpayers, employers and workers to testing facilities and insurance companies,” said co-author Ge Bai, health policy and management professor at Johns Hopkins Bloomberg School of Public Health. “This study revealed key problems affecting the efficiency of the U.S health care system, namely, rigid government rate-setting, price insensitivity of consumers, and misaligned incentives of insurance companies. It highlights an opportunity for policymakers to improve the affordability of healthcare services by focusing on addressing these problems.”
According to the researchers, examples of issues that contribute to this situation include:
- The Medicare program that sets a static payment rate at $51 per test, which substantially exceeds the cost and fails to reflect the economies of scale.
- The FFCRA which prohibits cost-sharing, thus taking away insurance companies’ ability to steer patients away from expensive labs.
- The CARES Act that encourages out-of-network labs to set high prices.
In addition to Halliday and Bai, other team members include:
- Cara Tan, undergraduate researcher in the Department of Economics in UH Mānoa’s College of Social Sciences
- Ruben Juarez, economics professor in UH Mānoa’s College of Social Sciences and UHERO research fellow
- Seth Colby, tax research and planning officer, Hawaiʻi State Department of Taxation