Thursday, September 28, 2017

Rare Very Highly Paid Tests May Drive Industry Profitability

One of the features of the PAMA raw data is that some tests (especially CYP testing and drug tox testing) had an outlying minority of very highly paid tests - e.g. >$10,000 for tests with median prices around $500.

With so much price transparency industry-wide under PAMA, both for volume and for market price distributions, there may be compression of pricing in the future.

For a hypothetical test, I modeled the impact of reducing outlier high prices on profitability.

The model test has a median price of $500, but a price range of $50 to $2000.   (This doesn't match any one test, but is realistic given actual data I sampled).   There is a normal volume distribution, as shown in the table, with 50 cases at the median price and 5 at the farthest outlier prices; there are 160 total tests.   The cost (COGS) of the test is $250.

In this model, the lab currently has $85,750 revenue, $40,000 costs for 160 tests, and $45,750 gross profit, or 53% gross profit.  Interestingly, 35% of gross profit comes from just the 15 high outlier tests.

In a future year, with so much price transparency on the table, we assume that market price ranges are considerably compressed, now falling between $250 and $750.   Revenue drops to $77,500  - there are fewer super expensive tests, but fewer dirt cheap ones.  Gross profit is now $37,500, or a fall in gross profit of 18% from $45,750 initially.

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