Testing labs in the U.S. have been earning windfall profits as a direct consequence of the Covid-19 pandemic. Using tax data from Hawaii, we found that statewide growth in private diagnostic labs’ monthly revenue tracked the volume of Covid-19 PCR tests in lockstep. Between May and December 2020, lab revenue grew at an average of 8% a month. Labs are making more than $10 a test in profit.
Why are these profits possible? The American healthcare system let labs set prices for Covid-19 tests well above their costs, costing taxpayers and private insurance companies dearly, for three reasons.
First, reimbursement rates set by Medicare and Medicaid fail to account for economies of scale. When labs do more tests, their unit cost drops, but reimbursement rates stay fixed. Labs with a high testing volume can perform a PCR test for less than $20, but the Medicare payment rate remains $51. (Medicaid can pay even more.) Medicare reimbursement rates often serve as a floor when private insurers negotiate with providers. As a result, the high and static government-set rates give providers leverage to demand higher payments.