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The high cost of constant Covid testing

Completed Covid-19 swab tests in sample bags at a testing site in Sacramento, California on January 12.


David Paul Morris/Bloomberg News

Testing labs in the United States have made windfall profits as a direct result of the Covid-19 pandemic. Using Hawaii tax data, we found that statewide growth in private diagnostic lab monthly revenue kept pace with the volume of PCR Covid-19 tests. Between May and December 2020, lab revenues increased by an average of 8% per month. Labs make over $10 profit per test.

Why are these benefits possible? The US healthcare system has let labs price Covid-19 tests well above their costs, costing taxpayers and private insurance companies, for three reasons.

First, the reimbursement rates set by Medicare and Medicaid do not take into account economies of scale. When labs perform more tests, their unit cost drops, but reimbursement rates remain fixed. Labs with high testing volume can perform a PCR test for less than $20, but Medicare’s payment rate remains $51. (Medicaid can pay even more.) Medicare reimbursement rates are often used as a floor when private insurers negotiate with providers. As a result, the high, static rates set by the government give suppliers leverage to demand higher payments.

Second, the Families First Coronavirus Response Act banned cost sharing for testing. As a result, public and private insurance bear the full brunt of the testing costs and cannot refer patients to cheaper labs. While laudable on equity and public health grounds, this removed another lever for controlling costs: consumer pressure.

Third, many private insurance markets are not competitive. Hawaii Medical Service Association, the state’s largest insurer, controls 63% of the market and 20% of the market is controlled by Kaiser, which combines providers and payers, meaning patients can’t switch insurers without also changing doctors. This reinforces the market power of insurers, who can pass on the additional costs to premiums without fear that their affiliates will change insurers, and who benefit from the increase in expenses. To make matters worse, the Cares Act explicitly discouraged insurers from negotiating prices with out-of-network labs, bolstering the market power the labs already had.

While testing was essential in the war against Covid-19, the windfall profits were by no means necessary to maintain testing capacity. The federal government has created a perfect storm in which private labs can make huge profits during a time of human misery at the expense of taxpayers, employers and workers.

Mr. Halliday is a professor of economics at the University of Hawaii at Manoa. Ms. Bai is a professor of accounting and health policy at Johns Hopkins.

Wonder Land: America’s system of government is mired in the mud after decades of “doing something” to fix the problems, to make things worse. Images: AFP/Getty Images Composition: Mark Kelly

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Appeared in the June 7, 2022 print edition.


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