CEO SUMMARY: At a minimum, 2003 proved to be a year of relative stability for the laboratory industry, as demonstrated by THE DARK REPORT’S “Ten Biggest Lab Stories of 2003.” The year was free of industry-wide crises and scan- dals. That allowed most laboratory administrators and pathologists to concentrate on improvements to their laboratory operations and service menus.
ONCE AGAIN, our list of the “Ten Biggest Lab Stories of 2003” provides revealing insights into issues actively shaping the management strategies of clinical laboratories and pathology group practices.
Just as we have in past years, THE DARK REPORT has identified ten of the most significant stories that surfaced during 2003. Each of these stories, in its own way, illustrates how the laboratory industry is reacting to evolutionary and revolutionary changes within the American healthcare system.
Mostly the news is good. Across all segments of the laboratory industry, individual lab organizations and path- ology groups are enjoying an environment of relative calm. Reimbursement is stable, operations are predictable, and there is no “universal” outside threat comparable to the financial turmoil instigated by HMOs during the last decade.
However, this calm environment masks some potent forces for change. Within most large hospital laboratories and in all independent commercial laboratories, intense efforts to improve the status quo are under way. Simply put, smart lab administrators and pathologists are pushing their lab organizations to be more productive. They want to squeeze out more cost savings. There is also an ongoing need to acquire and deploy new lab technology that furthers the mission of their parent health system.
It is this management emphasis on improving operational performance that has innovators and early-adopter laboratories turning to quality management systems like ISO-9000, Six Sigma, and Lean. For that reason, THE DARK REPORT believes the single most significant story of 2003 is the validation of quality management systems in transforming laboratory operations.
A “Feet First” Leap
The evidence comes from the experience that four large health system laboratories had when they decided to jump, feet first, into adopting quality management systems like ISO, Six Sigma, and Lean to make over their high volume core laboratories.
As first and exclusively reported in different issues of THE DARK REPORT, these four large health system laboratories were able to slash average turnaround times for inpatient testing by factors of 40%, 50%, and 60% following a 16-week implementation project. Of equal importance, productivity gains exceeding 50% were common, with comparable improvements in quality and service levels.
These accomplishments are remarkable and will not go unnoticed by other laboratory directors and pathologists. Inspired by the example of these four pioneering laboratories, THE DARK REPORT predicts that a steadily growing number of hospital laboratories will opt to introduce the management methods of Six Sigma and Lean into their labs during the next 24 months.
There is further progress on another significant laboratory industry trend that THE DARK REPORT was first to identify. That trend is the patient safety movement, which carries along with it sever- al other key trends, such as improving healthcare outcomes, measuring and publishing provider performance, and paying financial incentives to hospitals, physicians, and other providers which achieve high outcomes.
Visible signs of this trend are the rapid-fire introduction of: 1) new standards by accrediting bodies that directly measure outcomes connected to patient safety; 2) the first outcomes-linked financial incentives by major insurance companies; and, 3) Medicare’s efforts to collect data and measure the performance of hospitals. Not surprisingly, hospital administrators are beginning to ask their laboratories to make contributions to clinical improvements that serve these new objectives.
Anatomic pathology is affected by both of these top ten stories, but will follow the lead of clinical laboratories. However, anatomic pathology won’t lag by much. THE DARK REPORT is already collecting incredible stories about early-adopter pathology groups which are actually doing “real-time” pathology for a growing percentage of their case volume.
Rounding Out The “Top Ten”
The eight other stories in our “Top Ten” for 2003 include recognition of laboratory medicine’s role in suppressing the SARS outbreak, changes in how payers relate to laboratory providers, uneven Medicare compliance policies and similar trends of influence on today’s laboratories and pathology group practices.
As in past years, THE DARK REPORT recommends that lab directors and pathologists use this list of big stories as the basis for a strategic planning session. Feedback from clients and regular readers tells us this has been a useful tool in aligning a laboratory’s vision and strategic focus with the changing realities in the American healthcare system.
Further, expect to see additional intelligence briefings on these subjects during 2004. That’s because they will have continued influence on the laboratory industry.
2003’s Big Lab Story #1
ISO, Six Sigma, Lean Principles Are Validated in Core Lab Projects
PREPARE FOR A CYCLE OF DEEP CHANGE in how the nation’s clinical laboratories are organized and operated. During 2003, several prominent hospital laboratories boldly took quality management methods used outside healthcare, applied them to laboratory operations, and harvested major benefits.
In Portland, Oregon, Kaiser Permanente Northwest Laboratories used ISO-9000 principles to design a new core laboratory facility and reengineer work processes. Productivity soared, quality increased, and gains in service levels were obvious to the lab’s physician clients. (See TDRs, July 28 and August 18, 2003.)
Using a combination of Lean and Six Sigma management techniques, three major health system laboratories redid their high-volume core chemistry and hematology work cells. In projects lasting less than 16 weeks, TAT for inpatient testing was cut by an average of 50%, with comparable gains in productivity, overall costs, and lab service levels.
DSI Laboratories of Fort Meyer, Florida, Fairview Health Services of Minneapolis, Minnesota, and West Tennessee Healthcare of Jackson, Tennessee deserve recognition for these accomplishments. (See TDR, September 8, 2003.)
More importantly, it can be expected that other clinical laboratories will not be able to ignore improvements of this magnitude. Expect more labs to embrace ISO, Six Sigma, and Lean techniques.
2003’s Big Lab Story #2
Patient Safety Initiatives Driving Deep Changes to Healthcare System
IF ANY QUESTIONS REMAINED about the importance of improving patient safety, the events of 2003 certainly dispelled them.
Throughout the year, various healthcare accrediting bodies announced changes and additions to their accrediting criteria specifically to improve patient safety. Probably the most prominent example is the Joint Commission on Accreditation of Healthcare Organizations (JCAHO). It is swiftly shifting its emphasis toward specific goals which enhance patient safety.
Employers are taking an assertive role through groups like the Midwest Employers Group on Health and the Leapfrog Group. Officials at the Centers for Medicare and Medicaid Services (CMS) are actively working with hospitals groups and other provider associations to develop and implement programs which reward improvements in clinical outcomes and patient safety.
Big news for the laboratory profession is the formation of a laboratory Quality Institute by the Centers for Disease Control (CDC). The effort was launched with a two-day meeting in Atlanta last April. This Quality Institute is chartered to develop national measures for laboratory quality. These measures will be collected and reported annually. The goal is to introduce these measures by the fall of 2004.
2003’s Big Lab Story #3
Lab Industry Lobbies Congress: One Big Win, But Also a Setback
SUCCESSFUL OPPOSITION to the proposals to reinstitute the 20% co-pay for Part B Medicare lab testing services is a milestone victory for the laboratory industry.
This victory stands in stark contrast to a lackluster track record in lobbying Congress. Since the mid-1980s, the lab industry has endured regular cutbacks to funding for lab testing services. Because of unique politics, this year’s effort by some within Congress to reinstitute the 20% lab test co-pay was considered to be a serious threat.
Thus, the successful effort to beat it back is an exceptional event. One major reason for this achievement is that a different cast of characters became involved and did a different type of lobbying campaign. It started with the American Association of Bio-Analysts (AABA), which, among other things, encouraged its member laboratories to go directly to seniors and educate them about this proposal.
It included individuals like the CEOs from cross-town competitors Bio-Reference Laboratories, Inc. and Sunrise Medical Laboratories, both located in metropolitan New York. The CEOs from both companies raised money, raised consciousness, and invested lots of personal time to educate key policy-makers in Congress. Although the 20% co-pay was defeated, the Medicare bill which passed did include a provision freezing CPI updates for lab testing for several years. Thus, the need for more effective lobbying remains.
2003’s Big Lab Story #4
Molecular Diagnostics Makes Important Inroads in Clinical Use
LABORATORY TESTS BASED on molecular technologies still represent a small portion of the total volume of tests performed annually in the United States. But that status quo is changing at a steady rate.
Most lab directors and pathologists are familiar with the key role molecular diagnostics now plays in treating HIV patients. Molecular technologies are finding diagnostic applications in other infectious diseases. Most prominent during 2003 was the recommendation by professional associations that cervical cancer screening guidelines now include HPV testing for women meeting specific criteria.
In oncology, the use of various molecular-based tests is gaining wider
acceptance. An early example of pharmacogenomics is the use of the Her2/neu test with breast cancer patients to justify Herceptin® as an appropriate therapeutic option.
Another example of this trend is the marketing campaigns launched this year by Laboratory Corporation of America and Quest Diagnostics Incorporated to introduce their choice of molecular-based assays for colon cancer screening. Both national lab companies are using their extensive sales and marketing network to educate physicians and payers about these tests. As new molecular assays continue to reach the market, these types of marketing efforts will be used to introduce them and insure that adequate reimbursement is established.
2003’s Big Lab Story #5
Evidence Accumulates of Uneven Medicare Compliance Practices
THIS IS A STORY WHICH IS STILL EVOLVING. Evidence is accumulating that uneven Medicare compliance practices are becoming a growing problem within the competitive market for lab tests referred from physicians’ offices.
During 2003, a significant number of laboratory administrators and pathologists began to include uneven Medicare compliance practices in their service markets as one of their significant management challenges. This is a change from the last half of the 1990s, when newly-instituted laboratory compliance requirements for Medicare fraud and abuse caused many labs to act cautiously.
The issues revolve primarily around how lab competitors handle ABNs, how labs assess charge-backs to client bill accounts which did not provide the information necessary to successfully bill Medicare, and how labs use the “free testing” strategy described in an OIG fraud alert.
Anecdotally, most lab directors and pathologists have stories about egregious compliance practices by lab competitors in their area which have been willing to adopt aggressive interpretations of Medicare compliance guidelines and statutes. Just a few years ago, it was uncommon to hear these types of stories.
Using “chatter” on this topic as a guide, it is reasonable to conclude that there is a lack of uniformity in Medicare compliance practices across the lab industry. If this proves true, it could eventually trigger some type of action by the OIG.
2003’s Big Lab Story #6
Robust Job Market for Pathologists And All Laboratory Professionals
FOLLOWING A DECADE of lab consolidation, when layoffs of medical technologists were common, the 2000s has seen a robust job market for med techs, pathologists, and all categories of advanced laboratory skills.
The inadequate supply of med techs has been well-documented on these and other pages. Less recognized is the already-acute shortage of histotechnologists. However, what is often overlooked is that the year-to-year increase in the volume of specimens tested creates a growing demand for skilled laboratory professionals.
This is a trend which has significant implications for clinical laboratories and anatomic pathology group practices. Continued growth in the volume of testing requires more trained labor, along with advanced technology that auto- mates many labor-intensive steps.
The market is already responding to increase the supply of technical professionals. The number of med tech training programs is increasing. The number of distance learning opportunities is growing. It’s a similar story in the pathology profession. Pathologists with sub-specialty skills are often getting multiple offers for positions or private practice partnerships. There is still a demographic “gap” that affects every category of laboratory professional skills. But there are positive signs that the supply of trained lab professionals will be increasing.
2003’s Big Lab Story #7
SARS Outbreaks Reveal Strengths And Vulnerabilities of Laboratories
LEAVE IT TO THE REAL WORLD to provide SARS as a timely example of the strengths and vulnerabilities of our nation’s laboratories.
On the plus side, the SARS outbreak demonstrated how modern diagnostic technology can speed up the process of recognizing new diseases and controlling outbreaks of these diseases. Researchers were able to quickly map the genetic structure of the SARS virus and identify its likely point of origin.
For a number of developed countries, the speedy recognition of this new disease allowed public health officials to take effective steps to identify travelers coming from affected regions and minimize or prevent the introduction of SARS into their country.
On the minus side, SARS showed gaps in how healthcare systems are prepared to deal with what may be primarily an airborne infectious agent. In Toronto, SARS patients in two hospitals exposed large numbers of hospital workers to the disease, forcing the workers into quarantine.
Laboratorians in Toronto learned important lessons about unidentified weaknesses in laboratory procedures. It was recognized that lab workers are potentially vulnerable to SARS exposure in patient service centers, from courier visits to physicians offices, and from interaction with infection control teams. However, just as during the anthrax episodes of 2001, good laboratory practices minimized risk.
2003’s Big Lab Story #8
Good Times for Regional Labs And Hospital Lab Outreach Programs
EVENTS IN 2003 DEMONSTRATED that independent regional laboratories and professionally-managed hospital laboratory outreach programs are enjoying vigorous and profitable growth.
Although the number of independent commercial laboratories remains small, most are enjoying a relative time of prosperity. The largest of these firms is Clinical Pathology Laboratories, Inc. (CPL) of Austin, Texas. It has launched an expansion program which takes it outside of its traditional market of Texas. In California, smaller independent labs like WestCliff Medical Laboratories of Newport Beach are ramping up sales efforts and enjoying substantial increases in laboratory testing volumes.
Hospital lab outreach programs have similar success stories. PacLab Network in Washington State is growing at a steady rate, as are any number of hospital laboratory outreach programs.
Two primary reasons lie behind this rosy environment. First, in most cities, the primary competitor is one or both of the two blood brothers. Yet many physicians still prefer to use a local laboratory where that option exists. This favors regional labs.
Second, most local labs have adjusted to the fact that they may not be a contract provider for many health plans in their area. In recent years, they have learned how to capture the non-contract lab testing business which still exists in their marketplace.
2003’s Big Lab Story #9
Payers Look for Different Benefits When Selecting Laboratory Providers
IN THE 1990S, many smaller regional laboratories lost access to managed care contracts. Public lab companies were aggressive in their willingness to accept contracts with capitated reimbursement and utilization risk as a way to gain exclusive access to patients.
However, healthcare trends and changing expectations of employers (who “buy” health plans for their employees) are causing health insurers to rethink aspects of their operations.
One factor in this change is consumer rejection of the closed panel, gatekeeper-model HMO. THE DARK REPORT was first to identify this shift back in 1998. Since that time, enrollment in PPO, POS, and other types of health plans which allow consumer choice has increased substantially. Insurers and employers had to respond to this major shift in consumer expectations.
In addition, the drive to improve patient safety and the trend to measure provider outcomes gives insurers an incentive to select laboratory providers on different criteria than the lowest price for high-volume routine lab tests.
This trend is creating opportunities for local lab providers that didn’t exist in the 1990s. Compared to past years, the ability to provide inpatient and outpatient lab test data to physicians and payers and specialized testing services uniquely suited to a region’s needs now have more value to some payers.
2003’s Big Lab Story #10
Public Anatomic Path Companies “Hit the Wall” During a Tough Year
AFTER A MULTI-YEAR RUN of great gains in specimen volume and revenues, the nation’s three largest public anatomic pathology companies “hit the wall” in 2003.
DIANON Systems, Inc. was acquired by Laboratory Corporation of America in January 2003. AmeriPath, Inc. sold itself to Welsh, Carson, Anderson & Stowe and became a private company early in 2003. IMPATH, Inc. filed chapter 11 bankruptcy in August 2003 and still seeks a buyer.
Although the management teams at all three companies lost their independence, that doesn’t mean that the market opportunities to sell anatomic pathology services directly to physicians has disappeared. To the contrary, these three anatomic pathology firms demonstrated that the traditional model of anatomic pathology—a group practice serving one or more community hospitals—is no longer the only viable business model.
The problems in each of the three large public companies that led to sales or bankruptcy have less to do with a change in market demand and more to do with failings of the management teams within these firms to respond to rapid growth rates and other business challenges. (See TDR, September 29, 2003.)
With these three companies now distracted by internal issues, the time is opportune for competing pathologists to expand their businesses.