2006’s Top Lab Stories Identify New Threats

Several disruptive events during the year promise to trigger widespread change

CEO SUMMARY: Presented here are THE DARK REPORT’S “Ten Biggest Lab Stories of 2006.” Compared to earlier years, 2006 was not transformative for the laboratory industry. But it was an eventful year, particularly influenced by Siemens’ decision to acquire DPC and Bayer Diagnostics, along with the decision by UnitedHealth Group to grant an exclusive national lab services contract to Laboratory Corporation of America.

OUR LIST OF THE “TOP TEN LAB STORIES FOR 2006” centers around two major themes. The primary theme can be described as the search for improved efficiency.

Of course, salted in the list are some standout stories with major relevance for the laboratory industry. For example, the decision by UnitedHealth Group to exclude Quest Diagnostics Incorporated from its national laboratory services contract is likely to trigger long-lasting consequences across a broad swath of the laboratory industry.

It can be argued that the UnitedHealth decision is also an example of the search for efficiency. After all, UnitedHealth is taking this step in pursuit of cost savings and other benefits.

Other Top Ten stories that involve the search for efficiency include specialty physicians bringing anatomic pathology in house, Medicare posting the fees it pays providers on its Web site, the growth of walk-in clinics in pharmacies and retail stores, consolidation within the in vitro diagnostics (IVD) industry, and the achievement of Sonora Quest Laboratories in winning the Arizona Quality Program’s highest honor.

Judging The “Buzz Factor”

If these 10 stories are weighted according to the “buzz factor”—that is, the amount of comment and speculation that followed the public news—then UnitedHealth’s contract decision and Siemens Corporation’s acquisition of Diagnostic Products Corporation and Bayer Diagnostics this spring would be number one and number two for 2006.

In the case of UnitedHealth, its decision is likely to trigger a cascade of consequences across the laboratory industry for several years to come. A list of basic questions illustrates why this will be true.

Can UnitedHealth exclude Quest Diagnostics as a contract provider and avoid experiencing widespread unhappiness among physicians and patients, not to mention troublesome disruptions in service? Will other large national health insurers decide to squeeze harder when it comes time to negotiate their laboratory services contracts? Does this shift in managed care contracting status quo between the two blood brothers mean that either or both will engage in aggressive price discounting to win future managed care contracts from the other?

Imaging Giants Enter IVD?

In the case of Siemens, its willingness to pay more than $7 billion to acquire DPC and Bayer Diagnostics triggered much speculation. Would GE and Philips—competitors to Siemens in the imaging marketplace—also decide to acquire IVD companies? If they did, which IVD companies would they acquire? What will Siemens do with DPC and Bayer Diagnostics? Does Siemens have a plan to integrate imaging and in vitro diagnostics?

All of those questions will require time to answer correctly. It will take several more years to understand how the developments of 2006 will alter the laboratory industry.

Across the laboratory testing marketplace, probably the single most disruptive development of 2006 was the widespread and active interest by specialty physicians to convert anatomic pathology into an in-house ancillary service.

Across the laboratory testing marketplace, probably the single most disruptive development of 2006 was the widespread and active interest by specialty physicians to convert anatomic pathology into an in-house ancillary service. This is a trend which negatively affects national pathology companies and community hospital-based anatomic pathology group practices.

Specialist physicians, particularly urologists, gastroenterologists, and dermatologists, are the source of large volumes of biopsies. When a pathology laboratory loses access to these cases, the revenue loss is significant. In many situations, revenue from specialty physician referrals is used by pathology groups to acquire new technology and expand the menu of test services they offer.

It is a reason why this trend is such a threat to private pathology group practices. Payers are actively trimming reimbursement for pathology professional services. Many payers are attempting to cease all payment for clinical pathology professional services. The result is an ongoing revenue crunch that hits smaller pathology groups particularly hard. The impact of these trends is compounded when urologists and GIs internalize anatomic pathology and cease referring specimens to national labs and local pathology group practices.

More Lab Acquisitions

Each year, THE DARK REPORT recommends that laboratories use these “Top Ten Lab Industry Stories for 2006” as the basis of a strategic review session with the lab’s executive team. It provides a helpful foundation to discuss the impact of specific trends and identify relevant responses to allow the laboratory to stay ahead of events.

Disruptive forces are loose within healthcare and the laboratory industry. As noted above, the managed care contracting status quo of several years received a significant jolt when UnitedHealth took its unexpected action. Similarly, Siemens’ huge bet in in vitro diagnostics may trigger a cascade of consequences in the months and years to come.

1. Upset to the Managed Care Status Quo: UnitedHealth’s Unexpected Strategy

NEWS THAT UNITEDHEALTH GROUP would dump Quest Diagnostics Incorporated from its national contract on January 1, 2007 hit the laboratory industry with hurricane force. (See TDR, October 16, 2006.)

By selecting Laboratory Corporation of America to be its sole national laboratory provider, UnitedHealth has demonstrated the changing strategies and economics within the nation’s largest payers. Because of consolidation and other factors, reducing the cost of spending on lab testing is a business goal that the nation’s second largest health insurer is willing to pursue, despite considerable obstacles.

Experts predict that a significant number of physicians and patients will be unhappy about Quest Diagnostics’ exclusion from UnitedHealth’s lab provider panel. Further, LabCorp will be scrambling to create the service infrastructure it needs to serve UnitedHealth physicians and patients in several regions around the country. So for both UnitedHealth and LabCorp, the exclusive national contract is a gamble with no certainty of major success.

What is true about this change in UnitedHealth’s national contracting status quo is that regional laboratories and hospital outreach programs have been handed an opportunity to step in and win market share in their communities. Many independent laboratories tell THE DARK REPORT they are already picking up considerable amounts of new business. It would be ironic if UnitedHealth’s decision proved a boon to community labs.

2. Anatomic Pathology Is Cannibalized by Its Most Important Customers

IT’S THE FASTEST-MOVING TREND to hit anatomic pathology (AP) in four decades. Ever-growing numbers of specialist-physicians are taking active steps to establish a pathology laboratory within their group practice. (See TDR, July 3, 2006.)

Across the specialties of urology and gastroenterology, there is keen interest in establishing anatomic pathology as an in practice ancillary service. As it was with the emergence of anatomic pathology laboratory condominiums (pod labs) in 2004, THE DARK REPORT was first to identify and describe this trend for the pathology profession. (See TDRs, July 19, 2004 and August 9, 2004.)

In fact, within six months of THE DARK REPORT’s exposé of AP lab condos, the federal Office of the Inspector General (OIG) issued Advisory Opinion 04-17 and took a negative position on a proposed business model of AP laboratory condominiums.

In the 24 months since the OIG’s advisory opinion, urologists and gastroenterologists did not lose interest in anatomic pathology. Instead, larger specialist groups took active steps to build their own histology laboratory and line up pathology professional services. Smaller specialist groups opted for TC/PC arrangements, where a willing pathology laboratory provides technical component (TC) services and the referring physicians make arrangements for the pathology professional component services, for which they bill directly.

3. Transparency in Health Pricing Arrives, Led By Medicare and Private Payers

MAKE NO MISTAKE ABOUT IT! Powerful players in the American healthcare system want consumers to chose their own providers and directly pay for more of the healthcare they receive.

Count the federal government (which currently pays for 40% of all healthcare in the United States) as one of those powerful players. This spring, the Medicare program began publishing the fees it pays for common procedures on its Web site (www.medicare.gov). The aim is to allow consumers to have more information about what hospitals and physicians are paid for certain services. (See TDR, March 20, 2006.)

But the feds are not alone. Allied with them on price transparency are the major private payers. By the end of 2006, Aetna, Inc., Humana Inc., Cigna Corp., UnitedHealth Group Inc., and Blue Cross Blue Shield all made the prices they paid providers accessible to their beneficiaries. (See TDR, November 6, 2006.)

So far, THE DARK REPORT is the only laboratory industry resource which has explained this development and recommended that clinical laboratories and pathology group practices prepare to respond to this development. Already, several laboratories have reported an increase in the number of patients asking how much they will be charged for their laboratory tests. Labs with transparent pricing are likely to find it easier to collect directly from the patients they serve.

4. Anthem Raises Stakes in Fight Over Clinical Path Professional Fees

WHEN ANTHEM FILED lawsuits against three different pathology group practices over professional fees in Virginia this fall, it signaled an escalation in the ongoing battle between payers and pathologists over such payments. (See TDR, November 15, 2006.)

As a division of Wellpoint, Inc., the nation’s largest health insurer with 34 million beneficiaries, Anthem certainly has the deep pockets for a long court battle. The Anthem lawsuits seek a refund of clinical pathology professional fees it paid to pathologist defendants during a three-year period, along with punitive damages.

Anthem’s action comes despite the fact that the pathology profession has generally won favorable decisions in a variety of state and federal courts over the past two decades. These courts have ruled that clinical pathology professional services are a direct benefit to patients and should be compensated.

What makes the Anthem lawsuits both notable and troubling is the point of law that might result from an Anthem victory. Anthem is seeking a refund of payments already made by them to the pathologists, under a valid contract that existed between Anthem and the pathologists at the time such payments were made. A court ruling in Anthem’s favor would represent a new legal threat to all providers, not just pathologists. Further, these Anthem lawsuits do escalate the ongoing battle over clinical pathology professional fees.

5. Government Weighs Scales of Justice Against Execs of Impath and UroCor

IT WAS COINCIDENCE THAT, LAST JUNE, federal criminal cases were ended against former executives of both Impath, Inc. and UroCor, Inc. (See TDR, July 24, 2006.)

In the Impath case, all six defendants were found guilty in a scheme to manipulate the company’s finances to produce as much as $64 million in phantom revenue between 1999 and 2002. Four of these defendants were sentenced in June.

Impath ex-President and COO, Richard Adelson lost his jury trial and received a sentence of 42 months in prison, a $1.2 million fine, and was ordered to pay restitution of $50 million. Former Chair and CEO Anu Saad, Ph.D., had pled guilty earlier and was sentenced to three months in prison, two years of supervised release, and given a $6,900 fine.

In the UroCor case, all three defendants were acquitted in a jury trial. It was the first time federal prosecutors had indicted laboratory executives for violations of anti-kickback statutes. Prosecutors accused the defendants of inducing physicians through deeply discounted pricing and waiving charges for tests done as an out-of-network provider.

During the trail, defense attorneys argued that the federal government had failed to provide clear guidance on laboratory compliance. The jury evidently agreed, as it voted to acquit all three defendants. This trial’s outcome complicates the issue of laboratory compliance, particularly in the area of inducement.

6. Big, Bigger, and Biggest: IVD Firms Use Acquisitions to Bolster Growth

DURING 2006, four significant consolidations in the in vitro diagnostic manufacturing industry demonstrated that acquisitions continue to be a favored way for companies gain market clout.

Siemens Medical Solutions paid $1.86 billion for Diagnostic Products Corporation (DPC), followed weeks later by its $5.21 billion acquisition of Bayer Diagnostics. Another blockbuster deal, at about the same time was the reverse merger between Fisher Scientific International Inc. and Thermo Electron Corporation. The combined revenues of these two companies top $8 billion per year. (See TDR, May 22, 2006.)

Another significant transaction was the acquisition of Melbourne, Australia-based Vision Systems Limited by Danaher Corporation. Losing bidders for Vision were Ventana Medical Systems, Inc. and Cytyc Corporation. (See TDR, November 6, 2006.) The year ended with TriPath Imaging, Inc., signing a definitive merger agreement with Becton, Dickinson and Company for a purchase price of about $350 million.

In each case, these acquisitions will lead to a realignment of a specific segment of the diagnostic marketplace. Of these four acquisitions, the most closely watched will be Siemens. As a major player in diagnostic imaging, its investment in DPC and Bayer Diagnostics has triggered plenty of speculation about its strategic plans for clinical diagnostics.

7.  Pharmacy Chains Build Walk-In Clinics And Support On-Site Blood Draws

NATIONAL PHARMACY CHAINS are taking steps which could eventually make them competitors to clinical laboratories. The first step is the development of rapid, walk-in primary care clinics in pharmacies and other retail locations.

CVS Corporation raised the ante when it acquired MinuteClinic, which operates 83 retail clinics in 10 states, including 66 clinics in CVS pharmacies. At the time of this acquisition, one expert predicted that 10,000 retail walk in clinics would be operational by 2010. (See TDR, September 25, 2006.) Rapid, walk-in clinics are already operated by such major retail chains as Wal-Mart, Rite Aid, Osco, Sav-on Drugs, Kroger, Shoprite, and Piggly Wiggly.

Now, the need for Laboratory Corporation of America to add patient service center (PSC) sites to service UnitedHealth beneficiaries is causing LabCorp to court pharmacies as locations for patient drawing centers. It plans to have 250 draw sites open in MinuteClinic locations within CVS Pharmacies. LabCorp also signed a deal with Duane Reade to open 20 PSCs in Duane Reade pharmacies. These will be private rooms staffed by LabCorp employees.

As pharmacies gain experience in supporting blood draws, could they become interested in performing point of care testing on site that would support filling prescriptions? Recent events lend credence to such a prediction.

8. Number of Molecular Assays Grows And Shows Market-Moving Potential

MOLECULAR DIAGNOSTIC ASSAYS have increasing potential to transform the laboratory market nationwide, as two particular developments in 2006 showed.

During the year, more attention was focused on cytochrome P450 (CYP450). Tests based on CYP450 could help prevent adverse drug reactions (ADRs), a major source of deaths and healthcare expenses. (See TDR, April 10, 2006.) Testing individuals for genetic variations in CYP450 could help determine whether patients can metabolize drugs comprising 25% of the current formulary (representing 700 million prescriptions each year). The implication is that the volume of CYP450 testing is likely to grow steadily in coming years. It has the potential to be a revenue blockbuster.

Another development is the rapid clinical acceptance and revenue growth of RedPath Integrated Pathology, Inc., in Pittsburgh. RedPath is one of the first commercial laboratories to integrate genomic analysis with everyday pathology practice. (See TDR November 6, 2006.) Its technology allows pathologists to provide different tests that support both the diagnosis of cancer and the planning of treatment across multiple organ systems.

Clinicians are becoming quicker to utilize assays that incorporate new molecular technologies and are more sensitive tools for diagnosis and treatment. In turn, greater use of molecular-based assays should greatly benefit the pathology profession.

9. CAP Launches First-Ever Program Of Unannounced Lab Inspections

IN THE SPRING OF 2006, the College of American Pathologists (CAP) began a program of unannounced laboratory inspections. Also moving toward unannounced inspections was the Joint Commission on Accreditation for Healthcare Organizations. (See TDR, February 27, 2006.)

Unannounced inspections are one legacy of the startling mismanagement at Maryland General Hospital’s laboratory in Baltimore in 2004. Investigators determined that, for more than 14 months, the laboratory had reported potentially inaccurate HIV and HCV results on at least 460 individuals. (See TDR, April 5, 2004.)

Discovery of this scandal lead to an investigation by Maryland state health authorities and several congressional hearings. During the hearings, CAP officials promised to tighten inspection and accreditation standards. Unannounced inspections are one result of those promises.

The unmistakable message to the laboratory industry from this development is that more transparency in the operation and performance of laboratories is on the way. Unannounced inspections are just one step in a national effort to make the entire healthcare system more accountable to patients and payers for quality and safety.

Clinical laboratories and pathology group practices can expect to see oversight of laboratory operations increase. Support for such reforms will come from both payers and regulators.

10. Sonora Quest Lab’s Quality Program Highlights Direction for Lab Industry

IT WAS A LAB INDUSTRY MILESTONE when Sonora Quest Laboratories (SQL) earned the Arizona Quality Program’s highest honor—the Governor’s Award for Quality. (See TDR, February 6, 2006.)

It is the latest honor on Sonora Quest’s quality journey. The laboratory organization adopted Six Sigma quality management methods several years ago and has used this initiative to boost customer and employee satisfaction, while increasing quality, improving profit margins, and developing closer relationships with managed care companies in the state.

THE DARK REPORT has regularly chronicled the experiences and successes of the first laboratory organizations to embrace quality management systems like Lean, Six Sigma, and ISO-9000. When properly implemented, these management methods have helped laboratories to enjoy 50% gains in average turnaround time (for hospital labs), productivity, and error reduction.

Sonora Quest Laboratories may be the first lab organization to have won such a prestigious quality award, but it won’t be the last. Growing numbers of laboratories, and hospitals are taking the first steps to introduce quality management systems into their organizations. This is a steadily-growing trend, and one with the potential to help all laboratories and pathology group practices meet the challenges of declining reimbursement and the need to spend heavily to acquire new diagnostic instruments and information technology.

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