Anatomic Pathology Business Faces Uncertain Future

Payer cuts to pathology reimbursement and hospitals buying medical groups are key factors

CEO SUMMARY: There’s a day of reckoning on the way for the traditional business model of the private pathology group practice. At most risk are smaller pathology groups that typically have five or fewer pathologists. Blame it on the reduced prices that Medicare and private insurers are paying for pathology services. Another factor is the trend of office-based physicians selling their medical practices to hospitals and insurers. The pathology profession is poised for a new cycle of consolidation.

NOT SINCE THE MID-1990s has the private practice business model of anatomic pathology seen such competitive market pressures as in the last 30 months.

At that time, it was the entrance of national pathology lab companies like Dianon Systems, Impath, and UroCor that disrupted the private practice business model of pathology. Organized as national pathology companies, from the mid-1990s forward, they took business away from local pathology groups by sending in their national sales teams to scoop up specimen referrals from office-based specialist physicians in communities across the nation.

This time around, changes to the pathology marketplace are being triggered by the Medicare program and private health insurers. In recent years and as a result of their repeated and collective actions, public and private payers have substantially reduced the payments earned by anatomic pathology labs and group practices. These changes range from the elimination of the TC grandfather clause in 2012 and the substantial reduction in Medicare reimbursement for CPT 88305-TC in 2013 to the new Medicare coverage guidelines and prices that became effective on January 1, 2014.

Similarly, the coverage decisions and prices posted during 2013 for the new molecular test CPT codes by the Medicare administrative contractors represent substantial reductions in payments for many molecular tests. These coverage and pricing decisions are often mirrored by private health insurers, thus compounding the negative financial impact of this situation for a large number of pathology groups and lab companies.

Shrinking Path Revenue

At the same time that payers are reducing what they pay for anatomic pathology services, another trend is reinforcing the revenue shrinkage seen at many pathology groups. Over the past eight years, a substantial number of office-based physicians have sold their medical practices to hospitals, health systems, and health insurers.

Post-sale, pathology groups can lose the specimen referrals from these office-based physicians. That is because the new owners of these physician groups frequently redirect the pathology specimens to their favored anatomic pathology lab providers. Each of these marketplace dynamics is a contributing factor as to why a sizeable number of private pathology group practices in communities across the nation are experiencing significant reductions in revenue and operating margins.

Widespread Financial Pain

This financial pain is widespread. Pathology groups large and small throughout the United States report significant decreases in the amount of money they now collect for the same volume of surgical pathology services and molecular/genetic testing. In some cases, the revenue drop has been dramatic and has caused some lab companies to close their doors. (See TDRs, May 28, 2013 and July 18, 2013.)

THE DARK REPORT is hearing from pathologists and pathology practice administrators throughout the United States and they have a common problem. They say that the revenue decline at their laboratories has been so rapid and deep that it now costs them more money to provide some anatomic pathology services than the amount they are reimbursed by government and private payers.

Moreover, most of these anatomic pathology groups have yet to identify a viable strategy for coping with the decreased payment they receive for certain significant anatomic pathology services. That also includes developing a new business model they can use to deliver value and maintain financial stability.

Pathology Advisors Agree

These facts are affirmed by pathology consultants and attorneys with long-standing connections to the pathology profession. They acknowledge that a growing proportion of their pathology clients are actively considering radical business options in response to shrinking revenue and declining profitability.

These business options run the full spectrum of possibilities. One of the most common actions being reported is the reduction in the number of pathologists employed by a group. With revenue shrinking, these pathology groups are taking the opportunity to release the less productive pathologists in their group practice.

Pathologists who were considered average contributors in terms of productivity and/or revenue generation are finding that their partners don’t want to renew their contracts. One consequence of this situation is a definite increase in the number of pathologists seeking jobs at this time.

Some pathology groups that own a technical laboratory are exploring how to sell the lab to an interested buyer. But it is a situation where there are many sellers and few buyers—at least not at a purchase price that the selling pathology group is willing to accept. Therefore, this strategy is not working for these lab sellers.

Best Business Strategy

In response to these developments, pathology groups are looking for the right business strategy or some type of exit plan. Their pathologists and practice administrators want to take action before the current market value of their pathology group or laboratory is eroded by further reductions in revenue.

However, today’s anatomic pathology marketplace is a tough environment. There are few buyers for a pathology practice and those buyers are refusing to pay prices that the selling pathologists deem as acceptable.

It is also true that smaller pathology groups—as measured by revenue and the number of pathologists—have fewer restructuring options. These pathology groups lack the economies of scale, a broad base of clients, and the range of subspecialty expertise that would make them an attractive acquisition or merger candidate for any pathology super-practices located within their regions.

Given the realities in today’s pathology market described above, THE DARK REPORT predicts that the pathology profession will soon see a cycle of mergers and consolidations. However, this consolidation cycle will be different than those seen in the last two decades.

Cycle of Consolidation

The pathology profession is likely to see smaller—and financially weaker—pathology groups seek to merge with the stronger pathology groups in their community. Little money will change hands in these transactions. Rather, the smaller group will be happy to fold itself into the larger group and gain whatever additional financial security results from being part of that larger laboratory operation.

Remember that there are thousands of private pathology practices in the United States that have five or fewer pathologists. These smaller groups lack the financial staying-power to survive the ongoing reductions in revenue that both Medicare and private payers are pushing down on anatomic pathology.

In fact, should the nation’s smallest pathology groups delay action on restructuring their business affairs, they are likely to end up in either a Chapter 7 or a Chapter 11 bankruptcy. Certain pathology vendors have told THE DARK REPORT that, over the past 24 months, they have lost customers through Chapter 7 bankruptcy actions—something that these vendors have not seen in prior years.

Less Money, Less Time

These predictions are based on a reasonable interpretation of market forces that are clearly visible today. The window of opportunity for smaller pathology groups to reposition themselves is growing smaller as payers continue to reduce what they pay for pathology services.

Aurora Diagnostics: It Shares Industry Woes

BECAUSE MOST PATHOLOGY GROUP PRACTICES are privately held and do not regularly report their financial earnings, it can be difficult to obtain objective information about the state of the anatomic pathology marketplace.

However, there is one pathology company that does report its quarterly financial performance because its debt is held by the public. That is Aurora Diagnostics, Inc., of Palm Beach Gardens, Florida. Founded in 2006, it has acquired and currently operates about 20 community pathology practices in 12 states.

In its public financial filing for the third quarter of 2013, Aurora Diagnostics reported a decline in revenue of 10.5%, from $69.4 million Q3-2012 to $62.1 million in Q3-2013. Similarly, for the full nine months of 2013, Aurora Diagnostics’ revenue declined 12%, from $211 million to $186 million.

Aurora stated that its average revenue-per-accession through September 30, 2013 “was approximately $114, down from $128 in the quarter ended September 30, 2012.” This is a decline of 11% .

Company officials attributed this decline “primarily to Medicare reductions, including changes to the 2013 Fee Schedule and sequestration, as well as lower reimbursement from private insurance, the BlueCard program, and a change in service mix.”

As a side note, for those watching the collapse of the business of providing lab testing to nursing homes, in this filing, Aurora explained that it had sold a clinical laboratory business in August 2012. This business served primarily nursing homes and long term care facilities. Aurora said that, for the “three and nine months ended September 30, 2012, the discontinued operation had net revenue of $0.8 million and $3.8 million, respectively, and net losses of $0.3 million and $2.2 million, respectively.”


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