CEO SUMMARY: It started about eight years ago and shows no signs of slowing down. Specialist physicians, particularly urologists and gastroenterologists, have learned about the benefits of operating their own in-clinic anatomic pathology laboratories. One-by-one, these specialty practices are investing in this ancillary service. As they do, local pathology groups lose access to these tissue referrals. This major shift in the pathology marketplace gives many indications that is a trend that won’t be reversed.
OVER THE PAST DECADE, there has been a steady shift in how specialist physicians refer their anatomic pathology specimens. with increasing frequency, these specialists choose to build their own in-clinic pathology laboratory and take responsibility for the anatomic pathology testing performed on behalf of their patients.
This trend is disruptive to community hospital-based pathology groups, for a simple reason. In most cities, the largest source of specimen referrals to local pathology groups has been urology and gastroenterology groups located in the same community.
Lost Access to Specimens
Thus, when these local specialists establish their own in-clinic anatomic pathology laboratory, there is a significant fall-off in specimens flowing to the local anatomic pathology group. If the decline in case referrals from long-time client physicians is significant, it can trigger serious operational and financial issues for the pathology group which lost access to these cases.
Pathologists are justified in their concern about the long-term consequences of this trend—both on the future of their pathology group practices and on their profession. However, many pathologists fail to understand the larger transformation going on in the anatomic pathology testing marketplace, of which specialist in-clinic pathology labs represents just one element.
The same attractive economics that made the profession of anatomic pathology such a good place to make a comfortable living across many decades has caught the full attention of the investment community. These economic fundamentals are bringing an entirely new business mindset to the production, delivery, and marketing of anatomic pathology testing.
At the same time—and independent of the desirable financial opportunities in anatomic pathology—basic healthcare reform trends are about to exert powerful dynamics on how the U.S. healthcare sys- tem orders laboratory tests and reimburses for them.
It is necessary to bring both of these sources of change together to understand, for example, why specialist physicians have found it relatively easy to establish and operate their own in-practice anatomic pathology laboratories. Further, these same market fundamentals argue that the rather slow and sleepy competitive market for anatomic pathology testing that was standard in the 1990s will not survive the 2010s.
Canary in the Coal Mine
In fact, the trend of specialist physicians bringing anatomic pathology testing in- house might be considered a powerful “canary in the coal mine” warning for the majority of the nation’s smaller community hospital-based pathology groups. As go the highest-referring sources of tissue, is likely to go the other sources of tissue referrals.
That implies that other traditional sources of tissue referrals from the outreach community that flow to community hospital-based pathology groups could be similarly diverted. This would happen as investors and more progressive pathologists act decisively to organize a delivery model designed to outperform the turnaround times, the quality, the informatics features, and the customer service typically offered by a smaller pathology group practice.
Caught by Surprise
Because of their daily workload, few pathologists have time to consider how their profession is evolving. That is why they are frequently surprised when physician-clients in their community suddenly decide to switch to another pathology lab company. The warning signs of competitive sales activity were likely visible, but went unseen by the local pathologists because of the loyal referral relationship they had long enjoyed with those office-based physicians in the community.
Similarly, even as many pathologists focused on their daily practice of pathology, new delivery models of anatomic pathology services were enjoying impressive successes. The numbers tell the tale. Dianon Systems, Inc., of Stratford, Connecticut, shifted its business emphasis to anatomic pathology in 1995, a year when its revenues were about $50 million. By 2002, the year it was acquired by Laboratory Corporation of America, it had grown to more than $190 million in annual revenue.
Eight Years to $100 Million
Bostwick Laboratories, Inc., of Glen Allen, virginia, offers a similar example. Founded by David G. Bostwick, m.D., in 1999, it grew to almost $100 million in annual sales by the end of 2007. For investors, these are remarkable rates of growth. They’ve watched similar successes at other national pathology companies, including Ameripath, Caris, CBL Path, and Poplar Healthcare (the renamed GI Pathology Partners), to name a few.
For all the decades since world war II, the private group practice was the dominant business model for anatomic pathology. Not until the second half of the 1990s did another business model emerge that proved capable of capturing the tissue referrals of office-based physicians. (See sidebar on page 7.) That business model proved to be the national pathology company which sends sales reps to crisscross the country to wrest pathology case referrals away from local pathology group practices.
AP Condo (Pod) Labs
Next, during the decade of the 2000s, specialist physicians began to learn about the financial benefits of operating an anatomic pathology laboratory. The first anatomic pathology laboratory condominium (pod labs) emerged in 2002. (See TDRs, July 19, 2004, and August 9, 2004.)
Opposition to this business model by the pathology profession and rather swift regulatory action curtailed this business model within several years of its appearance. However, by that time, the genie was out of the bottle. Urologists and GIs had quickly learned that there were financial benefits and clinical advantages to having an in-clinic anatomic pathology laboratory. Over the past five years, a steadily-growing number of these specialist groups invested to create their own pathology laboratories.
Pathologists who comment publicly about this trend often attribute financial motives to the decision by specialist physicians to create their own anatomic pathology laboratories. After all, who better understands the favorable economics associated with processing and diagnosing tissue than pathologists?
But this trend has other important drivers. Specialist physicians face greater pressure to deliver improved health outcomes for their patients. medicare and private payers are designing reimbursement incentives which reward physicians when they improve patient care.
Patient Satisfaction Surveys
At the same time, payers are measuring patient satisfaction with their physicians. Office-based physicians know that they must also continually do better at meeting the expectations of their patients—as measured by patient satisfaction surveys.
All of these factors are reasons why a specialist physician can defend the operation of a pathology lab within his or her group. Sure, there is money to be made, but, as the physician business leader who was interviewed on pages 3-5 pointed out, the gastroenterologists in his group enjoy a 24-hour turnaround time for their pathology testing, have more control over the quality of the tissue that is collected and processed by their in-house pathology lab, and enjoy much closer contact and ongoing consultations with their pathologists.
It will benefit pathologists who are reading all these tea leaves to understand that, whether the competitor to the community hospital-based pathology group is a national pathology lab or in-sourcing by local specialist physicians, the referring physicians have a choice about where to send their tissue specimens. The local pathology group can compete successfully—but it must first step up its own service level and sales program.
Who to Blame for Changes? Urocor? Dianon? Impath?
EACH YEAR, THE COMPETITION FOR ANATOMIC PATHOLOGY SPECIMENS grows more intense. New competitors regularly enter the market and new delivery models for pathology testing constantly spring up.
All of this is the direct opposite of the quiet—and very collegial—anatomic pathology market of the 1980s and later. During this era, the nation’s 3,300 independent pathology group practices generally had a defined service area and served office-based physicians within this regional market with little or no competition.
So what changed? And who was responsible? Much of the blame can be attributed to UroCor, Inc., when it was a public lab company in Oklahoma City, Oklahoma. Back around 1992, following a Chapter 11 bankruptcy, UroCor re-organized with a strategy of offering both lab testing and pharmaceutical services to urologists across the nation.
Immediately, UroCor began growing at double digit rates. It did not take long before Dianon Systems, Inc., of Stratford, Connecticut, noticed this growth. By 1995, Dianon was building its own national sales force to call on urologists and gastroenterologists to solicit pathology specimen referrals.
Contemporary with these developments, Impath, Inc., of New York, New York, had entered the market with sophisticated breast cancer assays. It also grew at double-digit rates as hospital-based pathologists referred cases for the secondary diagnosis.
The culminating event to these developments probably came in 2002. In just seven years, Dianon had grown from about $50 million in annual revenue to more than $190 million yearly. It was acquired that year by Laboratory Corporation of America for a whopping price of $598 million!
This acquisition caught Wall Street’s attention. Since 2002, hundreds of millions of dollars have been invested to buy and operate anatomic pathology companies.