1999’s Top Ten Stories Reflect Speed of Change

Clinical lab industry undergoing another cycle of fast and far-reaching transformation

CEO SUMMARY: This year’s round-up of the lab industry’s Top Ten most important stories lacks any compelling single theme. THE DARK REPORT’s conclusion? 1999 was a transition year. No new outside forces rattled the lab industry, allowing lab executives and pathologists to concentrate on implementing their particular laboratory’s business plan. However, early hints at transformational forces showed themselves in 1999.

IT’S TIME ONCE AGAIN TO PRESENT our list of the Top Ten most important stories for the year. The Top Ten story list demonstrates that 1999 was a relatively quiet year for laboratories and pathology groups.

THE DARK REPORT’s Top Ten stories draw attention to the most important forces shaping the laboratory industry. For 1997, the big story turned out to be laboratory compliance. Compliance has dominated the radar screens of lab executives almost continuously. In contrast, both 1998 and 1999 have been relatively quiet years.

However, THE DARK REPORT views 1999 as a seminal year for future events. As our Top Ten story picks reveal, there are a number of transformational forces beginning to emerge.

Seen from that perspective, 1999 is a transitional year. Technology introduced this year will cause today’s accepted management models of laboratory organization to be replaced by new models. As examples of this, we point to technologies now enabling web-based lab test ordering/results reporting and routine chemistry and hematology point-of-care (POC) testing.

As usual, THE DARK REPORT presents its Top Ten story list in no particular order of importance. We recommend that our clients and readers reflect on the range of themes that these stories represent. The Top Ten story list demonstrates that management challenges for laboratory and pathology during the next five years will be extensive and far-ranging!

1. Quest Diagnostics Gobbles Up SmithKline Beecham Clin Labs

IT WAS ROLE-REVERSAL TIME IN 1999 for Quest Diagnostics Incorporated. Acting boldly, Quest CEO Kenneth Freeman spent $1.3 billion to acquire SmithKline Beecham Clinical Laboratories (SBCL) from Smith-Kline Beecham, PLC.

If not the biggest lab industry story for 1999, it certainly attracted the most attention. When news of the acquisition was made public last February 9, it was widely reported by both the financial and lab industry press.

But many journalists and laboratorians missed a fascinating twist to this story. Quest’s purchase of SBCL is a magnificent example of role reversal. To understand why, turn back the clock to January 31, 1996. That was the day the Wall Street Journal reported that Corning Corporation was looking to sell its “faltering” Corning Clinical Laboratories (CCL) division (now Quest Diagnostics). The most likely buyer? SmithKline Beecham. (See TDR, February 5, 1996.)

In early 1996, SBCL was the strongest of the three blood brothers. That was certainly not the case by February 1999. It took only 36 months for Quest Diagnostics (CCL) to build the financial capability necessary to acquire and absorb SBCL.

Quest acquired its prize on August 16, 1999. Since that date, a new leader- ship team was chosen from Quest and SBCL executives. Now it faces the daunting task of consolidating two national laboratory systems, creating a unified corporate culture, and making money.

2. Tidal Wave of Hospital Lab Consolidation Crests by 1999

CONSOLIDATION OF HOSPITAL OWNERSHIP was the direct cause of widespread hospital lab consolidation. Beginning in 1995, the twin consolidation movements literally reshaped the American hospital and laboratory systems.

This consolidation tidal wave crested by the start of 1999. The raw numbers are astounding. THE DARK REPORT wrote this in its April 5, 1999 issue:

According to SMG Marketing Group, a Chicago-based healthcare information and marketing company, there are now 604 integrated health systems (IHS), a number which increased by 40% between 1995 and 1998! More importantly, the rate at which hospitals are joining systems increased at twice the rate. SMG says that 3,760 hospitals were in systems by January 1999, an 83% jump from 2,060 hospitals in April 1995.

Since there are only 4,800 acute care, non-government hospitals in the United States, this means that multi-hospital system now operate 80% of the nation’s hospitals! That doesn’t leave much room for further consolidation of either hospital ownership or hospital laboratories.

Instead, THE DARK REPORT expects hospitals to push their labs toward more sophisticated management, with the goal of improving care quality while lowering costs. This shifts emphasis away from today’s management emphasis on the operational efficiency of how the lab collects specimens and performs tests.

3. Wall Street Bargain Hunters Return to Clin Lab Industry

CERTAINLY 1999 SAW WALL STREET once again invest money in commercial laboratory companies. 1999 was the first time in several years when more investment money poured into the lab industry than flowed out.

But do these investments signal the beginning of a financial boom for the lab industry? THE DARK REPORT thinks not. It is our belief that a significant portion of these investors are “bottom-fishing.” After several years of widespread financial losses and bankruptcies among commercial laboratory companies, these investors believe bargains are to be found.

The size of the successful deals financed is telling. The year’s big transaction was the acquisition of SmithKline Beecham Clinical Laboratories by Quest Diagnostics Incorporated. This $1.3 billion acquisition was easily financed. Another big transaction was Kelso & Company’s purchase of Unilab Corporation. In taking Unilab private, Kelso spent about $420 million.

In the pathology segment, AmeriPath, Inc. continues to roll along, doing group practice acquisitions and posting profits. IMPATH, Inc. also posted strong performance and closed several lab acquisitions.

Despite investor optimism, the lab- oratory industry will continue to struggle for adequate reimbursement. Excess laboratory capacity is still abundant, and physicians are under pressure to utilize fewer tests. This certainly limits the upside profit potential from investments in laboratory companies.

4. Phlebotomist Reuse of Needles Shows Vulnerability of Labs

IT WAS EVERY LAB MANAGER’S WORST nightmare. On April 16, 1999, SmithKline Beecham Clinical Laboratories (SBCL) and California’s Department of Health Services (DHS) held a joint press conference.

The purpose was to announce that a phlebotomist at an SBCL draw station in Palo Alto, California had reused butterfly needles on patients. Before it was over, the story was national news and caused an uproar in the San Francisco Bay Area that refused to go away.

Eventually some 15,000 people would be offered free blood testing. Lawsuits, still pending, were filed against SBCL and the phlebotomist. DHS filed charges against the phlebotomist and fined SBCL $102,000 for its part in the affair.

THE DARK REPORT considers this a timely warning to laboratory executives and pathologists. It is a reminder that every laboratory organization is vulnerable to rogue actions by its employees.

The Palo Alto phlebotomist affair demonstrates that the lab industry requires a high degree of public trust to function. It evokes memories of the Tylenol poisoning case. And it shows how fast that news of any risk to public health can bring a laboratory (in this case, SBCL) under intense media scrutiny. That is why all laboratories and pathology practices should assess their vulnerability and develop prevention programs and crisis response plans.

5. Total Lab Automation (TLA) Fades in Favor of Other Options

HERE’S A TOP TEN STORY that’s gone unreported, except in THE DARK REPORT. It involves total laboratory automation (TLA).

In our first issue for 1999, we declared “TLA to be DOA”. (See TDR, January 11, 1998.) During the balance of the year, we heard no one step forward and contradict our assessment that the first generation of TLA had failed to deliver a cost-effective solution to laboratories.

To the contrary, both CAP Today and MLO published stories where TLA advocates admitted, however grudgingly, and with plenty of waffle-words, that TLA itself was probably still not ready for prime time. Instead, applying automation technology to laboratory work modules was to be the focus.

THE DARK REPORT has long agreed with that scenario. There is much faster return on investment (ROI) and increased flexibility from automating and mechanizing selected portions of the clinical laboratory.

But even we were surprised at how quickly another technology appeared during 1999 that would further erode the economic rationale supporting TLA. That is point-of-care (POC) testing for high volume, routine chemistry and hematology tests.

A new technology mix of modular lab automation, routine chemistry at POC, and the multiplex technology of companies like Luminex, will change the form of labs to the degree that TLA becomes a less relevant solution.

6. Anatomic Pathology Evolving Into a National Marketplace

IT’S BEEN A LONG TIME IN COMING. After many years of predictions, 1999 marks the year that anatomic pathology began to “go national.”

Although the vast majority of anatomic pathology continues to occur locally, there is an ever-growing number of pathology companies which offers services on a national basis.

THE DARK REPORT has regularly predicted that clinical and operational integration of healthcare services will cause pathologists to consolidate their individual groups into regional super-practices.

This is happening, and as consolidation occurs, a number of pathology-based companies are organizing to offer anatomic pathology services on a national basis.

For example, AmeriPath, Inc. continues to grow through acquisition. These acquisitions allow it to expand into new regional markets. DIANON Systems, Inc.’s expansion into anatomic pathology is another example of a national AP competitor. IMPATH, Inc. represents a different business mode. Its services are designed to support community hospital-based pathologists. But IMPATH is organized as a national provider.

The message should be clear to all anatomic pathologists. Traditional boundaries that once defined local markets are crumbling. This means local pathology group practices need a two-dimensional business plan that targets local and national opportunities.

7. Internet Gold Rush Brings E-Commerce to Healthcare

THIS WAS THE YEAR THAT THE INTERNET established itself as the dominant new force for reshaping business and commerce across the globe.

This was also the year that the Internet gold rush aimed itself at healthcare. Entrepreneurs and Wall Street financiers think the $1 trillion American healthcare system is ripe and ready to be plucked.

Sitting dead center in the cross- hairs of these profit seekers is the clinical laboratory industry. For years, laboratorians repeatedly pointed out that clinical laboratory data is usually 80% of a patient’s permanent healthcare record. They’ve also pointed out that laboratory transactions make up a high proportion of all clinical and operational transactions.

Even if payers and physicians haven’t listened, profit-driven Internet entrepreneurs have. Armed with this knowledge, an ever-increasing number of Internet companies are working to provide laboratories, physicians, and hospitals with Internet technology and web-based products.

The big dog in this hunt is Healtheon/WebMD. But LIS vendors such as Sunquest, McKesson/HBOC, Meditech, Cerner, and SMS have yet to weigh in with their next generation of web-based lab products. There are also many home-grown initiatives by labs themselves.

Add this all up and it becomes clear that Internet productsand services will soon give clinical labs and pathologists a lot of new business tools.

8. Hospital Laboratory Outreach Programs Come of Age in 1999

PROBABLY THE BEST-KEPT SECRET IN THE laboratory industry is that professionally-managed and market hospital laboratory outreach programs are profitable and thriving.

Across the United States, there can be found a small cadre of laboratory administrators who appreciate the multiple benefits that a solid lab outreach program delivers. They use it as their secret weapon to deliver job security to their medical technologists and lab staff.

Hospital lab outreach programs also boost the in-house capabilities of the laboratory. It puts profit dollars on the table for the hospital administrator, and it strengthens the relationship between physicians and the hospital.

Throughout 1999, THE DARK REPORT provided examples of successful hospital laboratory outreach programs. One enterprising lab director, Joseph McCauley of West Hills Hospital and Medical Center, even used outsourcing as a way to get his 236-bed community hospital into the outreach business.

THE DARK REPORT predicts that hospital labs operating solid outreach programs will survive and preserve their operating autonomy with a higher degree of success than hospital labs which don’t have outreach programs. Moreover, clinical integration makes hospital lab outreach programs a threat to commercial laboratories, including the two blood brothers.

9. Many California Physicians Endure a Financial Meltdown

FINANCIAL WOES OF CALIFORNIA physicians are relevant for an important reason. Healthcare initiatives that succeed in California are copied elsewhere. What fails in California is avoided elsewhere.

On October 11, THE DARK REPORT disclosed that at least one in ten private physician group practices in California was expected to declare bankruptcy or close down by the end of 1999. These statistics were provided by the California Medical Association and validated by Price WaterhouseCoopers.

This remarkable situation is compelling evidence that the California model for managed care has proved an abject failure. As a result, laboratory executives and pathologists should expect a variety of consequences, some good and some bad, as managed care plans in other parts of the country assess and respond to the California experience.

We may soon see the end of capitation, at least in the form it was used throughout the 1990s. We may also see the end of unlimited risk arrangements for providers. In California, this accounts for significant provider and physician losses.

Most importantly, we may see legislative remedies that require payers to establish reimbursement levels which are based on the true cost to provide healthcare services, as validated by independent actuaries. That would directly benefit the lab industry.

10. Routine Chemistry & Hematology Ready for Point-of-Care Sites

MOVING HIGH VOLUME, routine chemistry and hematology out of the core lab and to the point-of-care (POC) has not been a possibility. At least not until now.

Most lab experts and futurists were caught napping by the impending introduction of a credible new POC chemistry instrument. Its manufacturer claims that decentralized testing, utilizing this POC instrument, can compete in cost and performance with core lab testing.

THE DARK REPORT published the lab industry’s first look at Careside, Inc.’s point-of-care solution for moving routine high volume testing out of the core lab. If Careside’s technology solution works, it promises to give lab executives a viable way to move much high volume, routine testing out of the central lab and into a POC setting.

Even if Careside’s solution doesn’t fully deliver, THE DARK REPORT believes that the “Pandora’s Box Principle” is now at work. Simply put, competing chemistry and hematology instrument manufacturers will need to respond to this competitive threat with their own POC solution.

As that occurs over the next couple of years, lab managers will have a variety of feasible options for decentralizing routine testing. Wherever POC routine testing provides competitive advantage, aggressive labs will be willing to use it to steal clients from competitors. Opening this Pandora’s Box may accelerate the move to “distributed testing.”

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