2001’s Ten Big Stories Presage Future Direction

Radical change in the laboratory industry was not evident over the course of the year

CEO SUMMARY: During 2001, few labs found themselves under intense pressure to change or react to dramatic events in the healthcare marketplace. Like 2000, this past year was marked by evolutionary progress, not revolutionary change. However, continuing signs indicate that consumers will play a greater role in decisions involving lab tests. One surprise: slow growth of e-healthcare services.

WOW! AFTER THE BREAKNECK pace of change through most of the 1990s, the year 2001 was relatively calm. Most laboratories enjoyed their highest degree of stability in seven or eight years.

THE DARK REPORT’S pick of the “Ten Biggest Lab Stories” of 2001 reflects this “steady as she goes” environment. In fact, maybe one of the biggest stories should be that radical change was not a factor for most labs during the year.

There are two primary reasons for this, both financial. For the commercial lab sector, pressures from managed care contracting practices (and pricing) are easing. Across the nation, there is less capitation and many lab provider panels are adding providers.

For the hospital lab sector, significant Medicare budget cuts from the 1996 Balanced Budget Act (BBA) were moderated by subsequent Congresses. This increased the amount of money flowing into hospitals, thus easing the financial squeeze for many.

One big story was actually a non-story. During the year, healthcare e-commerce, in all its forms, failed to make a significant dent in the marketplace. This is particularly true of browser-based lab test ordering and results reporting, contrary to the famous prediction of THE DARK REPORT back in the fall of 1999.

There are many interesting factors inhibiting a faster adoption of Internet- based services by the healthcare system. These include technology limitations, lack of broadband access by many categories of healthcare providers, and, most importantly, failure of e-health service providers to offer compelling value.

Don’t Write-Off E-Health

But it would be a mistake to write-off healthcare e-commerce. Its potential to remove significant costs from the healthcare system while boosting productivity and quality remains. Early adopters in healthcare and the laboratory industry are proving that this potential can be converted to real dollars and cents.

THE DARK REPORT includes the September 11 terrorist attacks as a “Top Ten” story for an obvious reason. Beginning on September 12, everyone began managing their businesses and laboratories with a different perspective. Certainly that day effected a pervasive and recognizable change in the way every American enterprise conducts its business.

In that same vein, the anthrax attacks are included in the lab industry’s “Top Ten” story list. After all, just about everybody working in a clinical laboratory is now acutely aware that, at a moment when someone’s guard is down, specimens from an as-yet unidentified victim of a biochemical terrorist attack might come into the lab for testing.

Questions Med Techs Ask

The anthrax attacks have caused most med techs to consciously think about two things, in either order. One, will I correctly identify the active biochemical agents if such a specimen should come into the lab? Two, could I be unintentionally infected by unwittingly handling such a specimen inappropriately? Tough questions—but they accurately reflect today’s reality in labs around the country.

Another story on our “Top Ten” list is HIPAA. This may be the individual story which is having the greatest operational impact on laboratories and pathology group practices. Since HIPAA requires an active response, labs throughout the country are now devoting management resources to developing an appropriate compliance program.

Along with HIPAA, the med tech shortage is another “Top Ten” story which directly impacts many laboratories around the country. However, the story is bigger than lab-based medical technologists. Across the entire healthcare system, there are growing, and in some cases, acute shortages of trained technical staff in radiology, pharmacy, nursing, and other clinical areas. So the lack of adequate manpower is not unique to the clinical laboratory industry.

New Regulatory Attitudes

One of the more interesting stories on the “Top Ten” list is how the new administration is effecting changes to the regulatory environment, particularly the Medicare and Medicaid programs. THE DARK REPORT sees heartening signs that top regulators appointed by the new President want to operate their agencies in a more collaborative manner. This is a long-overdue change in attitude and may make it easier to enact many of the proposed reforms to laboratory test reimbursement policies.

Certainly this year’s “Top Ten” list has mostly good news for the lab industry and pathology profession. As in past years, THE DARK REPORT suggests that laboratory administrators and pathologists use this “Top Ten Biggest Stories” list as a way to review the strategic directions of their laboratories and group practices. Clients of THE DARK REPORT who do this tell us that it always triggers a productive planning session.

1. September 11: The Day That Changed Everything Worldwide

SELDOM IS THERE AN EVENT which galvanizes world attention and becomes a “before and after” marker for historical events. September 11, 2001 meets that criteria.

The terrorist attacks on the World Trade Center in New York City and the Pentagon in Washington, DC caused the world to become a different place on September 12. The consequences have been profound and far-reaching.

The lab industry was affected, both in the cities that were attacked as well as throughout North America. The grounding of the air transport system stopped the flow of lab specimens. It also interrupted timely delivery of necessary reagents and other lab testing supplies. (See TDR, September 24, 2001.)

But those were temporary disruptions in the normal flow of lab industry affairs. The cumulative consequences of September 11—economic, social, and political—will directly and indirectly affect laboratories and pathology group practices for years to come.

THE DARK REPORT believes September 11 will cause American society to make different choices about social issues in coming years. These choices will include healthcare and will incorporate new values over those of past years.

That is why September 11 makes this year’s list of important lab industry stories. It is a watershed event, rare and unusual, which forces all levels of society to think differently, act differently, and conduct business differently.

2. Anthrax Puts Labs Squarely in the Forefront of the War on Terrorism

BY DELIVERING ANTHRAX through the U.S. Postal System, terrorists brought clinical laboratories directly into the conflict.

Just as certain terrorists used weaknesses in the airline system to attack the United States, other terrorists used a different system—the mail—to launch their attacks. Just as September 11 is a “before and after” event for America, the anthrax attacks of late September and early October are now a “before and after” event for clinical laboratories.

That’s because individual laboratorians have been given fair warning that they are on the front lines of biological and chemical terrorism. Should such attacks be launched surreptitiously, it is most likely physicians in primary care and emergency room settings who will see the patients and it is laboratorians who will be first to make, or confirm, a diagnosis related to those attacks. (See TDR, October 15, 2001.)

Across the United States, laboratory organizations of all types are reviewing crises and contingency plans and updating them to include biochemcial terrorist attack scenarios. At the state and federal levels, officials are moving to increase funding for lab services related to terrorist attacks.

Most of the increased attention and resources will be focused on the public health lab sector. But, clinical labs increasingly recognize they may be first to identify an event and raise the alert.

3. Med Tech Shortage in Labs Reflects Wider Shortage of Healthcare Techs

ONE ISSUE GETTING WIDE PLAY in the clinical laboratory industry is the inadequate number of trained medical technologists and technicians available to fill open positions.

In a growing number of regional markets across the United States, larger labs are reporting difficulties in filling all open positions for med techs. There is universal acknowledgement that med tech training programs have been shutting down, reducing the supply of newly-trained med techs coming into the job market.

However, this phenomenon is not unique to the clinical lab industry. Similar shortages are occurring in other healthcare sectors. This summer, THE DARK REPORT published a study done by the American Hospital Association (AHA). It surveyed 715 hospitals and looked at vacancy rates for open positions.

The AHA reported vacancy rates for lab techs exceeded those for nurses, 12% to 11%. But vacancy rates for billing/coders, radiology techs, and pharmacy techs were even higher, at 18%, 18%, and 20%, respectively. The AHA estimates there are 168,000 open jobs at the nation’s hospitals. It says that 75% of these unfilled positions are for nurses.

There is good news in this for the clinical lab industry. The inadequate supply of trained technical staff is not unique. Across the spectrum of clinical care, there is a need for more trained individuals. This will stimulate the educational community to fill this vacuum.

4. First Generation of Managed Care Proves Inadequate—What Next?

CLOSED-PANEL HMOS and full-risk, capitated contracts are no longer the prime business model of the managed care industry.

The first generation attempt at widespread managed care failed for three significant reasons. One, it could not control healthcare costs over a sustained, multi-year period. In hindsight, that generation of managed care business model represented a one-time cost squeeze, basically at the expense of hospitals, physicians, and other providers.

Two, consumers rejected the closed-panel HMO option by a huge majority. Once a large number of middle class Americans found themselves denied care and unable to easily get second and third medical opinions, they resoundingly rejected this approach to providing medical care.

Third, healthcare providers proved to be another powerful lobby against the business model of managed care’s first generation. With each passing year, hospitals and physician groups in a growing number of cities and states began to reject capitated, full-risk contracts.

By 2001, even the managed care industry recognized it was time to change the way it conducted business. A definite shift towards more open types of health plans is under way. Further, employers have become emboldened to explore new and innovative ways to provide healthcare coverage to their employees.

5. HIPAA Arrives to Launch Reforms To Management of Healthcare Data

HERE COMES HIPAA! A long time in coming, implementation of this much-debated law is finally under way.

Much of the attention has focused on HIPAA’s onerous requirements for maintaining confidentiality, privacy, and security for sensitive healthcare information. Since the stock in trade for laboratories and pathology group practices is lab data and interpretive information, compliance with HIPAA is becoming a business necessity.

Unfortunately, a significant number of laboratories and pathology group practices have yet to give HIPAA compliance the attention and resources necessary for proper compliance. As experts interviewed in THE DARK REPORT have noted, it is not a smart operational decision to defer complying with HIPAA’s requirements.

On the other hand, there is an immensely beneficial side to HIPAA. Along with the privacy requirements, HIPAA also mandates a uniform method for clinical reporting and claims submission. The goal is to create a common electronic reporting platform between payers, all classes of healthcare providers, and patients.

Labs should find this a welcome reform. It will reduce costs for the lab to report results and submit claims. More importantly, it will make it easier for payers to service “any willing lab provider,” thus encouraging HMOs to include more labs in their provider panels.

6. Failure of E-Health to Penetrate American Healthcare System

BACK IN 1999, there was every indication that e-commerce business models were poised to transform healthcare.

Business experts were watching how Amazon.com and E-Bay.com were not just becoming dominant in their respective fields of retail book sales and auction house services, but were also creating a new business channel.

In healthcare, Healtheon, Inc. was targeting the paper-based flow of claims, prescriptions, lab tests, and other forms of healthcare transactions. In response, insurers, healthcare suppliers, and GPOs were scrambling to create Internet-based buying exchanges. Leading healthcare enterprises perceived that, if they did not incorporate Web-based services into their product menu, they would find themselves at a competitive disadvantage.

But a funny thing happened on the way to this new Internet-based healthcare world. The big boys stumbled and the weaknesses of existing Internet technologies became apparent. Healtheon merged with WebMD, then acquired a lot of “real” businesses. It lost billions of dollars. The numerous buying exchanges sponsored by insurance companies, manufacturers, and GPOs have been consolidating into a handful of surviving enterprises.

After much hype and billions of lost dollars, the healthcare community has taken a “show me” attitude towards the Web. It is cautiously adopting only Web-based services that make economic sense.

7. National Anatomic Pathology Companies Come of Age

IT’S OFFICIAL! National anatomic pathology services are here to stay. The dominance of the local pathology group practice is steadily diminishing.

THE DARK REPORT makes this declaration armed with these facts: During the past six years, three companies relatively unknown in the anatomic pathology arena in 1995 will do a combined total of more than $600 million in anatomic pathology testing (AP) in 2001. Those three companies are AmeriPath, Inc., DIANON Systems, Inc., and IMPATH, Inc.

Their growth rates have been remarkable. It happened even as many pathologists nay-sayed the ability of a national pathology company to send sales reps into their community and get physicians to refer specimens to a central AP lab thousands of miles away.

THE DARK REPORT sees plenty of evidence that growing numbers of office-based physicians are willing to refer AP specimens to national companies. That is the “buyer” side of the equation.

On the “seller” side, national AP companies are often the first to introduce innovative services. They are sensitive to turnaround times and regularly measure client satisfaction.

There will always be a role for the local pathology group practice. But competition is on the increase. The historical dominance of local pathology is lessening because of national competitors.

8. New Administration Changes Regulatory Environment

THERE’S A SUBTLE CHANGE in the attitude of regulators appointed by President George W. Bush. That’s particularly true of Tommy Thompson, picked to head the Center for Medicare/Medicaid Services (CMS).

One of Thompson’s first official acts was to change the name of HCFA—the Health Care Financing Administration—as a way to signal to providers that a new attitude would prevail. Whereas HCFA was perceived to conduct business in an adversarial manner, the newly-renamed CMS is striving to be more collaborative.

This shift, no matter how small, can have a compounding effect on the career bureaucrats who daily make the myriad decisions affecting Medicare and Medicaid policies.

This shift is rooted in the philosophical difference which marks the political right from the political left. There is an element of the political left which believes private enterprise to be fraudulent and always ready to “steal” if the opportunity presents itself. This is certainly in keeping with how the OIG pursued commercial labs in the “LabScam” prosecutions of the 1990s.

But on the political right, there is a group of thinkers who believe free enterprise is the source of innovation which improves quality and lowers costs. This is true of Tommy Thompson. Accordingly, for the balance of this administration, a number of decisions may be made that favor rational reforms to laboratory test reimbursement policies.

9. Consumers Getting Savvy, Now Taking Charge of Their Healthcare

CONSUMERS ARE THE ULTIMATE beneficiaries of healthcare services. That simple truth has often been overlooked by both private health plans and Medicare.

But that’s no longer true. The baby boomers, long a major change agent in American society, are scrutinizing the healthcare system. Increasingly they are taking proactive steps to direct the healthcare provided to their elderly parents, their children, and themselves.

As part of this process, they are questioning all aspects of the healthcare system. It is no coincidence that, last July, JCAHO began requiring hospitals to disclose to patients any episode where care did not meet acceptable standards. Litigation by angry baby boomers over medical errors has increased in recent years. What drives some of this litigation is anger that the healthcare establishment often tries to deny or cover up medical mistakes.

However, for laboratories and pathology group practices, the change in consumer attitudes is expressing itself in a different way. Consumers now want more access to lab testing. They want direct access to the pathologists who have diagnosed their tissue specimens.

If labs are to meet the changing expectations of their customers—consumers—then they must begin implementing services which give patients greater access to lab test information and the experts who can explain test results.

10. Happy Days Are Here Again For Public Lab Companies

STRONG STOCK PRICES for public lab companies in 2001 provided ample evidence that the explosive growth of their share prices during 2000 was no fluke.

Today Quest Diagnostics Incorporated and Laboratory Corporation of America have credibility and respect on Wall Street that was unimaginable just a few short years ago. In fact, this credibility has rubbed off on smaller laboratory companies as well.

These smaller public lab companies are prospering too. During the past year, AmeriPath, Inc.; Bio-Reference Laboratories, Inc.; DIANON Systems, Inc.; and IMPATH, Inc. have all seen their share prices move upward.

A new crop of lab companies took advantage of this favorable time to go public. The year started with Dynacare, Inc., Specialty Laboratories, Inc., and Unilab Corporation fresh off their IPOs (initial public offering). Several other private lab companies are preparing themselves for an IPO, when they deem the moment to be most auspicious.

With investors alert to the potential that pharmacogenomics and proteomics can have in boosting diagnostic testing, THE DARK REPORT predicts that the lab industry will remain a hot sector among the professional investment community. Look for more lab companies to go public during the next few years.

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