Change Beneath Surface Marks 2004 Lab Stories

Lack of disruptive events during 2004 belies deeper forces triggering change

CEO SUMMARY: Presented here are THE DARK REPORT’S “Ten Biggest Lab Stories of 2004.” These are the events we consider most important to the lab industry during the year. However, in contrast to past years, 2004 lacked the types of blockbuster events which radically change and reshape the competitive landscape. Instead, 2004 was a relatively quiet year and change occurred at a slower pace.

LOOK BACK ON 2004 AND IT’S EASY to decide that there were no significant changes or disruptions to the laboratory testing marketplace. Ergo, it was a quiet year.

I would only partially agree with that conclusion. It is true that, at the end of 2004, the lab industry looked and acted much like it did just 12 months ago. However, I would argue that several major blips appeared on the lab industry’s radar screen which will directly trigger major change.

In particular, I would like to comment on three of these “radar blips.” Each is included in our picks for the “Ten Biggest Lab Stories of 2004.” That’s because, although not a trans- forming force during this calendar year, each represents the first steps of an evolutionary force that we expect to inexorably force significant change upon the laboratory industry.

One story which meets this criteria involves the growing embrace by healthcare providers, including laboratories, of quality management methods and philosophies. It is no longer accurate to say that only a handful of hospitals or laboratories are committed to quality management (based upon systems such as Lean, Six Sigma, and ISO-9000).

During 2004, the executive leader- ship of a substantial number of hospitals, health systems, and laboratories made a commitment to fully implement some form of quality management system into their organization. Because these initiatives are still in their infancy, it remains mostly invisible to the media and healthcare commentators. They continue to tell isolated stories about the experiences of early-adopter hospitals with Six Sigma. But the larger picture eludes them.

Improving Lab Performance

I believe this is a significant development—and worthy of inclusion on our “Top Ten Lab Stories for 2004”— because as more hospitals and laboratories deploy quality management systems, it raises the competitive bar. If leading laboratories continuously reduce error rates, substantially improve quality, and lower costs, won’t other laboratories in that region be forced to match that performance to remain competitive?

I am firmly convinced that wide-scale adoption of quality management systems in the laboratory industry will create a new class of winners and losers. The winners will be the labs which move quickly to implement quality management methods. The losers will be those laboratories which cling to their status quo as long as possible. In today’s world, “as long as possible” is often too late.

I am firmly convinced that wide-scale adoption of quality management systems in the laboratory industry will create a new class of winners and losers.

Pathology group practices are not immune to this trend. National anatomic pathology companies are expected to lead the drive to use quality management methods. As their quality improves and as their costs decline, it will give them a competitive advantage over those hospital-based pathology group practices which do nothing because they decide they have neither the time nor the inclination to invest in such quality management systems.

My next “radar blip” trend involves healthcare’s goal of the universal electronic medical record (EMR). Sometimes this is also called the “paperless” healthcare system. On page 6, you will read how President George W. Bush is calling on the federal government to lead the effort to achieve a universal EMR within ten years. Certainly we covered that story for you in May. But we also were first to alert you to this back in the summer of 2003.

Federal IT Health Initiatives

At that time, we explained the significance of the newly-signed contract between the Department of Health and Human Services (DHHS) and the College of American Pathologists (CAP). The five-year, $32.5 million pact gave DHHS access to CAP’s SNOMED® CT system, which contains a standardized medical vocabulary containing precise terms for 340,000 medical concepts. (See TDR, July 7, 2003.)

Further, during the past three years, THE DARK REPORT has been first to explain the importance of the Veteran Administration’s move to an all-electronic healthcare information system and the American military’s use of LOINC as the necessary precursor to its universal EMR. The armed forces want an EMR that will follow service personnel and their dependents anywhere on the globe. (See TDR, June 24, 2002.)

THE DARK REPORT hopes that your laboratory connects these dots before your competitors do. Healthcare will go paperless. Federal health programs will drive this change. Laboratories, as information factories, should position themselves to be enablers and leaders in this movement. To be followers cedes important dimensions of control to some other sector of healthcare.

The third “radar blip” trend I think worthy of your special attention involves a couple of our “Top Ten Lab Stories for 2004.” One is the criminal indictments of three ex-UroCor executives for violations of federal anti-kickback laws and securities fraud.  The second involves changes in lab contracting practices by Medicaid programs in Florida and California.

…government health programs are becoming more aggressive in their efforts to control or stamp out any activity deemed to be in violation of laws and regulations.

Both stories are based upon efforts by government officials to crack down on activities which cost government health plans lots of money. In some cases, the activities are clearly fraudulent. In other situations, due to the lack of clear statutory or regulatory guidance, the same activities might be defended as legal, but fraud investigators have a motive to make the opposite argument.

Government Regulators

My interpretation is more pointed. Collectively, the actions by Florida and California Medicaid program managers, the criminal prosecution by one federal attorney, and the OIG’s publication of proposed language to change the calculation of usual and customary fees all point to one conclusion: government health programs are becoming more aggressive in their efforts to stamp out any activity deemed to be in violation of laws and regulations.

Within the laboratory industry, there will continue to be plenty of debate about compliance requirements and what does and doesn’t meet the letter of the law.

But this debate doesn’t address three larger points. One, government health programs don’t have the money to adequately fund services. Two, the public is increasingly intolerant of healthcare providers who “rip off” Medicare and Medicaid. And three, there is political hay to be harvested when providers deemed to have abused Medicare/Medicaid are publically identified and punished.

That means it is likely that the environment between government-funded healthcare programs and laboratories (indeed, all providers) is likely to become more adversarial during the next 24 months. Thus, 2004’s developments are a cautionary sign that laboratories should review their business practices and improve their compliance programs.

Use In Strategic Planning

As you read through our summary of the “Top Ten Biggest Lab Stories of 2004,” relate these events to your laboratory or pathology group. Each year a significant number of our clients use this list in their strategic planning process. Not only does it provoke worth- while discussion, but it helps executive teams better understand how these lab industry stories are directly influenced and shaped by developing trends and evolving competitive pressures.

Finally, what topics didn’t make the Top Ten list? Nothing revolutionary happened to point-of-care testing (POCT) in 2004. There were no breakthrough LIS or Web-based lab test order/resulting products to disrupt the existing market- place. Experts continue to predict that no paradigm-shifting lab test technology will hit the clinical marketplace. These are useful signs that the pace of change in the lab testing marketplace is likely to remain stable, at least through 2005.

Top 10 – No.1
Quality Management Systems Make Big Inroads In Labs and Healthcare

THROUGH 2003, EXAMPLES of laboratories and hospitals which fully adopted quality management systems like Six Sigma, Lean, and ISO-9000 were extremely limited. That changed in 2004.

During the past 12 months, a sizeable number of hospitals, health systems, and laboratories have made strategic decisions to adopt and implement a system of quality management. Most of these organizations are still in the study and decision stage. Actual implementation has yet to begin in earnest. For that reason, this phenomenon is invisible to most of the public. Only after significant improvements result from actual implementation does the public start to
pay attention.

The adoption rate is driven by the results generated from early adopters. THE DARK REPORT has covered the experience of clinical laboratories which benefited from Lean and Six Sigma. (See TDRs, August 30 and September 20, 2004.) It has also profiled the hospital-wide Lean initiative at Virginia Mason Medical Center in Seattle, Washington. (See TDR, November 22, 2004.)

What these organizations have in common are gains of 50% from quality improvement projects which take just weeks to implement. It is these swift, deep, and long-lasting gains which are forcing other hospitals and laboratories to take their own steps toward implementing a quality management system.

What these early-adopters are doing is raising the bar. Their improved quality and higher performance will force competitors to respond in kind.

Top 10 – No.2
More Office-based Docs Take Steps To Bring Anatomic Pathology Services In-house

IT’S A BIGGER THREAT to the anatomic pathology (AP) profession than managed care contracting practices were during the 1990s.

Over the past 18 months, an incredible number of specialist physician groups took decisive steps to capture, in one form or another, the anatomic pathology revenues generated by their patient referrals. This was seen primarily in the specialties of urology and gastroenterology. (See TDRs, July 19 and August 9, 2004.)

The most visible sign of this trend is the emergence of anatomic pathology laboratory condominium complexes in Florida and Texas. Under one roof, up to 12 identical histology laboratories, each owned by a different physician group, would be operated by the condo complex operator. Notwithstanding a host of compliance issues triggered by this particular business scheme, an impressive number of urology and GI groups jumped at the chance to own their own AP laboratory and earn profits from this source.

However, AP lab condos mask a wider trend of specialist groups approaching local pathologists with the specific goal of crafting some type of discounted pricing or joint venture arrangement that allows them to share in AP revenues generated from their patient referrals.

To date, the pathology profession has not developed an effective strategy to counter these initiatives. Until it does, it can expect continued erosion of specimens and revenues from this source.

Top 10 – No.3
Federal Government Leads Drive To Accelerate Health IT Adoption Pace

ANY MAJOR SHIFTS in the adoption and use of information technologies by hospitals, physicians, and payers has huge consequences to laboratories.

That’s because the end product created by all laboratories is information. For that reason, the federal government’s role in pushing the American healthcare system toward a paperless information technology capability—the universal electronic medical record (EMR)—bears close watching. The evolution to that “perfect state” will profoundly change the way laboratories interact with physicians, payers, and patients.

THE DARK REPORT was the first and only lab industry source to point out the significance of President George W. Bush’s press conference on April 26, 2004. He called for adoption of a universal EMR within ten years, asked Congress to double funding for this effort to $100 million in FY2005, and created the sub-cabinet level post of National Health Information Technology Coordinator. (See TDR, June 7, 2004.)

Remarkably, this press conference was ignored by both the New York Times and The Wall Street Journal. However, that’s not the case for clients and regular readers of THE DARK REPORT. As healthcare’s major provider of useful clinical information, they are on notice that they should prepare their laboratories to accommodate the American healthcare systems’ evolution to a universal electronic medical record.

Top 10 – No.4
Criminal Anti-kickback Indictments Of Ex-UroCor Executives Is New Threat

NEWS THAT THE FEDERAL ATTORNEY in Oklahoma City had filed criminal indictments against three ex-UroCor executives caught the lab industry off-guard.

That’s because these charges claim UroCor violated federal anti-kickback statutes. The indictments are based on UroCor’s practice of offering a urologist-client deeply discounted client-bill arrangements to induce Medicare patient referrals from him/her.

Veteran lab industry attorneys believe this is the first time a federal attorney has indicted a laboratory executive for anti-kickback violations. In contrast, the billion-dollar settlements of “Lab Scam” in the 1990s resulted from allegations that Medicare fraud and abuse statutes were violated.

Discounted client billing is a com- mon practice within the laboratory industry, which makes these criminal indictments alarming. Were the jury to find UroCor’s client bill discounting policies in violation of anti-kickback laws, then this court case would create a new level of uncertainty. Any laboratory offering client bill arrangements to physicians at deeply discounted pricing might be at risk of criminal violations.

It should be noted that, because it takes two to violate anti-kickback statutes, a guilty verdict in the Uro-Cor case has ramifications for urologists who were clients of UroCor. Also, going forward, that same risk would be true for physician-clients who benefit from discounted lab test client bill arrangements.

Top 10 – No.5
FL & CA Medicaid Officials Effect Radical Lab Contracting Changes

MEDICAID PROGRAMS in both Florida and California are making significant changes to how laboratories are allowed to provide testing services to Medicaid beneficiaries in each state.

In Florida, there is an attempt to implement a bidding process that would award an exclusive, three-year contract to one laboratory. The winning laboratory would perform all outpatient testing for all Medicaid beneficiaries in the state.

In California, Medi-Cal officials are halfway into a new contracting process. Licensed laboratories currently providing testing services to Medi-Cal beneficiaries have been required to submit an application. Based on a variety of criteria, Medi-Cal will select and execute a contract with some of the lab applicants. Labs not selected will not be allowed to provide testing to Medi-Cal patients. (See TDRs, April 26, May 17, and November 22, 2004.)

Competitive bidding of laboratory testing services is another trend that will reshape the lab industry. Medicare is moving forward with its demonstration program for competitive bidding of laboratory testing. Results are to be reported to Congress by December 31, 2005. A similar competitive bidding initiative is unfolding in British Columbia’s health program.

Collectively, these examples are powerful evidence that government health programs will use such techniques to wring substantial cost reductions from laboratory testing services.

Top 10 – No.6
Medicare’s New Director Ready To Infuse Market-based Philosophy

THIS HIGHLY SIGNIFICANT development has gone mostly unreported by the nation’s media. Few people understand that Medicare’s new Director of the Medicare program has radical and different perspectives on how market incentives can help the agency better achieve its mission.

Mark McClellan, M.D., Ph.D. was installed as Director of the Centers for Medicare and Medicaid Services (CMS) in March 2004. Since then, he has brought a market approach to crafting solutions to problems facing the government healthcare programs.

One example is McClellan’s evolving policy of having Medicare reimburse for new medical procedures, new therapeutic drugs, and new diagnostic tests, so long as patients receiving these treatments agreed to participate in studies to measure the clinical effectiveness of the new technologies and these studies are funded by outside entities, including companies and organizations providing such services. (See TDR, November 22, 2004.)

McClellan believes that market incentives will stimulate private enterprise to develop effective clinical services that improve healthcare outcomes while lowering the overall cost of care. THE DARK REPORT believes such policies will prove particularly beneficial to the laboratory industry. That’s because, under this policy, Medicare is more likely to cover and reimburse for those new diagnostic test technologies validated to be effective by rigorous clinical studies.

Top 10 – No.7
Lab Breakdown at Baltimore Hospital Draws Scrutiny to Accreditation

LABORATORY ACCREDITATION PROGRAMS found themselves under congressional scrutiny this year following the spectacular operational failures inside the laboratory at Maryland General Hospital (MGH) in Baltimore.

MGH’s laboratory was accredited by the College of American Pathologists (CAP). Despite significant problems with its HIV and HCV over a 14-month period, neither CAP inspectors nor inspectors from the Maryland Department of Health uncovered these problems, despite multiple visits during this time frame. (See TDRs, April 5, April 26, May 17, 2004.)

Several Congressional hearings took place in the months following the discovery of problems within the MGH lab. At every hearing, there was criticism of the laboratory accreditation process and its reliance on peers to do inspections.

At the same time, newspapers in the Baltimore area prominently featured this story, since the lab at MGH may have reported inaccurate HIV and/or HCV test results on as many as 2,000 patients. It was public recognition of how established institutions could neither detect nor correct the continuous flow of medical errors generated by this laboratory.

THE DARK REPORT believes the intensity of public debate over this situation, and the scrutiny given to laboratory accrediting processes, demonstrates a fundamental change in public tolerance of medical errors. There is decreasing tolerance for any lab which fails a patient.

Top 10 – No.8
Cancer Diagnostics Attracts Major Investment Dollars from Wall Street

WALL STREET SENT A BIG MESSAGE to the laboratory industry during 2004. “It’s about cancer, stupid!”

During the year, some big money was invested in cancer-based diagnostics and therapeutics. Genzyme Corporation paid $215 million to acquire IMPATH, Inc. from bankruptcy court. Three days earlier it paid $1 billion to purchase Ilex Oncology, Inc. and seven months earlier it had spent $600 million to acquire SangStat Medical Corporation. Both of these companies have therapeutic drugs used to treat lymphoma and leukemia. IMPATH does lots of lymphoma and leukemia testing, which makes it first to know about patients who will need therapeutic drugs. (See TDR, March 15, 2004.)

Genzyme’s investment of $1.8 billion must be viewed in context with two major deals in 2003. One is Laboratory Corporation of America’s $598 million purchase of DIANON Systems, Inc. and the other was Welsh, Carson, Anderson & Stowe’s $840 million investment to purchase AmeriPath, Inc.

Wall Street’s willingness to provide $1.65 billion to fund the acquisitions of IMPATH, DIANON, and AmeriPath confirms that oncology is expected to be one of the most profitable areas of healthcare. Clinical laboratories and pathology group practices should “follow the money” and reassess their own lab’s strategy for cancer diagnostics. It’s a market segment for cancer diagnostics. It’s a market segment expected to yield significant profit margins in coming years.

Top 10 – No.9
Molecular Diagnostics’ Steady Growth no.9 Portends Many Impending Changes

MOLECULAR DIAGNOSTICS IS POISED for a big market shift. Because of unfavorable economics, clinical testing based on molecular technologies has been mostly limited to nation- al reference labs, specialty lab companies, and academic center labs.

That is changing swiftly. Increasing numbers of community hospital laboratories are setting up molecular tests and offering them to clinicians. That’s because of two reasons. First, a still- small number of molecular assays have very high clinical value. Second, refinements in technology now make it easier and less complex for a community hospital laboratory to perform certain molecular assays and offer faster turnaround times.

2004 was probably not the water-shed year for clinical molecular diagnostics. Payers remain reluctant to cover these high-priced assays in the absence of clear and compelling clinical evidence of their value. The supply of laboratory scientists trained in molecular technologies is much less than demand.

However, progress in this field is swift. New understanding about DNA, RNA, and proteomics is fueling intense development efforts. Laboratory administrators and pathologists can expect to see an explosion in the number of brand-new molecular-based assays which hit the market. The challenge will be to identify the ones which have clear clinical benefit, because payers are more likely to cover those tests.

Top 10 – No.10
Subtle and Important Shifts Appear In National Lab Contracting Practices

FOR TWO FULL YEARS, just two lab companies have dominated the national market for laboratory tests referred by office-based physicians and by hospitals. Payers and group purchasing organizations (GPOs) are now beginning to respond to this limited choice of laboratory providers.

Obviously, one major factor that drives contracting decisions by health insurers and GPOs is lowest price. With their economies of scale, both in purchasing and in production, the two blood brothers hold a major competitive advantage over smaller laboratory competitors. But it seems that service still matters too, maybe more than many would admit.

During 2004, UnitedHealth Group, Inc. selected Esoterix, Inc. as a lab services provider on its national contract. Esoterix thus joined Laboratory Corporation of America and Quest Diagnostics Incorporated on the United Health provider panel.

UnitedHealth took this step because it had complaints from physicians about their limited choice of labs and service issues from the contract labs. It was also a step to reduce off-contract leakage and leverage lower prices from its existing lab panel.

Later in the year, Premier, Inc. added Specialty Laboratories, Inc. as a fourth lab provider for its national reference testing contract. Viewed together, the actions by UnitedHealth and Premier show that other factors may allow smaller labs to carve out provider status in these types of contracts.

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