Curse Of Consolidation Plagues Health Providers

Healthcare’s billion-dollar behemoths struggling to achieve stability & profits

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WITHOUT QUESTION, today’s healthcare world is dominated by a single obvious trend: consolidation. The consequences of consolidation affect every segment of healthcare in the United States.

The commercial laboratory industry had the dubious distinction of being the first major segment of healthcare to undergo consolidation. Laboratorians are still dealing with its lingering effects.

Major cutbacks in the number of commercial laboratory sites, significant downsizing of med techs, and the creation of huge regional laboratory testing centers are the legacy of consolidation in the commercial lab industry.

The process of hospital laboratory consolidation is now in full flush. Activity to consolidate hospital labs is under way in almost every region of the country. Hospital laboratorians everywhere are dealing with the consequences of this pervasive trend.

Pathology Consolidation

The profession of pathology is only now embarking on its own consolidation journey. Within the pathology profession, consolidation is driven by hospital mergers, managed care contracting practices, and the arrival of pathology physician practice management (PPM) companies.

Whether the eventual consequences of pathology consolidation turn out to be good or bad has yet to be determined. Pathology consolidation is a market process which cannot be stopped, regardless of its impact upon individual pathologists.

Healthcare consolidation is an undeniable fact. That is why it is important for laboratory executives and pathologists to understand two key, but contradictory facts, about the consolidation process.

“Cottage” Providers

Fact One: The American healthcare system is evolving towards integration of clinical services. This requires the fragmented marketplace of “cottage” providers to be consolidated into intergrated provider networks.

Economics require managed care companies (MCO), hospitals, physicians, and ancillary providers to cooperate in providing comprehensive healthcare to patients. This can only be accomplished by preventing gaps in the patient’s treatment (a fundamental flaw in fee-for-service healthcare).

Regardless of the organizational form chosen, the goal of HMOs and integrated delivery systems is to link physicians and providers in order to eliminate gaps in managing the health of individual patients.

That is why the day of the solo practitioner has ended. It is why large corporations strive to buy up hospitals, physicians, laboratories, LTC facilities, and similar providers.

Fact Two: Consolidation creates large size and more clout in the marketplace. But large size does not guarantee profits and success.

It is important to understand the ramifications of this business concept. Consolidation is the dominant trend in healthcare. Consolidation creates size, market clout, and power with buyers. But large size is no guarantee of stability, sustained profits, and business success.

Too Big To Manage

THE DARK REPORT can list examples of this phenomenon in every segment of healthcare. Columbia/HCA grew from two hospitals in 1988 to 400 hospitals and $20 billion in sales by 1997. But, notwithstanding Medicare compliance and fraud issues, Columbia’s executives found it too big to successfully manage and have begun shrinking the company.

Among MCOs and HMOs, the nation’s largest companies posted immense losses during the last 18 months. Oxford Health, Kaiser Permanente, and United Healthcare posted losses, in millions, of $508, $275, and $565 million, respectively.

Posting Losses

In the PPM industry, industry leaders posted losses at an astonishing rate. MedPartners lost $840 million. FPA Financial Management entered bankruptcy. Even the darling of Wall Street, PhyCor, is writing off $92 million and telling analysts to expect weaker profits in coming years.

As laboratory executives and pathologists understand the contradictory nature of both facts about consolidation, it provides them with the key to developing the winning business strategy for their lab or pathology practice. The key is that service counts more than size.

Any successful business must meet and exceed the expectations of its customers day after day. Excellent customer service by laboratories and pathology practices insures a loyal customer base. It also permits labs and pathology practices to price services so as to maintain acceptable profits.

Consolidation is a market force which will not be stopped. But if laboratorians and pathologists understand the Achilles heel of these huge corporations, they can outcompete them. Healthcare is still a local business. The competitive edge is the exceptional service a local lab offers in its community.

Success Stems FromService, Not Because Of Huge Size

CONSOLIDATION AND HUGE SIZE do not guarantee profits and success. This creates an opportunity for smaller labs and pathology practices.

Excellent customer service is the critical success factor. Size generally inhibits billion-dollar healthcare behemoths from offering exceptional service.
But nimble labs and pathology practices can excel at innovative customer service.

In San Diego, Pathologists Medical Laboratories (PML) operates a successful, independent commercial laboratory. Despite San Diego’s brutal managed care market, PML’s growth has been steady and the lab consistently
makes money, unlike its other competitors in the state.

Cleveland’s Bayless-Pathmark is a pathology practice which expanded from two pathologists to 22 in the last six years. It posts steady growth and profits through exceptional client service. And it does this without the “business experts” from a large PPM.

These are just two examples from THE DARK REPORT’S files of lab and pathology innovators. They prove that consolidated behemoths can be bested in the marketplace by nimble labs.

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