"Newsmaker Interview"

Global Laboratory Trends Dominated by Rising Costs and Labor Shortage

“The Web has transformed many industries and it’s clearly affected our industry. This trend will help raise the bar in quality and overall performance among laboratories and manufacturers.”
—Jim Reid-Anderson
Chairman, President, and CEO of Dade Behring

CEO Summary: Recently, THE DARK REPORT conducted a roundtable interview with executives of Dade Behring. Present were Jim Reid-Anderson, Chairman, President and CEO; Donal Quinn, Chief Operating Officer; and Mark Wolsey-Paige, Chief Strategy and Technology Officer. Topics discussed ranged from domestic and global trends in the clinical laboratory industry to evolving business strategies in the in vitro diagnostics (IVD) industry—and Dade Behring’s responses to these developments. The interview was conducted by Editor Robert L. Michel.

EDITOR: There’s high interest in the new products introduced by Dade Behring Inc. in recent months. It is expected to shift the competitive market because your company is ready to compete for the business of high volume laboratories, here and across the globe. That makes it timely to discuss Dade Behring’s views on current issues now confronting laboratory administrators and pathologists. After all, it has been almost five years since your last interview with THE DARK REPORT. (See TDR, October 28, 2002.)

REID-ANDERSON: Oddly enough, in terms of our overall view, it hasn’t changed with regard to what I said to you five years ago. Dade Behring continues to be the largest company in the world that’s solely dedicated to clinical diagnostics. We serve about 25,000 customers around the world, and have about $1.7 billion in annual revenue.

EDITOR: Why is this distinction important?

REID-ANDERSON: Since we don’t have business lines to serve the research market or other biotech industries, our focus is solely on clinical diagnostics. That gives us a unique and intimate understanding of the needs and opportunities in clinical laboratory services.

EDITOR: Because you believe that, over the past five years, the same basic forces continue to shape the evolution of the clinical lab marketplace, let’s review the key points.

REID-ANDERSON: We believe there is a broad trend in the industry that involves the role of clinical diagnostics in the life cycle of patient care. It is recognized that fast, accurate diagnosis helps save lives and promotes wellness. Further, if used appropriately, laboratory testing has the potential to help contain healthcare costs overall. That area is a strong trend and one on which we are focused.

EDITOR: I suspect that you see a problem, along with an opportunity.

REID-ANDERSON: Yes. The problem is that the relative amount of funding for diagnostic testing has declined in recent years.

EDITOR: Could you explain that?

REID-ANDERSON: Numerous reviews of healthcare spending show that diagnostics represents just 2% of total healthcare costs. When you and I spoke last, diagnostics was about 3% in these same spending tallies. So, diagnostic’s proportion of the total health- care spend has declined significantly in a short time. Despite the fact that diagnostics continues to be the basis for 70% of health- care decision making, the profile of laboratory medicine is not high enough. Policymakers do not fully understand the benefits that can come from diagnostics.

EDITOR: What other issues confront laboratories today?

REID-ANDERSON: A primary issue is the continuing increase in cost, both in operating the laboratory and providing healthcare services. Another primary issue is laboratory labor—both the availability of labor and its cost.

EDITOR: Those were tops on your list of issues five years ago.

REID-ANDERSON: Nothing has changed on these points. Of course, there are many other areas of focus, such as informatics and reimbursement pressures. These are issues that affect the United States and many European countries. On the demand side, in all of the developed countries, you have aging populations. This generates increased demand for diagnostic testing and other healthcare services.

QUINN: We have operations in 35 countries and this trend is common across the globe. Many countries are introducing DRG-style approaches to control the rising cost of care.

EDITOR: Does the introduction of DRGs (Diagnosis-Related Groups) trigger certain consequences to the healthcare system?

QUINN: DRGs have been used in the United States since the 1980s with some success. But this type of focus on costs leads to market consolidation. Outside the United States, Australia provides probably the best example. Australia has experienced strong market consolidation on the one hand, followed by privatization on the other hand. Because of consolidation, Australia’s lab market is now controlled by about seven large lab companies. We see a similar trend in France and Germany.

EDITOR: So, you see a clear trend of a concentration of lab services into fewer and larger laboratory companies.

QUINN: Yes, and this creates a dilemma for labs undergoing consolidation. They must reduce costs while at the same time maintaining or improving turn-around times and the quality of care.

EDITOR: Let’s shift gears and talk about how Dade Behring is positioning itself to respond to these trends and the evolving needs of clinical laboratories.

REID-ANDERSON: At the time of our last conversation five years ago, Dade Behring was just beginning to see the results of a change in corporate strategy. During our early years in the 1990s, the primary focus was placing instruments. It was the traditional, sales-driven culture that was common to many corporations. About the time of our reorganization and corporate refinancing, we changed our strategy to adopt a customer-first culture. We think you will see this culture shift reflected in our people.

EDITOR: That’s an interesting strategy for differentiation. Can you explain how you are creating that difference?

REID-ANDERSON: Of our worldwide staff of 6,300 employees, more than half are what we describe as “customer facing.” One of our priority goals is customer retention. We are able to retain customers because we consistently help them acquire the right solution for their needs, and then we provide consistent service day in and day out. We recognize that business goals can only be met by having people within our company who are focused on meeting the needs of our customers.

EDITOR: Let me be a skeptic, for a moment. All companies say they want to use customer service to deliver competitive advantage. What is different at your company?

“Because of consolidation, Australia’s lab market is now controlled by about seven large lab companies. We see a similar trend in France and Germany.”
-Donal Quinn

REID-ANDERSON: Of course we aim to deliver products and middleware solutions. But we recognize that it is equally important to service those products very well for five or more years—throughout the length of the contract. Our goal is to provide the same intense level of service at the end of the contract as we did at the beginning. We believe lab customers recognize this level of service commitment.

EDITOR: You are talking about a business strategy that, at its heart, is unrelated to healthcare and lab industry trends.

REID-ANDERSON: Even though it’s important to respond to market trends, you also have to focus on the customer. That’s because every lab has its own unique set of requirements—regardless of market trends. We have identified 14 points of contact that we have with our customers. We relentlessly measure how we meet our customers’ expectations on each of these 14 points of contact.

WOLSEY-PAIGE: Robert, one point might help you better understand this corporate strategy. If you recall, during the 1990s, Dade Behring was a company put together by Wall Street investors. They acquired products and business divisions from several different IVD industry players. Our challenge was to mesh what were five different company cultures into a single Dade Behring culture. Emphasizing customer satisfaction was an effective way to align and unify the thinking of all our employees.

EDITOR: That is an excellent point. Most lab directors and pathologists tend to overlook the fact that today’s Dade Behring is a consolidation of several earlier—and well-established—diagnostic vendors. I would like to switch topics again and discuss technologies. In particular, what are Dade Behring’s views about progress in proteomics and informatics, as they relate to clinical laboratory testing?

WOLSEY-PAIGE: Since our reorganization in 2002, we have steadily increased our annual investment in research and development. We intend to use technology as the strategic complement to the customer-facing organization. This will play out in two ways. First, we will use technology to advance the clinical mission of the laboratory. Second, we will use technology to improve both the clinical efficiency and the work flow efficiency of the laboratory. Both of these objectives are met with our Dimension Vista® platform.

REID-ANDERSON: Five years ago, Robert, we discussed the Dimension Vista® platform. At the time, it was called Project Epsilon. We are now shipping that product to customers and what I described in our conversation is now in use in laboratories.

WOLSEY-PAIGE: Let me connect our perspectives on technology to the lab industry macro trends we discussed earlier. The laboratory industry is poised for great times. Demand for laboratory testing increases even as labs have new assays that offer increased sensitivity and specificity. Most physicians and the people making clinical decisions value the capabilities of technology. But the pressures of increasing costs and declining reimbursement mean that laboratories have little margin for error. We hope to provide our customers with technology and solutions that help them succeed, despite these negative economic trends.

EDITOR: Essentially, you aim to support the effort of laboratories to reduce the margin for error in how clinicians utilize lab tests. Do you see progressive laboratories executing a strategy to participate in the pre-pre analytical activity of the clinician and the post-post analytical activity of the clinician? That’s where clinicians decide what test to order and then, after getting the test results, how to treat the patient.

QUINN: Among the leading laboratories, we see this trend. To support this trend with technology, we are building expert systems into our instrument platforms and middleware. These are designed to manage work flow and aid in evaluating results and interpretation.

EDITOR: Are labs in other countries deploying expert systems on a wider scale than we see in the United States?

QUINN: That varies widely. For example, there is a great deployment of expert systems in Germany. However, in some areas of medicine, there’s an aversion to anything that’s perceived as cookbook medicine. That issue must be overcome for expert systems to gain wider acceptance. Across our product line, the strongest demand for this capability is in protein testing, as well as segments of the microbiology market. Those are areas where we’ve seen great demands for that capability.

REID-ANDERSON: I’d like to get back to the question you asked a few minutes ago about trends and technology. I’d like to add a few others. The first one involves the prevalence of integrated analyzer systems. Market data collected by independent companies indicates that the number of integrated analyzer systems is growing rapidly. In the United States, about 46% of labs have integrated systems and most of these simply combine chemistry and immunoassay testing on the same platform.

EDITOR: Will this trend continue?

REID-ANDERSON: Definitely. The United States is ahead of the rest of the world in terms of using integrated instrument systems. In 2001, independent data showed that integrated instrument systems represented about 19% of the U.S. lab market. And the most recent survey, completed during 2006, shows that integrated instrument systems now hold about 46% of the market in the United States. This is a big area for Dade Behring, since we have a market share of approximately 81% of those integrated systems with our Dimension family.

EDITOR: Are laboratories moving toward this type of solution as a way to automate work processes and streamline work flow?

REID-ANDERSON: That is a major motivation. This is a trend now extending into all of the international markets. Now, I don’t believe 100% of U.S. labs will have integrated systems 10 years from now. But, bym2017, it could be 80% to 90%. Globally, probably fewer than 20% of labs now use integrated instrument systems. The trend toward instruments that can do more will be huge.

EDITOR: Is it true that another significant trend in laboratory instrumentation since 2000 is the growth in demand for pre-analytical systems? After all, pre-analytical automation can positively affect workflow through the rest of the laboratory, as well as help address the labor shortage facing most laboratories.

REID-ANDERSON: That was going to be my next point and you just hit on it: automation. We totally agree with your points about automation. We predict that a broader and more capable variety of solutions will be available in the future. At one time, experts believed that only high volume labs would have these solutions. But advances in technology now make it possible for mid-and high-volume labs to incorporate these solutions.

EDITOR: Is that why we’re seeing automation as an important labor substitution strategy? In other words, the technology is enabling a lot more solutions than what was called automation in 1995 or 1996?

REID-ANDERSON: Yes, absolutely. Another trend we’ve seen in the in vitro diagnostics (IVD) marketplace is that laboratory customers expect their vendors to deliver enhanced services. This goes beyond higher expectations for the performance and reliability of instruments and reagents. They want their suppliers to provide superior support services, along with help in developing solutions that advance the clinical and operational performance of their laboratory.

EDITOR: This trend could be described as the interest of laboratory customers to work with suppliers who provide added value, such as the operational consulting teams we now see at many IVD manufacturers.

REID-ANDERSON: You describe the change in the expectations of laboratory customers. This is one reason why we adopted a “customer focused” business strategy. Donal, I know you have strong opinions about this trend, right?

QUINN: Yes. That’s correct. Given the pressures that we’ve talked about where consolidation is happening in a particular market, how does a laboratory truly differentiate what they do from competing labs? If they can provide a differentiated service to their customers, then they are almost guaranteed to be able to continue to grow and develop.

EDITOR: Thus, in your view, an IVD manufacturer such as Dade Behring can differentiate itself with its laboratory customers if it can provide these labs with the help, knowledge, and service package they need to achieve a similar differentiation with their own customers?

QUINN: Our goal is to ensure that we support them in that effort, and therefore be in a position where we truly deliver on a consistent basis day in and day out. We aim to delight our customers at every point of contact. That is our fundamental approach in the marketplace.

“The United States is ahead of the rest
of the world in terms of using integrated instrument systems.”
-Jim Reid-Anderson

EDITOR: If you were to articulate some of the specific steps that Dade Behring takes in terms of service and performance ‘on the street’ for customers that would differentiate Dade from the other major IVD companies, what are they?

QUINN: We measure our performance against the 14 different points of contact. We look at each of those points in terms of their importance to our customers. It’s no surprise that the number one need, in every country across the globe, is the performance of the field service organization. Another priority is to look at each laboratory as being unique. Every laboratory has unique needs and that provides us an opportunity to develop a solution to meet that lab’s specific needs. In some cases, it may be how a large, multi-hospital health system wants to integrate lab testing services across multiple sites. In another situation, it may be how we help the laboratory exploit e-commerce.

REID-ANDERSON: In addition, we try to find supplementary support for our customers as well. I’ll give you an example. This is something new since we talked earlier. About five years ago, we developed a scholarship program because we understood that our customers had problems recruiting staff to work in labs. We are investing over $1.25 million in nine countries to fund scholarships for students who are pursuing degrees as clinical laboratory professionals. That program has become extremely successful. It’s grown every year, and that differentiates us as well. The scholarships are one area in which we have increased our investment.

EDITOR: On the topic of investment, this may be a good time to talk about the type of new technologies you expect to see in the marketplace in coming years.

REID-ANDERSON: With so many laboratories looking for integrated solutions, help in refining work flow, and the in-house capability to offer a broad menu of tests, we’ve aligned our technology efforts to support these objectives. One approach is ultra-integration. That involves the combination of chemistry and immunochemistry and enhancing it by adding much more capability. We have built the ability to perform nephelometric protein testing into our new Dimension Vista® platform so we can offer the same quality of measurement on our chemistry/immunochemistry analyzer that has been the hallmark of stand-alone nephelometers in the past. Improving ease of use is a priority too.

EDITOR: Could you comment more on that point?

REID-ANDERSON: Our goal is to develop and deliver solutions which take labor contact out of the laboratory. For example, our new analyzer has highly automated calibration and QC procedures. Customers recognize the value of that benefit. In addition, our customers want to monitor the instrument and discern differences in performance and intervene proactively to deal with any variation. We responded to this need by designing our Dimension Vista® instrument very differently from early Dimension platforms, adding the ability to monitor the instrument remotely. We have wanted this for a number of years. We designed the instrument with hundreds of sensors, all of which can be tracked over the Internet. That allows us to continuously monitor the performance of the instrument remotely. Over time, as we get more experience with this data, we will be able to proactively intervene before a problem develops by sending a service rep to the site or calling the customer if we see a potential issue. Also over time, we will mine the data, allowing us to make design changes to make our instruments even more reliable.

EDITOR: The value of LOCI™ technology is that it increases the sensitivity of the next generation tests, right?

REID-ANDERSON: Yes. We talked about LOCI™ a few years ago and it has unique advantages. Mark can provide more detail on that topic.

WOLSEY-PAIGE: Yes, the actual performance will speak for itself as labs gain more experience working with individual assays on the Dimension Vista® menu. An important factor is the homogeneous nature of the technology. For example, there’s literally no difference in the way you process a chemistry test or a immunochemistry test other than the measurement station that it stops at and the light wave length you are flashing. This greatly simplifies the mechanical processing requirements for the system and means there is no time penalty on the instrument with this format.

REID-ANDERSON: We are also seeing another dividend from our research budget, which has been 9% of revenue in recent years. Our current technology pipeline has more than 100 products approaching introduction. Last year, Dade Behring had more tests approved by the FDA than all the other top five competitors put together. When you combine new instrumentation and new assays with our focus on service, we believe that lab customers will be very interested in the solutions we are bringing to market.

EDITOR: One area that I am curious about is the migration of QA/QC functions onto Web-based systems that allow real-time collection of data from laboratories worldwide. Will this development force IVD manufacturers that have been inconsistent in the quality of the reagents they ship from one batch to the next to have more consistent outcomes?

“Let me address the informatics part of this equation. The integration of in vitro diagnostics and healthcare informatics is already underway.”
-Mark Wolsey- Paige

REID-ANDERSON: Absolutely. The Web has transformed many industries and it’s clearly affected our industry. This trend will help raise the bar in quality and overall performance among labs and manufacturers. We focus on this area intensely. To the best of my knowledge, we are the only company that has no outstanding issues with the FDA. We work to ensure that we are not in a position to have such an issue. As laboratories access real time peer data, information flows more effectively and laboratory directors are able to measure how they’re performing versus other laboratories. At the same time, they will be able to assess the consistency and quality of their vendors’ reagents.

EDITOR: Do you think that, as laboratories adopt Lean and Six Sigma methods, that these quality management tools will make it easier to make relevant comparisons of their operational performance against other laboratories across the globe? For example, it becomes possible to look at analytical performance in terms of a Six Sigma rate—errors per million events— and compare it with the Six Sigma rate of other labs?

QUINN: These tools are effective in many ways and indeed Six Sigma is one metric that absolutely could be applied across the globe. Even though we talk about our strategic market, there are numerous laboratories in other countries that could match the standards that we see in some developed markets. That is true in the 35 countries in which we operate. As an organization, we welcome all kinds of transparency that can show how our products match up with the competitive offerings of other companies.

EDITOR: I am curious as to whether you believe that market and regulatory forces are raising the quality bar in diagnostic manufacturing—the supplier segment in laboratory testing.

REID-ANDERSON: That is certainly true. We have a strong focus on this area and that’s due in part to what happened about a decade ago when most of us joined the company. We had an issue with the FDA that was a defining moment for us as a management team. At the time, we said we would never allow ourselves to be in that position again. Now we listen with great care and attention when we interact with the FDA. We take immediate action on any problems that are identified.

WOLSEY-PAIGE: This is a rigorous effort. Along with FDA visits to our instrument and reagent manufacturing sites, we have an internal team that conducts surprise audits of our sites. If anything pops up as a result of those inspections, we fix it before it becomes an issue. In addition, we pay independent auditors to do surprise audits. In that way, we know exactly where we stand on QA and QC issues.

REID-ANDERSON: As you can see, not only does our manufacturing team get detailed information from customers on how we’re performing, but we’re independently checking quality. We know we must work to maintain the customer’s trust in our quality.

EDITOR: One topic I’d like to pursue involves the potential to combine imaging, IVD, and informatics as Siemens and General Electric are attempting to do.

REID-ANDERSON: As you recall from our conversation five years ago, ongoing consolidation of the IVD industry is something we predicted. At that time, we pointed out that consolidation would come from two areas. One source would be mergers and acquisitions among IVD manufacturers. The second source would involve major conglomerates buying into this industry. That has happened during the past 18 months, as Siemens and GE each acquired IVD manufacturers.

EDITOR: These two companies directly raised the profile of in vitro diagnostics with Wall Street. However, with your knowledge of technology and the market, can either or both of these companies integrate in vivo and in vitro diagnostics with informatics in ways that add value to clinicians?

REID-ANDERSON: There will be plenty of debate about that question. It may take as long as 10 or 15 years to fully realize the anticipated benefits in linking these technologies.

WOLSEY-PAIGE: Let me address the informatics part of this equation. The integration of in vitro diagnostics and healthcare informatics is already underway. So, as long as we adhere to standards and our systems provide information in a format that flows seamlessly into laboratory information systems and other clinical repositories, the desired benefits will accrue to the healthcare system.

EDITOR: Going back to the intersection and integration of in vivo and in vitro, we see announcements that technology allows an imaging procedure to see smaller and smaller structures of the human body. So, one could speculate that radiologists can now find structures inside organs that indicate possible early stage cancers. It’s not actionable information because the clinician doesn’t know if the cells are benign or malignant. Is it reasonable to assume that advanced imaging technologies could find that structure at an early stage. Then, the clinician could use fine needle aspiration to collect those cells and let molecular pathology confirm if they’re malignant. Would this be an example of how a Siemens or a GE could marry imaging procedures with clinical lab testing, thus enabling that imaging procedure to become a clinically appropriate procedure?

“…the vision of integrating imaging and in vitro diagnostics tends to downplay how advances in molecular diagnostics will arm clinicians with increasingly sensitive, highly accurate assays.”
-Jim Reid-Anderson

WOLSEY-PAIGE: It’s certainly reasonable. As the scenario plays out, the challenge will be managing the cost to the healthcare system. Obviously, it has a lot of appeal, but it is apt to be expensive if the number of interventions increase. The key to making the sale is building the value add—it’s a similar issue with PSA testing.

REID-ANDERSON: Also, the vision of integrating imaging and in vitro diagnostics tends to downplay how advances in molecular diagnostics will arm clinicians with increasingly sensitive, highly accurate assays. Look forward by five to 10 years. In that time, we will increase the number of onboard specialty tests that target disease for which there currently are no tests. Those disease states would include cancer. Furthermore, new assays that are more specific, more accurate, and more sensitive will be capable of early diagnosis in the way you describe. This is the specific direction of our research and development efforts. New assays will give physicians and patients greater knowledge and will be much more affordable for our customers.

EDITOR: That’s an interesting prediction. Let’s look next at the informatics goals discussed by Siemens and GE. They are dis- cussing the benefits of combining laboratory information systems (LIS) with data such as radiology images. Eventually, that could mean the ability to fabricate a workable electronic medical record (EMR) that could be used with clinical database systems. What are the strategic merits to this vision?

WOLSEY-PAIGE: This endeavor would certainly provide advantages. The main challenge is how you evolve from today’s information technology (IT) market position to this future state. To achieve the data integration you described, companies would need to migrate from a relatively small share position in the information systems market to a position where a sizeable number of laboratories adopt their LIS products. Building a commanding market presence will take time—along with a significant investment.

EDITOR: Time is growing short. We’ve covered a wide range of topics about trends and developments in the laboratory industry. Many thanks to all of you for participating in this discussion.

REID-ANDERSON: You are welcome. Donal Quinn, Mark Wolsey-Paige, and I enjoyed the opportunity to update our views on these subjects. As you have learned, everyone here at Dade Behring is optimistic about the future of clinical laboratory services.

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