CEO SUMMARY: It was on September 25, 1995 that the first issue of THE DARK REPORT was published. The laboratory industry was in financial turmoil. There was widespread consolidation in both the commercial lab sector and among hospital laboratories. Reimbursement for lab testing services was falling rapidly. Yet, through all these negative changes, there were still opportunities for growth and financial success.
IT’S AN ANNIVERSARY we feel justifies a headline! With this issue, THE DARK REPORT celebrates ten years of service to the laboratory industry.
Our first issue was dated September 25, 1995. It arrived on the scene as the laboratory industry—reeling from the effects of gatekeeper HMOs, along with contracts built around capitated reimbursement and full utilization risk to laboratory providers—was approaching its financial nadir.
In the commercial laboratory sector, 1995 was the year that MetPath, Inc. was a $1.7 billion giant and changing its name to Corning Clinical Laboratories. In April 1995, Roche Biomedical Laboratories acquired National Health Laboratories and adopted a new name: Laboratory Corporation of America. With $1.4 billion in revenues, LabCorp passed SmithKline Beecham Clinical Laboratories ($1 billion) to become the nation’s second largest lab company.
Things were similarly chaotic in the hospital laboratory sector. 1995 marked the start of a remarkable 45-month cyclone of hospital mergers and acquisitions. By December 31, 1998, SMG Marketing Group of Chicago, Illinois was reporting that the nation now had 604 integrated health systems (IHSs), a 50% increase in IHSs during that time. According to SMG, these IHSs owned, controlled, or managed 3,760 of the country’s 4,838 general, non-federal acute care hospitals. This was an 83% increase from the 2,060 hospitals that were in IHSs in April, 1995! (See TDR, April 5, 1999.)
Of course, consolidation of hospital ownership had a huge impact on hospital laboratories. The years 1995 through 2000 were marked by a huge number of projects to consolidate and integrate laboratory services across all the hospitals within an IHS.
And if that wasn’t enough, soon Congress would pass the 1997 Balanced Budget Act (BBA). This legislation drastically reduced the amount of Medicare money flowing to hospitals in the following few years, generating even more severe financial pressure on hospital laboratories.
Helping Lab Leaders
It was during these chaotic times for all laboratories that THE DARK REPORT arrived on the scene with a simple goal: to provide laboratory administrators and pathologists with the type of reliable business intelligence that would make an immediate difference in the financial and operational success of their laboratory organizations.
In fact, our lead story in the September 25, 1995 issue featured the strategic thinking of Paul Mango, who was Executive Director of the Reference Laboratory Alliance (RLA) at that time. This 40-hospital regional laboratory network, based in Pitts- burgh, was attracting national attention throughout the laboratory industry.
As a laboratory business model, RLA had two primary objectives. The first goal was to engage hospital laboratories in Greater Pittsburgh to collaborate in negotiating patient access for lab outreach programs from the area’s Blue Cross/Blue Shield insurer. The second goal was to create an integrated laboratory testing infrastructure—linked by sophisticated information technology services—that would enable the community hospital’s lab outreach program to compete effectively against the national laboratories.
In this story, THE DARK REPORT emphasized three specific strategic imperatives Mango recommended for hospital-based laboratories. They were:
•The economic posture of hospital-based laboratories must improve if they are to survive.
•The necessary economic improvement in hospital labs cannot be achieved without growing the revenue base [by using outreach testing programs].
•The revenue base of hospital laboratories cannot increase substantially (and, in fact, will continue to decrease) without participation in managed care contracts.
Ten years later, Mango’s strategic analysis remains relevant, notwithstanding the disappearance of the gate- keeper-model HMO from the healthcare marketplace in recent years. In providing this intelligence to our readers in 1995, THE DARK REPORT was arming them with accurate intelligence to guide their laboratory organizations through the financial turmoil that beset the entire lab industry over the balance of that decade.
Hospital Lab Outreach
Today, estimates are that 50% or more of the nation’s hospitals operate some type of laboratory testing outreach program. This is graphic evidence that Mango’s strategic imperatives in 1995 were accurate guidance for lab directors and pathologists.
Over the past ten years, THE DARK REPORT has worked hard to identify emerging market trends and provide intelligence about the successes enjoyed by early-adopter laboratories and pathology group practices. We were first to predict that exclusive national lab testing contracts with big insurers would be problematic—both for the laboratory winning the contract and the insurer.
In our November 13, 1995 issue, we analyzed the recently-announced, and first-ever, sole-source national lab testing contract between SmithKline Beecham Clinical Laboratories (SBCL) and Cigna Corporation. Worth an estimated $100 million per year to SBCL, it was our prediction that such pacts would not only be difficult to make work effectively, but would fail to deliver the promised financial benefits to all parties while alienating a large number of physicians providing care to Cigna patients.
Impact Of Deep Discounts
All of that came true, and more. During the next three years, SBCL aggressively pursued, and won, a number of sole- source national lab testing contracts by offering deeply-discounted prices. During those same years, Corning Clinical Labs (now Quest Diagnostics Incorporated) and LabCorp began to show pricing discipline in contract negotiations with major payers.
During 1997 and 1998, while average revenues-per-requisition were increasing at Quest Diagnostics and LabCorp, they were declining at SBCL. THE DARK REPORT believes SBCL’s deteriorating financial performance during those years played a major factor in motivating its parent company, SmithKline Beecham Plc, to sell its lab business to Quest Diagnostics during 1999.
I tell this story for a reason. It illustrates why accurate and timely business intelligence, as presented on these pages, helps lab executives and pathologists make more informed business decisions.
Where Is He Now? Update on Paul Mango
IN RECOGNITION OF THE TENTH ANNIVERSARY of THE DARK REPORT, it seems appropriate to do our first “Where Are They Now” update on the subject of the lead story in the inaugural issue of THE DARK REPORT, published on September 25, 2005.
That lead story featured the strategic thinking of Paul Mango, who was then employed by the Institute for Transfusion Medicine in Pittsburgh and was the Executive Director of the Regional Laboratory Alliance (RLA). As a lab executive, Mango had a unique background. He is a graduate of the United States Military Academy at West Point in New York, holds an MBA from Harvard University, and was employed by McKinsey & Company, one of the world’s most-respected strategic business consultants, prior to his position at the Institute for Transfusion Medicine.
The 40-hospital RLA broke apart over the next 24 months as the competing integrated health systems (IHSs) of UPMC Health System and Allegheny Health System acquired community hospitals and, after the acquisition, pulled the laboratories of the acquired hospitals out of the Reference Laboratory Alliance. Around this time, Mango returned to work at McKinsey & Associates.
Since that time, Paul Mango has developed special expertise in strategic consulting on healthcare issues for some of the nation’s leading organizations and corporations. THE DARK REPORT caught up with Mango just two weeks ago in Tucson, Arizona. Mango was there to co-facilitate a lab industry strategic “think tank” underwritten by Sysmex Corporation.
Still a keen strategic thinker on healthcare issues, Mango’s advice to lab executives and pathologists is to expect consumer-directed health plans (CDHPs) to rapidly have a major impact on the American healthcare system. Mango says this is good news for labs, because it will allow them to re-establish direct business relationships with both referring physicians and patients.
For example, the passage of time demonstrated that the handful of locally-owned, pathologist-managed lab companies that operated through the balance of the 1990s always continued to make money—because they had the discipline to not bid for managed care contracts that reimbursed lab testing at marginal cost.
Some executives of these labs have told us, over the years, that our analysis of events, and our coverage of these types of stories, provided them with both the knowledge and the confidence they needed to stay out of the deeply-discounted and/or capitated lab contracting fracas.
Some executives of these labs have told us, over the years, that our analysis of events, and our coverage of these types of stories, provided them with both the knowledge and the confidence they needed to stay out of the deeply-discounted and/or capitated lab contracting fracas. They were comfortable losing access to managed care patients, while concentrating on the remaining—and much smaller—market of fee-for-service patients.
With the attainment of our tenth anniversary publishing THE DARK REPORT, we think it’s timely to introduce two new features. In future issues, we will reach back ten years, pull out an important lab industry story of that time, and assess its impact then and now.
Much of the information we have presented on these pages contains management wisdom which never goes out of date. There are some fascinating “old” stories which have new lessons to teach, even as they validate the original points we were striving to make at that time.
To complement this retrospective analysis of a major story of past years and its continuing influence on the present, we would like to introduce an occasional feature called “where are they now?” We will search out individuals who were influential in the laboratory industry during those years, but then vanished from the scene. You will get an update on what’s happened to them, plus a dollop of their current advice to the lab industry—but only if they have something relevant to say.
To launch this new feature, check out the sidebar on the previous page. It’s an update on Paul Mango, who was the subject of the lead story in our first issue of THE DARK REPORT on September 25, 2005. Having caused a stir in the lab industry back then with his leadership in designing, implementing, and operating a 40-hospital regional laboratory network in Pitts- burgh, no one should be surprised that Mango is once again poised to shake up the healthcare world.
This time his message is that consumer-directed health plans will stimulate major changes to the American healthcare system. But then, that’s a story we’ve already written about in THE DARK REPORT earlier this summer.(See TDR, July 11, 2005.)
Ten Eventful Years
In closing, all of us at THE DARK REPORT would like to express our thanks for your support during these ten eventful years. You have welcomed us into your labs as we’ve traveled across the country. You’ve shared your strategies, your secrets, and your setbacks with us. It’s helped us to better understand what’s working…and what’s not in lab management.
