Picking Top Ten Stories Of 2005 for Lab Industry

Unexpected insights into market changes emerge from this year’s intriguing list

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CEO SUMMARY: THE DARK REPORT offers its pick of the “Ten Biggest Lab Stories of 2005.” This year’s list of stories ranges from major consolidation in both the laboratory and health insurance industries, to “true crime” episodes that triggered criminal indictments of certain public lab executives. 2005’s most important story may be the forceful arrival of consumer-directed health plans (CDHPs) in the healthcare marketplace.

PICKING THE “TOP TEN STORIES of 2005 proved easy this year. As the editorial staff of THE DARK REPORT sifted through the year’s major events, there was speedy consensus on the final list.

The number one story is the growing acceptance of consumer-driven health plans (CDHPs) in the United States during the past 18 months. We’ve been first to alert laboratory administrators and pathologists to this still-nascent trend and explain specific ways this will affect laboratories and pathology group practices.

One short-term consequence of CDHPs is the need for laboratories and pathology group practices to have transparent prices to quote to consumers upon request. Another is the capability to collect payment from consumers at time of service and to accept cash, credit cards, and health plan debit cards in patient service centers and other locations where specimens are collected.

Over a longer time, THE DARK REPORT predicts that CDHPs will return choice of laboratory provider back to referring physicians and patients. As that happens, community-based labs and pathology groups should regain competitive advantage that was lost during the 1990s when many HMOs excluded them from provider panels in favor of national laboratory companies.

Next on our “Top Ten” list is the arrival of a new billion-dollar laboratory competitor to the United States. With its acquisition of Clinical Pathology Laboratories, Inc. of Austin, Texas, Sonic Healthcare Ltd. has an operational base from which it can expand in any number of ways.

During the next few years, Sonic Healthcare has the potential to roil the competitive status quo that has existed between Quest Diagnostics Incorporated and Laboratory Corporation of America. It could decide to acquire regional laboratories as a way to build its revenue base in the United States. It has the corporate resources to expand outside the traditional markets served by CPL, using sales and marketing to capture new clients. Whichever business strategy Sonic implements, it introduces a new variable in the competitive landscape.

A number of stories on the 2005 “Top Ten” list involve efforts by state and federal healthcare officials to stimulate changes to the American health-care system. One dimension of this is the patient safety/outcome improvement trend. Labs and pathology groups can expect to see government health administrators introduce specific quality improvement programs that involve laboratory testing services. It will take some time, because labs are always low on the list of national health priorities. But the day will come when laboratories will be measured for quality and those measurements will be made public.

Cuts In Lab Reimbursement

Another trend in government health programs is to control the cost of laboratory testing. As reported on these pages in 2004 and 2005, the often- wacky contracting schemes cooked up by Medicaid officials in Florida and California are symptoms of a deeper disease. Medicaid is bankrupting state budgets and bureaucrats are responding with the most elementary strategy: changing reimbursement policies to pay laboratories less money.

Speaking of money, some executives in the laboratory industry took too much money, and did it illegally. When ex-IMPATH executives were indicted in New York City earlier this year, THE DARK REPORT surprised the lab industry with the findings that, since 1990, as many as 17% of public laboratory companies had CEOs who have had been indicted for criminal violations of federal healthcare statutes. And, for those cases that went to trial, the conviction rate has been 100%! (See TDR, June 20, 2005.)

Why Such Behavior?

This is a “Top Ten” story because it puts a different face on the frequency of corporate-suite crime that occurs in specific laboratory companies. It is appropriate for the laboratory industry to ask why the ethics in this sector of the lab industry are so different than that of, say hospital-based lab outreach programs.

A related story is the OIG’s continuing interest in anatomic pathology arrangements between office-based physicians, pathology lab companies and pathologists. With no recent enforcement action to serve as either a guide or a warning, the lab market-place is awash with anecdotes and stories about aggressive arrangements between referring physicians and anatomic pathology providers that, at best, skirt compliance requirements and, at worst, may be egregious violations of federal law. The OIG’s continuing interest should be a major caution sign for the entire laboratory industry.

As in past years, THE DARK REPORT recommends that lab administrators and pathologists may find it useful to build a strategic planning session around 2005’s “Top Ten” lab industry stories. These topics are early flags to trends that can swiftly change today’s status quo in the lab marketplace.

1.  Consumer-Directed Health Plans Poised To Transform Healthcare

YOU READ IT FIRST on the pages of THE DARK REPORT. Consumer-directed health plans (CDHPs) are expected to be “arguably, the most important development in health insurance since the widespread introduction of HMOs in the 1980s.”

No less an authority than McKinsey & Co. made this bold statement in the opening lines of the first-ever comprehensive analysis of consumer behavior in the first generation of CDHPs now in operation. (See TDR, July 11, 2005.) McKinsey & Co. believes that CDHPs provide consumers with the economic motivation to use healthcare services in radically different ways than is true of health plans like fee-for-service or HMO.

Consumer-directed health plans are designed around several primary factors. First, consumers are responsible for more out-of-pocket expenses. Many CDHPs require consumers to pay deductibles of $1,000 before insurance benefits kick in.

Second, Health Savings Accounts (HSAs) are designed to encourage consumers to become savvier buyers of healthcare services. Consumers can accumulate unspent funds in their HSAs.

As CDHPs cover larger numbers of consumers, labs and pathology groups must be ready to quote prices for lab testing services to consumers—and to collect payment for services at time of service by accepting cash, credit cards, or health debit cards.

2.  Sonic Healthcare Becomes Newest Billion-Dollar “Blood Brother” in U.S.

NOT SINCE 1999 HAS THE LAB INDUSTRY had three laboratory companies with revenues in excess of $1 billion per year.

During 2005, Sonic Healthcare Ltd. became the third member of this exclusive club when it acquired Clinical Pathology Laboratories, Inc.(CPL) of Austin, Texas. Sonic paid about $300 million to purchase a majority interest in CPL. (See TDR, September 12, 2005.)

Sonic Healthcare is a publicly-traded company based in Australia. It also owns clinical laboratories in New Zealand, Germany and in the United Kingdom. In buying its way into the United States, it presents an interesting wild card into the competitive land- scape for laboratory testing services.

Sonic Healthcare has a reputation as an efficient operator. It has deep pockets to support CPL’s expansion and to acquire other laboratories in the United States.

It also has a different business strategy when compared to national competitors Quest Diagnostics Incorporated and Laboratory Corporation of America. Sonic prefers to acquire local laboratories and continue operating them under their original name with the same staff.

Having placed a $300 million-bet to sit at the table and compete in the United States, Sonic Healthcare will certainly introduce new competitive wrinkles into a competitive lab services marketplace long dominated by Quest Diagnostics and LabCorp.

3.  Medicare Physician Pay-to-Perform Demonstration Project Now Underway

TWO EVENTS THIS YEAR ARE PAVING the way for Medicare pay-for-performance programs involving laboratory testing services.

On March 1, 2005, CMS (Centers for Medicare and Medicaid Services) launched a demonstration physician pay-for-performance (P4P) program. CMS selected 10 large medical groups, involving 5,000 physicians and 200,000 Medicare beneficiaries, to participate in this demonstration program. Savings attributable to improved patient care will trigger rewards to those physician groups that generate improved outcomes. (See TDR, February 21, 2005.)

The second event occurred last month. In November, CMS announced the results from the first year of its demonstration hospital pay-for-performance program. In all measurements, outcomes improved.

Called the Premier Hospital Quality Demonstration Project, the program launched in October 2003 with the voluntary participation of 260 hospitals. CMS will pay $8.85 million to hospitals that show significant improvement in targeted areas over the course of the first year.

Assuming that Medicare’s P4P quality initiatives involving hospitals and physicians continue to deliver measurable improvement in outcomes, it may not be long before the laboratory profession has its own pay-for-performance demonstration project.

4.  Institute for Quality in Lab Medicine Is Sign of Quality Shift In Lab Industry

MEDICARE IS NOW EXPERIMENTING with pay-for-performance programs as a way to motivate providers to improve the quality of care. Is it a coincidence, then, that the Centers for Disease Control and Prevention (CDC) has invested considerable resources into launching the Institute for Quality in Laboratory Medicine (IQLM)?

THE DARK REPORT thinks not. IQLM has two primary goals in phase one of its operations. First, IQLM will develop a white paper that takes a first crack at measuring, at the national level, the quality of laboratory testing services in the United States. The second priority is to develop viable metrics for measuring laboratory quality. It then wants to collect these metrics from individual laboratories and aggregate them to create a national bench- mark that can measure the year-to-year improvement in the quality of laboratory testing. (See TDR, May 9, 2005.)

Laboratory managers and pathologists will want to understand the ramification of federal health initiatives to measure the quality of care and to motivate providers to improve outcomes. At some point, the healthcare system will begin designing specific programs to encourage laboratories to boost their quality and improve outcomes.

The birth of IQLM is fair warning to the lab profession. Measures of laboratory performance will be introduced. Success will accrue to those labs which can “manage to the numbers” and deliver significant improvements in clinical outcomes while reducing cost of care.

5.  Medicaid Lab Contract Effort Flops In both Florida and California

BY NOW IT SHOULD BE COMMON KNOWLEDGE that Medicaid costs are blowing huge holes in the budgets of many states. In particular, Florida and California face major funding challenges.

That is why, in 2004, Medicaid officials in both states proposed unorthodox, even radical, schemes to contract for laboratory testing services on a statewide basis. Designed to cut costs—and designed by bureaucrats— both contracting schemes collapsed during 2005. (See TDRs, January 3, 2005 and October 24, 2005.)

In both Florida and California, the complexities and arbitrary design of these statewide contracting efforts doomed them to failure. As well, the politics of how these schemes might favor certain lab companies over others triggered vociferous opposition.

For now, labs in both states are delighted that these Medicaid contracting initiatives have died. But the real message behind these unexpected and unorthodox contracting proposals needs to be understood. State Medicaid bureaucrats, desperate to shave expenses, will try to slash the cost of such tests.

Perceptive pathologists and laboratory managers should keep a wary eye out for future bureaucratic schemes that could hurt access by Medicaid beneficiaries to lab testing. They may also want to use this time to organize a more effective lobbying capability in their state to make a better case with Medicaid regulators and elected officials.

6.  Physicians with Anatomic Path Labs Attracting Greater Scrutiny by OIG

 IN RECENT WEEKS, the Office of the Inspector General (OIG) announced its work plan for 2006. For the second consecutive year, the OIG will be looking at arrangements that involve office-based physicians and anatomic pathology (AP) services provided to their patients.

That means 2005 started and ended with an OIG focus on AP compliance issues. It had issued a negative advisory opinion on a specific AP laboratory condominium arrangement in the closing days of 2004. (See TDR, January 3, 2005.)

In its 2006 Work Plan, the OIG indicates it will focus on pathology services performed in physicians’ offices to deter- mine if the billings for such services comply with Medicare Part B requirements. The OIG will scrutinize relationships between physicians who furnish pathology services in their offices and outside pathology companies.

The direct cause of these compliance concerns is the exploding interest by specialty physicians—urologists, gastroenterologists, and dermatologists in particular—in a variety of arrangements that cut them in on revenues and profits derived from AP services provided to their patients.

Across the pathology profession, the proliferation of business agreements designed to steer AP revenues into the pockets of referring physicians is a major concern. On one hand, it represents a compliance risk. On the other hand, it erodes the professional services revenue of pathologists.

7.  Newest Wave of Lab Acquisitions Strengthens National Lab Oligopoly

THERE WAS PLENTY OF EVIDENCE in 2005 that the national oligopoly in lab testing services is strengthening.

For example, Laboratory Corporation of America picked off Esoterix, Inc. in April. In August, Quest Diagnostics Incorporated announced it would pay a hefty $934 million to buy LabOne, Inc. That deal was announced just weeks after Sonic Healthcare, Ltd.revealed it would buy Clinical Pathology Laboratories, Inc. of Austin, Texas. A few months later, in October, AmeriPath, Inc. bought Specialty Laboratories, Inc. and took the company private.

2005’s steady parade of lab acquisitions fulfills a prediction made in 2002 by THE DARK REPORT. That was the year when the two blood brothers swept American Medical Laboratories, Dyncare, DIANON Systems, and Unilab out of the marketplace as independent companies by acquiring them.

In the three years since 2002, the two blood brothers have demonstrated their readiness to pick off any laboratory company that attains a certain size and scale. Such acquisitions represent growth to the acquiring lab—but they also remove a competitor just as it is becom- ing big enough to vie for significant managed care contracts and clients.

Expect the nation’s largest labs to continue bidding aggressively for any laboratory company that can grow past $50 million to $100 million in annual revenues. It is unlikely that most lab firms in that size range will remain independent for very long.

8. Ongoing Consolidation Among Payers Concentrates Power In Fewer Firms

CONSOLIDATION AMONG THE NATION’S LARGEST HEALTH INSURERS accelerated during 2005.

The emerging “superpowers” are WellPoint, Inc., which now has 34 million members, and UnitedHealth Group, Inc., with 28 million members. Both companies announced major acquisitions during 2005. (See TDRs, July 11, 2005 and October 24, 2005.)

It was THE DARK REPORT which first called the attention of the lab industry to the extent and impact of consolidation among major health insurers. The market dominance of large firms has reached the point where WellPoint and UnitedHealth alone insure more than one-third of the 50 million Americans with private health insurance. This gives these companies growing clout when negotiating contract terms with hospitals, physicians, and laboratories.

THE DARK REPORT predicts that “second rank” health insurers, including companies such as Aetna, Inc., Humana, Inc., and Cigna Corp., are likely to respond with their own acquisitions. How this eventually affects the healthcare marketplace remains uncertain.

That’s because the growth of consumer-directed health plans (CDHPs) will increasingly give consumers more choice as to which hospital, physician, or laboratory they want. As that happens, contracted provider networks as we know them today will have less relevance. Health insurers will become expeditors of patient choice, not gatekeepers to access.

9. Crime in Public Lab Executive Suites Triggers More Criminal Indictments

IN A PLOT THAT MIGHT HAVE COME directly from the pages of True Crime magazine, six former executives of IMPATH, Inc. were indicted for federal crimes on March 30 in New York City. (See TDR, April 18, 2005.)

According to the federal attorney prosecuting the case, former Chairman and CEO Anu Saad, Ph.D., and former President and COO Richard P. Adelson, along with four other ex-IMPATH executives, had cooked the books for several years. The scale of the fraud is staggering. By the end of 2002, the indicted individuals were accused of inflating IMPATH’s reported revenues of $50 million per quarter by more than 50%!

Yet this brazen scheme by lab executives is not an isolated incident within the laboratory industry. THE DARK REPORT published an analysis which demonstrated that, since 1990, of 23 publicly-traded lab companies, four have been indicted for federal crimes. This represents 17% of the total public lab firms operating during this period.

This ratio of criminal indictments to public companies may be unmatched by any other industry. It exists as a backdrop to any future federal investigations into lab industry practices. Combined with the Labscam settlements of the 1990s, the criminal behavior of specific lab executives in past years, including ex-IMPATH managers, has the potential to bias federal health prosecutors in cases yet to be filed. That’s a high price for an industry to pay for the sins of a few.

10. Patient & Physician Identity Theft Is a New Risk for Labs & Path Groups

IT’S A REMARKABLE FACT that the first conviction under HIPAA statutes was of a hospital phlebotomist found guilty of stealing the identity of one of his patients.

It is even more remarkable that no one in the laboratory industry realized this fact until THE DARK REPORT published the details of the conviction of Richard Gibson, a phlebotomist in Seattle, Washington. (See TDR, March 28, 2005.)

That scoop was followed by an exclusive interview with the victim. Eric Drew. Diagnosed with acute lymphoblastic leukemia (ALL), Drew was fighting for his life in a Seattle cancer hospital when he discovered that someone had stolen his identity and was opening credit cards in his name. Drew’s story about how no one would help, from hospital to news media to police, makes a perfect case study in what providers shouldn’t do when their patients are victims of identity theft. (See TDR, April 18, 2005.)

Even today, most laboratories and pathology group practices have yet to fully recognize the threat of patient and physician identity theft. However, the consequences of being unprepared can be expensive. As in the Richard Gibson case, when the public finally learned about his crime, the hospital’s name was splashed across the television news and daily newspapers. It was their good fortune that Eric Drew declined to sue them over how Gibson, then an employee of the hospital, was able to access Drew’s confidential information.

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