CEO SUMMARY: Say goodbye to several of the trends which shaped the lab industry during the 1990s, such as consolidation and government compliance programs. Although these trends won’t completely disappear, they will be superseded by a number of new transformational influences. During the next 48 months, these influences will bring lightning change to clinical labs of every size and shape.
ONLY ONCE IN 1,000 YEARS is it possible for THE DARK REPORT to speak to you at a moment which simultaneously marks the birth of a new year, a new decade, a new century, and a new millennium.
The symbolism should not be ignored by you, your executive team, or your laboratory staff. It is the opinion of THE DARK REPORT that the next 48 months will introduce the most radical and rapid upheaval to the organization and delivery of laboratory testing ever to occur!
As future events validate our opinion, the clinical laboratory industry of 1999 will divide into two camps: winning laboratories and losing laboratories. The reason is simple. New technology and business models now arriving in the marketplace will require laboratory executives to evaluate, act, and implement at lightning speed.
Laboratory organizations willing to act rapidly in acquiring and harnessing
new technology will be first to provide their lab users with improved value-added. These laboratories will flourish in the coming years.
In contrast, laboratory organizations which adopt a “wait and see” approach toward new technologies and new business models will find themselves consistently at a significant competitive disadvantage. The new classes of winning and losing laboratories that we predict will be identified faster than ever before. It means that any laboratory organization that is not continually improving and evolving will probably disappear. The most likely mechanism is that it will be placed under the ownership and direction of a lab organization willing to respond as fast as the marketplace requires.
Critical Success Factor
But speed in analysis and action is not the only critical success factor. Today’s crop of laboratory executives and administrators will also need to think and react in a multi-dimensional manner. They will be confronted with unorthodox opportunities to reshape the way their laboratories perform tests, report results and contribute to successful healthcare outcomes.
The coming upheaval in the clinical laboratory industry must be viewed from the perspective of economic and political events now unfolding worldwide. The Internet and its enabling technologies are literally causing a revolution in how business and government organize and deliver services.
In hindsight, the years of 1998 and 1999 were relatively quiet for the clinical laboratory industry. These were years where most laboratory executives and pathologists concentrated their efforts on implementing necessary projects. Issues like laboratory compliance, post-consolidation clean-up, and LIS projects were the primary priorities for many laboratory organizations.
Need For Major Decisions
That will not be true for 2000 and 2001. Laboratory administrators will need to make major decisions about laboratory automation, enhanced LIS capabilities, Web-based links to clients, joint ventures with other lab organizations, and regional laboratory network proposals.
All of this will be happening against a backdrop of steadily declining reimbursement for lab tests, more complicated compliance guidelines, and a cascade of new diagnostic tests.
In this year’s “state of the laboratory industry” report, there are eight trends highlighted. Unlike in the past, most of the trends presented have the potential, in and of themselves, to be paradigm-shifters.
This is noteworthy. Each trend represents a significant aspect of laboratory operations. Lab executives will be required to make decisions as to how their laboratory should respond to each of these trends. It means that most laboratory organizations will have several major management projects under way at the same time.
For example, think of the complexity of dealing with the implementation of Web-based lab test ordering/reporting with physician office clients while also evaluating and implementing routine testing at the point of care. Add to this the normal responsibilities involved in compliance, ongoing cost reduction efforts, and clinical integration, and it will create a challenging environment for all lab managers.
This year’s “State of the Laboratory Industry” report is designed to draw attention to those market forces which will have immediate impact on laboratory organizations throughout North America.
For that reason, THE DARK REPORT recommends that laboratory administrators use this year’s major trends as the basis for strategic planning with their management teams. It is important for each lab’s leadership team to develop a winning plan of action.
State of the Laboratory Industry
Key Trend #1
Pace of Change
INDEPENDENT OF OTHER FORCES acting to transform the organization of clinical laboratories is a separate dynamic: the pace of change.
Throughout the 1990s, the pace of change steadily quickened. Each new cycle of change took less time to achieve widespread impact among clinical laboratories.
THE DARK REPORT places this trend at the top of our list of transformational forces. The reason is simple. An ever-shortening cycle of change requires lab executives and pathologists to make swifter decisions and implement necessary responses on an accelerated basis.
As each cycle of change in the clinical lab industry becomes more compressed, it places greater responsibility upon lab administrators and directors. Failure of these officials to respond in a timely fashion can spell failure for their lab organizations.
Compare two lab industry change cycles and it becomes easier to understand why the cycles are compressing into short time frames. The cycle of commercial laboratory consolidation required about nine years to complete. Starting in the mid-1980s, a group of national lab companies began acquiring independent regional labs.
In the early 1990s, the names of these companies were familiar to all. Allied, Damon, MetPath, MetWest, National Health Labs, Nichols Institute, Roche Biomedical Labs, and SmithKline Beecham Clin Labs were all recognized brands. The culminating year for commercial laboratory
consolidation was 1994.
MetPath acquired both Damon and Nichols Institute to became a $1.7 billion company. Roche acquired National Health Labs and created Laboratory Corporation of America, with $1.5 billion in annual revenues.
Another change cycle was consolidation of hospital labs, which required about four years to accomplish. Prior to 1995, only a handful of consolidated hospital lab organizations could be found. Between 1995 and 1999, hospital lab consolidation was widespread across the United States and Canada.
New trends and change cycles will sweep through the lab industry in less time than the 48 months required to achieve widespread consolidation of hospital laboratories. For example, THE DARK REPORT predicts it will take as little as 24 months to complete the transition to web-based lab test ordering/reporting between physicians’ offices and laboratories.
Similarly, THE DARK REPORT believes that a new generation of point-of-care instruments for routine lab tests, such as chemistry and hematology, will lead to rapid decentralization of routine testing. This change cycle may require as little as 36 to 42 months to have industry-wide impact.
As change cycles to the lab industry accelerate their impact, it requires management of every laboratory to respond faster and faster. Expect the pace of change to create more pressure on lab decision-making than any other single trend in the foreseeable future.
Key Trend #2
NUMBER TWO ON OUR LIST OF important trends are Web-based links between physicians’ offices and clinical laboratories for lab test ordering/results reporting.
During the next several years, THE DARK REPORT believes that Web-based links between doctors’ offices and labs will have tremendous impact on the way lab laboratory services are organized and delivered.
The direct and immediate benefit will be to reduce the cost and improve the efficiency of submitting test requisitions and delivering test results. During the course of 1999, each of the three blood brothers signed contracts with companies to develop and deliver Web-based information links between their labs and their physician office clients.
DIANON Systems, Inc. and UroCor, Inc. did likewise. As public companies, these laboratory organizations are under continual pressure to reduce costs, increase profits, and capture more business. It is no coincidence that, during 1999, the five largest public lab companies committed to converting to a Web-based system for lab test ordering/results reporting with their physician office clients.
These lab companies believe they will gain competitive advantage and direct financial benefit from Web-based links to their clients. Competitive pressures will force other labs to quickly convert doctors’ offices to this kind of ordering/reporting system.
THE DARK REPORT predicts that virtually all physician offices generating large volumes of laboratory tests will be using Web-based test ordering/ results reporting within 24 months. (See TDR, November 1, 1999.)
But there is another, equally important aspect to this trend. Laboratory executives and pathologists should view Web-based links between labs and physician’s offices as “enabling technology.”
THE DARK REPORT sees Web-based links as a platform for delivering new and more sophisticated value-added services to laboratory customers. During the next several years, new developments in data base management and enhanced data processing software will give laboratories an unprecedented ability to create useful information from raw laboratory test data.
Combine this capability with Web access, and clinical laboratories will be able to deliver compelling data set analyses to clinicians, managed care plans, government regulators, and integrated healthcare system operators.
There are already early efforts to apply existing technology towards this type of information management. DIANON Systems, Inc.’s CarePath® product is one example. It’s a comprehensive, lab test-based disease management information suite. Although developed independent of Internet technology, it is being adapted for Internet access by payers, physicians, and patients.
THE DARK REPORT believes Web-based lab test ordering/results reporting will find rapid acceptance among physicians. This is a lab service which is definitely “physician-friendly.”
NEVER UNDERESTIMATE the power of consumers. After a decade of taking a back seat in decisions about their healthcare, American consumers are about to reassert themselves.
For laboratories, this will be a paradigm shift of immense proportions. After all, clinical pathologists and lab executives have traditionally viewed the referring physician as their primary customer. With the arrival of managed care, HMOs and other players also gained importance as customers of the laboratory.
That kind of thinking placed the patient last on the priority list for most clinical laboratories. In fact, as labs got patient complaints about bad draws, lost specimens, and similar issues, efforts to fix the situation were usually motivated toward keeping the physician and payer happy. After all, it was they who chose the laboratory, not the patient.
That’s now changing! Baby-boomers have a different attitude toward healthcare than their parents. Baby-boomers take an active, educated role in every aspect of their healthcare. They do primary research before visiting their doctor. They want to understand the nature of their diseases and participate in decisions affecting their care and that of their family (including their now-elderly parents).
Evidence of this fact is compelling. Since the birth of the Internet, pornography had generated the largest volume of Internet traffic. Not so in 1999. Healthcare eclipsed pornography as the subject of greatest interest. Consumers by the tens of thousands are using the Internet to research medical issues affecting themselves and their families.
Within the laboratory industry, many clinical pathologists have reported an increase in the number of customers who want to order their own lab tests, independent of their doctor. There is even a laboratory in Kansas City which is located in a retail shopping mall and caters to these kinds of patients.
Foresighted laboratories will begin to include patients in the information loop along with the physician who referred the test. Laboratories will use the Internet to notify patients when test results have been delivered to the doctor. Labs will provide patients, in advance of the draw, detailed information about the lab tests which will be performed and how they are used in diagnosis, prognosis and patient monitoring.
Further, THE DARK REPORT believes that some clinical laboratories will begin to educate consumers in their service markets about the types of lab technologies and quality steps utilized internally to produce a quality test result. In other words, the same techniques used by commercial companies to educate consumers about product quality will occur in the clinical lab industry.
Moreover, the power of consumers to alter the way lab testing services are offered and performed should not be underestimated. The consumer is king and has lots of money to spend. More than a few labs will be willing to profit by targeting lab services to these customers.
IF THE DECADE OF THE 1990s can be described as a decade of laboratory consolidation, then the decade of the 2000s will be described as the decade of laboratory decentralization.
The enabler for this trend will be point-of-care (POC) technology. The first target for laboratory decentralization will be high-volume, routine lab tests. If a POC instrument performs such tests at acceptable quality and a lower price, it creates the incentives to move routine testing out of the centralized core lab and into near-patient and point-of-care settings.
The first generation of routine POC instruments is now in the marketplace, led by Careside, Inc.’s POC chemistry analyzer. Careside expects to introduce its POC hematology instrument by second quarter, 2000.
This development is notable. For the first time ever, laboratory executives now have a choice: routine chemistry and hematology tests can be done either in a central laboratory or at the point of care.
Moreover, THE DARK REPORT predicts that Careside’s products will stimulate competition from other diagnostics companies. Certainly existing manufacturers are not going to cede their market shares to Careside without a fight.
Assuming that Careside’s technology and cost structure proves cost-effective in clinical usage, then competing diagnostics companies will be forced to respond with their own POC solutions.
THE DARK REPORT calls this the “Pandora’s Box Effect.” Once Pandora lifted the lid and released all the plagues into the world, there was no way to “put them back in the box.” In the same manner, any POC solution for routine testing that demonstrates acceptable quality and a competitive cost will be like opening the lid to Pandora’s Box. There will be no way to return laboratories to the way they once were.
That is why the introduction of Careside’s POC solutions for routine testing should be seen as a significant event. It gives laboratory executives and pathologists a new option for performing testing. It also encourages competing diagnostics vendors to bring their own POC solutions to market.
Moving routine testing to the point of care is a paradigm shift in the current organization of clinical laboratories. Once the option to decentralize routine testing is proven to be viable, every segment of the clinical laboratory industry will be affected.
If doctors install these instruments in their offices, it will reduce the flow of specimens to commercial laboratories. If integrated healthcare systems move routine testing to POC settings, it converts the remaining core lab into a reference and esoteric center. That certainly reduces the need for laboratory capacity and will trigger significant changes in how labs are organized.
Here is technology with the potential to support the “distributed laboratory” of which so much has been written. It will bring new opportunities for laboratorians to become more involved in clinical integration.
Key Trend #5
REGIONALIZATION of laboratory services goes hand-in-hand with most of the trends presented here.
THE DARK REPORT has long predicted that laboratory regionalization would emerge as the predominant organizational model. Regionalization of lab services is a rational response to most of the fundamental forces acting upon healthcare.
The emergence of national laboratory companies in the first half of the 1990s demonstrated that it was possible to regionalize laboratory testing in a profitable manner. The surviving two blood brothers continue to prove that current levels of reimbursement are enough to sustain their regionalized lab systems.
During the first half of the 1990s, the first consolidated hospital laboratory organizations sprouted in a number of cities. These early experiments further validated the feasibility of a regionalized lab infrastructure.
Detroit was probably the first metro market to see this phenomenon on a wide scale. Each of its nine healthcare systems had consolidated lab testing as early as 1992.
Next came regional laboratory networks. During 1995 and 1996, these were the hot topics. Again, Detroit was early on the map, with Joint Venture Hospital Laboratory Network (JVHLN) becoming operational by 1992. In 1995, two other high profile networks launched operations. One was Pittsburgh’s 40-hospital Regional Laboratory Alliance (RLA). The other was San Francisco’s Bay Area Hospital Laboratory Network (BAHLN).
Time has demonstrated that many daunting hurdles face a lab network composed of independently owned and operated hospital laboratories. Yet the concept of regionalizing laboratory services is sound and the network movement has not disappeared.
In fact, the lab industry is gaining much practical experience from its attempts to organize and operate lab networks. Progress has been frustratingly slow. Few lab networks are willing to boast of mighty accomplishments. Yet among the 30 to 50 individual networks in some form of organization or operation, there is optimism. Their leaders recognize that the era of the regional lab network is approaching.
THE DARK REPORT predicts that Internet technology, movement of routing testing to POC, and clinical integration will support and foster the regionalization of laboratory services. There will be interesting consequences to these trends.
For example, Web-based lab information links will reduce the cost and complexity of moving information between network laboratories and physicians’ offices. As routine testing moves to the point of care, the remaining volume of reference and esoteric testing means a reduced test volume may not support the existing number of laboratories in most cities.
As a result, central labs in most metro areas will become reference/esoteric testing centers and will serve extended geography. That is why regionalization will be the logical end game for lab services.
Key Trend #6
INTEGRATION OF CLINICAL SERVICES will continue throughout the next decade. This means that laboratories will be required to provide testing services and diagnostic information to an expanded list of healthcare entities.
Historically, laboratories have played a very defined role within the American healthcare system. The primary users of lab testing were hospitals, certain office-based physician specialties, and facilities like nursing homes.
During the coming decade, laboratories must become “customer responsive” to the needs of all players within the integrated healthcare system. It will no longer be sufficient to offer a single menu of services and let lab users “take it or leave it.”
To the contrary, the successful clinical laboratory of the next decade will be adept at spotting the unmet needs of each segment of the healthcare community. It will create and offer customized services to those unique segments. As a result, different types of laboratory customers will get different menus of laboratory services.
This will emulate the changes in how personal computers are sold. Originally, personal computers came in a limited number of configurations. It was Michael Dell, of Dell Computers, who first allowed the customer to specify his/her computer. Then Dell’s company would manufacture that personal computer to fit the customer’s unique requirements.
Dell’s innovation is now the standard for the computer industry. Any consumer can get a customized PC from any serious computer retailer. THE DARK REPORT believes that clinical integration will drive a similar “service customization” for laboratory organizations.
The earliest models of “customer-responsive” laboratories can be seen in a number of evolving integrated healthcare systems (IHS). Kaiser Permanente is one example, particularly in its Northern California and Southern California divisions. Another good example is the Penn State/Geisinger Healthcare System, headquartered in Danville, Pennsylvania.
Each of these IHSs are pushing their clinical laboratories to expand from the central core laboratory. To meet objectives for increased integration of clinical and operational services, pathologists and lab managers now find themselves interacting with clinicians in untraditional ways.
What is constant, however, in the function of these laboratories is that they continue to be recognized as the intellectual resource and “guardian” of laboratory medicine. In this role, the laboratorians guide and assist clinicians in evaluating how laboratory tests can be used to improve patient outcomes while lowering the cost of care.
THE DARK REPORT believes that clinical integration, far from being a threat to clinical labs, will usher in a golden age of diagnostic medicine. Pathologists, Ph.D.s, and medical technologists will find themselves ever more involved in the patient care continuum.
Key Trend #7
E-COMMERCE is transforming retailing, manufacturing, and distribution throughout the world. E-commerce will also transform healthcare as we know it today.
Laboratory executives and pathologists should not underestimate the radical transformation which E-commerce will bring to healthcare. Economic transactions based on Internet technology represent a new “Internet Age.”
The first Industrial Age moved the world economy away from its agricultural foundation. Now the Internet Age is about to move the world economy away from its industrial foundation. The Internet Age represents an economic model where information is both power and the source of profits!
THE DARK REPORT cannot predict the exact form and shape of the Internet Age. That will be determined in the worldwide marketplace. But there are early clues to how healthcare, and the clinical laboratory industry, will be reshaped by the Information Age.
First, knowledge and information will represent power and added-value. This is different from the industrial age, where land, buildings, and equipment meant power. For labs, this means who performs the test is less important than who has access to the test results—and can convert those test results into useful information.
Second, transactions which generate laboratory test results (and information) will be non-traditional. Early evidence of this can be already seen in the marketplace. For example, companies already allow customers to place orders over the Internet. The companies then manufacture that order, precisely to the customer’s specifications, on a real-time basis.
This type of ordering arrangement is such a serious threat to the automotive industry that car manufacturers are preparing to sell their cars this way. Soon it will be possible for car buyers to log on a web site for General Motors, Ford, Mercedes, etc. and order a car exactly the way they want it: color, interior, extras, and engine.
Their car will be custom manufactured. How local auto dealers participate in this process has yet to be determined. This business model is changing daily, as technology and customer expectations change.
Recently, it was announced that two advertising agencies had purchased clinical trials companies. Why? Because they wanted to learn how new drugs are tested for efficacy and safety. With the growth of direct-to-consumer advertising by pharmaceutical companies, these ad agencies want to acquire the knowledge and information necessary for them to serve their drug company clients.
These are just a couple of revolutionary changes now occurring because of E-commerce. Many of our readers shopped for Christmas presents on the Internet this year. This is certainly a paradigm shift and eliminates trips to the shopping mall.
E-commerce will soon reshape the “buying habits” of payers, physicians, and patients. Clinical laboratories will find it necessary to respond to the new world of E-commerce.
Key Trend #8
MANAGEMENT PHILOSOPHY WAS a trend that was also on THE DARK REPORT’S last “State of the Lab Industry” list.
THE DARK REPORT believes that a fundamental change in the philosophy of clinical laboratory management has been ongoing throughout the 1990s.
The dominant model of hospital and commercial laboratory management has been the pyramid. It’s a “top down” management model. People at the top tell people lower on the pecking order what to do and how to do it.
Since 1980, that traditional management model has been increasingly superseded throughout the world by a different management system. This new model is customer-focused, and encourages “empowering” employees at all levels to take responsibility.
There are any number of ways to describe this new management model. Most laboratorians have heard or read about the various systems. They go by monikers such as ISO-9000, Total Quality Management (TQM), Continuous Quality Improvement (CQI), and others.
At its foundation, this is a management model which emphasizes respect for the customer and the employee. It emphasizes meeting the customer’s needs and expectations as the right way to guide the progress of the company. It also encourages senior management to empower employees to become more involved in designing and managing the processes over which they are directly accountable.
Within the American healthcare system, most provider organizations, including clinical laboratories and hospitals, have been slow to adopt this management model.
In contrast, most healthcare suppliers, manufacturers, and distributors, are already deep into this new management model. For example, almost all the diagnostics companies have achieved ISO-9000 designation.
What is important to understand about this new management paradigm is that it establishes an entirely new game in the marketplace. It is not the old game with new rules.
The American automobile and copier industries learned this lesson the hard way in the 1970s, when Japanese companies invaded American markets. The Japanese companies were close to the customer and made better quality products. They captured so much business that a number of America’s most respected corporations almost went bankrupt.
The message for laboratory executives and pathologists is simple. The new management paradigm represents an entirely new game, with its own rules. Those companies organized around this new management paradigm have a competitive advantage over those companies which haven’t yet changed.
It is imperative that management leaders in the clinical laboratory recognize this trend and respond to it. Success in this effort should guarantee a financially stable and productive laboratory organization.