War College Identifies Emerging Lab Trends

Case studies by leading laboratories point to Internet, information as key

CEO SUMMARY: Disruptive technologies and the arrival of healthcare E-commerce were two common themes which emerged from this year’s Executive War College on Laboratory and Pathology Management. Consensus by faculty and attendees alike was that every lab organization should have an Internet business strategy, along with an accelerated implementation timetable!

DESPITE CONTINUING laboratory consolidation and a shrinking number of senior lab executives, a record crowd of 450 attended this year’s Executive War College, held May 16-17 in New Orleans.

In itself, the large number of attendees at the War College verifies an industry trend. A growing number of laboratory administrators and pathologists recognize they must have answers if they are to prepare their laboratory organizations to meet the challenges of healthcare E-commerce, laboratory regionalization, and continuing pressures to further reduce the cost of laboratory testing.

Reshaping Healthcare

As Editor-in-Chief of THE DARK REPORT, it is my responsibility to set the themes for each Executive War College. This year, I used the concepts of macrotrends and microtrends to describe these forces.

Macrotrends are those dynamics which influence the entire healthcare system. I can identify at least four of these. (See sidebar below.) Microtrends are specific dynamics exerting maximum influence on the evolution of laboratory management. These key trends were identified and published earlier this year in THE DARK REPORT. (For clinical laboratory key trends, see TDR, January 3, 2000. For anatomic pathology key trends, see TDR, January 24, 2000.)

I believe it is important to relate these macro and microtrends to the dilemma facing the laboratory industry. I call this dilemma the “Nike Sports Shoe Paradox.” All clinical labs must address this dilemma before they can profit from new opportunities in laboratory medicine and diagnostics.

The Nike Corporation business model is built around contract manufacturing. It is contract manufacturers who fabricate the sports shoes that Nike sells under its brand. These manufacturers are located in low-cost economies, where the shoes can be made most cheaply. This allows Nike to pay about $5 per pair to the sports shoe manufaturer. Nike then sells these shoes to the retail public at $120 per pair.

Thus, Nike receives $115 of profit on every pair of shoes to cover the cost of design, engineering, G&A, marketing, sales, and allow a profit. The contract manufacturer gets only $5 for every pair of sports shoes to cover all of its expenses and leave a profit.

Apply the “Nike Sports Shoe Paradox” to clinical laboratory and anatomic pathology management. Labs are paid commodity prices to do high volumes of routine testing. Reimbursement for routine testing is at rock-bottom levels and is barely adequate to cover expenses, let alone generate an adequate profit.

Commodity-Priced Testing

Yet, despite these tenuous profit margins, labs typically spend virtually 98% of their capital, resources, and management time in specimen collection, accessioning, testing, reporting, and billing for tests that generate little or no profit. Only 2% of the lab’s resources are invested in products and services which have higher utility to physicians, and come with greater profit margins.

Labs are like the contract manufacturers of Nike sports shoes. They only get $5 of the $120 a consumer pays for a Nike sports shoe. The dilemma facing all laboratories today is how to shift away from manufacturing the sports shoe (routine assays) and shift to the higher profit products that lab data can yield, such as early disease detection, disease state management, test utilization trends, and so forth.

Four Macrotrends Now Reshaping Healthcare

During the Executive War College’s opening presentation, Editor-In-Chief Robert L. Michel of THE DARK REPORT identified these four macrotrends as major forces for change to the American healthcare system.

MACROTREND 1
Information Technologies

Lump together all technologies enhancing the collection, analysis and communication of data. This includes computer hardware, software, Internet, Web, wireless, ASP, PDA, and more.

MACROTREND 2
Miniaturization

Since the 1970s, technology continues to shrink and miniaturize the size of the machines which do our work. Size of both diagnostic instruments and required amounts of reagents will continue to shrink.

MACROTREND 3
Management Philosophy

New management philosophy embodied in IS0-9000 and similar quality management systems. Emphasis is on “system of prevention”, meeting customer’s expectations

MACROTREND 4
Consumer Empowerment

We are leaving the age where individuals depended on government to meet their needs. (Social security, welfare, unemployment insurance.) Better educated populations are taking greater responsibility for their own lives. (Investing in retirement, healthcare, educating their children.)

Recognizes Dilemma

The kick-off case study at this year’s Executive War College recognizes this dilemma. South Bend Medical Foundation (SBMF) is Indiana’s largest clinical laboratory. It is actively pursuing several simultaneous management priorities to deal with pressures to reduce costs, while positioning itself to offer laboratory services which have higher value to physicians, payers, and patients.

“We have four primary strategic initiatives,” stated Bob King, Vice President at SBMF. “They include new technology, networking and regionalization, information management capabilities, and direct-to-consumer/ provider advertising.

Positive Results

According to King, the earliest phases of each management priority have generated positive results. Technology applications in the laboratory have lowered costs. Networking has increased the geography that SBMF services while increasing specimen volume and revenues.

It was a similar story at Sonic Healthcare LTD, a public lab company based in Sidney, Australia. In his case study presentation, Colin Goldschmidt, M.D., Managing Director, described how Sonic had used acquisitions of local, pathologist-owned laboratories to become the biggest lab company in Australia.

“In 1992, we were a financially-struggling laboratory with revenues of A$12 million,” he said. “This year, our revenues will approach A$400 and we have 64 laboratory operations located in most of the key population centers of Australia and New Zealand.”

“The Australian healthcare system is experiencing much of the same types of economic pressures as those of the United States and Canada,” added Dr. Goldschmidt. “Many of your laboratory solutions have equal application in Australia and New Zealand.”

Faster Cycle of Change

Dr. Goldschmidt was one of almost 50 faculty presenters at this year’s War College. A careful analysis of the podium comments and audience dialogue during the course of the event revealed that the cycle of change in the lab industry is far faster than anyone realized. Specifically, the rate at which new technology is flowing into laboratory medicine is far swifter than has been publicly recognized.

This was undeniably true during group conversations at the Lab CEO SUMMIT, which is held for senior-level lab executives and pathologists the day after the War College ends. For example, during one discussion about an emerging new lab technology, a Vice President from Roche Diagnostics, Inc. told lab CEOs in attendance that approximately 60% of Roche Diagnostics’ sales this year comes from products which did not exist 18 months ago!

If the cycle of change to laboratory management and technology is accelerating at this rate, it means that the lab industry is going to separate into new groups of winners and losers at an even faster pace than THE DARK REPORT has predicted.

The lab industry is going to separate into new groups of winners and losers at an even faster pace than THE DARK REPORT has predicted.

Another interesting insight emerged from the discussions among CEOs at the Lab CEO SUMMIT. During the session on CARESIDE, Inc.’s new point-of-care (POC) chemistry and hematology instrument suite, attendees were learning how and why SmithKline Beecham Clinical Laboratories (SBCL) decided to fund the precursor company to CARESIDE in 1993.

I was fascinated to learn that SBCL had explored a possible business scenario where it would use still-to-be-developed POC technology to shift routine chemistry and hematology out its regional labs and back into the physicians’ offices.

These POC instruments in the doctors’ offices would be electronically connected to SBCL. This arrangement would permit SBCL to have continuing access to lab test data from routine testing. But it would be the physician offices that had responsibility for doing the test and getting paid.

Exit Routine Testing

Remember the laboratory dilemma and the “Nike Sports Shoe Paradox?” This business scenario, once it is enabled by POC technology, would allow commercial labs to exit the manufacturing of sports shoes (routine tests) at $5 per pair, while still retaining access to the test results from routine testing, which represents the value-added that accrues to Nike from the $120 retail sale.

For laboratory executives and pathologists who can think “out of the box,” this is an intriguing business model. It retains a lab’s access to laboratory test data, but allows the lab to shift resources away from doing routine tests reimbursed under commodity pricing and shift to lab services which have higher profit margins.

There was a single, ever-present theme to almost every War College presentation. It was the need for laboratories and pathology groups to respond to the Internet and healthcare E-commerce. Laboratory executives from all types of lab organizations dis- cussed their Internet strategies.

Web-Based Lab Information

Although the heavyweights of the healthcare E-commerce world get all the publicity and attention, the reality in the laboratory marketplace is quite different. It appears that the Internet will indeed be one of the equalizing factors in the delivery of laboratory services.

More specifically, the capital cost to become an Internet-enabled laboratory provider is going to be quite reasonable. Once Internet-enabled, a laboratory can compete very effectively against better-capitalized laboratory organizations.

This is demonstrated by the experience of Clinical Laboratories, Inc. (CLI) of Throop, Pennsylvania. On its own, this independent commercial laboratory developed its Web-based lab test ordering/results reporting system two years ago.

Chief Executive Officer Kuo Cheng described to an enthralled audience how his lab “home-brewed” its own Internet solution on a modest capital budget. Earlier this year, CLI allowed its physician clients to use their wireless devices to access and download test data. “We accomplished this wireless capability at no cost to us,” declared Cheng. “Our experience is that the Internet allows us to compete against any laboratory, even the nationals. It also permits us to give every physician-client virtually the same high level of service.”

Plenty Of Evidence

THE DARK REPORT sees plenty of evidence that Kuo Cheng’s experience at CLI can be duplicated by other labs. There are many small, specialty vendors who have viable laboratory information products entering the market.

For the traditional giants of the LIS industry. this means it will probably not be easy, nor automatic, to move their existing lab clients onto ASP-based products for lab test ordering and results reporting. Instead, the lab marketplace may be a little like the Old West, as upstart companies come gunning for the established firms’ lab customers.

Add up the collective wisdom of 50 innovative management presentations at this year’s Executive War College and one thing becomes obvious: the laboratory marketplace is evolving at an ever faster pace!

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