CEO SUMMARY: In many ways, 2000 was a relatively quiet year for laboratory organizations. This list of the ten biggest stories in the lab industry for 2000 demonstrates that the most innovative laboratory organizations in the United States are “raising the bar” for service and quality in the competitive marketplace. This will change the status quo in many regions of the United States.
DESPITE THE MILLENNIUM HYPE, the year 2000 arrived like any other. Widespread fears about Y2K problems shutting down the world’s computers (and elevators, water supplies, electric power grids and the like) proved groundless.
Within the laboratory industry, the year 2000 has come and gone the same way, without major change and upheaval. Unlike most years of the 1990s, 2000 lacked transformational changes with the potential to impact virtually every individual laboratory throughout the country.
It is against this background of a “ho-hum” year that THE DARK REPORT offers its annual list of the lab industry’s “Ten Biggest Stories” of the year. Certainly there were no blockbuster announcements, such as when Quest Diagnostics Incorporated disclosed that it would acquire SmithKline Beecham Clinical Laboratories in February 1999; or when, in early 1997, the Office of the Inspector General (OIG) announced that the entire lab industry would be required to develop compliance programs.
The strategic value in this year’s list of “Ten Biggest Stories” derives from its ability to reveal what the healthcare marketplace is doing and how it’s different today from what it was a year ago. The “Ten Biggest Stories” list helps to mark the end of ongoing business trends and identify the emergence of new business trends.
For example, during 2000, the first group of early adopters in the clinical lab industry implemented Web-enabled lab test ordering and results reporting between the lab and physicians’ offices.
It is noteworthy that, first, these labs saw economic justification in this investment and, second, after implementation, these labs are extremely happy with the performance and cost- effectiveness of their Web-enabled lab test ordering and results reporting. This story confirms there is business justification for Web-enabled services between lab and physicians’ offices. In actual use, these services add value to physicians while lowering the lab’s cost of serving that physician.
TLA’s Failed Promise
In contrast, go back to 1995. At that time, headlines heralded the installation of total laboratory automation (TLA) systems in several early-adopter laboratories. But, after these TLA systems were installed, neither the laboratories involved nor their TLA vendors were willing to publish rigorous and detailed information about the specific productivity improvements and financial return on investment (ROI) generated by this equipment. That silence was evidence that expected cost savings and productivity gains from TLA were less than expected.
Perceptive observers made good use of the fact that news of pioneering TLA installations was followed by the ominous silence about performance details. It allowed them to steer clear of this technology until later generations of equipment could finally deliver acceptable gains in productivity and return on investment (ROI).
Keeping to this theme that the “Ten Biggest Stories” list offers relevant insights into the laboratory marketplace, THE DARK REPORT observes that one big story is the dearth of new laboratory joint ventures between commercial lab companies and hospitals or hospital systems. Two years ago, there was widespread evidence that a growing number of hospitals were actively entering into joint ventures and other forms of business collaboration with commercial laboratories.
Few New Joint Ventures
Yet 2000 passed without any significant announcements of new laboratory joint ventures. To the contrary, a couple of high profile collaborations were terminated.
Stories that don’t appear on the 2000 list of the “Ten Biggest Stories” can be just as important. For example, the year 2000 passed without HCFA and the OIG launching another major fraud and abuse action against the clinical laboratory industry.
That’s certainly a change from earlier years, but it also reflects a shift in thinking by government enforcers. It means that individual laboratory compliance programs have eliminated the “worst” abuses, or more likely, a properly-managed lab compliance program makes it more difficult for the government to successfully shake down labs with allegations of Medicare “fraud and abuse.”
Top Ten Biggest Stories
As these examples indicate, much wisdom can be gleaned from the “Ten Biggest Stories” list. On the pages which follow, THE DARK REPORT highlights its picks for the year 2000. These are not presented in order of importance, because of the subjectivity involved in that kind of ranking.
In conclusion, THE DARK REPORT observes that the common link among these ten stories seems to be a “raising of the bar” for lab services. In some cases, the lab industry is seeing the first steps of what will be exponential change to lab testing services in the near future.
1. Arrival of Web-Based Connections For Linking Lab and Doc’s Offices
INTERNET TECHNOLOGIES ARE EXPECTED to revolutionize many aspects of laboratory medicine. Ground zero in this revolution is the electronic connection between laboratories and physicians’ offices.
The year 2000 arrived with a handful of early adopter laboratory organizations already using web-based lab test ordering and results reporting systems to connect their lab with physicians’ office clients.
Centrex Clinical Laboratories in upstate New York became the first commercial lab client of Abaton.com to go operational and link physicians’ offices to the lab with web-based lab test ordering and results reporting.
In Throop, Pennsylvania, Clinical Laboratories, Inc. had gone live with Web-based lab test results reporting during the summer of 1998. Its accomplishment in the first months of 2000 was to enable physicians to use their wireless PDAs to access lab test results!
Other “early adopter” labs are forging ahead with Web-based connections. Most common is lab test results reporting because of its high utility for physicians. THE DARK REPORT believes that the lab industry is now in the early stages of what will be an exponential curve for lab adoption of Internet-based services. Early reports are that such Internet-based services are generating cost savings and improved client satisfaction.
2. IS0-9000 Management Systems Take Root in Laboratory Industry
NEW MANAGEMENT SYSTEMS for laboratory operations are establishing a beach head in the clinical laboratory industry.
At Quest Diagnostics Incorporated, three additional regional laboratory divisions achieved ISO-9002 certification. These labs are located in Juarez, Mexico; Deerfield Beach, Florida; and Wallingford, Connecticut. Quest Diagnostics expects all its significant lab divisions to have ISO-9000 certification during the next couple of years.
Laboratories within certain regional divisions of Kaiser Permanente are working to achieve ISO-9000 certification. The Kaiser Permanente lab in Portland, Oregon has passed its audit, and waits only for the official certificate.
THE DARK REPORT believes that laboratory organizations which embrace the management philosophies of W. Edwards Deming, ISO-9000, and similar systems will have competitive advantage over laboratories which do not. This will be equally true for both hospital labs and independent commercial labs.
It is no coincidence that Ortho Clinical Diagnostics now offers a “value-added” service in teaching its lab customers the techniques of “Six Sigma” and “Lean manufacturing.” These management systems have demonstrated their effectiveness in boosting quality, lowering costs, and most importantly, improving the satisfaction of customers, including both physicians and patients.
3. Stock Prices Explode on the Upside For Nation’s Public Lab Companies
IT WAS A BIG SURPRISE for knowledgeable observers of the American clinical laboratory industry. Share prices of most public laboratory companies blew through the roof in 2000.
For shareholders, this was a happy event. But for the laboratory industry, it marked an important change in the competitive marketplace. Public lab companies are no longer at deaths door. To the contrary, their cash flow and operating profits is improving. This gives them the capability to fund any number of new sales and marketing programs.
In absolute terms, the performance of some lab company stocks was remarkable. Quest Diagnostics Incorporated started the year at $30 per share. By September it reached $141 and currently trades at $107. At Laboratory Corporation of America, the story was the same. After a 10-for-1 reverse split in May, share prices soared from $33 to $130 during September. LabCorps stock now trades at about $134 per share. Other lab companies like DIANON Systems, Inc. and IMPATH, Inc. had similar run-ups in their share prices.
Public lab companies are the most aggressive at introducing new lab testing
services and putting sales people on the street. For that reason, their surging profit margins can be expected to finance more ”value-added” lab services, along with expanded sales campaigns in efforts to capture market share from independent and hospital labs.
4. Human Genome Project Finishes First Stage of Genetic Mapping
PROBABLY NO SINGLE AREA of medical technology will boost the fortunes of clinical laboratory testing more than knowledge of the human genome.
That is why the joint announcement about the initial mapping of the human genome this spring by Celera Genomics and the government-funded Human Genome Project Team is an important scientific milestone. As the first step in developing precise knowledge about individual genes, this draft “map” is already helping researchers accelerate the identification of specific genes and their functions.
During 2000, Celera Genomics has also mapped the mouse genome. Researchers find the similarities between mouse and human DNA to be helpful in identifying specific gene sequences and their functions.
As most lab administrators and pathologists know, pharmacogenomics is the speedily-evolving branch of science which intends to marry diagnostics, therapeutics and patient monitoring. The goal is to use genetics-based diagnostic testing to identify, in advance, whether a patient will or will not benefit from a specific drug, and whether that patient will or will not have adverse reactions to that same drug. Now that the first map of the human genome is available, expect to see some remarkably effective new genetics-based tests hit the diagnostics market very soon.
5. Highwater Mark for Capitation And Closed Panel HMO Insurance Plans
EVIDENCE IN THE HEALTHCARE marketplace during 2000 makes a convincing argument that the highwater mark for capitated provider contracts and closed panel HMOs has now passed.
If true, it is a positive development for all lab organizations in the United States, whether national labs, regional independent labs, or hospital labs. The decline of these business practices should help bolster the financial stability of clinical laboratories around the country.
CEOs of both Laboratory Corporation of America and Quest Diagnostics Incorporated have told the investment community that their companies are insisting on improved pricing for laboratory tests. As existing contracts renew, both lab companies are working hard to switch from capitation to discounted fee-for-service arrangements. This effort seems to be meeting with some success.
On the closed-panel HMO front, clients and regular readers of THE DARK REPORT are aware of policy changes within national HMOs such as United Healthcare and Aetna U.S. Healthcare to revise or drop onerous requirements for preapproval by physicians. There have also been provider-initiated lawsuits against major HMOs alleging deliberate “below-cost” reimbursement policies. (See TDRs, March 27, 2000 and April 17, 2000.)
Taken collectively, these developments signal a major change in managed care/provider relations.
6. Anatomic Pathology Profession May Soon Have Its First $500 Million Firm
TRADITIONALLY, ANATOMIC PATHOLOGY has been a medical specialty delivered on a local basis by relatively small pathology group practices.
Events during 2000 demonstrate that, at least on a regional level, anatomic pathology (AP) is consolidating into business forms which are economically viable and competitively superior.
Two relevant examples of this business model are AmeriPath, Inc. and the former Pathology Consultants of America, Inc. (PCA). In recent years, both companies posted significant growth in revenues and operating profits using a similar formula: pathology group practice consolidation at the regional level, supported by aggressive sales and marketing of anatomic pathology services within that region. The evolution of their business plans ran a parallel course. PCA acquired another pathology company, PathSOURCE, Inc. in May and renamed itself Inform DX, Inc. By November, Inform DX had agreed to merge with AmeriPath.
With this merger, AmeriPath is on track to generate net revenues of about $330 million in 2001. It is now the AP profession’s largest company. Sustaining strong rates of revenue growth and profits will be challenging for AmeriPath. But the company has financial resources to compete locally which cannot be matched by small pathology groups.
7. Consumers Getting Savvy, Now Taking Charge of Their Healthcare
IF THE 1990S WAS THE DECADE of managed care, then the 2000s will be the decade of consumer-driven healthcare.
During the year 2000, a growing number of laboratories and diagnostics vendors began to actively court consumers. This involved advertising campaigns and marketing efforts to educate consumers about the benefits and medical importance of certain types of laboratory tests.
Certainly Cytyc’s advertisements in a variety of women’s publications promoting the benefits of the ThinPrep¤ Pap smear test is one example of direct-to-consumer marketing.
An increasing number of laboratorians have first-hand stories about patients who demanded a copy of their test results, or showed up at a draw station wanting to order their own lab tests.
At Quest Diagnostics Incorporated, this heightened consumer interest in lab test results did not go unnoticed. In April, through a joint venture with MedPlus, Inc., Quest Diagnostics began to make lab test results available to patients on a Web site called mydailyapple.com. Patient inquiries to the site significantly exceeded the expectations of Quest Diagnostics and MedPlus.
There are already a number of laboratory companies advertising directly to the public. They are willing to perform tests at the request of consumers. These examples show why labs should give their consumers a lot more attention.
8. Innovative Regional Lab Networks Expanding Collaboration and Services
WITHIN THE NATIONAL MARKET for clinical laboratory services, there has been one sustained theme over the past ten years: consolidation and regionalization.
Consolidation of lab organizations and regional collaborations between laboratories are a consequence of unused and excess lab capacity, for which no payer is willing to continue subsidizing.
Hospital laboratory administrators recognized this dilemma about six years ago. Their response was to organize regional laboratory networks. However, for many reasons, mostly relating to trust and control, few of these regional lab networks have provided the financial relief for which their organizers had hoped.
Yet during 2000, a handful of regional laboratory networks continued making salutary progress. In Detroit, Joint Venture Hospital Laboratory (JVHL) network now offers a statewide service infrastructure. Its managed care contracting skills are sophisticated enough to allow it to capture lab provider status with Michigan’s largest health insurer.
Down in Florida, the Florida Reference Laboratory Network (FRLN) is working to link member labo- ratories via Internet-based communications and maintain a common clinical data repository. It plans to offer physician office clients Web-based lab test ordering and results reporting during 2001.
These regional laboratory networks demonstrate that this business concept is a viable way to rationally use existing local lab resources.
9. Dearth of Joint Ventures Involving Commercial Labs and Hospital Labs
DURING 2000, SOME IMPORTANT laboratory joint ventures between commercial lab companies and hospital laboratories came to an end. More importantly, no significant new joint ventures appeared during the year.
It is reported that the performance of several laboratory joint ventures involving national laboratory companies and hospital labs are not meeting the financial and marketplace expectations of the joint venture partners.
In Southern California, Quest Diagnostics Incorporated pulled the plug on the former SmithKline Beecham Clinical Laboratories project involving 30 Tenet Healthcare hospital labs. Quest Diagnostics did not like the economics of the project.
These developments are surprising. At the Executive War College in May 1999, all of the hospital lab case studies boasted about some form of business collaboration with a commercial laboratory. During the past 18 months, it appears these collaborations have not generated the economic rewards expected by joint venture partners.
In fact, the big news for 2000 was the increased interest of integrated healthcare networks (IHN) in establishing shared laboratory organizations. Most noteworthy was the announcement in April that Aurora Health System of Milwaukee (12 hospitals) and Advocate Health Care of Chicago (10 hospitals) would consolidate management of their lab organizations.
10. Thin-Layer Pap Smears Capture Considerable Market Share
DURING 2000, Cytyc Corporation’s ThinPrep¤ for liquid preparation of Pap smears captured at least 20% of the American market.
Cytyc’s accomplishment is remarkable. At a time when the healthcare system is squeezed for financial resources, Cytyc has managed to position ThinPrep as a valid test option for referring physicians, while insuring adequate reimbursement for clinical laboratories.
From that perspective, Cytyc pro- vides a business template for the introduction of new diagnostic technology into the clinical marketplace. During the same years that Cytyc was introducing ThinPrep, at least three competing firms were offering laboratories other enhanced Pap smear test technologies, with much less financial success.
One of the key differences in Cytyc’s business strategy was its willingness to invest considerable amounts of money in marketing to health insurance companies. Cytyc understood that, regardless of the clinical benefits of the ThinPrep test, if reimbursement was inadequate for the labs performing the test, then labs would decline to offer it.
Thus, Cytyc’s 20%+ share of the Pap smear testing market is a lesson in the power of sales and marketing to help labs build specimen volume and net revenue. Labs should appreciate that investing in sales is a valid way to achieve revenue goals and financial stability.