Investment Bank Bullish On Clinical Labs, Pathology

Multiple trends in healthcare opening doors for laboratories to deliver value in new ways

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CEO SUMMARY: For clinical laboratories and anatomic pathology groups willing to adapt to the evolving needs of the American healthcare system, there are many positive opportunities. That’s the view of a Wall Street investment bank that just published a report on the lab testing sector. The report on healthcare trends includes commentary about developments in cancer care, acceptance of personalized medicine, and the growing activity in direct-to-consumer lab testing.

DESPITE THE FACT that the clinical laboratory industry and the anatomic pathology profession have experienced tough financial times recently, at least one New York investment bank sees opportunity in the coming years.

This is welcome news for many pathologists and lab administrators who have felt financially-beleaguered in recent years because of severe budget cuts and falling lab test prices. There was optimism in a report released in July by Cain Brothers—an investment bank in New York City solely focused on healthcare services. This optimism is based on labs responding appropriately to meet the changing needs of the American healthcare system.

The report titled, “Medical Labs and Diagnostic Testing: A Growing Value Proposition,” was written by Tom Gallucci, Managing Director, and Dan Gofman, Vice President, both of Cain Brothers. Gallucci, who has covered the lab testing sector since the late 1990s and thus has deep experience and a long-term perspective on the lab testing industry, said he was responsible for most of the contents.

In its introduction, the report said, “the medical lab and diagnostic testing industry are being presented with significant opportunities as the healthcare system moves away from fee-for-service reimbursement and toward a model that is based on value while pushing risk onto the provider.”

Efficiency, Quality, outcomes

After calling attention to the major transformation of the American healthcare system, Gallucci identified the opportunity for labs, saying, “Looking ahead, as the overall reimbursement paradigm shifts, the healthcare system will be increasingly focused on efficiency, quality and outcomes. This dynamic plays into the hands of the lab industry given that testing is vital to driving optimal care patterns at the lowest cost.”

Within the clinical laboratory testing sector, the report noted the tension between hospital and health system labs with outreach programs and how they compete with independent lab companies. Going forward, hospitals will see reimbursement evolve away from fee-forservice in favor of value-based and budgeted payment. Thus, hospital administrators may start to view lab testing as a cost and look for new ways to reduce those costs and improve efficiency, including potentially partnering with labs or outsourcing lab work, Gallucci said. This scenario would favor the national labs or other labs and related companies because of their expertise and economies of scale, he added.

Cain Brothers See Opportunities for Laboratories To Provide Direct-Access Testing to Consumers

IN A NEW REPORT ABOUT THE LABORATORY TESTING industry, author Thomas Gallucci, Managing Director of Cain Brothers, discussed the emerging business opportunities in direct-access testing (DAT).

Personalized medicine is driven by a new focus on consumerism, and this development leads to another trend that can favor the lab sector, which is direct-access testing, he said. “Advancing… technology is bringing lab testing logistically closer to the patient, while making it more economical as well,” wrote Gallucci. “At the same time, rising consumerism in healthcare is being driven by a growing focus on transparency, wellness and prevention, as well as patient demands for greater control over their own healthcare. As a result, even regulators are loosening labrelated policies, helping to open the door of opportunity in the direct-access or direct-toconsumer testing market.”

The shift in the design of health insurance plans is another driver of the DAT trend. “The introduction of high-deductible health plans and growing opportunities for individuals to purchase health insurance via exchanges are fostering a new element of consumerism throughout healthcare,” he wrote. “As patients more closely consider their healthcare choices, many kinds of improvements in transparency are developing.

“With lab data driving the majority of healthcare decisions, it is natural that demand for greater patient control over testing and test results is on the rise,” stated Gallucci. “This dynamic, combined with a more favorable regulatory environment, should foster solid growth of the direct-toconsumer (DTC) laboratory testing business over time.”

“Consumers are drawn to direct-access testing for another reason: It lets them have a bit more privacy while also monitoring their health over time without having to go to a doctor frequently,” Gallucci added. “Many direct-access labs let consumers order tests without a doctor’s order and they can get results online, again bypassing the doctor… Direct-access or direct-to-consumer testing is a positive trend.”

Improving patient outcomes

For some hospitals and health systems, partnering and outsourcing are two solutions. But Gallucci added that other strategies may be appropriate for some hospitals as well. Within an integrated delivery network, such as an accountable care organization, the hospital lab on the medical campus within a community is positioned to provide fast turnaround times that contribute to improved patient outcomes in physicians’ offices, while also maintaining a full longitudinal record for patients that is based on the same test methodologies and reference ranges across all care settings: inpatient, outpatient, and outreach.

The difference between the somewhat higher marginal cost per test of these labs versus the lab test prices offered, say, by a national lab, is not enough for many health systems to opt for outsourcing their lab testing needs. This is certainly the experience of such integrated healthcare providers as Kaiser Permanente, Geisinger Health, and North Shore Long Island Jewish Health System.

The report has much to say about anatomic pathology and the molecular diagnostic and genetic testing that is associated with pathologists. Gallucci is optimistic, he said, that reimbursement will improve, for example.

“It looks like anatomic pathologists may have put the worst behind them,” he said. “Reimbursement cuts have hit this sector very hard in recent years, particularly from Medicare. But while government-related reimbursement can be difficult to predict, it appears to have hit bottom.”

Several trends will continue to increase the demand for more sophisticated diagnostic services in the field of pathology. For example, “the rapid growth of cancer underpins utilization trends and the potential for related data to generate value in research and development circles is strong, making anatomic pathology a potentially attractive area for investment,” the report said.

“Testing in support of cancer will be a major opportunity for anatomic pathology labs,” it continued. The incidence of cancer is increasing and the report noted that, “cancer is one of the four diseases that account for more than half of the global healthcare spend” and is growing at the rate of 10% per year.

Personalized Medicine

The report also addressed the personalized medicine trend and how it will fuel the demand for lab tests. “Simply put, lab drives the ‘precision’ in precision medicine,” the report noted. “The growth of companion diagnostics offers a lab the opportunity to reinvigorate its value proposition across not only the provider/payer landscape (at a time when payment systems will increasingly reward efficiency), but within the pharma/R&D world as well.

“This trend is particularly important given that payment systems will increasingly reward efficiency,” the report continued. “Certainly personalized medicine is not a new concept but it’s in a position to take off now. This trend is particularly significant given that payment systems will increasingly reward efficiency.”

Lab data will become a source of value for both clinical labs and anatomic pathology groups. As the report stated, “technology is also fostering the ability to gather new information about the individual, with genomics enabling consumers to better predict future health risks, then allowing them to take a proactive stance toward maintaining their health. Finally, beyond specific tests, information technology is enabling the massive amounts of data generated by labs to be turned into actionable information across a number of platforms, i.e. product manufacturers, healthcare providers, and research organizations.”

Lab Industry Segmentation

For older pathologists and lab executives, one of the insights from this report is how Gallucci views segmentation within the laboratory medicine profession. In the
1990s, it was generally recognized that three segments dominated the industry: independent labs, hospital labs, and anatomic pathology labs. Gallucci, however, provided this list of sectors in the lab industry today, noting that there is some overlap among them:

  • Full-service and/or major publicly traded
  • Not-for-profit and hospital-affiliated
  • Esoteric, genomic and personalized medicine, including cardiology, oncology, chronic disease management, pharmacogenomics and genetic testing companies
  • Anatomic pathology
  • Toxicology
  • Niche laboratory and related companies, including regional and dialysisoriented labs, breath testing, laboratory management and benefit management, information technology and distribution companies.

Contact Tom Gallucci at 212-981-6890.

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