Hitting Financial Bottom

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During the last three years, financial news from the clinical laboratory industry has generally been bad. Two things attracted the media’s attention. Multi-million dollar Medicare fraud settlements involving laboratories got widespread notoriety. Financial losses at public laboratories attracted less public attention, but were big news among Wall Street analysts and investors.

After such a sustained diet of bad news stories, I take pleasure in writing what I believe is good news. I believe that 1997 is the year when the clinical laboratory industry hits financial bottom. The financial performance of public laboratories in 1997 is much improved over the years 1994 through 1996.

Does that mean I believe the turnaround has started? No! The laboratory industry is still subject to declining utilization, falling reimbursement and increased regulatory scrutiny. There is still excess capacity in both hospital laboratories and commercial laboratories which the marketplace will continue to squeeze out. It will be difficult for the majority of laboratories to show strong operating profits. Sustained growth of 15% to 20% per year with fat operating profits was true in the 1980s and early 1990s. It will not be true during the next five years.

Stronger financial performance during the first nine months of 1997 is not the only reason I believe our industry is hitting bottom this year. I see evidence that an increasing number of lab executives are finally willing to make radical changes to their laboratories in order to survive. The easy- going management environment of the fee-for-service healthcare world is being replaced by the frenetic, ever-changing intensity of managed care. A growing number of laboratory administrators are recognizing this and beginning to introduce new strategic paradigms and management techniques into their laboratories.

The most tangible evidence of this is in the earnings of the publicly traded laboratories. So far this year, the three blood brothers report stable revenues and earnings. This is in stark contrast to 1995 and 1996. Meanwhile, since the three national laboratories are under-performers compared to the best of the independent regional laboratories which still operate, I predict that our industry will see most of its management innovation spring from these independent laboratory companies. This includes consolidated hospital laboratory organizations which operate aggressive outreach programs.


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