CEO SUMMARY: It is common for a pathology group to simply say “No, we won’t help” when it is asked by a specialist physician group for help in establishing its own in-practice ancillary service in anatomic pathology. After all, the pathologists are losing a big chunk of their revenue, and helping a client compete against them. However, here’s one pathology executive whore commends a different approach.
CERTAINLY THE TREND of specialist physicians establishing in-house anatomic pathology (AP) services is a threat to the financial well-being of many hospital-based pathology groups. After all, specialist physicians usually refer high volumes of specimens to their local pathology group.
“The economic impact of these events is substantial,” stated Bernie Ness, President of B.J. Ness Consulting Group of Toledo, Ohio. “For example, The Urology Group of Cincinnati, Ohio was referring approximately 65,000 biopsies per year before it opened its own pathology laboratory in recent years. When these specimens stopped flowing to the local pathology providers, their cash flow took a huge hit.
“That is why pathologists become concerned whenever one of their biggest urology or gastroenterology (GI) clients approaches them and asks for help in developing a technical lab- oratory and assisting in the development of their own anatomic pathology testing program,” added Ness. “It is not easy for pathologists to confront the loss of this major revenue source, and at the same time, be motivated to help their clients internalize these case referrals.”
Ness has an interesting perspective on the trend of specialist physicians getting into the AP business. His career has been devoted to building laboratory sales programs and helping pathology groups develop growth-oriented business strategies. Because of this experience, in recent years he has been approached by specialty physician groups to help them evaluate their options to develop in-house technical laboratories and pathology professional services.
Both Sides Of The Table
“That means I’ve seen this issue from both sides of the table,” observed Ness. “I’ve participated in the planning sessions of some very large urology and GI groups. The bigger the group, the savvier they are. These doctors understand the economics of medicine. They are quick to recognize why anatomic pathology can be a profitable ancillary service for their practice.
“The numbers are significant,” he added. “For an investment of about $200,000, a GI group with eight or more physicians can realize about $50,000 per partner per year, after expenses, based on the average volume of specimens generated per GI.
Ready To Act And Invest
“These large specialist groups also have another advantage over their pathology peers in the community,” continued Ness. “They are entrepreneurial, quick to make business decisions, and ready to invest their capital for any clinical opportunity that gives them a reasonable return on investment.
“By contrast, the typical local pathology group they approach to initiate discussions about some type of collaboration is much more conservative and deliberate in their decision making—particularly about a collaboration which means cannibalizing a significant source of their existing specimen volume and revenues.”
Ness acknowledges that this situation is highly stressful to pathologists. “There is no business in the world which wants to hear that a major customer is going to compete against it—and wants help to get started!” exclaimed Ness. “Pathologists have every right to be unhappy about this development.
Basic Business Decision
“That being said, pathologists still must make a fundamental business decision when faced with this situation,” he continued. “They have two options. First, they have many good reasons to refuse to collaborate and end the relationship with this client. Few people would blame them for choosing this option.
“Second, they can look past the radical change in their business relationship and decide to help their existing client develop the anatomic pathology program most appropriate to their situation and needs,” explained Ness. “In my view, this is the best course of action, because I see opportunity in the long run.”
It is a case of making lemonade from the lemons. “By the time these urologists and GIs have decided to talk to their pathology provider about setting up a technical lab or negotiating different prices for professional services, they’ve already made the basic decision to establish an ancillary service in anatomic pathology,” said Ness. “The local pathologists should want to stay involved with this client.
“That’s because the future is uncertain and things change,” observed Ness. “The best business decision is to maintain the relationship, even if it comes with fewer specimens and less revenue. Think about the risk factors for the physician group.
Things Change Over Time
“First, there are lots of regulatory, compliance, and liability issues which are not fully recognized by specialist physicians,” he said. “The lab industry is keenly aware of how quickly coverage and reimbursement changes can alter the economics of lab testing. Look at the recent reduction in flow cytometry reimbursement, for example.
“Next, rapid advances in molecular technology are shifting the economics of many assays,” noted Ness. “Not only does that add complexity to the technical laboratory, but these new tests may be under-reimbursed. And don’t forget the professional factor. These new tests require more sophisticated knowledge of laboratory medicine. Each of these factors is cumulative over time and can erode the financial attractiveness of running an in-practice pathology laboratory.
“My point is, it is better to have a finger in the pot than to be locked out of the kitchen,” advised Ness. “For that reason, I think local pathology groups should negotiate shrewdly with their clients when approached in this fashion and craft the best possible deal they can, given the circumstances.”
A Different Consideration
Ness says that pathologists should analyze the situation from a different economic perspective. “Why not consider providing pathology professional services within the specialty group’s offices at a negotiated rate?” he asked. “After all, the pathologist will be paid to read the slide and sign out the case and submit a single bill to the group for services rendered. The specialist group must pay for the office, micro- scope, AP reporting system, dictation, and the like. They will also bear the time and expense of filing claims.
“Seen from that perspective, simply providing professional services at a negotiated rate, without all the management headaches and overhead, may be a reasonable outcome—given the determination of the specialty group to get into the anatomic pathology business,” said Ness.
Ness has prepared a detailed analysis of the specialist physician AP trend, titled “Pathology Alphabet Soup.” In strategic planning sessions with pathology groups, he lays out the business options that are available, and recommends a proactive business development program.
“There are many factors which point to this trend as something which is hot today—but likely to cool off at some future point,” said Ness. “It’s like the anatomic pathology laboratory condominiums—pod labs. These were hot in 2003 and 2004, particularly in the urology specialty. But the OIG’s Advisory Opinion 04-17 put the brakes on this business model.
“That’s why a ‘do nothing’ strategy by local pathology groups is unwise,” he advised. “It’s better to take what you can get today and stay connected to these physicians. This keeps your group in the game and ready for the next unexpected opportunity.”
“Old School” Paths vs. “New School” Paths
CHANGE MEANS OPPORTUNITY and that is true of situations where specialist physician groups decide to launch an in-practice ancillary service in anatomic pathology.
“I see two responses in the pathology community,” explained Bernie Ness, President of B.J. Ness Consulting Group of Toledo, Ohio. “One response comes from what I term ‘old school pathologists.’ These are pathologists with decades of experience who remain comfortable with the traditional business forms of medicine. These pathologists are likely to resist doing any type of revenue-cutting deal with their specialist physician clients.
“The other response comes from ‘new school pathologists.’ These are younger pathologists who are intrigued by innovative opportunities to provide care,” said Ness. “They are often quick to see professional and financial benefits to collaboration with the specialist physicians. Their medical and other training has also exposed them to many non-traditional practice settings. So they have a willing- ness to be experimental.
“When you recognize the extremes each group represents, then you can see an obvious point of conflict within a pathology group practice that has both “old school’ and ‘new school pathologists,” he continued. “One group is motivated to preserve the status quo and not loosen preferred professional standards. The other group is open to new professional and business arrangements and is willing to explore these with the specialist physicians.”