CEO SUMMARY: Growing numbers of hospital labs report that higher costs of new diagnostic tests have become a new management problem. That’s because diagnostic manufacturers are developing tests around a new business model, one that calls for higher pricing based on a premise of higher clinical value. Marketing campaigns for these new assays will become increasingly sophisticated and pervasive.
TO INTRODUCE new diagnostic tests, manufacturers are adopting more sophisticated marketing models, some of which are designed to support higher prices for these new assays.
In a growing number of hospital laboratories, the higher cost of new reference and esoteric testing is causing concern. In response, many lab directors and pathologists have begun to develop formal procedures within the hospital to guide physician utilization and educate them about the actual costs incurred by these new tests.
Problem Expected To Grow
THE DARK REPORT predicts that the problem of higher costs for new lab assays will become a bigger management challenge for hospital laboratories in coming years. That’s because companies introducing new diagnostic tests built upon genomic and proteomic technology design their business model upon the assumption they can sell their new lab tests for a relatively high price.
Such companies want to copy the success of Cytyc Corporation’s Thin- Prep® Pap Test, which, since its launch in 1995, has captured more than 50% of the Pap testing market in the United States, causing Cytyc’s stock price to soar in value.
Besides copying Cytyc’s new product launch strategy, diagnostic test developers will increasingly borrow marketing techniques from the pharmaceutical industry. This will include direct-to-consumer advertising and “detail reps” paid to visit clinicians in their offices and educate them about the test and how and when to order it.
One direct consequence of this trend is that clinical laboratories will be bypassed, in certain ways, because these types of marketing campaigns are aimed directly at clinicians and patients. When this occurs, clinical laboratories lose their primary role as the source of information and education about new diagnostic tests for the clinicians they serve.
For hospital labs seeking to control test utilization and the cost of send-out testing, this is a troublesome trend. The desire of diagnostic manufacturers to introduce tests which generate higher profits is in direct conflict with the hospital lab’s need to control the overall cost of testing done on its patient population.
The strategic marketing plan used by Cytyc to introduce its ThinPrep Pap test is now considered a textbook example for how to launch a new diagnostic test. That is why it is being studied and emulated by other diagnostic companies.
…this is a troublesome trend. The desire of diagnostic manufacturers to introduce tests which generate higher profits is in direct conflict with the hospital lab’s need to control the overall cost of testing done on its patient population.
In the ThinPrep marketing plan, Cytyc attacked with four distinct initiatives. First, it worked diligently to see that clinical studies claiming bene- fits from the ThinPrep test were widely-publicized in the medical community. Two, it worked diligently to get health plans to agree to adequate reimbursement for ThinPrep tests—then publicized those agreements as a way to encourage other insurers to make the same decision.
Third, Cytyc marketed ThinPrep directly to female consumers. In magazine advertisements and other literature, the company subtly implied that ThinPrep was a “safer” test than conventional Pap smears. Cytyc also played a role in supporting advocates of improved women’s health as they lobbied payers and Medicare to make favorable decisions to include the ThinPrep Test as a covered procedure.
Fourth, Cytyc carefully structured the pricing structure of ThinPrep testing to make it more profitable for commercial laboratory companies than conventional Pap smear testing, so long as local health plans offered adequate reimbursement for ThinPrep.
Cytyc’s Next Test
The success of Cytyc’s marketing promotion of ThinPrep testing is reflected in its revenues and profits. For 2002, the company expects revenues to top an estimated $272 million. To diversify its product line, last fall Cytyc paid $167.5 million to acquire rights to “ductal lavage,” a procedure that can be used in breast cancer screening.
By understanding this four-pronged marketing strategy, lab executives and pathologists can track Cytyc’s efforts to duplicate its ThinPrep marketing strategy for ductal lavage. The early efforts are already visible. Thus, a press release on April 3, 2002 trumpeting the decision by CareFirst BlueCross BlueShield(with 3.1 million beneficiaries in Maryland, Delaware, DC, and Virginia) to “adopt a positive coverage policy for ductal lavage.” It is worth noting that the definition of a “positive coverage policy” is not provided.
This announcement was followed on April 24, 2002 by Cytyc’s financial earnings report. In this report, Cytyc confirmed that two of the four elements of its marketing plan were already in play.
First, Cytyc has a team of sales people now calling on clinicians. “In January, Cytyc’s specialty sales force began promoting to breast surgeons and radiologists the use of FirstCyte Ductal Lavage.” Second, Cytyc notes that Empire Blue Cross (New York) announced coverage of ductal lavage testing. Cytyc also declared that “currently, health plans representing nearly 20 million members cover ductal lavage.”
In coming months, the laboratory profession will probably see news releases about clinical studies of ductal lavage. It is important for the company to demonstrate clinical efficacy if it wants clinical use of ductal lavage for breast cancer screening to become more common. Thus, the company will widely-publicize any positive findings from these studies.
Labs “Out of the Loop”
THE DARK REPORT believes it is important for lab directors and pathologists to understand the marketing strategies used to introduce new diagnostic assays. Because these marketing strategies call for the manufacturers to advertise directly to consumers and educate clinicians with their own sales reps, laboratories will be “outside the loop,” at least until test requests for the new assays are received in the lab.
As many pathologists know from first-hand experience, being outside the loop means a surprise when a clinician requests a multi-test esoteric panel, costing several thousand dollars, following a visit by that manufacturer’s sales rep to the clinician. These surprises are hitting hospital labs more frequently, demonstrating that more esoteric testing sources are using this marketing strategy.
New Set Of Challenges
As growing numbers of new assays based on genomic and proteomic science hit the clinical marketplace, hospital laboratories will find themselves dealing with an entirely new set of problems involving physician utilization and the cost of send-out testing. Many of these will be a direct result of the different business models and marketing strategies used by diagnostic manufacturers.
In summary, the experience of many laboratories demonstrates that fundamental changes are already occurring in the way new diagnostic tests are brought to market. These changes may be adding extra costs without providing better clinical outcomes.
Not All Labs Will Get Access to New Assays
EVEN AS DIAGNOSTIC MANUFACTURERS change the way they market new laboratory tests, they are also changing the way they distribute these new assays to clinical laboratories.
To build a “brand” (think Coca-Cola, MacDonald’s, and Mercedes-Benz) from a new diagnostic assay, companies need to develop a distribution channel to the clinical marketplace. To accomplish this, they will sign exclusive agreements with specific laboratories they think can help them build market demand. These agreements will prevent other labs from having access to the test.
Becoming the distribution partner with diagnostics companies is a key strategy of Quest Diagnostics Incorporated and Laboratory Corporation of America. They believe it will be a source of competitive advantage. (See Ken Freeman’s comments on this subject in TDR, April 22, 2002.)
Visible Genetics, Inc. is using this strategy with its FDA-approved TRUE-GENE HIV-1 genotyping test kit. It has agreements with Esoterix, Bio-Reference Laboratories, and a handful of other selected labs to offer this test in competition against the “branded” home brew assays offered by some of the national lab companies.
While this may be a good business strategy for the diagnostic manufacturer, it restricts access to the test by early-adopter labs which want to set up and run the test for their clinicians.