CEO SUMMARY: CARESIDE’s point-of-care testing system gives laboratory executives a new tool for bringing value-added laboratory services to clinicians. In this exclusive interview, W. Vickery Stoughton, Chairman and CEO of CARESIDE, Inc., shares his perspectives on the clinical laboratory marketplace. As President of SmithKline Beecham Clinical Laboratories, Mr. Stoughton was responsible for starting the effort to create a point-of-care solution for routine chemistry and hematology testing. Here are his thoughts and predictions for how POC technology may decentralize routine laboratory services.
“To capture…full…savings, it is necessary to substitute, in entirety, the traditional way of performing tests in the centralized laboratory for a decentralized laboratory system.”
W. Vickery Stoughton, Chairman, CARESIDE, Inc.
EDITOR: It’s important for thought leaders in clinical laboratory management to understand why CARESIDE, Inc.’s new point-of-care (POC) chemistry and hematology instruments were brought to market. I would also like for you to explain why these instruments, and others like them, will trigger important changes to the structure of both hospital labs and commercial laboratories.
MR. STOUGHTON: Robert, the history of CARESIDE is a good starting point. It makes it easier to understand how and why CARESIDE’s technology gives laboratory administrators and pathologists a new tool to lower laboratory costs and provide physicians with improved lab services.
EDITOR: CARESIDE was originally part of SmithKline Beecham Clinical Laboratories (SBCL). Why did SBCL decide to get into point-of-care lab testing?
MR. STOUGHTON: In 1993, a group of us at SBCL decided to look at several emerging technologies which had the potential to alter the economics of laboratory testing and change the role of commercial laboratories within the healthcare system.
EDITOR: Was this a strategic study exercise to identify transformational technologies and develop a business plan to minimize their potential negative effects to SBCL’s core business?
MR. STOUGHTON: Yes. We identified three technology areas which might alter the economics of laboratory testing. They were laboratory automation, point-of-care testing, and information management capabilities.
EDITOR: That’s interesting. Since 1993, laboratory automation has yet to make a huge dent in the clinical lab world. POC is certainly not a dominant influence today, and enhanced information management technology is only now on the verge of making a widespread impact. Why did you end up focusing on point-of-care testing as a strategic response?
MR. STOUGHTON: We did a study of the volume and composition of the lab tests then being done at SBCL. What we learned will not surprise most lab executives. There were 70 individual test assays which generated 60% of the specimen volume coming into the SBCL national lab system annually.
EDITOR: What about the dollar volume from these 70 assays?
MR. STOUGHTON: In 1993, SBCL was generating $1 billion in revenues. These 70 assays accounted for about $350 million in annual net revenue.
EDITOR: What you describe is the classic application of the 80/20 Rule. As you and your team studied these numbers, what concerned you about this situation?
MR. STOUGHTON: Not surprisingly, these 70 assays were high-volume, routine types of tests, centered around chemistry and hematology. We realized that if a diagnostics company were to develop a truly effective point-of-care solution, then SBCL was at risk of losing 60% of its specimen volume and 35% of its annual net revenues.
EDITOR: After this realization, how did you leap from a strategic technology assessment exercise to actually funding a major research and development project for POC chemistry and hematology?
MR. STOUGHTON: In a true sense, we realized SBCL’s vulnerability to POC technology, if and when it made it to market. We also recognized that Medicare and the healthcare system were changing. Remember, this is 1993. Managed care is growing rapidly. HCFA and the OIG are making an issue of Medicare fraud and abuse. Fee-for-service reimbursement for lab testing was declining. Capitated and lab risk agreements were increasing. It became obvious to us that we needed to think differently about how to organize and deliver laboratory services.
EDITOR: But why an “invent it yourself” decision for point-of-care testing?
MR. STOUGHTON: We surveyed the diagnostic companies and decided none of the established firms was prepared to cannabilize profits from their existing product lines to sell a POC solution. In 1993, there was little market for such technology. And certainly few reference labs and commercial labs would be willing to extensively re-engineer their operations to decentralize routine testing while maintaining centralized testing for esoterics.
EDITOR: Is that why SBCL decided to develop their own POC solution?
MR. STOUGHTON: Our thinking was “we’d better do this ourselves, before someone does it to us.”
EDITOR: Initial funding for this POC project was provided by SBCL. When and why did that change?
MR. STOUGHTON: Well, the original project was launched with SBCL in 1994. For various reasons, this project was spun off as an independent company in November 1996.
EDITOR: That company was called Exigent Diagnostics, Inc., which later became CARESIDE, Inc., correct?
MR. STOUGHTON: Yes. We purchased the intellectual property, equipment and other assets from SmithKline Beecham, PLC (SB) and SBCL. SB made an investment in our company and we entered into a distribution and supply agreement with SBCL. The SBCL agreements are now held by Quest Diagnostics, Incorporated as a result of its acquisition of SBCL.
EDITOR: Incorporated in November 1996, CARESIDE has operated as a separate company. It issued an IPO (initial public offering) in June 1999, raising a net of $12.4 million. Any comments on your relationship with Quest Diagnostics since it acquired SBCL?
MR. STOUGHTON: Not at this time.
EDITOR: Vic, CARESIDE’s offering prospectus made this statement: “CARESIDE has developed and plans to sell a proprietary blood testing system called the CARESIDE system. It is designed to decentralize laboratory operations.” (editor’s italics.) THE DARK REPORT believes it is imperative that forward-looking lab executives and pathologists understand what this means to the laboratory organization they operate today. Could we talk candidly about why CARESIDE’s POC chemistry and hematology instruments have the potential to transform the organizational structure of both hospital labs and commercial labs?
MR. STOUGHTON: Certainly. First, your readers should remember this important fact: CARESIDE exists today because our executive team at SBCL realized that technology and economics were going to change the way clinical laboratories provide testing services, whether we liked it or not.
EDITOR: That is a good point. You acknowledged the future would be different, and you began to rationally prepare for that future. Clients of THE DARK REPORT should keep that in mind as they learn about the changed economics that POC chemistry and hematology will bring to the clinical lab industry.
MR. STOUGHTON: Let me explain the main economic opportunity that our CARESIDE testing solution makes feasible. If you look at the cost of getting a test result in a laboratory, approximately 60% of that cost is devoted to the preanalytical stage and QA/QC. This 60% number includes any courier and distribution costs, accessioning, aliquotting, specimen preparation, as well as QA/QC expenses.
EDITOR: Which means the remaining 40% of test costs involve performing the test itself and reporting the results.
MR. STOUGHTON: That’s correct. The economic proposition of our CARESIDE solution is simple. If you take those routine, high-volume tests and move them out of the centralized, core laboratory into our point-of-care system, you can eliminate as much as 90% of those preanalytical and QA/QC costs.
EDITOR: But, although 90% of preanalytical costs incurred by sending the specimen to a core lab can be eliminated, does the CARESIDE POC system add back costs? What are the net savings?
MR. STOUGHTON: Where we get more expensive, obviously, is how we present the test analyte. We don’t have the volume-driven, high-throughput economies of scale of today’s centralized laboratories. So, on every test dollar we may add back about 20¢. Net these cost components out, and our POC system can generate cost savings of about 35% over the same tests done in a centralized laboratory.
EDITOR: I assume that savings of this magnitude require a total commitment to moving routine assays out of the core laboratory and into the POC setting.
MR. STOUGHTON: To capture that full 35% savings, it is necessary to substitute, in entirety, the traditional way of performing tests in the centralized laboratory for a decentralized laboratory system.
EDITOR: In other words, this new model of laboratory services comes close to that emerging term, “distributed laboratory.” This describes a laboratory organized around doing testing where it makes the most sense, whether patient self-test, home care, point-of-care, rapid response lab, or core lab.
MR. STOUGHTON: Yes. In the hospital, for example, our CARESIDE instruments would be placed where the nurses generate the specimens and get results within minutes. This permits the hospital to remove the hematology, chemistry, coagulation, and other instruments from the core lab. These tests migrate nearer to the patient. The core lab is then organized around reference and esoteric testing. Thus, the CARESIDE instrument is not a cost add-on to the system, it is a cost replacement. We expect to demonstrate considerable cost savings from this decentralized testing model.
EDITOR: You mentioned nurses as involved in the POC testing. Their participation in lab testing and phlebotomy is certainly a regular point of dispute in many hospital settings.
MR. STOUGHTON: True, but there are several models for labor that you can use. For example, the phlebotomist could perform the test at the time of the draw. In some situations, I would expect that time and motion studies on nursing would document that nurses spend a significant amount of time chasing results and getting them to doctors. However, if these same nurses were to do the POC testing and gain immediate access to the results, there would probably be a net productivity gain, and the nursing staff would be happier.
EDITOR: What about the concept of a laboratory test cart?
MR. STOUGHTON: That is certainly another model. In fact, pharmacies used to be centralized in the basement of the hospital, then “unit dose” carts came along, and now the clinical pharmacist comes into the nursing units to work directly with the care team. The CARESIDE system can now allow laboratorians to take a med tech, and in a similar way as the clinical pharmacist, have the med tech directly involved with the care team, providing lab test results and interpretation directly to the clinicians and nursing staff. Med techs would find it a much more stimulating work environment than today’s situation, where they are relegated to the centralized laboratory and any communications with the care team are generally by telephone.
EDITOR: Vic, your point-of-care lab testing models are consistent with our message here at THE DARK REPORT. We firmly believe that the future of clinical laboratory medicine lies, not in simply generating test results, but in helping clinicians use those test results to improve healthcare outcomes while lowering the cost of care. Thus, laboratorians will be using their minds and their knowledge to support clinical decisions. You are on target in suggesting that med techs can move to the point-of-care along with routine chemistry and hematology testing. This puts them right in the midst of the action, and increases their ability to positively influence clinical practices.
MR. STOUGHTON: That could come to pass.
EDITOR: Another topic I would like you to share with clients of THE DARK REPORT is the fundamental shift in the structure and form of clinical laboratories that is about to occur. It’s this concept of decentralizing routine testing by moving it to the POC setting.
MR. STOUGHTON: Decentralization is a key theme in the business world today. Most all the technology enhancements to diagnostic testing now moving through the development pipeline will encourage and support decentralizedlaboratory testing.
EDITOR: You believe that laboratory decentralization will follow the same path as other industries, is that not true?
MR. STOUGHTON: Basically, yes. I would ask your readers to compare what is soon to happen within the clinical laboratory industry to the business situation of IBM Corporation in the early 1980s.
EDITOR: Please explain.
MR. STOUGHTON: IBM provided business with a complete line of large, centralized computers. It was the largest, most profitable, and most admired company in the computer industry. But IBM was incapable of understanding the impact that personal computers would have in the way corporations managed information.
EDITOR: Would you explain that, please.
MR. STOUGHTON: Both IBM and its customers were committed to centralized information system technology. IBM made billions of dollars in selling this equipment. But IBM was not willing to adapt and pursue the business opportunities presented by the personal computer as it arrived on the scene.
EDITOR: But IBM’s first PC was the machine that set the standard for personal computers.
MR. STOUGHTON: That shows you the influence that IBM had, and how it went unfulfilled. IBM had such clout and respect in the marketplace that any technology solution it offered business was immediately accepted. IBM’s PC solution became the PC industry standard, but IBM would never devote its resources into developing a cost-competitive PC product. Compaq Computers built an IBM-PC clone, undersold IBM, and became a billion-dollar company in less than 24 months. Its computer solution for business was decentralized information processing.
EDITOR: Meaning that it moved information management out of the centralized data processing center and out to desktops, to where people actually did the work.
MR. STOUGHTON: Yes, and then just a few years later, Dell Computers came along, and stole Compaq’s market from it, with a just-in-time manufacturing strategy that allowed it to undersell Compaq and IBM. Dell figured out a way to be even closer and faster to the customer than Compaq.
EDITOR: There seems to be two lessons in your story. First, when information decentralized, IBM lost its market dominance because it refused to change, making Compaq the winner. Second, just-in-time manufacturing is similar to point-of-care testing. Dell Computer moved closer to the customer with its manufacturing, and knocked Compaq off the mountain.
MR. STOUGHTON: Those are good lessons. My point in telling the IBM story is that the clinical laboratory industry must realize that customers will drive the shift from centralized laboratories to decentralized laboratory testing. It’s going to happen, and all the supporting elements already exist in the healthcare marketplace.
EDITOR: If I listen carefully to what you are saying, your message is basically that physicians and caregivers are ready to embrace laboratory testing solutions which give them faster and accurate results while controlling or reducing the cost of lab testing.
MR. STOUGHTON: That’s correct. Laboratories must be willing to respond to their customer’s expectations for faster turnaround times and more convenient, accurate testing capabilities. One way to accomplish this is by moving routine testing out of the centralized, core laboratory and closer to the customer.
EDITOR: It is certainly true that knowledgeable experts confidently predict an explosion in patient self-testing, home care testing, near patient testing, and point-of-care testing. The core lab will continue, but it will be dedicated to doing reference and esoteric work. This is lower volume, higher proficiency types of testing.
MR. STOUGHTON: That is why it is important for laboratorians to understand that all these new technologies, including the CARESIDE system for routine chemistry and hematology, contribute to improving the overall value of laboratory testing to the healthcare community.
EDITOR: Before we end this interview, I would like you to address the concept of decentralizing routine testing in greater detail. This runs against the training and experience of so many hospital laboratory directors and clinical pathologists.
MR. STOUGHTON: Robert, that is partially true. But I think the real challenge will be to get hospital administrators to think in other terms besides the core laboratory. Most laboratory directors are quick to incorporate improved lab testing technology, once they see it validated in actual clinical practice.
EDITOR: I’d agree with that.
MR. STOUGHTON: Hospital administrators, on the other hand, are not so close to laboratory technology. Thus, getting them to accept the fact that they don’t need a central laboratory for routine testing will be a big challenge. I can speak from first-hand experience on this point. During my career, I was responsible for integrating the laboratory functions for two large hospitals, involving 1,700 beds.
EDITOR: As your POC system enters the marketplace, there will be reluctance by senior hospital administration to abandon the centralized laboratory model. On one hand, this business model has proven reliable. On the other hand, few hospital administrators are willing to risk problems by being the first to eliminate the centralized lab in favor of doing routine chemistry and hematology at the point-of-care.
MR. STOUGHTON: We are optimistic that acceptance of the CARESIDE system will happen relatively quickly.
EDITOR: Why is that?
MR. STOUGHTON: First and foremost, we anticipate that laboratories will find the economics to be compelling. Here is a new model for doing routine, high-volume testing that can save up to 35%, when adopted in entirety, over doing the same tests in a centralized laboratory.
EDITOR: What about other benefits and incentives?
MR. STOUGHTON: There are several, and most are obvious to laboratorians. Get doctors used to a 15-minute turnaround time on tests and they will become ardent supporters. Then there’s the improvement in specimen quality. POC means fewer problems with specimen mishandling and specimen deterioration. And, the sooner the test is run after the draw, the better the test result.
EDITOR: Do you think there will be resistance by payers and inadequate reimbursement?
MR. STOUGHTON: No. The CARESIDE system provides cost-competitive test results. By its design, it makes it easier to meet and document medical necessity. We believe that payers will recognize these features and reimburse for this technology.
EDITOR: In closing, Vic, is there anything else you would like to add?
MR. STOUGHTON: I would encourage those laboratorians who embrace the idea of value-added laboratory testing services to contact us directly for more information. We are very much interested in working with progressive laboratory organizations that are ready to pursue the benefits of decentralizing routine lab testing.
EDITOR: Thank you very much for some powerful insights into the laboratory marketplace.
MR. STOUGHTON: You’re welcome. We appreciate the opportunity to share some significant points about the future direction of the clinical laboratory industry.