Bio-Reference Labs Develops Regional & Niche Strategies

Nation’s Largest Mid-Size Lab Firm Thinks Local and Acts Global

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CEO SUMMARY: Bio-Reference Laboratories, Inc. (BRLI) of Elmwood Park, New Jersey is a lab company on a roll. In just five years, it has grown from $66 million to more than $160 million in annual revenues. For regional laboratories across the country, BRLI’s business strategies demonstrate how a well-focused business plan, combined with good management execution, can generate sustained increases in specimen volume, revenues, and profit mar- gins. In this exclusive interview, BRLI CEO Marc Grodman, M.D. shares details about BRLI’s strategies and success.

IN AUGUST, two of the nation’s mid-size laboratory companies were acquired. The sale of LabOne, Inc. and Clinical Pathology Laboratories, Inc. puts Bio-Reference Laboratories, Inc. (BRLI) in a unique position.

It is the largest laboratory company serving office-based physicians that is not owned by a billion-dollar parent. With sales projected at $160 million for this year, BRLI, based in Elmwood Park, New Jersey, now occupies the gap between the nationals and smaller independent labs. Over the past five years, the company has enjoyed annual revenue growth of 20.39%.

Strong Rate of Growth

In recent years, BRLI has posted strong rates of growth in specimen volume, revenues, and earnings. Bio-Reference Labs considers itself a laboratory that responds to unmet needs—some regional, some national. It has a deliberate strategy of seeking out specific markets in diagnostic testing that offer value-added opportunities and can provide it with competitive advantage.

This is why lab administrators and pathologists should study BRLI’s business strategies. Its dual focus on regional and national opportunities offers insights into strategies a local laboratory can use to gain competitive advantage over national labs in the regional healthcare community it serves.

“BRLI is probably the most misunderstood lab company operating today,” stated Marc Grodman, M.D., President of BRLI. “This is true for two reasons. One, most lab managers and pathologists consider BRLI to be a somewhat traditional lab, providing primarily routine testing services to office-based physicians. Two, within the investment community, the unorthodox nature of BRLI’s business strategy makes it a more complex company to study and understand.”

BRLI’s primary market is highly competitive. It serves physician offices, nursing homes, and clinics in the greater New York City area. This metro area spans eastern New York, Connecticut, New Jersey, and Pennsylvania. The company also offers services in certain specialized, focused markets that are national in scope.

“We’ve built our growth strategy around two key themes,” noted Grodman. “One is to find innovative, targeted opportunities in diagnostic testing. The other is to offer personalized service to our physician-clients.

Hyper-Competitive Market

“Today’s lab marketplace is both rapidly changing and hyper-competitive,” he continued. “Innovation drives competitive advantage. Small labs are capable of innovating at a swift pace. That allows them to offer clinicians unique services which may not yet be available from competing labs.

“Match this innovation with personalized service and regional companies like BRLI are perfectly positioned to drive volume growth and enjoy strong customer loyalty. That translates into high rates of client retention,” explained Grodman.

“National laboratory companies enjoy an enormous advantage because of economies of scale,” observed Grodman. “This allows the national labs to enter just about any market using discounted pricing. On the other hand, they’ve grown so large that they are challenged to deliver the kind of personalized services physicians and patients want. This creates significant opportunities for us, as it does for any regional or niche/specialty laboratory.

“Differentiation and service are the reasons why BRLI is not like the majors,” he said. “We are a retail lab, not a wholesaler. BRLI represents a different type of business plan. We are a regional lab that looks for focused market opportunities— markets that are unique in some way. Some may be non-traditional markets that are developed locally and then attract business nationally.

“BRLI looks for lab testing segments that have two primary attributes,” explained Grodman, “First, by providing services tailored to the unique needs of clients, BRLI differentiates itself from any other laboratory competitor. Second, the lab testing and other primary services can be sold at a ‘retail’ price because of the added value BRLI provides to clients. As a laboratory, we want to compete on value and generate higher margins.

“By developing focused testing businesses—creating a series of lab testing franchises, if you will—BRLI not only grows, but it earns better margins on the resulting business. This gives us the cash flow to invest in the next round of testing segments we want to develop,” observed Grodman.

Start Local, Expand National

As Bio-Reference Labs builds a lab testing segment locally, it is also looking for opportunities to capture clients in other geographical markets. “We’ve learned how to maximize our growth potential in our core market, which includes the greater New York area and reaches into Connecticut, New Jersey and parts of Pennsylvania,” Grodman observed. “But, we also recognize that growth potential in a defined regional market has its limits.

“Our segment strategy allows us to find a segment of the lab marketplace where we can differentiate ourselves from the competition—and be paid at retail,” he continued. “Once we’ve developed this business segment locally, we have the resources, the experience, and the sales and marketing team to introduce our services into other regions around the country.

Different Business Model

“This is the part of our business model which is not understood by many people,” added Grodman. “BRLI offers different services in different segments of the lab testing marketplace. A laboratory company is not defined by its test menu, but by the market it serves. You are your demographics.”

BRLI believes that niche markets alone are not enough to sustain double digit rates of growth over the years. “Another rich area for gaining competitive advantage is to anticipate customers’ needs. When it comes to personalized customer service, quality and quantity are inversely proportional,” observed Grodman. “This works to the advantage of those smaller regional and local laboratories capable of providing innovative, high-quality services at competitive prices, while maintaining the human ‘connectivity’ factor.

“A regional lab can offer very intense personal services and connection with the community it serves,” he continued. “It is easy for local pathologists to visit with local physician-clients. After all, lab testing involves laboratory medicine and physicians do value a personal relationship with a knowledgeable pathologist. It is not easy for pathologists in the national labs to have such personal contact with local physician-clients. At BRLI, we build our business around these advantages.”

Lab Tests & Informatics

Grodman offers several examples of these business lines. “Genpath is an outstanding cancer and genomics laboratory that is national in scope; it is probably the finest hematopathology lab in the country,” he said. “We have a steadily-expanding correctional health program. Our PSIMedica business unit offers clinical knowledge management services. It can aggregate disparate data—including claims data, enrollment data, prescription data, and laboratory data—and produce an array of information solutions for reducing healthcare costs and improving quality performance.

“Many hospital outreach programs are aware of CareEvolve, which is our Web-based healthcare portal,” he noted. “We sell a version of CareEvolve as a comprehensive connectivity solution to physicians and laboratories nationwide. CareEvolve is now used at 18 hospitals and hospital systems around the country. It serves over 100,000 patients. Our ability to provide advanced services are tightly-interwoven around our technology investment in CareEvolve.

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“BRLI is what you might call a ‘super-regional’ lab company,” said Grodman. “Superimposed on this platform, we build franchises in multiple areas that benefit from our basic infrastructure and strong marketing staff. Our strategic focus is to develop ways to provide value-added lab services to physicians and healthcare providers. We seek out areas where we can make a difference. We enter market segments where we see the opportunity to add value.

“Our correctional health con- tracts represent one example of the segment franchise strategy,” he explained. “During this past quarter, we were selected as a primary laboratory vendor for Correctional Medical Services. Based in St. Louis, Missouri, it is a major player in the national market for correctional health. We are using the experience we’ve gained in our correctional health testing contracts with the City of New York and the New York State Corrections Department to expand into other regions.”

One element which attracted BRLI’s attention to the correctional market is the test mix. “Prison populations need HIV and HCV testing,” observed Grodman. “These are higher-revenue tests. It fits with our strategy of seeking market opportunities with potential for higher revenues per patient.

“However, correctional testing contracts cannot be simply considered as another ‘lab account.’ Correctional institutions need multiple testing capabilities and require specific analytical support. These are high-service clients in the fullest sense of the term,” observed Grodman.

“As a regional laboratory, we were willing to develop the infrastructure to service the specific needs of correctional clients,” he added. “However, as we developed this ability and gained experience servicing this niche, we’ve built the business infrastructure which gives us the ability to establish this same service model in other states. We now provide correctional health laboratory services in New Mexico, Kansas, and Maine. We believe these are examples of market segments that regional laboratories need to develop if they are going to compete effectively over time.

“Another market segment we are developing is oncology,” noted Grodman. “In particular, we think the surgical pathology subspecialty of hematopathology has particular promise.

Growing Oncology Market

“This is based on our experience. BRLI has enjoyed robust growth in top-line revenues across all lines of business,” he observed. “However, the greatest growth has been in our oncology revenues. Oncology testing tends to be more intense because it is such a rapidly evolving area.

“We want BRLI to be the source of clinical expertise, meaning that we offer the referring clinician more than just a set of numbers from the test result,” commented Grodman. “In oncology, technology advances in both therapeutics and diagnostics are exploding. If we have access to tissue; that is, if BRLI has diagnosed the original tissue, we can go back to the referring physician and discuss the appropriateness of additional testing and the relationship of this testing to potential therapies—some so new that the clinician may not be fully aware of them and their relevance for his/her patient.”

Essentially, Grodman is describing a market segment model, this time in oncology, which moves the pathologist closer to the clinician as a medical consultant. This tight clinical relationship anchors the client to BRLI and means that a competitor offering a lower price for a test is not likely to cause this client to switch to a competing laboratory.

Oncology Sales Force

Evidently BRLI is making this particular business strategy succeed. “Our oncology business is expanding rapidly,” he said. “Every day, we perform as many bone marrow procedures as any lab in the country. We believe we have one of the best hematopathology laboratories in the country. Oncology diagnostics is one area where we have been able to make a real difference for our clients. We support this business segment with a dedicated sales force, advanced reporting techniques, academic-style reporting, and state-of-the-art clinical practices.”

If there is any single strategy that underpins all aspects of BRLI’s business lines, it is advanced informatics capabilities. “All lab directors and pathologists understand that, in simplest terms, a lab- oratory is basically an information company,” emphasized Grodman. “For a laboratory, this means it is necessary to interweave informatics into any business opportunity it wants to exploit. I consider informatics to cover the sciences concerned with gathering, manipulating, storing, retrieving and classifying recorded information. Such a broad description reminds us that informatics requires a variety of resources to function effectively in support of the lab and its clients.”

“This is why we believe the underlying basis of productivity at any lab is informatics. For a long time, many lab managers and pathologists have failed to fully appreciate how sophisticated use of informatics can add tremendous value to their laboratory testing services,” observed Grodman.

“Moreover, the current effort to establish a national healthcare information system is a timely warning for all labs and pathology groups,” he added. “It shows how the inescapable momentum leading us to a different healthcare system is informatics-driven.”

Grodman, who actively participates in laboratory industry lobbying efforts in Washington, D.C., believes the drive to better use healthcare informatics creates major opportunities for laboratories. “In D.C., the hottest thing right now is pay-for-performance,” stated Grodman. “All pay-for-performance programs are based on data warehousing and analytical processing.

“Data warehousing provides the capability to analyze large amounts of historical data. For health organizations, like laboratories, with large quantities of information, this can result in significant competitive advantage,” explained Grodman. “It enables multiple-user and aggregate queries that cut across different segments of a company’s operation.

Combining Data Sets

“As one example, regional testing data could be compared against physician subspecialty data, even if they were originally stored in different databases with different structures,” he continued. “It’s an efficient way to manage and report on data that is from a variety of sources, non-uniform, and scattered throughout the healthcare organization.

“Online analytical processing (OLAP) uses database tables to enable multidimensional viewing, analysis, and querying of large amounts of data,” noted Grodman. “This technology enables management to get fast answers to complex queries, or to analyze historical data for trends and patterns. There are only a handful of analytical engines in the U.S.”

Bio-Reference Laboratories has one of these analytical engines. “We believe ours may be the simplest, easiest, and most intuitive,” declared Grodman. “We’ve done 15 imports from major medical companies. Within five to ten years all labs will be part of pay-for-performance programs. Laboratory data will be critical to care. It will be linked to reimbursement. Laboratories need to make a strategic decision about how they will be part of this process.”

Potential Business Niche Emerging in Histology

HISTOLOGY IS A SLICE of the lab marketplace which is on the Bio-Reference Laboratories’ (BRLI) radar screen.

“This is a lab specialty which interests us,” stated Marc Grodman, M.D., CEO of BRLI. “We believe hospitals will find it increasingly difficult to compete in histology, for several reasons.

“First, it is getting more difficult to hire skilled histotechnologists,” he explained. “Second, the explosion of new histology procedures increases the complexity of running a histology laboratory with a broad menu—particularly if the hospital cannot generate enough specimen volume to justify new, in-house histology services.

“As histology becomes more complex and requires more capital investment, we think that a market for outsourcing certain histology services will emerge,” he observed. “This is a perfect niche for a regional laboratory like BRLI.

“We have the infrastructure to provide this service. We have expertise in running a sophisticated histology laboratory. And we have the ability to recruit, retain, and support both histotechs and pathologists with subspecialty expertise. For us, histology represents an exciting business opportunity,” concluded Grodman.

Value-Added Informatics

Bio-Reference Labs is moving forward with its informatics strategy. “Success at BRLI is based on pinpoint market analysis enabled by sophisticated information technology,” stated Grodman. “We expect pay-for-performance programs will cause Medicare and private payers to more closely monitor outcomes—and to use de- tailed information about clinical practices to help providers improve patient outcomes. We believe BRLI already has as much relevant information as any other healthcare provider to support this effort.

“In fact, we saw the benefits from our informatics platform in the weeks following Hurricane Katrina,” offered Grodman. “After Katrina passed through parts of Louisiana, Mississippi, and Alabama, we found it tough to deliver test results to client-physicians in the affected areas.

Remote Access Via Web

“However, as physicians and some oncology patients undergoing therapy relocated into unaffected areas, using the Internet, they were able to access our system to retrieve both current test results and their cumulative test records,” recalled Grodman. “This allowed treatments to continue with minimal disruption. Laboratory services like this made a difference in the lives of these patients. It was also a powerful demonstration of how a laboratory’s informatics capability creates recognizable value for physicians and their patients.

“This sophisticated informatics capability was not achieved over-night,” advised Grodman. “It’s taken almost 15 years for Bio-Reference Laboratories to build up its informatics infrastructure.

“During these same years, many independent lab companies disappeared from the market. BRLI survived and thrives today because it never viewed itself in the traditional way, as a clinical laboratory organized to deliver test results to referring physicians. Rather, we’ve operated from a deeper, more sophisticated understanding of the role of laboratory testing in the healthcare system,” observed Grodman.

Prediction Is Now Fact

“In fact, it was 2000 when I spoke at the Executive War College, in detail, about this business vision. We were actively shaping BRLI into a knowledge-based entrepreneurial enterprise, built around a customer-connectivity business model. It’s all IT-based,” he said. “Now, in 2005, BRLI is exactly where we predicted it would be in 2000!”

THE DARK REPORT makes two observations about BRLI. First, it provides a valid example of how regional laboratories can build their own profitable lab testing business from a value-added business strategy. As Grodman pointed out, local laboratories must sell their services at ‘retail’ because of the price advantage enjoyed by national lab companies. But to sell at retail, the lab must offer services that have value to client-physicians and which cannot be easily duplicated by competing labs.

Second, BRLI demonstrates that it is possible for a regional laboratory to build national lines of business, using the infrastructure and capabilities originally created to serve a local market.

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