OURLab Founder Lays Out New Business Strategy

Fundamental changes in lab marketplace trigger move to merge lab company with OPKO

CEO SUMMARY: For OURLabs of Nashville, Tennessee, it was the host of changes in the lab testing marketplace that motivated it to go looking for a partner. Its recently-announced merger with OPKO Health, Inc., of Miami, Florida, creates opportunities for OURLab pathologists to do more in therapeutics and pharmaceutical development. OURLab will also be able to leverage its sales force to sell OPKO’s proprietary diagnostic tests, including a test panel designed to detect prostate cancer.

THERE’S A NEW BUSINESS STRATEGY at OURLab of Nashville, Tennessee. It’s the reason the pathology lab company entered into an agreement to merge with OPKO Health, Inc., of Miami, Florida.

On October 19, OPKO issued a press release announcing “an Agreement and Plan of Merger” with Prost-Data, Inc., the owner of OURLab. Through a series of mergers, Prost-Data/OURLab will become a “direct wholly owned subsidiary” of OPKO, a public company (NYSE: OPKO).

The parties announced that OPKO would pay $9.4 million in cash, and $30.6 million in shares to Prost-Data. The deal is expected to close by year’s end.

To learn more about the details of this transaction, THE DARK REPORT caught up with Jonathan Oppenheimer, M.D., the founder of Oppenheimer Urologic Reference Laboratory (OURLab). He discussed the business strategies which led to the agreement to merge with OPKO.

“The market for lab testing services has changed dramatically since OURLab was founded in 1996,” noted Oppenheimer. “In response to these changes, there was an increased need for us to find a partner.

“This merger is important for OURLab because it creates the opportunity to use our existing resource base in three new ways,” he explained. “First, because of proprietary diagnostic and therapeutic technologies at OPKO Health, our clinicians will be engaged in activities that go beyond laboratory medicine and pathology.

New Growth Opportunities

“Second, it leverages our sales force by giving them more products to sell,” noted Oppenheimer. “Third, in addition to our work in diagnostic medicine, we can now get involved in the development of pharmaceuticals, which is a fast-growing area of medicine today.”

Post-merger, Oppenheimer, currently CEO of OURLab, will become CEO of OPKO’s diagnostics division. Oppenheimer cited fundamental changes in the lab testing marketplace as contributing to the strategic decision to find a partner. “As medical professionals, our primary responsibility is to patients,” he said. “We can’t serve patients if we are not taking care of the bottom line of our business.

“In a business, the first obligation is to make a profit and that is where medical providers have a built-in conflict,” he added. “As a physician, you shouldn’t profit at the expense of your patients. You should profit by helping your patients. People want to pay for clinical value and this merger allows us to do that.

“Frankly, I don’t know how any private lab company today can avoid being bought up by bigger lab companies or hospital systems,” Oppenheimer said. “The big box lab companies such as Laboratory Corporation of America and Quest Diagnostics Incorporated, are very good at winning exclusive managed care contracts. They are so good at acquiring contracts that it’s difficult to compete against them.

“The deeply-discounted pricing offered by these lab companies to win and hold their managed care contracts is one reason why so many payers view the work of laboratories as a commodity,” he added.

Hospitals Are Buying Labs

“Another reason lab medicine is a difficult business today is that hospitals and hospital networks are buying private labs and physician practices,” said Oppenheimer. “Because those lab specimens now go to the hospital system, that cuts the supply of specimens on which private national labs depend.”

Oppenheimer acknowledged that the change in reimbursement for prostate biopsies in seven states served by Medicare contractor Palmetto GBA is just one more example of how the lab marketplace is changing. (See sidebar this page).

“OURLab has not seen a decrease in the number of biopsies it does or in the number of vials from this policy,” noted Oppenheimer. “But it has seen a downward trend in revenue from those biopsies as a result of this new policy. And it’s likely that this policy is being felt more severely at the urology groups that operate in-office pathology labs.”

OPKO has a proprietary assay called the 4Kscore test that may eventually cause a decrease in prostrate biopsy testing, added Oppenheimer. OPKO launched this test in Europe. It is used to predict the probability of positive biopsies in men suspected of having prostate cancer. OPKO believes it could reduce the number of unnecessary prostate biopsies by 50% or more. This would benefit patients but would reduce lab revenue because of the need for fewer biopsies.

Change in Prostate Biopsy Billing Affects Claims

ONE REASON LABS may be seeing reduced reimbursement for prostate biopsies is a change in policy that Palmetto, GBA, announced in August. The nation’s largest Medicare contractor, Palmetto serves seven states: California, Hawaii, Nevada, North Carolina, South Carolina, Virginia, and West Virginia.

Effective August 7, Palmetto limited the number of prostate biopsies that may be reported for CPT code 88305 to four services. To report five or more prostate biopsies, providers must use G0416 with one unit of service. The effect of this policy is to cap reimbursement for a 12-core prostate biopsy at about 47% of its former level.

“Pathology labs that have operations in jurisdictions that Palmetto serves have definitely been affected,” said Joe Plandowski, Co-founder of In-Office Pathology of Lake Forest, Illinois. “That policy was implemented in August, which means that labs billed for prostate testing under the new rules in September. So it is only in recent weeks that labs would begin getting their rejection notices. It is likely that labs in those seven states probably had a decrease of about 50% in Medicare revenue from prostate biopsies.”

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