CEO SUMMARY: As many pathology groups discover that their best urology and gastroenterology clients are taking serious steps to do their own anatomic pathology, they ask a basic question: How did their best-referring clients suddenly become motivated to get into the pathology business? The answer is simple: in recent years, other labs have taught specialist docs that anatomic pathology can be highly profitable.
IN SELECTED REGIONS OF THE COUNTRY, specialist physicians have acquired a keen interest in arrangements that allow them to capture some or all of the anatomic pathology revenues generated from their patient referrals.
It’s a development that doesn’t bode well for the long-term financial prospects of local pathology group practices. That’s because urology and gastroenterology (GI) groups are at the vanguard of this trend—and they traditionally refer high volumes of specimens to their pathology providers. As these physician groups internalize their pathology referrals, or send the work to other pathology providers, local pathology groups are likely to experience a significant decline in specimen volume and revenues.
In order to respond to this trend, it is important for pathology groups and laboratory companies to understand the market dynamics propelling it for- ward. It is a young trend, almost unknown at the beginning of this decade. But the spontaneous combustion of two factors caused it to emerge and gain momentum at a surprisingly rapid pace, particularly among urologists and gastroenterologists.
One factor was the substantial reduction in reimbursement for clinical procedures that were a core component of urology and GI revenues in recent years. For example, according to a story published in Urology Times in December 2004, “a [urology] practice treating 48 prostate cancer patients receiving hormonal therapy would see gross revenue decline from approximately $132,000 in 2004 to $41,000 in 2005, based on CMS’s projected reimbursement rates issued July 26, 2004.” (See TDR, May 30, 2005.)
Profits From Anatomic Path
Specialist physicians, facing large declines in reimbursement on important clinical procedures, became highly motivated to find ways to offset that revenue, particularly with ancillary services they could offer their own patients. Anatomic pathology is one such ancillary service which caught their attention.
The other factor originated from within the laboratory industry. In recent years, there has been plenty of trade gossip about TC/PC arrangements between pathology laboratories and specialist physicians. (See pages 2-6 for a description of the TC/PC business model.)
In tracking this development, THE DARK REPORT believes that US Labs, Inc. was among the first, if not the first, to directly market a TC/PC business arrangement to office-based specialty physicians. This started along the East Coast in early 2002, possibly first in Maryland, but shortly there-after also in New Jersey and New York.
At that time, US Labs was beginning to expand its test menu and offer pathology services to office-based urologists and gastroenterologists. It had seen the success of DIANON Systems, Inc. and wanted to build specimen volume from these sources.
TC/PC In Flow Cytometry
US Labs had been offering a TC/PC arrangement in flow cytometry to its client pathologists. It would process the specimen in its laboratory and then send the flow cytometry data to the referring pathologist. In this arrangement, US Labs would bill for the technical component (TC) and the referring pathologist would diagnose the case and bill for the professional component (PC).
As it launched its sales program to urology and GI groups, US Labs offered a similar arrangement. The sales pitch went something like this: “Send us your specimens. Our laboratory will process them and send the finished slides to your group. We will bill for the technical component. You can hire or contract with a pathologist in your area, at a negotiated rate. You can then mark up the professional component and directly bill private payers.
“Oh, by the way, if you need help finding and contracting with a pathoogist willing to work at a discounted rate, we will help. And also, because of Medicare regulations, we will do all the TC/PC on your Medicare patients and send a global bill to Medicare.”
…for the labs offering these arrangements, they were getting paid full ticket for the TC, plus they were generally getting all the Medicare work, which they would bill globally. So these PC/TC client accounts were profitable…
This sales pitch proved appealing, at least in the Eastern United States. It was of particular interest for smaller urology and GI groups, because, with only two to four physicians, they didn’t have the specimen volume needed to financially justify their own histology laboratory. But with US Labs doing the TC, it was simple and profitable to contract out the work to pathologists willing to work at a discount, then mark-up and send a bill to private payers for the professional component.
Over the past four years, this sales pitch was successful enough that competing pathology laboratories responded with their own PC/TC arrangements. For example, Lakewood Pathology Associates in Lakewood, New Jersey was among the first to adopt this sales approach with office-based specialist groups.
High Interest In AP
The current high interest in anatomic pathology by specialist physicians is a sign that the TC/PC arrangements offered by US Labs, Lakewood Path- ology, and similar pathology companies, contributed significantly to their rapid growth in specimen volume and revenue during the past four years. Along the
mid-Atlantic area, many urology and GI groups were willing to participate in a TC/PC business relationship.
It should be noted that, for the labs offering these arrangements, they were getting paid full ticket for the TC, plus they were generally getting all the Medicare work, which they would bill globally. So these PC/TC client accounts were profitable for the laboratory.
Now comes the “shop talk” factor. News began to spread through the urology and gastroenterology communities that there was good money to be made from anatomic pathology services. During 2003 and 2004, stories about the profits from the earliest anatomic pathology laboratory condominiums (“pod labs”) were like pouring gasoline on the fire of financial interest.
Full, In-House Capability
Not surprisingly, during the past 30 months, growing numbers of urology and gastroenterology groups have taken active steps to evaluate opportunities in anatomic pathology. And size matters. Groups with eight or more physicians are highly likely to be actively developing a full, in-house anatomic pathology capability.
For smaller groups, particularly those with four or less physicians, a TC/PC arrangement is more typical. Because of the smaller volume of specimens, these groups like the economics of having a laboratory provide the technical services. They will then line up their own pathologist, pay a negotiated rate, then mark-up and submit a claim to private payers for the professional component.
Since specialist physicians have plenty of economic motive to enter the anatomic pathology business, this may prove to be a long-lasting trend.
Within Pathology, TC/PC Has a Long History
THERE IS A LONG HISTORY OF TC/PC ARRANGEMENTS WITHIN THE PATHOLOGY PROFESSION. It started years ago when the technical laboratory in hospitals would provide processed slides to the hospital’s contracted pathology group.
In these situations, the hospital owned the technical laboratory and it would bill the technical component (TC). Processed slides were sent to the pathologists. They would evaluate the slides, sign out the case, and bill for their professional component (PC).
This sets up an interesting contradiction. For decades, the many pathologists who worked in such a setting—whether employed by the hospital, or an employee or partner in the hospital-based pathology group practice—have generated almost all of their income strictly from the professional component services they provide. They have had no ownership share in a technical laboratory.
One could argue that the TC/PC business model has been widespread and has been good to the pathology profession. It also raises an interesting question. For pathologists who currently practice in such a hospital setting and who bill only for professional component services, is there much difference if they provide these services directly to aurology or gastroenterology group?
After all, they would be performing the same type of work, in almost the same circumstances. Their income would be based on their professional component billings. Whether based in a hospital or a physician group practice, the daily work flow of the two environments are quite similar.
The similarity of the working arrangements in both environments suggests that, if a greater proportion of pathology services were to migrate away from hospital-based pathology and into physician office settings, pathologists are likely to follow that work to its new location.