AmeriPath Reports on 2003, Its First Year as a Private Firm

Company reports that Quest is internalizing anatomic pathology contracts at a steady rate

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WILL BUSINESS BE BETTER for AmeriPath, Inc. as a private company than it was as a publicly-traded firm? Its 2003 financial report indicates some interesting challenges, many common to all laboratories.

First, a look at basic numbers. AmeriPath’s net revenues grew from $478.8 million in 2002 to $485.0 million in 2003. That’s a growth rate of less than 1%. Net income for 2003 was $5.4 million compared to net income of $44.6 million in 2002. The company attributed the decline in net income to higher interest expenses, merger-related expenses, and restructuring costs.

Many of the challenges facing AmeriPath are common to the laboratory industry at large. From labor shortages to managed care contracts, a variety of issues are impacting the company’s operations.

Managed Care Contracts

One challenge is access to managed care patients. As it acquired anatomic pathology practices, AmeriPath also became owner of the managed care contracts held by these group practices. In a number of cases, pathology groups were doing sub-contract work for national laboratories like Quest Diagnostics Incorporated and Laboratory Corporation of America.

As clients and regular readers of THE DARK REPORT know, in recent years Quest Diagnostics has steadily internalized anatomic pathology (AP) work it formerly contracted out to local anatomic pathology groups. Because AmeriPath held a substantial number of these subcontracts, it has lost a significant chunk of revenue.

In 2003, AmeriPath reports it was paid $3.3 million for its Quest work. That is a decline of 85.4% from 2002, when AmeriPath’s revenues from Quest contracts totaled $23.3. million. That shows the speed with which Quest Diagnostics is building its AP capacity.

Significant Volume

As an aside, it is worth noting this fact. Whenever Quest Diagnostics (or LabCorp) internalizes revenue like this, it is included in the net revenue growth calculations. In 2003, Quest Diagnostics also internalized much of the send-out testing formerly referred by Unilab Corporation to Specialty Laboratories, Inc. Specialty has acknowledged that the Unilab testing represented about $17 million per year in business. Add that to the $20 million Quest picked up by internalizing work formerly done by AmeriPath, and the numbers get significant for Quest during 2003.

Shortages of trained technical labor are a concern at AmeriPath. In a financial filing, it stated that “in many markets, because of competition for technicians, periodic salary increases and retention bonuses have been necessary to retain and attract employees.” Just in the area of histology, AmeriPath states that its costs increased by 18.4% between 2001 and 2002.

Bidding For Scarce Labor

Hospital laboratories and pathology group practices should take notice of this fact. As a for-profit corporation, AmeriPath will bid as aggressively as necessary to attract labor. If it can’t do the work, it can’t generate the revenue. Thus, AmeriPath is a major factor in establishing the level of salaries and benefits for technical labor in many markets. Because hospitals are not as market-responsive, their compensation packages will probably lag behind those of the national laboratory companies.

AmeriPath similarly acknowledges the challenges in maintaining adequate numbers of pathologists, particularly those with subspecialty expertise. It doesn’t discuss the specifics of pathologist compensation, but it does provide some statistics for pathologist turnover.

As of December 31, 2003, AmeriPath employed 408 pathologists. AmeriPath states that, for the years 2001, 2002, and 2003, the turnover rate for pathologists in the company was 10.0%, 8.8%, and 13.3%, respectively. The number of pathologists turning over in each of those same years was approximately 40, 35, and 53, respectively. As a result, in the past three years, about 128 of AmeriPath’s 400 pathologists have left the company.

Pathologist Turnover

The financial impact of this should not be underestimated. Replacing each pathology generates substantial expenses. First, there is the cost of recruiting and any headhunter fees. The second source of additional costs involve relocation, signing bonuses, and similar upfront concessions.

Third, and most importantly for the AmeriPath business model, the incoming pathologist will probably have a higher salary than his/her predecessor. A large number of AmeriPath pathologists became employees of the company when their group practice was acquired. Often, as part of the generous acquisition price, pathologists from the acquired group agreed to work at a compensation package reduced from the amount they earned as partners in a private practice.

Whenever these pathologists decide to leave AmeriPath, the pathologist hired as a replacement may need to be paid more compensation. Unlike the departing pathologist, who has a financial nest egg from his or her share of the group’s purchase price, the incoming pathologist wants to be paid at a competitive market rate. Thus, pathologist turnover will tend to raise AmeriPath’s existing cost to do business.

Allowances For Bad Debt

One additional challenge AmeriPath must address is bad debt and contractual allowances. In its 2003 financial report, AmeriPath indicates that, under new ownership, it changed its estimates of contractual allowances “resulting from the analysis of our managed care contracts.”

Based on this analysis, AmeriPath increased its reserves by $4.5 million. One reason for this increase in reserves may be that AmeriPath’s new owners are taking a conservative position and using this year to write down as many items as possible. Then, in subsequent years, if the company performs better than estimated, its profit margins will be greater.

Finally, anatomic pathologists will want to know whether AmeriPath is buying pathology practices. For 2003, the company acquired four anatomic pathology group practices. That compares to seven acquisitions in 2002 and just one acquisition in 2001.


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