Aurora Diagnostics Buys Toledo Pathology Group

Sale was result of local pathologist’s strategy to access more capital and business resources

CEO SUMMARY: Consultants in Laboratory Medicine of Greater Toledo was sold to Aurora Diagnostics last month. CLM’s president said that, as an ancillary service, pathology has little appeal to hospital administrators who want to cut costs as quickly as possible, and all hospital-based services are targets for cost reduction. Therefore, CLM sought a partner that could take over administrative functions so that its pathologists could focus on delivering added value to enhance patient care.

THINGS ARE GETTING TOUGHER for private pathology group practices. That’s the opinion of one pathologist business leader who just sold his regional pathology company.

Last month, Aurora Diagnostics of Palm Beach Gardens, Florida, announced the acquisition of Consultants in Laboratory Medicine of Greater Toledo, Inc. CLM is a hospital-based practice with 16 pathologists.Terms were not disclosed.

F. Michael Walsh, MD, MBA, Chairman of the Department of Pathology and Medical Director of CLM, said the pathologists provide laboratory medicine and anatomic pathology services on an exclusive basis to 11 hospitals of the ProMedica Health System, a non-profit health system serving 27 counties in northwest Ohio and southeast Michigan. The pathologists do not own the laboratories in those 11 hospitals.

The acquisition is one example of how the practice of anatomic pathology and laboratory medicine is changing quickly, Walsh said. “Over the past three years, we watched as markets contracted rapidly, health systems consolidated, were acquired, or have been forming integrated networks,” he noted. “As these trends continue, every pathology group must have a big footprint in these newly-defined regional healthcare markets. Otherwise, they will be left behind.

Crunching the Numbers

“As much as we like to think it is not, pathology is an ancillary service to healthcare executives,” he said. “Pathology has no special appeal to hospital administrators who look to reduce costs as fast as possible.

“As pathologists, we can emphasize how much added value we provide,” Walsh continued. “But unless a group can truly reduce costs, it may not survive. It is essential for pathologists to show with hard numbers what they can do in terms of reducing costs both for their practice and the health system. At the same time, the pathology lab must show that it can exist and expand on its own without turning to the health system for financial support.

“What’s happening here in Northeast Ohio is very similar to what’s happening in pathology nationwide,” observed Walsh. “What’s happening is difficult for pathologists because, in general, we don’t actually know what’s going on in the C suite, and these executives make decisions that are best for the hospital or health system without regard for what’s best for pathologists.

“For these reasons, pathologists need to be involved in much larger organizations, ones that can afford to invest in the systems needed to make pathologists more efficient,” he noted. “Those of us running pathology groups must understand the crucial importance of operating more efficiently. It’s imperative to get the most out of the existing pathologists and staff. In today’s healthcare system, it is no longer possible to simply add staff to increase productivity.

“Plus, we have to recognize that both pathology revenue and the number of surgical procedures are going down,” Walsh added. “There will continue to be fewer surgical procedures because so many people now have high-deductible plans and they are choosing not to have surgical work done if they can avoid it.

“Another factor that is holding down revenue for pathology groups is the high levels of uncertainty in the health insurance market,” commented Walsh. “It is expected that consolidation among the nation’s biggest insurers will create still more downward financial pressure on smaller pathology groups.

“These are all reasons why the pathology profession needs to make advances in productivity,” he noted. “One example is more effective use of digital imaging, but that requires capital resources that only exist in large pathology groups.

“Digital imaging is expensive and, because it’s not certified for primary diagnosis, can only be done successfully by being part of a larger health system,” he said. “It’s fine for specialty consults and that’s why it works in larger systems. In smaller systems, digital pathology will not yet pay for itself.”

Following his own advice, Walsh sought a larger partner that could support a 16-member pathology practice while continuing to let them practice medicine. “When we started to look for potential partners, we considered our own health system, ProMedica, and the Cleveland Clinic,” he said.

“We also considered a number of other pathology companies. We believe, however, that some pathology companies have reached a point of diminishing returns. They still knock on surgery center doors and say, ‘Send us your work,’ even as health systems acquire free-standing surgery and endoscopy facilities and internalize the work to their own labs.

“On the other hand, Aurora has a significant focus on hospital-based pathology groups and I believe that’s where pathology’s biggest strength and opportunity exists,” noted Walsh. “That’s because, in hospitals, we have the important role of integrating patient data and being directly engaged in patient care teams. Aurora clearly understand the importance of integrating patient data into all aspects of care and that is something that does not exist at other pathology firms.

An Attractive Partner

“Another reason we were attracted to Aurora is they moved quickly and that was important to us,” Walsh added. “They also looked at where we are in terms of earnings before interest, taxes, depreciation, and amortization (EBITDA) and helped us set targets for our EBITDA. Aurora also took over all the back room functions, such as billing, contracting, and human resources. That lets us focus on practicing medicine.

“Here in Toledo, our pathology group will continue to operate as it always has and thus the hospitals and physicians will not notice any significant change,” concluded Walsh. “Meanwhile, CLM has access to the capital and specialty expertise it needs to develop additional ways to help cuts costs and deliver more value to the hospitals we serve.”

Contact Michael Walsh at 419-350-4852 or Fmwalsh@clm-pml.com.

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