Path Group Closes Its Lab After GIs Do In-Clinic Lab

Pathology group in Kettering, Ohio, responds to specialist docs building in-clinic pathology labs

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CEO SUMMARY: Kettering Pathology Associates of Kettering, Ohio, built a thriving outreach pathology business in this Dayton suburb before three gastroenterology groups either sent biopsy work out of state or built their own lab, and asked the pathologists to provide contracted professional component services at a discount. How the pathologists responded to these developments illustrates new challenges to the pathology profession.

WHAT HAPPENS TO LOCAL PATHOLOGISTS WHEN SPECIALIST PHYSICIANS in a community build their own pathology lab and bring this work in-house? Do pathologists have effective strategies to counter this situation? Are there win-win solutions for both pathologists and specialist physicians?

The trend of specialist physicians establishing their own histopathology laboratories and bringing anatomic pathology services in-house is a serious threat to the pathology profession. The consequences can be significant.

That is the case in Kettering, Ohio, where Kettering Pathology Associates (KPA) has watched specialist physicians either send biopsies out of state for discounted services or build pathology laboratories within their group practices. A variety of strategies to cope with this situation have brought mixed results.

The story of what happened is a cautionary tale for all pathologists facing the threat of increased competition from specialist physicians opening their own labs. As the story of the Kettering pathologists demonstrates, there are no easy answers for pathologists reluctant to offer professional services at a discount, especially when other pathologists are willing to step in and do this work on those financial terms.

Kettering Pathology Associates is typical of community hospital-based pathology groups across the nation. It provides pathology services to 522-bed Kettering Memorial Hospital. The outreach business arm of KPA is Regional Pathology Services (RPS), which was organized in 1994 and built an off-site lab in 2001.

“It was 2002 when the first of several independent gastroenterology (GI) groups approached us about doing discounted work,” recalled RPS Medical Director Richard L. Pelstring, M.D. “Before long, another GI group wanted to do the same thing. When one of them began talking about opening its own lab, that GI group approached us with a proposal for RPS to send pathologists to read the slides in their GI office for a discounted fee.

Discounted Work

“RPS refused these first two offers,” he continued. “But the volume of work lost was so much that we ultimately agreed to do discounted work for a third GI group.”

These changes to its client base had a major impact on the pathologists’ outreach business. Once a seven-physician group doing 18,000 outreach surgical specimens a year, RPS has since become a
much smaller entity. It no longer operates its free-standing laboratory and has moved its outreach specimen processing back into Kettering Memorial Hospital.

“RPS was organized in 1994 specifically to do work for office-based physicians only,” Pelstring explained. “Over the years, we built this outreach practice largely on doing work for gastroenterologists. There are three large gastroenterology groups in this area, and we did at least some of the work for all three of them. And that part of the work kept growing substantially.

Flourishing Outreach Program

“At one point, RPS was doing about 18,000 surgical specimens annually in the outreach side of the business, compared to about 16,000 or 17,000 hospital surgical specimens,” noted Pelstring. “The number of outreach cases had grown to exceed the inpatient cases generated by the hospital.

“About the time we opened our separate laboratory, one of the three GI groups asked us if we would do discounted billing for them so they could bill the full amount to their non-Medicare insurers,” Pelstring explained. “We weren’t interested in doing that. Without much discussion, the GIs sent the work to a lab in Texas that agreed to do the work at a discount.

“Even though we lost that account, we were taking the high road,” Pelstring explained. “We don’t believe in offering professional services at a discount.

“Then, at about that same time, we started getting overtures from the largest of the three GI groups asking us to do the same thing for them,” he continued. “Of course, the GIs in town all know each other. At this time, their reimbursement was falling and they were motivated to find different ways to offset that decline in their income. One way to do that is to bring the pathology work in house.

Potential Problems

“We were very thorough in explaining to the GIs about the potential quality problems that could result from doing lab work in-house as proposed,” Pelstring said. “We talked to them about the potential Stark, legislative, and compliance issues. That seemed to forestall their efforts for a few years. But eventually the largest GI group decided to bypass those issues and open their own lab.

“At the time, that particular GI group was splitting its work,” he explained. “About half of that work came to us and about half went to a competing pathology group in Dayton. This largest GI group wanted both pathology groups to come to their offices and do the professional component at a discounted fee.

“Once again, our pathologists decided that we weren’t going to do that,” stated Pelstring. “But, in a surprise move, our competitor decided that they would do it. The next thing we knew, the GI group opened its own lab and our competition had pathologists reading all of those slides in their offices at a discounted fee!

“As with the first case, we weathered that storm,” Pelstring added. “At that time, our annual volume was about 18,000 surgical specimens and 30,000 Paps. Loss of the two GI groups dropped our surgical pathology volume to about 12,000 annually and, of course, we continued to do our hospital work.

“But then last year, the third and last GI group in town decided to build its own lab,” he continued. “Were we to lose those specimens, outreach volume at RPS would drop to about 8,000 surgical specimens a year. With specimen volume at that level, the economics of the off-site laboratory changed. We asked ourselves whether it made more sense to return this work to the hospital.

“That’s when things started to change within our pathology group,” he added. “Some members of the group were concerned about losing all this work. The group was divided on the issue of providing discounted professional services.

“There were some—including me— who said, ‘We have held this line all this time. Why stop now?’ But others in the group said, ‘We can’t continue to let work go out the door. Even though it’s at a discount, we have to do it’,” related Pelstring.

“In a partnership, it’s important to lis- ten to each other,” he added. “Some pathologists were willing to go to this client’s office and read those slides at a discount. So, that’s what we decided do. When the final GI group opened its in-office lab last month, two or three members of our group decided to go there and read slides at a discount. And two or three members of the competing pathology group will also provide pathology professional services under a discounted arrangement. We’re going to do alternate weeks. That’s how it unfolded.

“But the rates this GI group offered for the discounted service were substantially below what Medicare pays,” Pelstring said. “That’s one issue that troubles me about these arrangements. When a physician colleague says, ‘I’m going to open a lab and take the responsibility for that work and I can make a profit on it,’ that’s one thing. But when they say, ‘I am going to make a profit on it by doing the technical side inexpensively and by offering you a fraction of Medicare rates to do it,’ that’s hard to take.

“Insurance companies don’t treat us like that,” he observed. “We don’t have an insurance contract that pays us below Medicare rates. However, now we have this new arrangement with a GI group that is significantly below Medicare.”

Kettering Pathology Associates is absorbing the business lessons from these events. But it is now a different pathology group than it was one year ago. “Despite all this turmoil, it does not mean the end of Regional Pathology Services,” Pelstring declared. “Remember, we started in the hos- pital as a subsidiary of our main corporation and we have always billed globally. When we did it at the hospital before, we billed globally and then paid the hospital for the TC.

“We have entered back into that arrangement with the hospital again,” he stated. “We are also down to five physicians now, instead of seven. No one was let go. We lost pathologists through attrition and have not replaced them.

Business Comes Full Circle

“We have come full circle with our business,” Pelstring said. “Our pathology group is still a viable entity. We’re fortunate in that our relationship with the hospital has worked out well and now the hospital is more interested in outreach. Further, the volume of 8,000 specimens annually is something they can handle.

“On the other hand, today, we do work only for one GI group and we’re doing it at a discount,” he added. “It’s not an easy pill to swallow when your physician colleagues say, ‘We love your services and there are no quality issues. But we are going to take this work and internalize it solely because it is a profit center.’ It sends a message that the value they place on your professional service may not be what you think it is.

Quality And Patient Care

“More and more specialty physicians are viewing pathology services as a commodity,” he said. “Economics aside, that view is unfortunate because there are intangible benefits to having an independent pathology group process and read these biopsies. That level of quality and patient care gets lost when it gets internalized into a big practice.”

“All physicians are getting squeezed on reimbursement,” he added. “We hear that from urologists and GIs. Yet, pathologists are being squeezed as much as anyone else.

“The contradiction is that urologists and GIs, as well as everyone else, want a competent group of pathologists who are well trained and have diverse subspecialty interests,” Pelstring noted. “However, for a practice like ours to have that kind of subspecialty diversity and attract people into the practice, we need enough case referrals to support all these people.

“When specialist physicians scrape this work off the top, they undermine the subspecialty expertise we can offer because we are forced to become a smaller group. We formerly had pathologists with subspecialty boards in cytology, hematology, dermatopathalogy, and neuropathology. We did not replace our dermatopathologist nor our neuropathologist when each relocated due to other professional opportunities.”

Pathologists across the country will recognize the common themes in the events that unfolded in Kettering, Ohio. As Pelstring noted, there are no easy answers when specialist physicians want pathologists to provide professional services at a deep discount.

Can The Pathology Profession Find a Way To Establish Reimbursement Equilibrium?

MARKET DYNAMICS affect each pathology group differently. But when the price for pathology services falls precipitously, are pathologists at fault? That’s the question asked by Richard S. Pelstring, M.D., Medical Director for Regional Pathology Services in Kettering, Ohio.

“Our pathology group thought we could weather the storm by losing work from some of the groups we had as clients,” he explained. “But we couldn’t afford to lose business from all three gastroenterology groups in town. They made up 70% of our volume at one point. But, we still have to generate income every day. When the work keeps going away, you reach a point where you’re willing to do the work for less.

“However, in many ways, the pathology community is largely at fault here,” Pelstring commented. “If, as pathologists and professionals, we weren’t willing to do work on these terms, then it wouldn’t happen. But obviously there are those pathologists willing to offer services at a deep discount. That opens the door so that now, if your pathology group won’t do this work for less, there are other pathologists who will.

“It’s a tough managed care market in Ohio,” Pelstring continued. “Anthem and UnitedHealthcare are the big payers. But, the specialist physicians—who are our own colleagues—offer less than what Anthem or UnitedHealthcare pay.

“That raises the question I am unable to answer: Why would an insurance company allow these arrangements?” Pelstring asked. “Why would they pay GIs with pathology codes? There’s nothing to gain. Pathologists must be credentialed. So, insurers know who we are. But when they pay a GI or urology group for pathology services, they have no idea who is reading these cases. How does that benefit their patients?

“There’s a patient care risk in operating that way,” he added. “Once the dollar drives who reads the slides and where they are being read, then it can create the potential for a patient care risk.”


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