Path Trends For 2002 Show Future Direction

Our biannual pathology profession review reveals which market forces are at work

CEO SUMMARY: Even as pressures to squeeze costs and consolidate within the pathology profession ease, a different set of market trends is exerting influence. Collectively, these trends portend the end of the small pathology group’s dominance of its local healthcare marketplace. It will become increasingly important for successful pathology groups to offer a full range of pathology subspecialty expertise.

IT MAY BE A RELATIVELY QUIET TIME in the pathology profession, since pressures to consolidate and regionalize have eased and most pathology groups are financially stable.

Certainly in the two years since THE DARK REPORT published its last comprehensive list of pathology trends, most pathology group practices now face a friendlier healthcare environment. But it would be wrong to characterize this quiet period as a time when marketplace changes have slowed.

To the contrary, although the six pathology trends presented in this issue are not expected to exert noticeable pressure on pathology groups in the short term, several of these primary trends will play out in the marketplace in complementary ways.

For example, the emergence of national pathology firms causes them to recruit “world class” pathologists and advertise that fact. That reinforces the growth of pathology centers of excellence. In turn, both of these trends play directly to the heightened interest of consumers, who are searching for best-of-class pathologists to review their case. Improvements in the Internet and telepathology enable consumers (and their physicians) to interact more effectively with pathologists located miles away.

Thus, although these six pathology trends may be “slower-acting” than market trends in the 1990s, their impact will be no less profound on how pathologists organize their practices and deliver clinical services.

Key Trend No. 1 State of the Pathology Profession 2002
National Pathology Firms

NATIONAL ANATOMIC PATHOLOGY (AP) firms are a relatively new phenomenon in the pathology marketplace. But their rapid growth and solid financial success is demonstrating the validity of their business model.

In simplest terms, a national anatomic pathology company is one which operates a limited number of centralized pathology labs and feeds these labs with specimens originated from all regions of the United States. The two best-known examples of this business model are DIANON Systems, Inc. and IMPATH, Inc., both publicly-traded. Another fast-growing player using this business model is USLabs, Inc., based in Newport Beach, California and still a private company.

In a similar fashion, the regional networks of pathology laboratories operated by AmeriPath, Inc., Laboratory Corporation of America and Quest Diagnostics Incorporated do a significant volume of pathology business. All three companies have one or more “core” AP labs capable of serving the national marketplace.

Collectively, these companies are actively reshaping the anatomic pathology (AP) profession. Through aggressive sales and marketing efforts, they are convincing office-based physicians that sending AP specimens to an out-of-area laboratory is as good an option, if not better, than referring those specimens to the pathology group based in the neighborhood hospital.

Earlier this year, THE DARK REPORT noted that it took only five years for DIANON, IMPATH, and AmeriPath to achieve combined annual revenues in excess of $600 million. This is not only a remarkable accomplishment, but irrefutable proof that office-based physicians are willing to shift their referral patterns away from local pathology groups. Pathologists should consider this to be a market shift of seismic proportions. Historically, local anatomic pathology groups have dominated the clinical marketplace.

THE DARK REPORT believes that the concept of “national anatomic pathology services” will continue to grow for many reasons. New technologies in molecular and genetic diagnostics, along with enhanced informatics and communications capabilities, will make it easier for physicians to use pathology labs located anywhere in the United States.

But economics is the trump card which will fuel this trend. The ample profits earned by this first crop of national anatomic pathology companies is leading to further investment by these companies in the resources they need to expand their market share. Here is what separates the national path companies from the local AP group practices.

The national AP companies are willing to invest capital to build their business. Local AP groups want to protect existing profits and are reluctant to invest their capital into new technology, sales and marketing pro- grams, and sophisticated management systems. For that reason, many local pathology groups will see their share of their regional market eroded by the national AP firms.

Key Trend No. 2 State of the Pathology Profession 2002
Consumers Find Pathology

CONSUMERS REPRESENT a powerful new force in the national marketplace for anatomic pathology services.

During the past three years, consumer use of the Internet to seek healthcare information has become the number one use of the Internet. This development is an early warning message to anatomic pathologists and lab administrators. Consumers are hungry for information about quality healthcare.

Pathologists already have first-hand evidence of increased consumer interest. During site visits to pathology groups around the country, THE DARK REPORT regularly hears of stories about patients telephoning the pathologist who signed out their case to get more details about their diagnosis.

This happens because the attending physician is giving the patient a copy of his/her pathology report (which, in and of itself, is a change from customary practices in earlier years) and the patient takes the initiative to call the pathologist. Because many pathology cases involve a serious disease, the patient is motivated to learn, directly from the diagnosing pathologist, the salient facts about his/her medical condition.

Improvements in the presentation of pathology reports in recent years is further evidence of the influence of consumers on the pathology profession. Color pictures, better charting, and more readable formats are a direct result of physician and patient needs. DIANON Systems, Inc. has used its CarePath™ system of physician, patient, and payer reporting to gain contract status as an AP provider with a growing number of the nation’s largest health insurers. (See TDR, December 17, 2001.)

Another sign of greater consumer involvement in healthcare is the failure of the closed-panel HMO to satisfy middle-class Americans. Consumers want to have control over their healthcare. They want access to the best physicians and they want the ability to get second and third opinions. Closed-panel HMOs denied consumers these benefits. It should surprise no one that managed care is abandoning that business model and developing more consumer-friendly health plans.

To capitalize on this trend, anatomic pathologists need to make themselves more visible to the consumer. One way local pathology groups can do this is by establishing a Web site. As noted earlier, the Internet is becoming the first place that growing numbers of consumers begin their search for information and quality providers when they, or their loved ones, become ill.

THE DARK REPORT believes that increased consumer involvement in their healthcare is a trend that will encourage and support the development of national pathology companies. This, combined with the national pathology company’s need for continual growth, will stimulate a variety of new pathology services that add value to physicians, payers, and, most importantly, consumers. It demonstrates why the healthcare market will not be static. It will continue to evolve in a dynamic way.

Key Trend No. 3 State of the Pathology Profession 2002
Path Centers of Excellence

MOST OF THE PATHOLOGY TRENDS presented in this issue of THE DARK REPORT are contributing to the creation of regional and national pathology centers of excellence.

To be a center of excellence, a pathology group will need to provide clinical services which are recognized to be above the norm. To further reinforce their standings as centers of pathology excellence, these groups will try to recruit top-rank pathology subspecialists in as many clinical areas as possible. Market competition will drive this phenomenon.

That will be particularly true of national pathology companies. They need to develop professional expertise which they can claim is better than that found in most localities. This is their motivation to hire world-class specialists in specific areas of pathology, then advertise that fact to physicians, patients, and payers. (See the AmeriPath item about Dr. Petras.)

On the consumer side, patients are looking for “best-of-class” physicians to add to their care team. Because many pathology procedures are integral to the accurate diagnosis of disease, it should be no surprise that growing numbers of consumers are willing to search for who they think is the nation’s “best” pathology sub-specialist in order to have their case referred for an additional professional opinion.

New technology is another trend which encourages pathology centers of excellence. It takes money and special expertise to acquire and offer new diagnostic procedures. Because some diseases are uncommon, to economically offer the related procedures requires access to larger populations. Thus, a regional or national pathology center of excellence has the best ability to capture enough specimens to make that line of testing profitable.

Of course, enhanced informatics and the Internet make it easier and cheaper for a physician (and his/her patient) to refer a case to an out-of-area pathology subspecialist. Teleconferencing and telepathology systems provide the necessary tools to allow effective communication between the parties. This trend also supports the development of more pathology centers of excellence.

Where does this leave the small pathology group practice which is known for its generalist skills and serves its local healthcare market adequately? If all the tea leaves are assembled and read correctly, the healthcare market is evolving in ways that will put smaller pathology groups at a competitive disadvantage.

To retain its position within the local healthcare community it serves, the small pathology group is going to need to identify its specific areas of expertise, then develop affiliations with other pathology groups in the area that have complementary areas of clinical expertise.

Strategically, market demand for pathology services will shift toward specialization, thus favoring pathology centers of excellence. Increased market share will go to those pathology groups, whether small or large, which respond to the new needs of this changed healthcare marketplace.

Key Trend No. 4 State of the Pathology Profession 2002
Molecular/Genetic Path

EVERYBODY KNOWS IT’S COMING! Molecular-and genetic-based pathology services are heading for the clinical marketplace. The only question is: when?

THE DARK REPORT wants to emphasize a different transformational aspect of this technology. Most pathologists understand the range of clinical benefits that will result from scientific breakthroughs in these disciplines. But few pathologists have given much thought to how the profession will be changed by these same technologies.

THE DARK REPORT believes that a golden age for pathology lies just around the corner. Assays based on new molecular and genetic technologies will require pathologists to contribute more time and more expertise in helping referring physicians diagnose and treat patients.

At its simplest level, this should mean increased revenues for pathology groups which invest in these new technologies and develop the skills necessary to deliver a high quality of clinical support.

Although this sounds easy, it will be challenging for many pathologists. The current practice model is designed to support a pathologist who spends most of the time looking through a microscope and preparing reports to be read by the referring physician.

The new practice model will require lots more interaction with the referring physician. This will include help in ordering appropriate tests, active consultation in evaluating the results, and input on determining follow-on tests or therapies. Ongoing consultations involving the monitoring of patients over time will also be included in the new pathology practice patterns.

Accept this premise and it becomes clear that traditional practice patterns in pathology are going to give way to a more collegial, team-type of interaction with referring physicians. Individual cases will become more complex and time-consuming, both in the actual testing itself, as well as the involvement with physician (and probably patient).

There are several early examples of this type of practice pattern. The evolution in the diagnosis and monitoring of leukemia and lymphomas, breast cancers, and HIV reflect this type of clinical practice model. The pathologist takes a more direct and active role in supporting the clinician. With certain patients, this role can continue for several years.

Accordingly, the challenge for the anatomic pathology profession is to understand the impact on molecular and genetic diagnostics at multiple levels: in clinical application, in operational execution, and in financial terms.

New diagnostics based on molecular and genetic technologies will require pathology group practices to invest their capital in different ways, to organize their pathology services in new models, and to respond to the different economics in a way that allows them to operate profitably.

This is the double-edged sword of pathology’s coming Golden Age. One edge represents opportunity and profit. The other edge represents change and risk.

Key Trend No. 5 State of the Pathology Profession 2002
Internet & Telepathology

DON’T FOR A MINUTE THINK that the recent dot.com bust means the end of the revolution in healthcare e-commerce and Internet-based informatics.

Although the failure of many high-profile e-business start-ups, such asPets.com and WebGrocer captured the nation’s attention and hurt investors’ pocketbooks, the unwritten story is that the advance of information-based healthcare services continues at a swift pace.

Even as these high-flying public companies landed in bankruptcy, a number of e-commerce companies demonstrated that the economic model of Internet-based services is viable. E-Bay is one example. It provides a place where people can sell anything of value, including junk. e-Bay has effectively altered, even co-opted, the business done by auction houses, pawnshops, flea markets, and garage sales.

E-Bay is the perfect example of how the Internet, and related technologies, can drive down the cost of doing business. That is because the Internet takes costs out of the buy-sell transaction. With minimal cost and effort, sellers can advertise their wares. At equally minimal cost and effort, buyers can locate an item, and compare it for price and quality. Then, both parties can consummate the transaction with great speed.

In healthcare, the move to e-commerce has, for the most part, been more cautious. The boom and bust cycle was concentrated around sites seeking to get consumers (and providers) to pay for access to health information. WebMD’s physician and consumer portal strategy has so far failed to gain a profitable foothold in the market. MedScape had a similar strategy to provide health information to both providers and consumers. It also failed to grab hold in the marketplace and just last month was sold to WebMD. (See page 15.) Then there’s the ill-fated DrKoop.com, which filed Chapter 7 bankruptcy in the last week of 2001 and exists no more.

Where e-commerce has succeeded in healthcare, it has been on a more modest scale. Some healthcare vendors use the Web to post their product catalogs, take orders, and transact business. Among the best of these is Fisher Healthcare, which has earned accolades for the organization and effectiveness of its Web site in this regard.

Within the diagnostics industry, IVD manufacturers are designing their instruments so that on-board systems and reagent usage can be monitored remotely, via the Internet. This will enable them to do preventive maintenance and manage reagent inventories in real time for their lab customers.

Telepathology tracks right along this curve. The cost of effective telepathology systems has fallen dramatically in recent years. Coupled with broadband access, telpathology technology is just about ready for primetime. Look for the federal government, through the Veterans Administration’s medical system and the military’s medical corps, to be among the first to develop viable telepathology services, since it is not constrained by medical licensing laws. An era of huge growth in healthcare e-commerce is almost upon us.

Key Trend No. 6 State of the Pathology Profession 2002
Shortage of Paths & Techs

POPULAR WISDOM SAYS there is a serious shortage of histotechnologists and cytotechnologists, but that the supply of pathologists is ample, possibly even more than the market needs.

THE DARK REPORT predicts that the pathology profession will be surprised at how fast a shortage of board-certified pathologists develops within the United States. Market forces already underway will fuel a demand for more pathologists.

It will be the opposite phenomenon from the 1990s, when consolidation and pathologist productivity dominated much of the organizational thinking of the pathology profession. During that time, it was recognized that newly-minted pathologists found it difficult to obtain good positions when they finished their medical education.

The real truth about the labor market in pathology won’t take long to make itself visible to the entire profession. Increases in the number of new diagnostic technologies and assays will reach geometric proportions. To support both research and clinical use of such technologies will require growing numbers of trained professionals at all levels, from techs to Ph.D.s and M.D.s.

However, the educational system is already turning out insufficient numbers of trained professionals. It will take some time before the resources exist to train larger numbers of people for these jobs. There will be several years of imbalance in the supply of trained technologists and pathologists versus the demand.

Of course, one way to bring supply into line with demand is to pay more. Thus, compensation for both trained techs and pathologists should increase in the coming years.

In the short term, however, parsimonious Medicare reimbursement for professional services will be an obstacle to attracting more labor through higher wages. But governments cannot subvert the marketplace forever. At some point, rational pricing for pathology and lab testing services has to occur. As it does, labor supply imbalances will be corrected.

There is another factor which will drive the demand for more pathologists. As Robert McGonnagle, Publisher of CAP Today, recently observed, “Many pathologists overlook that fact that the increasing complexity of pathology cases is requiring more pathologist time per case. Growing numbers of molecular diagnostic procedures can be used to supplement visual analysis of tissues.”

McGonnagle correctly notes that the growing number of AP and molecular procedures which are appropriate for individual cases requires more pathology time per case. Match that fact with the volume increases to come as baby boomers reach their retirement years, and it becomes clear that the existing supply of pathologists will quickly be eclipsed by that increased volume of work.

Not surprisingly, that’s one important reason why THE DARK REPORT believes that the pathology profession is soon to enter a Golden Age. The needs of the healthcare community for sophisticated pathology services will be higher than at any time in history.

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