Pathology Competitors Make Florida The Target

Hospital-based pathologists should prepare for the impending, intense marketing blitz

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CEO SUMMARY: Florida is about to become the marketing battleground for anatomic pathology. Three well-funded players are preparing to launch major sales efforts. Pathologists in the state wait with trepidation. Expectations of discounted pricing and a “gloves-off” sales strategy concern Florida’s hospital-based pathologists.

FOR PATHOLOGISTS CONCERNED with their economic and professional future, Florida is a state to be watched. Three well-financed companies are gearing up aggressive sales programs to capture additional anatomic pathology business.

New clients seized by these companies will come at the expense of local pathologists in the state. In particular, established clients of hospital-based pathologists will be solicited by these sales programs.

Leading the pack is AmeriPath, Inc. The company, based in Riviera Beach, is flush with cash from a public offering and has a big credit line with major banks. During the past several months, it ran advertisements in the help wanted sections of local newspapers and lab industry publications for sales reps and marketing managers.

Next in the competitive line-up is Pathology Services Associates of Florida (PSAF). This is a regional network of pathology practices organized last year under the business model developed by Dr. Louis Wright, Jr. of Florence, South Carolina. Like AmeriPath, PSAF is preparing to field a Florida-based sales force.

Also in the game is DIANON Systems, Inc. of Stratford, Connecticut. DIANON already has sales reps in Florida calling on prospective accounts. Its acquisition of Pathologist Reference Laboratories in Tampa earlier this year was a strategic move to expand its presence in the Sunshine State.

New clients seized by these companies will come at the expense of local pathologists in the state. In particular, established clients of hospital-based pathologists will be solicited by these sales programs.

A careful assessment of the business dynamics currently under way leads THE DARK REPORT to conclude that Florida will soon become the radical business battleground for pathology in exactly the same way that California became the radical business battleground for clinical laboratories.

In California, managed care’s rapid introduction caused the intensely competitive laboratory market to cut its throat while fighting for business. Numerous bankruptcies and radical downsizing throughout the state astonished laboratory executives everywhere.

Increase Specimen Volumes

Pathology will soon undergo a similar scenario in Florida. Each pathology company intends to blitz the state with an aggressive sales program. All three companies have the same goal: to increase the volume of anatomic specimens flowing into their laboratory.

This heightened sales activity promises to radically shift historical relationships between established pathology practices, their clients, and the hospitals they serve. Pathologists in Florida already see intense marketing fights over anatomic pathology specimens coming from surgicenters and other non-hospital sources.

But the impending sales campaign will introduce a new twist into the war: hospital contracts. For the first time in any pathology marketplace, we predict Florida hospital administrators will soon be regularly visited by sales representatives from pathology companies.

Lower AP Prices Ahead

These sales reps will begin the process of getting hospital administrators to consider the benefits of switching their anatomic pathology work. THE DARK REPORT believes that most sales people will offer a primary benefit to hospital administrators: lower price for anatomic pathology procedures.

It doesn’t take a crystal ball to foretell this. Sales people take the path of least resistance and “lowest price” is the easiest way to capture new accounts. This is particularly true of sales people whose commissions are thin because they’ve failed to bring in new business.

Whether these pathology sales reps successfully get the AP business or not, hospital administrators will use these “low price” business proposals against the pathology group which holds the existing contract for that hospital. Such proposals become negotiating levers against their current pathology group at the next contract renewal talks. This is the reason why the impending pathology sales blitz in Florida will beat down the overall reimbursement level for anatomic pathology services.

What is particularly interesting about the coming sales blitz is that all three companies represent a different business model for pathology. AmeriPath is a publicly traded physician practice management (PPM) company. Its pathologists are employees. AmeriPath wants to develop the capability of providing pathology services throughout the United States.

Physician Network Model

Pathology Service Associates of Florida is organized as a statewide component of a national network organization of PSA pathologists. It wants to preserve pathology at the point of care while providing the business structure to allow local pathologists to participate in state, regional, or national pathology contracts. Those practices currently a member of PSA organized themselves in order to access the anatomic pathology business negotiated through larger regional and national contracts Because PSA is composed of hospital-based pathologists, it will not send sales reps to solicit hospital AP contracts.

DIANON Systems is entirely different than AmeriPath or PSAF. It is a national reference laboratory with a central laboratory in Connecticut. Historically, it fed AP specimens into its central laboratory. The recent acquisition of a pathology laboratory in Tampa is a new twist on that strategy.

With three vastly different business models, the coming sales war in Florida will provide a great deal of useful information on which type of pathology organization can best survive in a managed care environment.

But it is also important that pathologists in Florida and elsewhere understand the ramifications of this impending sales battle. For the first time in history, sales forces will be diligently calling on any source of anatomic pathology specimens to capture the business for their pathology organization. It means that no longstanding pathologist-client relationship can be taken for granted.

Those pathologists who wake up to this fact have the best chance of countering these trends and stabilizing their income. Despite competition, there are opportunities to maintain strong client relationships and bring added value to physicians. But the “sit and wait” strategy will no longer work. Pathologists should educate their colleagues to the threat. The time has come for definitive action.

Pathology Sales Wars Wounded One Florida Pathology Practice

FOR EVERY ACTION, THERE IS A REACTION. When AmeriPath issued a press release in 1997 announcing its agreement to provide expanded AP services in Florida to SmithKline Beecham Clinical Laboratories (SBCL), it was a winner in the bid process.

But there was also a loser. It was the pathology practice which lost that anatomic pathology contract. For Pathologists Reference Laboratory (PRL) of Tampa, the contract represented a significant volume of total work flow. Lost revenue from that contract com- pounded the general decline in reimbursement experienced by pathology groups throughout Florida.

All parties with direct knowledge of this situation declined to talk on the record. It appears that additional financial pressure resulting from the lost contract played a role in the decision by PRL’s owners to sell the laboratory. As reported in this issue, DIANON Systems Inc. was the eventual buyer.

This situation is instructive. It demonstrates how rapidly the financial position of an established pathology practice can erode when just a few key contracts or clients are lost. This lesson should not be overlooked or ignored by pathologists, particularly in Florida.

Is AmeriPath the good guy or the bad guy in this story? The answer is neither. AmeriPath is a creature shaped by the stock market. Investors and shareholders want a return on their money. They expect revenues and operating profits to grow by 8%, 10%, 5% or more each year. If shareholders don’t get this growth, they replace management.

That is why AmeriPath has a huge appetite for growth. It is not sufficient to grow by acquisition alone. AmeriPath must also increase the annual revenues at each pathology practice which it buys. Failure to do so might cause shareholders to replace management. That is why the gloves are off in the next round of marketing wars. It is survival of the fittest.

Pathologists in Florida and other states should wake up to the new reality: the collegial days of respect and friendly competition among local pathologists are over. By the end of 1998, Florida will be a battlefield littered with the debris by more than one pathology practice which failed to respond to the impending sales onslaught and was forced to sell or merge to competitors.

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