CEO SUMMARY: Consolidation of pathology practices can be a complex and drawn-out process. But it doesn’t have to be that way. During the 1990s, Bayless Pathmark of Cleveland grew from a two-man practice into a regional pathology resource numbering 22 pathologists and serving 10 hospitals. One surprising result of this process was an increase in partner income. Michael Rabin, M.D., M.B.A. was the architect of Bayless Pathmark’s business strategy. In this interview he shares management lessons learned from real- world experience in consolidating pathology practices.
“Business savvy is a precious commodity in pathology. Increasingly it makes the difference between financial success and failure.”
Michael Rabin, M.D., Bayless Pathmark Pathology
EDITOR: Why does the subject of pathology practice consolidation stimulate heated debate among most pathologists?
DR. RABIN: There’s a simple answer and a complicated reason. Simply put, most pathologists don’t like radical change, particularly when forced upon them by hospital administrators. But the more involved reason is grounded in what I call the “three Cs:” compensation, control, and comfort.
EDITOR: I understand about compensation and control. When two or more independent pathology practices negotiate their consolidation, control involves who is chosen to be the new leader. Compensation obviously refers to unequal earnings pre-consolidation, and how that issue is resolved during consolidation. But comfort…
DR. RABIN: Comfort has to do with lifestyle. Many pathologists were able to select their own work schedule and days off. They were also able to influence the number of cases assigned to them during the course of a typical work week. So consolidation may require a radical change to the lifestyle patterns of individual pathologists. Not unreasonably, some are reluctant to give that up as part of the consolidation process.
EDITOR: Mike, your “three Cs” metaphor cuts right to the true reason why pathology consolidation is fraught with dissension. A consolidation of pathology practices means you’re messing with everyone’s money, you might be changing their preferred work schedule, and politics around the choice of new leadership can create factions at odds with each other.
DR. RABIN: That is a reasonable description of why pathology practice consolidation can become emotional, difficult, and impossible to complete.
EDITOR: Which brings me to the reason why I believe you have practical wisdom on pathology practice consolidation to share with clients and readers of THE DARK REPORT. In my visits with pathologists at Bayless Pathmark, I’ve noticed a certain degree of harmony and common purpose lacking in many other large pathology practices. During a ten-year period, you helped a two-man pathology practice expand into a regional pathology powerhouse with 22 pathologists serving ten hospitals. Would you share with us how this was accomplished, and what was done to avoid or minimize the rancor and ill-will so often found in attempts to consolidate pathology practices?
DR. RABIN: That’s a tall order. Many of our lessons were learned on a trial and error basis. And we didn’t always get it right the first time.
EDITOR: But you seem to have persevered…
DR. RABIN: Yes. Early on we understood that a critical mass of pathologists made sense, both from a clinical perspective and a financial perspective.
EDITOR: Explain that.
DR. RABIN: Two pathologists sitting in a single hospital with one contract are extremely vulnerable to anything the hospital administrators wish to do. More importantly, most small pathology practices fail to manage their business effectively. They work hard, do first-class pathology, and are unaware that they leave huge dollars on their own table every year!
EDITOR: You’re describing a conflict between clinical skills and business experience.
DR. RABIN: Basically yes. I’m a physician who also earned an MBA as soon as possible after graduation from medical school. I recognized that medicine was also business. I further recognized that the best medicine is frequently practiced where there is good business support for the group practice.
EDITOR: Why did you get involved in pathology?
DR. RABIN: In 1988 I was retained by a two-man practice at Meridia Huron Hospital in Cleveland to trouble-shoot their business practice. After evaluating the situation, I made some basic management and accounting changes. Within 24 months, practice revenue jumped from $600,000 per year to $900,000 per year, without increasing the volume of cases!
EDITOR: This sounds interesting.
DR. RABIN: Yes. It showed me how I could help pathologists focus on their clinical services, while generating more income to the partners.
EDITOR: So this early success probably gave you momentum to pursue additional business initiatives with this pathology practice?
DR. RABIN: That’s correct. Different pathologists in the area saw how changing business methods boosted income and improved the working environment for our pathologists. It spurred other practices to investigate what we did.
EDITOR: So tell me what business drivers you utilized to consolidate these other pathology practices into the 22-pathologist organization which created what Bayless Pathmark is today.
DR. RABIN: You can cut our business strategy into two pieces: an internal strategy and an external strategy. The internal strategy meant we focused on existing cases and existing dollars coming into the practice. How could we organize ourselves differently to capture more net dollars from this specimen flow? What would allow us to increase the partners’ income at year-end?
EDITOR: And the external strategy?
DR. RABIN: This was based on offensive and defensive initiatives in the marketplace. Could we diversify revenues by acquiring new client accounts? Could we minimize risk by serving more hospitals. Were there opportunities to hire pathology subspecialists and become the “essential” AP provider in our service area on the eastern side of the Cleveland metropolitan area?
EDITOR: You mean concentrating on selling new business…
DR. RABIN: Yes, but more than that. It is strategic positioning. Could our pathology practice become the major player on our side of town? Could we develop capabilities that made it essential for managed care plans, for IPAs, for hospital provider networks to include us as a contract provider? We had a clear vision of what we had to become to accomplish this.
EDITOR: Is one strategy better or more effective than the other?
DR. RABIN: Truthfully, no. Today’s healthcare environment requires every pathology practice to utilize every business tool to its maximize advantage. By accomplishing this, the pathology practice should see improvement in revenue and income, even in coming years. To do less is to court failure.
EDITOR: Those are strong words. So the first advice that you offer is to develop a sound business strategy for your particular market.
DR. RABIN: Yes.
EDITOR: The second piece of advice is that pathologists must simultaneously implement a business plan that addresses “internal” and “external” opportunities.
DR. RABIN: Definitely! Let me give you some specific strategies on the internal approach. First and foremost is what I call the “Revenue Expansion Strategy.” We adopted a serious attitude toward charges and collections. It was not uncommon for us to find that most pathology practices tracked individual specimens for liability purposes, but not for financial purposes. Would it surprise you to learn that it was common to find that 30% of the legitimate charges each year went uninvoiced!
EDITOR: Can I assume that, among other reasons, it was because the hospital was billing for the pathologists?
DR. RABIN: Partially true. That is one source of unbilled charges. But even within the pathology practice, services that were provided did not get entered into the billing system. Thus, they were never invoiced.
EDITOR: You’ve given one example of how much money can be captured. Any others?
DR. RABIN: Well, at consolidation, one practice which joined our group was producing $250,000 per month in revenues. After we implemented our “Revenue Expansion” program, revenue jumped to $350,000 per month. This 40% increase was on the same volume of specimens!
EDITOR: That’s an additional $1.2 million per year, and it flows into the practice year after year…
DR. RABIN: Now you understand why we made consolidation a positive event for the practices which joined us over the last ten years. Our business strategy was to show them how they would increase their partner income by consolidating with us, even though they might lose some independence and some flexibility in their personal work schedule.
EDITOR: What else goes into “Revenue Expansion?”
DR. RABIN: We evaluate fee schedules, so that each legitimate charge is billed closer to true market rates. Many labs undercode, lose charges, lose frozens, fail to bill peripheral smears. We capture all legitimate and legal charges previously unbilled.
EDITOR: Other internal strategies?
DR. RABIN: We paid attention to Part A reimbursement by the hospital, knowing that each hospital’s situation is unique. We developed an independent lab to capture Part B fees. But as we did this, we understood that we were entering into a new business and it needed to be managed profitably.
EDITOR: That makes sense.
DR. RABIN: We also reduced business overhead. It shouldn’t cost twice as much to manage a million dollar cash flow as a two million dollar cash flow. This makes the economics of consolidation compelling. We incorporated an outside billing vendor into our system. We slashed collection costs while improving the percentage of collected revenue. However, this is not a passive program. We intensely manage this function in partnership with our vendor.
EDITOR: How about operationally?
DR. RABIN: We did the obvious things with buying supplies, etc. Being a larger practice, we acquired productivity tools so the pathologists could do more work with less stress. These included voice recognition systems, which are still under refinement, telepathology equipment, and similar things. We discovered that triaging by specialty is an effective way to boost productivity and revenue. These tools have another important benefit. They enhance turnaround and quality, which gives our pathologists an improved competitive position in the market.
EDITOR: Let’s talk about “external” strategies.
DR. RABIN: Well, the defensive tactic should be paramount. When independent hospitals merge, they always discuss downsizing. The pathologist can chose to drive that process or suffer from it. Early on, we decided to be proactive. If there is a single group, covering many hospitals, who cares where the work goes? So we determined that we would serve multiple hospitals and multiple hospital systems. It was a defensive move to diversify our revenue base so we could accommodate the downsizing initiatives that would inevitably occur in our town.
EDITOR: Not many pathologists are willing to acknowledge the reality of that situation.
DR. RABIN: You’re right. But our pathologists had the courage to address this on their own. By diversifying revenue sources and by providing partners in the consolidated practice a higher income than they had in independent practice, we gave them an incentive to join us. Our super-practice then became the ultimate income insurance policy which they lacked with their small, independent practice. It also provided them a boost in their personal income. How many pathologists today would appreciate both benefits?
EDITOR: There is a subject I want to discuss in detail with you. It is the marketing and sales of anatomic pathology services.
DR. RABIN: That’s an exciting opportunity for pathologists. Done correctly, it’s like hitting the revenue jackpot. Unlike small pathology practices, our size provided us with the cash flow to hire a marketing rep and experiment with selling our services to physician offices. The results exceeded our expectations.
EDITOR: But wasn’t it difficult to convince the pathologists to invest money in hiring a sales rep?
DR. RABIN: Certainly. Don’t underestimate the difficulties our management team had in convincing pathologist partners to invest in many of the business tactics I’ve discussed. They are a conservative group and like to hang on to the money they’ve got. It took lots of effort to convince them that investing was good, and would generate increased income for them as the investments matured. Even when we were spectacularly successful in our previous project, asking for more capital to fund the next business initiative was always like pulling teeth.
“It is imperative that pathologists recruit effective business management skills into their practice. It is imperative that they utilize every management tool available to maximize stability and success.”
EDITOR: In that respect, pathologists are their own worst enemy. In today’s healthcare environment, it is necessary to invest capital in order to generate more personal income. That innate tendency to stick with the known is why many pathologists find their income eroding, not increasing.
DR. RABIN: Let me give you an example of how we convinced them to fund a sales rep. We had a podiatric pathology practice at one hospital. It was doing about 25 cases per month, 300 per year. That pathologist was eager to get outreach business. So we obtained funding from the partners, hired a professional, experienced sales rep (not some rookie at a low salary). Within a year, this sales rep had 250 (and now 500) podiatric cases per month flowing into our practice! With increased revenue flowing into the practice, it was tough for the pathologist partners to continue denying the benefits, and costs, of selling AP services.
EDITOR: Didn’t you have similar success selling dermatopathology services?
DR. RABIN: Yes. In fact, Bayless Pathmark aggressively courted and hired a qualified dermatopathologist. He received full partnership at the outset, with built-in performance incentives. If the business grew, he would earn a differential bonus for his specialty.
EDITOR: That’s a hefty investment in the future by your pathologists.
DR. RABIN: Yes, because at that time he had only about 4,000 dermpath cases a year. But our pathologists recognized that a good dermpath can generate $1 million per year in revenue. That’s double what a typical hospital-based pathologist can generate.
EDITOR: So what happened?
DR. RABIN: Within seven months, our sales rep, working with the new dermpath, increased dermpath cases to 7,000 per year. This, however, was short of our business plan projections. Some partners wanted to pull the plug on the sales rep. She was somewhat brash, and was beginning to earn significant money from commissions.
EDITOR: These pathologists were overlooking the net profit margins she was adding to their pay line?
DR. RABIN: Yes. In fact, we got through that battle and kept her. In another six months, she doubled the number of skins, to 15,000 per year. As partners saw the increase in their year- end distributions, the expense of a sales program ceased to be a concern. In fact, because of our outreach efforts, the overall number of tissues we handle now approaches 90,000 per year. The pathologists’ investment in their sales and marketing program has paid big dividends, wouldn’t you agree?
DR. RABIN: I wish that pathologists would appreciate that one of the strongest tools they can use to preserve and enhance their income is to fund an effective sales program. It is much easier to cover costs and increase partner distributions when net revenue grows year after year.
EDITOR: Are you saying that the “external” strategy should dominate a pathology practice’s business thinking?
DR. RABIN: Yes, to the degree that it gets the major emphasis. Remember my earlier comment. It is imperative that pathologists recruit effective business management skills into their practice. It is imperative that they utilize every management tool available to maximize stability and success.
EDITOR: What recommendations do you have for pathologists, given the topics we’ve discussed today.
DR. RABIN: My themes should be clear. At Bayless Pathmark, we made a commitment to clinical and financial excellence by supporting both. A well-managed pathology practice, by definition, will offer a superior quality of service. It will also provide income stability and growth to its pathologist partners.
EDITOR: That is what you referred to earlier, about the impact of providing useful tools, like voice recognition systems, to help pathologists handle workloads more productively…
DR. RABIN: Precisely! Pathologists should understand that a properly-organized administrative team will make it easier for them to practice a high level of medicine, spend more effective time with clinicians, and generate higher billings for clinical services that are appropriate and add value.
EDITOR: Mike, one single point stands out in this interview. It is the fact that Bayless Pathmark, by its organization and performance in the marketplace, made it a positive event for a smaller practice to consolidate with it.
DR. RABIN: You’ve hit on the best-kept secret in pathology. When two or more pathology practices consolidate, they should consider it an opportunity to exploit external business strategies, to the mutual benefit of all partner’s income distributions.
EDITOR: In other words, they’d make more money working together…
DR. RABIN: Certainly. But pathologists tend to focus on what they believe they are giving up by consolidating, not what they can achieve as a combined enterprise. This is one aspect of the Bayless Pathmark story which we did better than our peers.
EDITOR: Mike, we’ve covered a lot of ground in a short period of time. I am certain that there are more details, and additional business strategies and tactics which went undiscussed.
DR. RABIN: That’s true. We’ve not talked about managed care contracting, hospital system politics, and a host of other significant issues. Bayless Pathmark has its share of victories and defeats with these business activities.
EDITOR: Would you be willing to discuss these subjects with clients of THE DARK REPORT who would like to learn more?
DR. RABIN: Yes. I am interested in learning more about the business strategies of other pathology practices…what’s working, what’s not. I’ve done some consultations with a few groups here in the East. Pathologists would be surprised at how easy it is to launch these strategies, once they make that commitment.
EDITOR: Thanks for your insights!
DR. RABIN: Thank you for the opportunity to share the Bayless Pathmark story. It was fun to discuss our experience.