Peeking Into Finances Of Pathology Lab Condos

“Bare bones” revenue and expense projections are used to sway specialist physicians

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CEO SUMMARY: In the possession of THE DARK REPORT is a copy of revenue and expense projections shown by a pathology condo laboratory complex promoter to prospective urology groups. They project that even smaller urology groups can realize worthwhile income if they invest in a pathology condo lab and operate it successfully. This is validated by other financial projections done by a veteran laboratory executive.

WHY DO SPECIALIST PHYSICIANS opt for a pathology laboratory condominium as the preferred way to bring pathology services into their group practice?

To understand the motives and incentives which make this pathology option attractive to specialist physicians, it is necessary to understand the financial opportunities —from the doctors’ perspective. Companies which package and operate pathology laboratory condominiums on behalf of specialist physicians use some controversial assumptions to create an attractive financial picture.

Analyzing Their Projections

Recently THE DARK REPORT obtained copies of revenue projections used by a pathology lab condo company based in Florida to show prospective urology and gastroenterology (GI) groups how the scheme works. (See sidebar below.) THE DARK REPORT is publishing the pathology profession’s first look at how the pathology lab condo organizers present their scheme to specialist physicians.

These projections show revenue, expense, and net income projections to be realized from a pathology laboratory condo linked to a small, a mid-sized, or a large urology practice. Joe Plandowski, President of the Lakewood Consulting Group, based in Lake Forest Illinois, is tracking the pathology laboratory condominium phenomenon. When provided with the pathology lab condo company’s revenue and profit projections, Plandowski analyzed this information and developed several useful insights and conclusions.

“My first impression was that this is a most unprofessional presentation,” observed Plandowski. “It is an Excel spreadsheet printout and the projections are poorly presented, contain inaccuracies, and fail to properly account for the expected case mix. Not only do these revenue/expense projections lack sophistication, but they don’t paint a full and accurate picture of the true costs to operate a pathology laboratory.

“However, even if these projections are flawed in certain aspects, they do capture one essential fact: a modest-sized pathology laboratory can deliver worthwhile net income to whomever owns it,” explained Plandowski. “As you can see from the projections themselves, the pathology lab condo developers are saying that any small urology group can net $66,616 per year from their lab, based on 250 cases per year.

“For mid-sized urology groups generating 250 cases per year, net income is projected to be $188,511,” he said. “At 1,000 cases per year, a large urology practice is projected to earn annual net income of $428,466.

Recasting The Projections

“Having seen these numbers,” added Plandowski, “I did my own calculations. I modeled a urology example and a gastroenterology example. Included in my model are very specific assumptions that are lacking in the pathology lab condo projections. Not surprisingly, my urology numbers came out different than theirs.” (See sidebar below.)

“In my GI model, I had two assumptions of the average number of biopsies per case,” he noted. “At 8,000 cases per year, a GI group could expect to see a profit contribution of either $560,000 or $850,000, assuming 1.0 and 1.5 biopsies per case, respectively.

“My urology model assumes 1,000 cases per year,” continued Plandowski. “The urology group could generate a profit contribution of either $507,000 or $1,074,000, based on 6-core biopsies and 12-core biopsies, respectively. I would caution anyone trying to com- pare my financial model with the one believed to have come from the Florida pathology lab condo company. It lacks the necessary assumptions required to have a useful and reliable revenue and expense model.”

There are several aspects of the pathology condominium business scheme which disturbed Plandowski. “One concern is this promoter’s reliance on a 12-core prostate biopsy as the basis for revenue projections,” he said. “Obviously this increased the net collected revenue per prostate biopsy case. But there remains significant difference of opinion in the clinical community as to whether or not a blanket use of a 12-core procedure is clinically useful.

“I’ll avoid the clinical question for a moment and ask a practical business question: what happens if Medicare, upon seeing a rapid increase in the number of claims for 12-core biopsies, makes an arbitrary decision to reduce its claims exposure? It can do that by either writing strict rules for eligibility to file a 12-core biopsy claim, or by simply reducing the rate of reimbursement it pays for these procedures,” conjectured Plandowski.

“Now take this one step further. If Medicare takes effective steps to reduce either utilization or reimbursement, it is likely private payers will follow with similar actions,” he noted. “The net effect is destructive to the entire profession of anatomic pathology, not just the owners of these pathology lab condos. A significant portion of the revenue relied upon in the local pathology group practice to provide a full mix of anatomic pathology services shrivels up.”

Reward And Risk

THE DARK REPORT observes that pathologists should recognize one compelling fact from these financial models: any specialist physician group with sufficient specimen volume can make plenty of money from an in-house anatomic pathology laboratory. However, that may not compensate the AP lab owners for increased compliance risk, additional malpractice exposure, and other challenges familiar to pathologists.

“Pathologists, after studying these numbers, should understand that the economics of healthcare are changing,” observed Plandowski. “The old business models of pathology are becoming increasingly outmoded.”

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