Single-Specialty Path PPMs Posting Strong Growth, Profits

PATHOLOGY PPMS STILL AROUND

CEO SUMMARY: Although the financial travails of the physician practice management (PPM) industry are widely known, there is little recognition that a number of single-specialty PPMs are doing well. This is true of pathology, where at least six pathology-based PPMs still remain in business. The best of them demonstrate strong revenue growth and good profits. Their business achievements provide solid evidence that the market for anatomic pathology services is rapidly changing.

RISING FROM THE ASHES of the ravaged physician practice management (PPM) industry is a different type of PPM company. It is the single-specialty PPM.

The PPM industry’s behemoths were companies like Medpartners, PhyCor, PhyMatrix, and FPA Medical Management. All were multi-specialty PPMs, attempting to serve the divergent needs of thousands of doctors, practicing in almost all specialties.

Their financial collapse, between 1997 and 1999, was spectacular. Huge write-offs, messy bankruptcies, and basic mismanagement took its toll on participating physicians and investors alike. Many Wall Street analysts declared the PPM industry to be both irrelevant and dead.

Today, this conclusion ignores the continuing evolution of the single-specialty PPM. These are firms, both public and private, which focus exclusively on supporting the business, management, and clinical needs of a specific medical specialty.

During the same 1997-1999 time period that was so disastrous to multi-specialty PPMs, a number of single-specialty PPM companies posted strong growth and impressive profit margins.

Profitable single-specialty PPMs include TeamHealth, organized around emergency room physicians, and Ortho-Link Physicians Corporation, which supports orthopedic surgeons.

Within the pathology profession, there are at least six PPM companies. Of this group, only one company successfully completed an initial public offering (IPO). That company was AmeriPath, Inc. of Riviera Beach, Florida.

Since funding its IPO in October 1997, AmeriPath has aggressively used acquisitions to fuel rapid growth. At the start of 2000, its annual revenues are about $250 million. It employs 305 pathologists and another 1,500 people. It operates in 13 states and has contracts with at least 160 hospitals.

But AmeriPath’s success is not exceptional. At least one other pathology PPM, Pathology Consultants of America, Inc. (headquartered in Nashville, Tennessee) is also posting strong profit growth and expanding its presence in selected markets.

Business Performance

THE DARK REPORT believes the ongoing business performance of these two companies demonstrates that, despite the failure of the multi-specialty PPM business model, the single-specialty PPM business may yet be a viable answer to the needs of pathologists in today’s hostile healthcare environment.

If this is true, then anatomic pathologists and their group practice administrators need to reassess the existing business strategy of their group. The continued viability of the pathology PPM business model creates both a threat and an opportunity for small pathology practices.

Sustain Early Successes

Should pathology PPMs sustain their early successes, they will be active consolidators of independent pathology practices. This is the threat, for it means that any small pathology group practice, anchored to a single hospital contract, will find itself at a competitive disadvantage within its local market.

However, the success of pathology PPMs also represents an opportunity. Pathology PPMs are an external threat which should scare local pathologists enough to motivate them to form regional consolidated super-practices.

In so doing, local pathologists create the business and financial clout necessary to compete against all comers in their local market. Apparently there are some pathology groups which already recognize this combination of threat and opportunity.

THE DARK REPORT believes that partners in Associated Laboratory Physician Services of Wauwatosa, Wisconsin (18 pathologists) and J.J. Humes M.D. and Associates of Detroit, Michigan (13 pathologists serving the St. John Health System) decided to sell to AmeriPath late last year precisely because they recognized their relative weakness to deal with competitive market forces in their metropolitan areas.

The need for individual pathology practices to reassess their existing business strategy rests on more than just the threat of local consolidation and the entry of an outside pathology PPM into a metropolitan area.

By joining a pathology PPM, these practices immediately accessed more sophisticated management support, sales and marketing resources, and improved billing and collections capability. It also improved their access to capital to finance growth and enhanced pathology services.

Throughout the United States, consolidation of hospitals, physician groups, and managed care plans is concentrating power. Two and three-physician pathology groups are inherently powerless in this kind of environment.

That is why pathology practice consolidation continues to occur. It is also why the handful of private and one public pathology PPMs continue to expand. Pathologists need a critical business mass if they are to maintain their place at the negotiating table with a multi-hospital health system or a major HMO in the region.

Critical Business Mass

Pathologists can create critical business mass in one of three ways. First, they can consolidate their practices into a regional super practice. This was the method used by Bayless Pathmark, Inc. of Cleveland, Ohio. During the 1990s, Bayless Pathmark grew from a 2-man practice into a regional pathology resource with 22 pathologists serving 10 hospitals.

The second way for pathologists to create critical mass is to form a provider network. This allows them to negotiate for managed care contracts as a group, while maintaining their independence and local service emphasis.

Prime example of the network model is Pathology Service Associates LLC (PSA), a national organization of state pathology networks. Currently there are eight state pathology networks, with 85 pathology groups and 400 pathologists as members.

The network model can create critical mass. In South Carolina, 22 of the state’s 24 pathology practices are members of the PSA network.

Six Pathology PPMs

The third way to create critical mass is for a pathology group practice to become part of a pathology PPM. Currently, THE DARK REPORT is aware of six pathology PPMs. (See sidebar below.) Of this group, AmeriPath is the biggest, by a large margin.

The need for individual pathology group practices to reassess their existing business strategy rests on more than just the threat of local consolidation and the entry of an outside pathology PPM into a metropolitan area. There are several other important developments acting to transform the profession of anatomic pathology.

THE DARK REPORT presented these key trends in the preceding issue. They range from national branding of anatomic pathology services to pathology practice regionalization.

Several examples of “new generation” pathology companies demonstrate that these principles are in play. They further demonstrate that pathologists can increase their clinical contribution and personal incomes if they properly respond to these trends.

As evidence, THE DARK REPORT offers four examples, in alphabetical order: AmeriPath; DIANON Systems, Inc.; IMPATH, Inc.; and UroCor, Inc.

Different Business Strategy

Each of these companies is organized around a very different business strategy. For example, AmeriPath is a PPM. It wants to own and operate pathology practices. DIANON Systems offers anatomic pathology services to a national marketplace and does most of its work at one main laboratory. IMPATH supports community hospital-based pathologists in the diagnosis of difficult-to-diagnose cancers. UroCor focuses exclusively on the diagnostic and therapeutic needs of urologists throughout the United States.

Despite the different way each of these companies services the anatomic pathology marketplace, each has at least five common elements of success. All are linked to how they deliver anatomic pathology services to referring physicians.

ONE: Each company views the market for its anatomic pathology services as national, even if AP work in every city is done locally. This national perspective drives their business strategy and helps them to identify which types of anatomic pathology services have a growing demand and represent the best opportunity for profits.

TWO: Each company invests a significant amount of money in professionally-designed and managed marketing and sales programs. Pathologists connected to these companies have learned that sales is not a bad word. To the contrary, effective sales programs create financial stability and contribute to improved profitability.

THREE: Each company is consciously building a reputation for specialized, high quality anatomic pathology services. They are educating the clinical community and consumers about what anatomic pathology is, and how to recognize high quality.

This is where marketing programs and advertising plays a critical role in educating clinicians and consumers. To further emphasize the quality of their particular brand of anatomic pathology, each of these four firms maintain close relationships with nationally-respected academic pathology subspecialists.

FOUR: Throughout the 1990s, each company enjoyed solid year-to-year growth in the volume of AP specimens performed at its lab. This specimen growth could only be maintained by offering a satisfactory level of AP services in tandem with an aggressive sales program.

FIVE: Throughout the 1990s, each company had solid year-to-year increases in revenues. Regardless of overall company earnings, it is important to note that the anatomic pathology AP segment of their business was consistently profitable.

The sidebar at right shows how these four companies benefited from marketing anatomic pathology services to an inter-regional and national marketplace. It is noteworthy that these four companies posted healthy revenue and profit growth during the same years that the clinical laboratory industry, along with healthcare in general, struggled just to break even.

It should also be noted that these companies, as national anatomic pathology providers, are excluded from many local and national HMOs. Like most laboratories, they fight the same never-ending battle to gain provider status. This makes their sustained growth in specimen volume and revenues even more convincing.

The old loyalty to the community hospital pathologist is disappearing. This is only because physicians (and hospital administrators) believe they can get “better service” from regional or national pathology providers.

The market successes of these four different companies demonstrate that the profession of anatomic pathology is shifting away from its traditional roots. Each company provides AP services across regional and state lines, some to a national market. The fact that each company is growing steadily is important evidence that the day of the single, small pathology practice providing services exclusively to one hospital is ending.

Instead, multi-hospital systems now want a single consolidated pathology provider to cover all their anatomic pathology needs. Physicians in private practice are increasingly willing to refer AP specimens to pathologists working hundreds or thousands of miles away.

The old loyalty to the community hospital pathologist is disappearing. This is only happening because physicians (and hospital administrators) believe they can get “better service” from regional or national pathology providers.

“Better Service” Defined

This “better service” is more than just the diagnosis of the anatomic pathology specimen. “Service” covers the full range of physician/patient education, courier and logistics, turnaround time, the customized report formats issued to physicians, customer service responsiveness, and accurate billing.

The local AP group practice must realize that it is competing on more than: 1) a personal relationship with a local physician; and 2) the basic diagnosis of the specimen.

In today’s hectic healthcare world, the office-based physician is looking for every service edge that benefits his practice. The national AP companies understand this and compete by meeting these needs. Local AP groups must respond at a comparable level or they will be out-sold by companies offering anatomic pathology services nationally.

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