Smaller Pathology Groups Explore Consolidation

Retiring partner pathologists in small groups are one reason why acquisition activity is climbing

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CEO SUMMARY: In eastern Washington State, InCyte Pathology is developing a strategy that may well be repeated many times over in the coming years. As older pathologists who run smaller groups look to retire, they will consider selling their group practices to larger entities interested in forming regional pathology groups. These larger groups will consolidate the smaller practices, then invest in computer and digital pathology systems required to make them more competitive against national pathology companies.

IN TODAY’S WORLD OF PATHOLOGY MERGERS & ACQUISITIONS (M&A), the recent acquisition of the Davis-Sameh-Meeker Laboratory (DSM) in Walla Walla, Washington by Incyte Pathology, Inc., of Spokane, Washington, is not a big-dollar transaction.

After all, this was a three-pathologist practice founded in 1948. Located in a city of just 30,000 in the rural area of Western Washington, DSM is exactly like approximately two-thirds of the small community hospital-based private pathology group practices that dot the American landscape.

But this sale of a rather small independent pathology laboratory in Walla Walla is notable for a very important reason. It is an example of a wider trend of consolidation and regional integration now taking place in a growing number of communities across the nation.

Most of these transactions and business re-alignments happen quietly. Private pathology groups in the same town, or in nearby communities, have begun conversations to explore such business options as a merger between the practices or some form of collaboration, including shared testing systems.

The transaction between InCyte and DSM is an example of this consolidation strategy. In the last two issues of THE DARK REPORT, we have presented case studies of shared laboratory testing networks.

Collaboration in Pathology

In these lab networks, private pathology groups are collaborating with each other to take advantage of one group’s existing infrastructure and test menu. This has two strategic business advantages. It allows the participating pathology laboratories to beef up their clinical offerings and service levels to referring physicians—thus making them more competitive with the national pathology lab companies that send sales reps into their towns.

It also allows the pathology group providing the collaborative service to reduce its costs, due to the higher volume of specimens. For the pathology group that uses this collaborative service, front-end capital costs are greatly reduced, which is a significant benefit. It also gains competitive advantage because it can offer enriched pathology testing services to its own clients. (See TDRs, February 28, 2011, and March 21, 2011.)

Under the Radar Screen

These developments happen without attracting much attention from the wider anatomic pathology profession. That’s because the variety of acquisitions, mergers, and shared testing collaborations involving smaller community hospital-based private pathology groups attract little attention outside the city or town where these groups are located.

THE DARK REPORT believes that the anatomic pathology profession is now well into an important new trend of private practice consolidation and regionalization. This is happening for a number of reasons. These include:

  • Surge in number of retiring partner pathologists, now that Baby Boomers are reaching the age of 65 years old.
  • Need for private pathology groups to invest more capital just to hold on to existing clients and market share.
  • Need for private pathology practices to launch and maintain an effective sales and marketing program to retain market share and expand specimen volume.
  • Need for private pathology groups to have more clout at managed care contracting time, particularly as pre-authorization of genetic and molecular tests becomes more common.

New Trend in Pathology

Overall, this new trend of consolidation and regional integration involving private practice pathology groups will be a healthy response to the changing health-care marketplace. But it does spell the end of the professional corporation (PC) partner practice model that dominated the second half of the 20th Century.

Consolidation Trend Last Occurred in 1990s

FOR THE ANATOMIC PATHOLOGY PROFESSION, the last cycle of major consolidation happened during the 1990s. Two market forces drove regional consolidation and integration of private pathology groups during that decade.

One major factor was the consolidation of hospital ownership that took place between 1994 and 1998. Through these years, the number of multi-hospital health systems doubled, growing from around 300 to just over 600. As this occurred, it was common for the health system administrators to pressure the independent pathology groups serving the system’s hospitals to come together and form a single pathology practice. Any number of pathology “super-groups” were formed in just this way.

HMOs (health maintenance organizations) were the other primary driver of pathology practice consolidation during the 1990s. In cities where managed care plans were a dominant force, their use of exclusive, capitated, full risk contracts motivated local pathology groups to come together and consolidate into a single practice. This much larger pathology group could then be a more successful bidder for managed care contracts, thus protecting and improving the pathologists’ access to patients.

However, both of these market forces lost momentum by the end of that decade. The formation of new multi-hospital health systems tapered off. Gatekeeper-model HMOs fell out of favor. These developments eased the market pressure on smaller pathology groups, particularly those with one to four pathologists. They could remain independent and enjoy a degree of financial stability.

From 2000 forward, new market forces emerged. For example, specialist physicians began to build in-clinic pathology laboratories. This deprived local pathology groups of access to an important source of specimens and revenues.

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