Success Seems Elusive To Pathology Innovators

AmeriPath’s difficulties demonstrate challenges of introducing change to the pathology world

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CEO SUMMARY: Attempts to organize pathology practice management companies encounter resistance and market impediments. Success requires an astute business plan and a sophisticated management team to convince pathologists to abandon proven practice models and affiliate with regional or national pathology companies.

PATHOLOGISTS ARE NOTORIOUS for their skepticism and resistance to change. However, during the last three years those qualities may have served them well.

Prior to AmeriPath, Inc., no pathology “super practice” business model ever got off the ground. Thus, the innate business conservatism of pathologists prevented them from joining a concept that may have been ill-designed, poorly executed or simply ahead of its time.

AmeriPath is not the only “new” business model to hit the pathology marketplace. Others were tried. Even today several companies are recruiting pathology practices to sign up for their vision of pathology’s future.

Astute pathologists can learn a great deal from the experience of these entrepreneurs. It is inevitable that forces now transforming healthcare will require pathologists to change the way pathology services are organized and delivered.

Probably the most visible national recruiter of pathology practices in recent years was PATHCOR Inc., based in Oklahoma City. PATHCOR sprang from a concept developed by the owners of Medical Arts Laboratories in Oklahoma City during 1994. Throughout 1995 and early 1996, PATHCOR executives approached pathologists and held national meetings to drum up interest in their concept.

AmeriPath is not the only “new” business model to hit the pathology marketplace. Others were tried.

PATHCOR’s business plan was to create a national pathology service organization centered around regional hubs. As the parent, PATHCOR would provide group purchasing, group billing and other administrative services. Using a management service agreement, non-pathologist related expenses would be deducted and the remainder of the revenue would flow back to the regional hubs and their participating pathology practices.

The concept was the brainchild of PATHCOR’s President, Perry A. Lambird, M.D., M.B.A. Lambird, a pathologist himself, believed the time was ripe for a pathologist management company with national reach.

For a number of reasons, the PATH- COR concept never caught on with those pathology practices which studied the concept. Outside observers believe two factors contributed to the failure of PATHCOR to attract pathologist interest. First, PATHCOR never established a pro- totype regional hub system. Thus, it had no actual operating experience to demonstrate that service levels and economics were valid for their model.

Second, the business development team delegated to sell the concept was not effective. Industry observers give PATHCOR’s Chief Operating Officer, Robert Savasten, high marks for both his business acumen and his efforts. But PATHCOR’s use of Aaron Korngold, a healthcare consultant based on the east coast, always puzzled pathologists who looked at the PATHCOR model.

PATHCOR suffered a quiet death in the spring of 1996. The corporation could no longer maintain the overhead of an executive team which included at least eight individuals. Estimates are that PATHCOR’s annual payroll exceeded seven figures.

Contemporary with PATHCOR’s 1995-96 recruiting efforts were those of Nashville-based American Pathology Resources (APR). APR was formerly affiliated with Allied Clinical Laboratory and known as Reference Pathology Laboratories. After Allied was acquired by National Health Laboratories in 1994, pathologists and venture capitalists purchased the pathology operation, then revamped it and gave it a new name.

Throughout 1995, it was PATHCOR, AmericanPathology Resources and Ameripath which actively solicited pathologists…

During the first half of 1995, American Pathology Resources sent a mailing to pathology practices throughout the United States. The purpose of the mailing was to interest pathologists in APR’s proposed pathology management model.

Response from the mailing must have been significant. During 1995, pathologists throughout the United States told THE DARK REPORT that, after receiving the mailing, they sent in a reply card indicating interest in learning more, but never heard back from APR. APR must have been inundated with responses.

During this time, American Pathology Resources based their pathology practice model on their regional success with a “circuit riding” approach they used in Tennessee. Rural hospitals were served by pathologists who visited each location on a predetermined schedule. Anatomic pathology specimens were processed at regional centers.

It was surprising that one major pathology practice which found APR’s concept appealing was the group at Scripps Clinic in La Jolla, California. La Jolla is a heavily urban marketplace, so the regional concept that was effective in Tennessee apparently did not succeed in California. When the two-year agreement expired between APR and Scripps, the California pathologists decided not to renew it.

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Practical Experience

During 1995 and 1996, American Pathology Resources gained practical experience and market feedback from their efforts to acquire and integrate pathology practices. APR then refocused its strategic business plan. It now structures its business organization around the equity model. It is still actively recruiting pathology practices to join their business. Recently a hospital-based pathology group serving a Southern California hospital signed with APR.

Throughout 1995, it was PATHCOR, American Pathology Resources and AmeriPath which actively solicited pathologists to join their business model of a national pathology company.

During 1996, two other organizations surfaced with regional or national pathology business models. Pathology Service Associates (PSA) of Florence, South Carolina became the first pathology network to actually deliver statewide pathology services. Unlike the other models, PSA is organized as a healthcare network. It provides network services to pathology practices which remain independently owned and operated.

After recruiting 14 pathology practices in South Carolina, PSA began servicing its first managed care contract in October of 1996. (See TDR, September 3, 1996.) During the course of the year, PSA exhibited at pathology trade shows and conferences throughout the country.

PSA’s Chairman is Louis Wright, Jr., M.D. According to Dr. Wright, the credi- bility of PSA and the fact that PSA is designed to support pathology locally at the point of care caught the attention of pathologists in several states.

Besides efforts to form an interstate pathology network linking PSA’s participating pathologists in South Carolina with pathology practices in neighboring Florida, Georgia and North Carolina, the PSA concept is being exported to states as far away as Utah and California.

One reason why PSA enjoyed rapid success in attracting pathology practices outside the state of South Carolina is the fact that they waited until the business model was established and the network had signed managed care contracts to provide anatomic pathology services. PSA did not recruit pathology practices outside the state until these things occurred. Thus, PSA had a track record and real experience to share with prospective pathologist practices.

During 1996, another pathology practice management business model appeared in the marketplace. The firm is Physician Solutions, Inc., based in Nashville, Tennessee.

Over the last 12 months, Physician Solutions has quietly approached a number of pathology practices. The company is organized to provide two services.

First, they offer basic pathology practice business management support. This is the traditional menu of strategic and practical business support for pathology practices.

Second, they offer a national pathology company model which is organized around an equity-sharing arrangement. The goal of this business model is to provide pathology practices with a consolidation vehicle that offers pathologists income driven by equity sharing.

Both American Pathology Resources and Physician Solutions use the equity model for compensating pathologists who sell their practices to the companies. In this respect, both companies are different from AmeriPath, which is using the employment model.

1997 Will Be Significant

THE DARK REPORT predicts that 1997 will be a watershed year for pathology practice consolidation. Pathology Service Associates, AmeriPath, Physician Solutions and American Pathology Resources will continue to market themselves aggressively to pathologists.

Their aggressive marketing coincides with the increasing presence of managed care in regional markets throughout the United States. The combination of the two forces will entice a number of pathologists to sell their practices.

Because each one of these four pathology consolidators is pioneering a business concept, THE DARK REPORT further predicts that there will be more financial disappointments than successes during the early years of this trend.

The reason is simple. Management, marketing and economics will play an increasingly greater role in the financial stability of pathology practices. These are skills that most pathologists never acquired as a complement to their highly developed clinical skills.

Yet precisely these talents will separate pathology winners from pathology losers during healthcare’s transition to managed care. Already the earliest attempts to consolidate pathology have demonstrated several approaches which won’t work. With time some of the current pioneers will find an effective business formula.

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