CEO SUMMARY: It was a year when the two blood brothers got much bigger and expanded market share by buying their largest competitors. With patient safety as the goal, employers began active steps to force hospitals, physicians, and other healthcare providers to use quality management systems to reduce errors. Unpredictable in many ways, 2002 set the stage for accelerating change in our healthcare system.
THERE’S LOTS OF DIVERSITY in this year’s selections for the “Ten Biggest Lab Stories of 2002.” Topics cover a broad spectrum of management issues for lab administrators and pathologists.
THE DARK REPORT prepares its “Ten Biggest Lab Stories” each year specifically to help laboratory administrators and pathologists with strategic planning. Each top ten story recognizes important developments and trends that are reshaping the way laboratory services are organized and delivered.
The range of subjects on 2002’s “Ten Biggest Lab Stories” list reflects the challenges facing the nation’s laboratories. Some stories involve wide scale changes to the healthcare system. Other stories relate to specific areas of laboratory operations. But each story represents a significant driver for change that directly affects clinical laboratories across the United States.
Within the American healthcare sys- tem, employers are no longer willing to accept the status quo. Faced with huge year-to-year increases in healthcare costs, employers are taking direct action to change the way hospitals, physicians, and other providers operate their organizations. (See Story No. 3–page 5).
Employers are the driving force behind patient safety. But their efforts go beyond simply reducing unnecessary errors. The nation’s largest employers have launched a major drive to embed quality management systems into the nation’s hospitals and physician group practices. Meantime, on their own initiative, a growing number of hospital laboratories are introducing ISO-9000 and Six Sigma-types of quality management systems into their organizations. (See Story No. 4–page 5.)
Impact Already Visible
Laboratories already see the impact of broad initiatives aimed at reducing medical errors. There’s more talk of patient safety by hospital administrators. New guidelines proposed by healthcare accrediting agencies are shifting the emphasis away from documentation and toward accurate measurement of outcomes.
Another major story of 2002 was the acquisition appetites of the two blood brothers. Between the two, they paid $2.9 billion to remove four of their largest publicly-traded lab competitors from the marketplace. (See Story No. 1–page 3.)
The impact of this unexpected major wave of commercial lab consolidation was to create a national oligopoly in the market segment of physicians’ office send-out testing. The two blood brothers now have unprecedented dominance across the country. In various large cities, each holds a monopoly position.
Are Service Declines Ahead?
THE DARK REPORT believes the national oligopoly-regional monopoly in physicians’ office testing has close parallels with the airline industry, also a national oligopoly-regional monopoly. Like the airline industry over the years, will the lab industry see a similar decline in basic services, a lackadaisical attitude toward customers, and increased prices? Many local lab people believe these consequences can already be seen in national lab services provided in their particular city.
There is wide recognition of the growing MT/MLT shortage. But THE DARK REPORT is first to call attention to the even more pernicious shortage of histotechnologists. This shortage is here, it’s universal, and it has yet to get the attention and resources necessary to resolve it. (See Story No. 5–page 6).
Each of the “Ten Biggest Lab Stories of 2002” represents a significant development or trend now actively shaping and influencing some aspect of laboratory operations. THE DARK REPORT recommends that clients use this list as the basis for a strategic planning session involving their lab’s key management thinkers. Each lab needs to craft its response to these trends and market dynamics.
Lab Opportunities Abound
Ample opportunities for success remain in today’s marketplace. Examples of growing hospital lab out- reach programs are easy to find. Local pathology groups which launch well- managed outreach sales programs invariably generate good returns.
For hospital labs focused inward, on inpatient activity, there are comparable opportunities to add value, reduce costs, and expand useful clinical services. Adoption of quality management systems is one important way to attract the capital and manpower resources required to accomplish these goals.
Taken collectively, THE DARK REPORT believes the “Ten Biggest Lab Stories of 2002” demonstrates how the laboratory industry will soon be shifting its management emphasis. The drive for patient safety, efforts to measure outcomes, and the introduction of quality management systems into hospitals and physicians’ offices will generate important changes in the customers served by clinical labs. Laboratories should use the insights provided by this “Ten Biggest Story” list to develop effective strategies that meet the changing needs of their laboratory’s customers.
1. Lots of Consolidation Among Public Laboratory Companies
IF THERE WAS ANY SINGLE SURPRISE of 2002, it was further consolidation among the nation’s largest laboratory companies.
During 2002, Quest Diagnostics Incorporated acquired American Medical Laboratories and awaits FTC approval to buy Unilab. Laboratory Corporation of America bought Dynacare and in November announced an agreement to purchase DIANON Systems.
These four acquisitions represent almost $1.3 billion in annual lab revenues. To complete these transactions, the two blood brothers will pay about $2.9 billion! And these are just the four biggest lab acquisitions done during calendar 2002. The two blood brothers also purchased a number of smaller private lab companies in 2002.
Both LabCorp and Quest Diagnostics remain active and motivated buyers of any lab business that comes on the market. This includes outreach testing operations owned by hospitals. In recent months, both companies have made offers to purchase hospital lab outreach business in different cities around the United States.
Conclusion? The nation’s two biggest laboratories intend to get bigger. They are willing and aggressive buyers of any laboratory testing business which comes onto the market. By offering high purchase prices, the two blood brothers guarantee they’ll have first crack at buying these lab assets.
2. National Oligopoly-Regional Monopoly Becomes Laboratory Industry Fact
THIS YEAR’S WAVE of commercial laboratory consolidation has transformed the market for physicians’ office send-out testing into a national oligopoly between the two blood brothers, supported by specific regional monopolies favoring one company or the other.
THE DARK REPORT was first to identify and describe this competitive development. Laboratory Corporation of America and Quest Diagnostics Incorporated now dominate the national marketplace for physicians’ office send-out testing. At the national level, this lab testing market segment has become an oligopoly. (See TDR, May 13, 2002.)
At the regional level, LabCorp and Quest Diagnostics’ national oligopoly
becomes a regional monopoly. In many cities, one or the other controls more than 50% of the tests coming out of physicians’ offices.
By this analysis, the market for physicians’ office send-out testing is now a national oligopoly supported by regional monopolies. It is similar to the national air transport system, where nine airlines comprise a national oligopoly and each airline holds a monopoly market share in selected “hub” cities. Economic theory predicts that oligopolies and monopolies reduce services and increase prices because of a lack of effective competition. Some would argue that these consequences can already be seen in the physicians’ office testing marketplace.
3. Public Measurement of Hospital And Physician Performance Is Here
FORMAL EFFORTS by healthcare accrediting bodies to reduce unnecessary medical errors is about to have an additional consequence: the same data used to measure reduction of medical errors will make it possible to measure and make public the performance of hospitals, physicians, laboratories, and other healthcare providers.
This development is attributable to two major dynamics. First involves the public response to the Institute of Medicine’s (IOM) recent report that estimated between 48,000 and 100,000 patients die as a result of unnecessary medical errors in hospitals.
Second, the return of double digit increases in healthcare costs to employers is motivating corporations to take a direct role in how healthcare is administered and delivered. More specifically, employers are organizing to educate and help hospitals and physicians “run their business” with the same management methods used in manufacturing and services outside of healthcare.
THE DARK REPORT was first to identify how the Leapfrog Group’s campaign to reduce medical errors would also be a major step toward measuring provider performance. (See TDR, January 28, 2002.) Anatomic pathologists and clinical laboratories will eventually be measured on a variety of cost and quality variables. This information will be made public to help employers and patients select health providers which best meet their needs.
4. Quality Management Systems Gain Traction In Growing Numbers of Labs
DURING THE NEXT 24 MONTHS, the American healthcare system will begin a historic shift toward quality management systems common in business and industry.
Employers are driving this change. The nation’s largest employers, reacting swiftly to the reappearance of double-digit increases in healthcare costs, are taking active steps to change the way the nations’ hospitals and physicians organize and operate their businesses.
Employers, having seen how quality management systems like ISO- 9000, Six Sigma, and Lean boosted quality while driving sustained cost reductions, want hospitals, physicians, and other health providers to adopt these techniques. Employers believe that use of these techniques will reduce unnecessary medical errors, thus improving patient care and reducing healthcare costs.
The nation’s healthcare accrediting bodies have begun a mad scramble to incorporate quality management methods into their guidelines. The emphasis will shift away from documentation of processes toward measurement of outcomes.
Early adopter laboratories are already implementing these changes. Quest Diagnostics Incorporated is introducing Six Sigma throughout the company. During 2002, a handful of hospitals and hospital laboratories began introducing ISO-9000 and Six Sigma. That number is growing monthly.
5. Forget the MT/MLT Staff Shortage: Histotech Shortage is Here Now!
GROWING SHORTAGES of licensed medical technologists (MT) and medical laboratory technicians (MLT) grab headlines nationwide. But little recognized is the already acute shortage of histotechnologists in the nation’s clinical laboratories.
Region-by-region, the vacancy rate for med techs can range from almost zero to 20%. Labs in some cities are adjusting to a permanent vacancy rate of 15%+ while labs in other cities continue to have no problems recruiting adequate numbers of MTs and MLTs.
That is not true when it comes to histotechnologists. In its many site visits to labs around the country, THE DARK REPORT has yet to find a lab
which confirms it has enough histotechs to meet existing work demands. The staffing crisis in histotechnology is already here, but has not received the publicity given to the growing shortage of MTs and MLTs.
The shortage of histotechs is the unreported story behind the big head- lines about MT/MLT staffing trends. Moreover, histotechnology is involved in many of the fastest-growing segments of the diagnostic testing menu.
The testing supply-demand curve predicts more testing requiring histotechnology services even as the number of certified histotechs proves inadequate to meet existing test volume. Strategically, labs should take steps to anticipate and deal with this trend.
6. Heavily-Discounted Lab Test Pricing Again Proves To Be a Poor Strategy
USING MARGINAL COST PRICING to win new clients and expand market share has always been a dicey strategy in the laboratory testing business.
In 2002, the financial fortunes of two lab companies demonstrated that lesson once again. In the market for hospital send-out testing, American Medical Laboratories (AML) and Specialty Laboratories found themselves at competitive disadvantage due, in some important measures, to the consequences from selling new clients by offering aggressively low prices for laboratory tests.
In the case of AML, although the company grew rapidly, its pricing made it difficult for the company to amortize its sizeable debt and still pay
for the high costs of the national sales and marketing blitz it had mounted in recent years. As a result, it was vulnerable to an acquisition offer by one of the two blood brothers.
At Specialty Labs, “thin” profit margins on new testing business caused its executives to manage lab operations in a manner which seems to have contributed to its widely-publicized problems with state and federal lab regulators.
These experiences are a reminder that it is difficult for any laboratory to deliver top-quality lab testing services and recover the expenses of sales and marketing if the tests prices offered to a new customer do not have enough profit to cover direct testing costs plus all the necessary overhead.
7. Laboratory Automation Gains Credibility, But Far From True TLA
EFFORTS TO INTRODUCE total laboratory automation (TLA) into clinical labs have been ongoing for almost ten years. During 2002, these efforts gained traction, but in an unexpected way.
Sales of laboratory automation products are finally showing growth, but it is not TLA which leads the way. Rather, hospital laboratories are buying modular, task-oriented, or workstation consolidation solutions to automate selected work processes.
This is the consequence of two marketplace developments. First, the “next- generation” of automated diagnostic instruments that vendors showed at lab conventions in 1999 and 2000 are finally available for use in clinical laboratories. Second, as the shortage of MTs and
MLTs hits individual hospital laboratories, targeted lab automation solutions are increasingly viewed as a viable solution. Using automation to substitute for the unavailable labor supply becomes a cost-effective strategy.
The introduction of various types of automated solutions into the nation’s clinical laboratories is still in its infancy. The number of “automated labs” in the United States remains relatively small.
One reason is that many skeptical hospital lab customers, cautious because of TLA’s early failures, still find it tough to get detailed, accurate, and comprehensive information about the true costs of implementing and operating various laboratory automation solutions.
8. “Proprietary” Lab Test Technology Designed to Cost Lab Customers More
IT’S A SIGNIFICANT TREND in its earliest stages. Manufacturers of new diagnostic tests are creating patent-protected tests with the goal of charging lab customers more money per test.
The earliest efforts to achieve this have been regularly chronicled on the pages of THE DARK REPORT throughout 2002. The emerging diagnostic technology business model involves these two primary elements.
1)patent protection, which means labs must pay significant royalties to use the test or the diagnostic technology. Roche’s PCR was an early success of this strategy.
2)branded test, recognized in the marketplace by both physicians and consumers. By creating brand awareness and affinity, the diagnostic test manufacturer gains loyalty among the healthcare community. Cytyc Corporation’s ThinPrep® has built this following, allowing it to charge labs more while making it more difficult for a lab to switch a physician to a competing, lower- priced liquid preparation cervical cancer screening product.
This new market model for diagnostic technology also emphasizes restricted distribution to clinicians. The manufacturer grants selected labs exclusive rights to market and perform the test, giving them competitive advantage over labs which do not have this access.
The common theme underlying these dynamics is the goal of manufacturers to develop tests for which labs, payers and patients must pay more. This will threaten many hospital lab budgets.
9. At Long Last, a Major City Dominated By Hospital Lab Outreach Programs
IN ITS TENTH YEAR OF OPERATIONS, Detroit-based Joint Venture Hospital Laboratories (JVHL) reached an important milestone in its collaborative sales and marketing outreach program.
On May 1, 2002, it became the exclusive contract laboratory for Health Alliance Plan (HAP), an HMO with 125,000 lives. With implementation of the HAP contract, JVHL now holds every major managed care contract in the Greater Detroit area. (See TDR, March 11, 2002.)
Organized in 1992 specifically to pursue managed care contracts, JVHL is owned by eight of Detroit’s nine integrated delivery networks (IDN). As many as 150 hospital labs in the state of Michigan participate in certain of JVHL’s managed care contracts. Its 15 largest HMO contracts cover 1.35 million lives.
The fact that JVHL’s major hospital labs in the Detroit metropolitan market have become the city’s dominant lab serving physicians’ offices is a milestone worth recognizing. Yet, this accomplishment, because it is the exception, is a sad comment on the inability of hospital lab administrators in other regions of the United States to collaborate to their mutual benefit.
JVHL demonstrates it is possible for competing hospital laboratories to band together and, by collaborating, successfully capture market share in physicians’ office send-out testing.
10. LabCorp Gobbles Up DIANON Systems, Ready to Challenge in Anatomic Path
NO SINGLE EVENT OF 2002 WILL HAVE a more direct impact on community hospital-based pathologists than the acquisition of Dianon Systems, Inc. by Laboratory Corporation of America.
DIANON Systems, along with UroCor, Inc. (acquired by DIANON in 2001), pioneered the business model of a national lab company organized to provide primary biopsy services to office-based physicians. This is a market traditionally dominated by local pathologists.
By acquiring DIANON, LabCorp is signaling its intent to expand its share of the primary biopsy market that originates in physicians’ offices. (See TDR, November 28, 2002.) This is a market that Quest Diagnostics covets as well. If both LabCorp and Quest Diagnostics succeed in their efforts to capture more primary biopsy business, the losers will be local pathologists.
Most community hospital-based pathologists are vulnerable for two reasons. First, outreach specimens often comprise a small portion of their group’s total billings, so they don’t place much emphasis on retaining it. Second, few local pathology groups will invest in the sales resources necessary to protect their existing business from national lab competitors.
With the two blood brothers eying this market segment, it is timely for local pathologists to review their vulnerability and prepare to defend