TC/PC: Pathology’s Barn Door Is Now Wide Open

Lab industry has taught its best customers how to establish their own anatomic path business

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CEOSUMMARY: There’s a degree of irony in the current state of affairs. When a handful of lab companies decided to hit office-based urologists and gastroenterologists with the sales tactic of a TC/PC arrangement several years ago, no one realized the consequences of teaching these high-referring docs that there could be substantial profit in anatomic pathology services. Financial damage to the profession is just beginning.

HOW DID SPECIALIST PHYSICIANS become interested in anatomic pathology as an in-practice ancillary service? The answer is that both the education and the impetus were provided by the laboratory industry.

During the past four years, a select and steadily growing handful of laboratory companies pursued a sales strategy of calling on office-based urologists and gastroenterologists (GIs) and convincing them to participate in a TC/PC arrangement. The laboratory would provide the technical component and bill for that service. The lab would help the specialist physicians line up a pathologist who provided professional component (PC) services at a negotiated rate. This was marked up and billed by the specialist physicians.

Not surprisingly, once some of the urologists and GIs understood the operations and finances of anatomic pathology, it was a simple step to cross over and convert their TC/PC pathology arrangement into a full-fledged, in-practice AP ancillary service, allowing them to submit global bills. Then they began to tell their colleagues about this profitable ancillary opportunity.

There is a reason why this entire issue of THE DARK REPORT has been devoted to the subject of specialist physician groups creating an in- practice ancillary service in anatomic pathology.

Losing Your Best Customer

Anytime a profession’s major source of business and revenues decides to compete against its supplier, that’s a major development—one that challenges the economic stability of the profession. From this perspective, anatomic pathology is now facing a challenge with the potential to be more transformational than any trend seen over the past 25 years.

We all know that urologists and gastroenterologists refer high volumes of specimens for analysis by pathologists. In the preceding story, Bernie Ness mentions that The Urology Group of Cincinnati, Ohio generates about 65,000 biopsies per year! A large GI group with eight or more physicians will refer upwards of 30,000 biopsies per year.

These are the medical group clients which financially sustain many of the hospital-based pathology group practices around the country. That is why it is a financial dilemma of major consequence each time a top-referring specialist group calls its pathology provider and says “We would like you to help us set up our technical laboratory and advise us in developing our own ancillary service in anatomic pathology.”

What Happens Next?

I ask you to consider this: what does it mean for the profession of pathology when one of its largest market segments—office-based specialist physicians—begins to take active steps to establish their own in-house anatomic pathology ancillary service?

This trend can only prove disruptive to the status quo. Moreover, it will affect some pathologists more than others. Let me speculate how that may happen, looking at different segments of the pathology marketplace.

For the two blood brothers, this trend is likely to be only a blip. With combined revenues approaching $9 billion, Quest Diagnostics Incorporated and Laboratory Corporation of America will find a way to serve these types of clients, even if at reduced volumes. Plus, they have their own anatomic pathology strategies. Quest Diagnostics, for example, is said to have a goal of hiring 125 more pathologists during 2006.

Then there are the national and regional pathology companies. Most are organized to serve either or both the urology and gastroenterology special- ties. This trend will be quite disruptive to their long-term prospects, since it constricts their access to specimens.

However, these are for-profit companies, often financed by equity investors. They will respond vigorously to market changes and are likely to find some service niche that allows them to remain financially viable, even if their annual rates of growth slow or flatten. Companies in this segment range from Lakewood Pathology Associates, Pathology Partners, and GI Pathology Partners to CBLPath, Bostwick Laboratories, and OURLab.

For hospital-based pathology groups, this trend will prove troublesome. Since most of these pathology groups do not have a dedicated sales force to generate new sources of business, it will be more difficult for them to replace specimens lost when existing specialist physician clients bring their anatomic pathology in-house. The loss of revenues from these sources is likely to cause a direct reduction in partner compensation.

However, that may not be true for consolidated pathology “super groups.” Because they have their own technical laboratory, a service and sales force, and multiple hospital contracts, they have a better chance of replacing lost specimen volume and even offering esoteric tests to the urologists and GIs in their service area.

Timely Business Strategies

In each of the intelligence briefings of this special issue of THE DARK REPORT, we’ve analyzed a different aspect of this growing trend. Our goal is to help pathologists and their practice administrators develop timely and effective strategies. After all, anytime there is change, there is also opportunity.

This issue also highlights the irony of the TC/PC business strategy. It was the lab industry that taught these physicians to appreciate the profits in pathology. A handful of pathology companies opened the barn door—and it is likely to never be closed again!

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