Information as Pathology’s
Ultimate Trump Card:
Opportunities in the Digital Age
ROBERT L. MICHEL
Editor In Chief
THE DARK REPORT
Spicewood, Texas
Pathology Visions 2007
San Diego, California
October 21-23, 2007
rmichel@darkreport.com
ph: 512-264-7103
fax: 512-264-0969
My Goals Today!

One: Review primary trends currently
reshaping healthcare and lab services.

Two: Relate these trends to appropriate
responses in anatomic pathology
in coming years.

Three: Evaluate the “evolutionary”
versus “revolutionary” potential
for change in how pathology uses
digital technologies to add value.
My Thesis…

For pathology, digitization is
a critical path to maintaining
and increasing the value proposition
to users of lab data.

Multiple healthcare trends will create
opportunities for digitized pathology
to increase its role and contribution
in the clinical continuum.
Four Basic Sources of Change
In U.S Healthcare Market
Discussed at Executive War College

One: Consumers as primary buyers of
healthcare. (Private and Medicare/Medicaid.)

Two: Major commitment to universal
electronic medical record (EMR) and
integration of healthcare data.

Three: New diagnostic & lab technology:
genetic-based lab tests, automation, POCT.

Four: Widespread introduction of Demingbased quality management methods into
healthcare and clinical laboratory profession.
Change Agent Two
Drive to Universal EMR
Federal government taking lead role in
fostering development of universal EMR
(electronic medical record).
 Hospitals and health systems scurrying
to integrate existing data repositories
and create “single view” patient record.
 Enterprise IT integration is soaking up
majority of hospital IT budgets.
 Digitizing radiology images and work
processes is another expensive drain
on hospital IT dollars.

Change Agent Three
New Technology in the Lab
Steady stream of new diagnostic tests,
many based on molecular technologies.
 Point-of-care testing (POCT) growing
regularly in tests and capabilities.
 Different automation products
available for pre-analytical, analytical,
post-analytical. (Even middleware as
automation.)
 Impact of these technologies magnified
by enhanced informatics solutions.
 Remember: Labs’ end product is info!

Change Agent Four
Quality Management Methods
Healthcare—pushed by employers—now
using quality management systems.
 Savvy hospitals and labs are learning
that Lean/Six Sigma provides competitive
advantage, once the organization
embraces these quality methods.
 Quality requires accurate measurements,
more on this later.
 “First mover” to “early adopter” to general
adoption by labs and hospitals.
 Lab Quality Confab, Atlanta, Sept. 19-20.

Importance
of Information Technology
Software is more sophisticated.
 Storage costs and computing costs
are declining steadily.
 Wireless connections are ubiquitous
and can handle higher volumes
of information.
 Advances in Internet technology
make it feasible to perform more
functions using a Web platform.
 Interconnectivity and integration
continually easier to achieve.

IT as Threat and Opportunity

Information is the end product of all
clinical labs and pathology groups.

Hospitals working to integrate clinical
data into real-time patient EMR.

Office-based physicians are
implementing EMR systems.

RHIOs (Regional Health Information
Networks) under development across
the United States and Canada.

Labs must integrate with these users.
Pace of Change Accelerates
Laboratory medicine in the midst
of an accelerating cycle of change.
 Can identify six specific sectors
within laboratory medicine undergoing
major realignment.
 In each sector, rapid series of events
over the past six to 24 months.

Lab Sector One:
Managed Care Contracting
United Health does 10-year deal with
LabCorp, excludes Quest Diagnostics.
 Horizon BC/BS does exclusive contract
with LabCorp in New Jersey. Quest out.
 Aetna does exclusive with Quest,
excludes LabCorp.
 Cigna renews national contracts
with both LabCorp and Quest,
and does it early.
 LabCorp’s strategy of regional managed
care laboratory networks.

Lab Sector Two:
Clinical Lab Acquisitions
Sonic Healthcare Ltd enters USA.
In 24 months, spends $820 million
to acquire 8 labs with $500 million
in annual revenue.
 Apax Partners LP buys Spectrum Lab
Network (November, 2005).
 Laboratory Partners, Inc. acquires Terre
Haute Medical Labs and Cincinnati lab.
 New investors bidding aggressively
for laboratory assets and reshaping
the market.

Lab Sector Three:
Anatomic Pathology Services
Quest Diagnostics pays $2 billion for
AmeriPath (with $750 million in sales).
 Aurora Diagnostics acquires
nine pathology groups in 12 months,
now at $60 million in sales.
 Caris buys Pathology Partners.
 Water Tower Equity Partners buys
Lakewood Pathology Associates.
 CBL Path raising lots of capital
to fuel rapid expansion.

Lab Sector Four:
Molecular Diagnostics
Specialized startups, often with proprietary
or patented diagnostic technology.
 RedPath Integrated Pathology
 Signature Genomic Laboratories
 Access Genetics
 Roche’s hostile offer of $3 billion
for Ventana Medical Systems
($282 million in sales).
 Vision Systems Ltd: Ventana enters
agreement to buy; Cytyc offers more
money. Danaher (Leica) outbids both.

Lab Sector Five:
In Vitro Diagnostics Firms
5 of 15 largest IVD firms in world
have entered acquisition agreements
in past 16 months.
 Siemens pays $14 billion for DPC,
Bayer Diagnostics, and Dade Behring.
 GE buys Abbott for $8.1 billion,
then breaks the deal.
 Hologix pays $6.1 billion for Cytyc
($606 million in sales).

Lab Sector Six:
Health IT Companies
Ongoing consolidation and product
acquisition among IT companies.
 Per Se Technologies acquired
by McKesson.
 Pathology Service Associates (PSA)
acquired by Med3000.
 Data Innovations buys P.G.P. s.a.
of Brussels, Belgium.
 Misys unloads former Sunquest product
line to California investment group.

Anatomic Path Under Siege
Collectively, these trends and market
forces are having substantial impact
on anatomic pathology.
 Let’s take a closer look…

Landscape for Change-2000
Big Changes in Anatomic Pathology

Emergence of national AP firms, such
as UroCor, DIANON Systems, IMPATH.

Some consolidation of pathology groups
in large urban markets (related to
consolidation of hospital ownership).

Emergence of first specialty testing
companies in molecular diagnostics,
such as Myriad Genetics.

As a profitable, growing sector, AP
catches attention of two blood brothers.
Fast Forward to Year 2007
Looking at Anatomic Path Services

Quest Diagnostics and LabCorp
expanding into anatomic pathology.
(Quest/AmeriPath now employees 800 to 900+
pathologists. LabCorp employs 400+ pathologists.)

Growing number of national AP labs,
such as Bostwick Labs, CBL Path,
Clarient, Claris, Lakewood Pathology,
OUR Labs.

Specialty physicians, such as urologists
and GIs, establishing in-house anatomic
pathology services. (TC/PC arrangements.)
Year 2007
Looking at Molecular Diagnostics

Steady growth in numbers of specialty
testing companies with proprietary or
patent-protected diagnostic technology.
Athena Diagnostics, Clarient,
Genomic Health, RedPath Innovative
Pathology are just a few examples.
 These firms want the specimens
so tests can be performed in their
laboratories. Business goal is to be
exclusive provider of these diagnostic
technologies.

Looking Forward from 2007
Dominant trends in Healthcare…continued

Patient safety and pay-for-performance
have one thing in common:

Providers must closely measure
outcomes, increasingly in real time.

Providers must then use this data
to improve outcomes.

Integration of healthcare IT makes
this increasingly easier and cheaper.

Laboratories produce information…these
trends are both threats and opportunities.
Looking Forward from 2007
Dominant trends in Healthcare…continued

Increased scrutiny of outcomes and
public ranking of providers by quality
of outcomes motivates clinicians
to use lab tests more effectively.

Example: public release of cardiovascular
surgery outcomes, by providers, in New
York, starting in early 1990s.

Opportunity for labs and pathology
groups to increase their role as laboratory
medicine consultants to clinicians.
Imaging Intersects with Pathology
Consolidation / Integration of In Vitro & In Vivo DIagnostics

Siemens acquires:
 Shared Medical Services (SMS)–2000
 Diagnostic Products Corp (DPC)-2006
 Bayer Diagnostics-2006
 Dade Behring-2007

GE acquires:
 Triple
G Corporation–2003
 Amersham PLC–2003
(diagnostic imaging agents, protein separations)
 Abbott

Diagnostics–2007 (deal busts apart)
Philips Corporation—will it also acquire
LIS and in vitro diagnostic companies?
Let’s Put Things Together

Fact: large purchasers of healthcare
are making rapid progress in gathering
data about the cost of care and
outcomes produced by individual
hospitals, physicians, laboratories,
and other providers.

These purchasers will use this data
to reward superior performers and give
poor performers a motive to change
or exit as a clinical service provider.
That is Lab Opportunity

Laboratories are skilled at collecting
data and converting it into information.

Referring physicians, under pressure
to improve outcomes and the “cost per
healthcare encounter”, will have motive
to give greater value to lab testing and
consultation services.

Laboratory medicine has the
technology, knowledge, and experience
to help clinicians improve outcomes,
reduce unnecessary costs of care.
Quality Management
Pace of these trends will be magnified
by wider adoption of Deming-based
quality management principles.
 As noted, Lean and Six Sigma
techniques have passed through
“first mover” and “early adopter” stages.
 Now gaining acceptance across
both the hospital and laboratory industry.
 Quality management, by its use of realtime data to measure work processes,
reinforces wider trends in healthcare.

Evolution or Revolution?

We can argue about pace of change…

…but it is clear that the American
healthcare system is preparing
to undergo a radical makeover
during the next decade.

Change always creates new winners
and losers.
Comment on
Anatomic Pathology
Anatomic pathology is a sector of lab
medicine facing wrenching change.
 Most threatened: private pathology
group practices serving community
hospitals.
 For “rational reasons”, partners in these
groups are reticent to invest in their own
business…nor consider regional
consolidation.
 Growth in pathology profession
is already taking the form
of salaried positions.

Investors Changing Pathology
In general, private pathology groups
are not investing adequately
in technology and informatics.
 Investor-owned pathology groups
are investing in technology.
 Any opportunity to increase revenues
and build market share will be pursued
by commercial pathology firms.
 Use of enhanced informatics
and digitization is consistent
with this strategy.

Why Investor Interest?
Less money, less time, less regulation
to bring a new diagnostic test to market
and earn profits.
 Pharma: up to 10 years, $500 billion.
 IVD: 2-3 years, $30 million
 Sales of just $60 million/year make a
new lab test a financial home run.

And There’s More for Investors!
Investors know demographics
and aging baby-boomers will fuel
demand for existing and new lab tests.
 Priority of early detection, use
of personalized medicine, and increase
in pharmacogenomics/companion
diagnostics only adds more demand.
 Value proposition of well-researched
clinical benefit of a new lab test is
generally accepted by payers—thus,
ample reimbursement.

Necessary Responses
Pathology groups need to develop
subspecialty expertise, especially
in genetics and molecular pathology.
 Sophisticated informatics strategy
is a must! (See next slide.)
 Regional consolidation of pathology
resources is the right strategy to create
critical mass and market clout.
 Community hospital-based pathology
groups must be willing to invest in their
own business (practice).

Pathology Informatics
Healthcare is eliminating paper.
Pathologists must do the same,
in parallel.
 Pathology groups need to support
not just electronic claims and
electronic reports, but direct interfaces
with referring physicians.
 EMR adoption by large physician
groups is key trend and requires
bi-directional “interface gateways”
with labs and pathology groups.

IT in Pathology
With EMR use expanding and electronic
patient referrals increasing, demand
for full electronic pathology report
(with digitized images) will grow.
 Within pathology profession, need
for complex molecular work-ups
to bring together data from several
sources reinforces use of digital images
and data.
 Pay-for-performance and evidencebased medicine will require full digital
pathology record that supports data
mining and research analysis.

Supporting Efficiency
Pathologists must support both clinical
and operational efficiency.
 Physicians won’t use labs that don’t
support physicians’ clinical workflow
and operational workflow.
 That requires pathologists to support
the physicians’ evolution to full digital
implementation.
 These are additional reasons why
pathology groups should have a
sophisticated informatics strategy.

It’s A Revolution in Pathology

Status quo strategy no longer
sustainable for private pathology
groups.

New winners emerging:
 Investor-funded
pathology companies.
 Regional,
consolidated pathology
“super groups”
 Selected
academic center pathology
departments with a “market mindset.”
 Owners
of patented or proprietary
diagnostic technology.
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