Medical laboratories and pathology groups lose access to tissue specimens when office-based physicians operate their own in-clinic pathology laboratory

One trend reshaping the profession of anatomic pathology with surprising speed is the growth of in-clinic pathology laboratories by specialist physicians. As each office-based physician group builds its own in-clinic pathology laboratory, local pathology groups and medical laboratories lose access to the tissue specimens these doctors now process in their own pathology lab.

This trend has significant consequences for the nation’s 3,300 pathology group practices, as well as those national pathology and clinical laboratory companies that compete for the biopsy tissue referrals of office-based physicians. Losing access to the tissue referrals of local physicians makes it tougher for local pathologists to develop a broad range of experience and skills.

Anatomic Pathology Groups Lose Access to Biopsy Referrals

Equally important is the loss of revenue that results when a local specialist group stops referring its biopsies to the local pathology group. It shrinks the financial resources available to the local pathology group to attract top talent and to acquire and deploy the latest anatomic pathology testing technology.

A national survey of pathology groups and clinical laboratories is taking place with the goal of identifying the scale and scope of this trend. It is being conducted by William Blair & Co, LLC, and Dark Daily. To participate in this short survey, simply click on this link (or copy and paste this URL into your web browser: http://www.surveymonkey.com/s/APsurvey2011)

This erosion of access to biopsy specimens is why, over the last seven years, the trend of office-based physicians building their own in-clinic anatomic pathology laboratories has been a major disruptive force within the pathology profession. During this same time, neither community hospital-based pathology groups nor the national laboratory companies have developed an effective strategy to respond to the desire by growing numbers of office-based physicians to build their own in-clinic pathology laboratories.

In-Office Pathology Laboratories First Appeared in 2002

“This in-office pathology laboratory trend was first started by urologists back around 2002 and 2003,” stated Amanda Murphy, Analyst, Equity Research in the Chicago, Illinois office of William Blair & Co, LLC. “That was when the business model of anatomic pathology condo labs (pod labs) first emerged in the states of Florida and Texas. Certain new government regulations caused this business model to fall out of favor within a few years.

“In recent years, it has been primarily the specialties of urology and gastroenterology groups that have built in-office pathology laboratories,” continued Murphy. “They generate large numbers of biopsies in their daily practice, so they have enough specimen volume to support the economics of an in-office anatomic pathology laboratory.”

As more office-based physicians decide to operate an in-clinic anatomic pathology laboratory in their practice, it reduces the number of biopsy referrals flowing to local pathology groups and national laboratories. In the table presented above by William Blair & Company, the quarterly growth or shrinkage in histology specimen volume (number of histology accessions) and associated histology revenue is shown for Laboratory Corporation of America (NYSE: LH). The table covers the period beginning with Quarter 1 2006 and ends with Quarter 4 2010 (estimated). As can be seen, during the years 2006 and 2007, LabCorp enjoyed quarterly growth rates approaching double digits. That all changed in Quarter 1 2008. Since that date, analysts at Blair believe that LabCorp’s histology specimen volume and revenue experience declined in each of the next eight quarters. This table may be indicative of the impact that the in-clinical pathology lab trend is having upon the entire anatomic pathology profession. In its quarterly financial reports in recent years, Quest Diagnostics Incorporated (NYSE: DGX) has similarly reported annual declines in the volume of anatomic pathology testing it handles. (NYSE: DGX) (Table courtesy of William Blair & Company.)

Murphy circulates throughout the clinical laboratory and pathology testing industry looking to spot emerging trends and to understand how these trends will affect the financial fortunes of medical laboratory companies. Following her attendance at this year’s Executive War College on Laboratory and Pathology Management that took place in New Orleans, Louisiana, on May 1-2, Murphy came away with several useful insights.

Based on her interaction with speakers and attendees, she published the following comments. “Although the larger clinical laboratory companies cite moderating growth in the anatomic pathology in-sourcing trends by office-based physicians, based on discussions at the Executive War College conference, the trend for office-based physicians to build out their own in-office anatomic pathology is continuing at a rapid clip. Specialist physicians are recognizing the benefits of bringing in-house the professional—“read” component [professional component–PC]—of pathology tissue testing.

In-Sourcing of Anatomic Pathology Testing by Specialist Groups

“In-sourcing of anatomic pathology testing by specialty physician groups is not a new trend,” continued Murphy. “But it has escalated in the midst of a weak economy as physicians seek to drive more revenue to their practice. This in-clinic pathology laboratory trend has been prevalent in dermatology, gastroenterology, and urology over recent three years and is continuing.”

Murphy provided some data to quantify the in-office pathology lab trend. “As of the last data point (March), Laboratory Economics estimates that roughly 907 urologists, 912 gastroenterologists, 181 dermatologists, and a total of 2,755 physicians have in-sourced anatomic pathology laboratory testing representing greater than $300 million in annual revenue.

“Most recently, we have heard that build out of full in-office histology labs (versus in-sourcing of just the professional read component) appears to be gaining ground in dermatology,” added Murphy. “In addition, some ob-gyn and oncology groups have also looked to in-source at least some medical laboratory testing. However, in-clinic laboratories have not yet become as prevalent in these specialties, given the high volume of specimens needed to make Pap smears profitable and the complex nature of oncology testing.”

William Blair & Company and Dark Daily invite pathologists and clinical laboratory managers to participate in a short survey on the trend of specialist physicians building an in-office anatomic pathology laboratory. As a contributor to this survey, you will receive a report of its findings.

To take the survey about in-office pathology laboratories operated by specialist physicians, visit this link http://www.surveymonkey.com/s/APsurvey2011.

Alternatively, you can copy this link and paste it in your web browser: http://www.surveymonkey.com/s/APsurvey2011

—Robert L. Michel

Related Information:

To take survey on in-practice anatomic pathology laboratories, use this link: http://www.surveymonkey.com/s/APsurvey2011

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