News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

Hosted by Robert Michel

News, Analysis, Trends, Management Innovations for
Clinical Laboratories and Pathology Groups

Hosted by Robert Michel
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Two Pathology Lab Deals Launch the New Year, One is Worth $100 Million

PathGroup of Nashville raises $100 million; OncoDiagnostic Laboratory is acquired

For the business of anatomic pathology, the new year got off to a fast start with two different deals announced yesterday. The biggest transaction was major capital infusion at PathGroup, Inc., one of the nation’s regional pathology supergroups. The other transaction was the acquisition of a pathology group practice in Cleveland, Ohio, by Predictive Biosciences, Inc., of Lexington, Massachusetts.

Yesterday, PathGroup, Inc., of Brentwood, Tennessee, announced a leveraged recapitalization which raised more than $100 million for the pathology services company. This transaction signals a shift in the business strategy for one of the nation’s larger pathology laboratory companies and gives it an ample war chest to fund acquisitions, as well as further expansion of its ongoing lines of laboratory testing.

More Physicians Move to Group Model Except Maybe Pathologists

Physicians continue to migrate toward larger group practice settings. Consolidation of physician group practices continues, although the pathology specialty seems to be resisting this trend. The American Medical Association reported in 2005 that about 40% of physician groups had 3 or 4 physicians, but those groups employed only about 11% of all group-practice positions. Conversely, only 1.4% of these groups had 100 or more doctors, but they represented almost 32% of the 247,000 physicians in group practices. By contrast, the predominant group practice model in pathology tends to be four physicians or less.

This gradual migration of physicians away from one to three doctor groups and into larger group practice settings has long term implications for both clinical laboratories and community hospital-based pathology groups. Larger physician groups refer greater volumes of specimens and this larger volume can help a laboratory justify adding customized services that add value to the referring clinicians.

For anatomic pathologists, in particular, consolidation of physician groups into regional super-groups comes with an interesting downside. Urology and gastroenterology groups, particularly those with eight or more physicians, generally have enough specimen volume to profitably internalize their biopsy referrals. That is why many of these groups are establishing in-house anatomic pathology laboratories. Because urology and GI group mergers were extensive during past decade, supergroups in these specialties control a proportionally larger volume of anatomic pathology case referrals. Thus, when they build their own laboratory, the loss of business to pathology labs can be significant.

Dark Daily observes that anatomic pathology groups are now seeing some unpleasant consequences from the lack of group practice consolidation in pathology during the 1990s. Even as their physician colleagues in the local community were merging and creating larger groups – primarily to gain leverage in managed care contracting – hospital-based pathology groups resisted this trend. After all, they often had patient access through their hospital’s managed care contracts.

During the 1990s, just a small number of regional pathology “super-practices” emerged. Examples of these groups, with more than 20 pathologists, are Bayless Pathmark Pathology in Cleveland, Ohio; ProPath in Dallas, Texas; UniPath in Denver, Colorado; and Pathology, Inc in Torrance, California. However, these pathology groups report greater success compared to their smaller peers. Their size allows them to finance sales programs to increase specimen volume and revenues, as well as to set up and offer new molecular pathology tests. With more resources, these pathology supergroups have tended to weather the healthcare storms with more stability.

Experts tend to believe that consolidation among physician groups will continue. There are many economic forces which make such mergers attractive. Not the least is the ability to spread the cost of EMR (electronic medical record) and practice management software systems across more doctors. The clinical laboratory industry has already undergone extensive consolidation. That is one reason why there are many competitive hospital laboratory outreach programs in the market today. Multi-hospital health system laboratories have more resources with which to develop an outreach program.

The question mark is what will happen to the private pathology group practice based in community hospitals. For the past 12 years, “bigger is better” has been a major strategy by all classes of providers and most medical specialties. How long will the profession of anatomic pathology resist the same market forces that motivated other physician specialties to merge and consolidate as a strategy to protect income and access to patients?