Goal is to maintain community pathology services while expanding subspecialty pathology expertise to offer more laboratory testing services to physicians
Two of Washington State’s largest anatomic pathology groups announced their intention to merge earlier this week. When completed, the combined pathology supergroup will number 36 board-certified pathologists and will have large histology laboratories in both the western and eastern regions of Washington.
The merger will bring together the pathologists of InCyte Pathology of Spokane with Eastside Pathology Incorporated of Bellevue. Although InCyte has 25 pathologists and Eastside has 11 pathologists, leaders at both pathology groups told Dark Daily that each group considers this a merger of equals. This is one key to understanding why this merger is happening.
Pathology Laboratories That Support Community Hospitals and Local Care
Both groups of pathologists enjoy practicing general pathology in support of the community hospitals that are located in their respective service regions. At the same time, each group recognized that the competitive market is shifting as office-based physicians increasingly want to have their tissue referrals diagnosed by a board-certified subspecialist pathologist.
Further, new molecular diagnostic technologies and the ongoing introduction of innovative genetic tests require local pathology group practices to invest significant capital. They often need to also go outside to recruit pathologists with the sophisticated skills to both oversee the processing of these specimens and perform the diagnosis. Smaller pathology groups either lack the money to make these investments, or are often uncomfortable with the risk associated with expanding their anatomic pathology test menu in this fashion.
Neither of these situations are likely to develop once the merger of InCyte and Eastside is completed. The combined pathology supergroup will be able to take advantage of economies of scale in how it operates its laboratories. It will also have an expanded panel of subspecialist pathologists and an energized sales program to use in winning new clients.
“Our two pathology groups have much in common and these combined strengths significantly outweigh any of the differences we’ve identified between our two pathology practices,” stated Peter Herreid, M.D., speaking on behalf of Eastside Pathology. “In particular, we believe our core strength is our emphasis on local pathology that supports hospitals, physicians and other healthcare providers in our respective service areas.”
For its part, InCyte is committed to this strategy and has made it clear to smaller pathology groups in the Northwest United States that it is open to discussing a merger or acquisition that would be mutually beneficial. One such example last year, when InCyte acquired the Davis, Sameh, Meeker Laboratory (DSM) of Walla Walla, Washington. (See The Dark Report “InCyte Pathology Buys DSM Labs in Walla Walla”). This practice had three pathologists.
“You can say that, post-merger, Incyte/Eastside intends to be a willing collaborator with smaller pathology groups that want to continue their mission of general pathology, but also want access to subspecialty pathology expertise and share in the benefits that accrue to a large pathology practice that brings them economies of scale and expanded market opportunities,” stated Gary Gemar, COO at InCyte. “We can deploy advanced information technology on behalf of the small pathology practice that improves their competitive position in their local community, while at the same time delivering subspecialty pathology services that are wanted by their client physicians.”
Business Strategy for Clinical Laboratory Testing Services
Harreid concurred with this business strategy. “Our goal in this merger is to build a practice platform that supports general pathology,” he stated, “At the same time, this also opens the door for small pathology groups to join us and complement their local test menu with the subspecialty pathology services that are wanted by their client physicians. This is a model that keeps anatomic pathology testing within the community and within the state.”
Pathology insiders in Washington State tell Dark Daily that InCyte and Eastside Pathology have had on-again, off-again negotiations for almost four years before this deal was successfully consummated. Along the way, Eastside was courted by more than one potential merger partner or acquirer.
Thus, it is noteworthy that neither party opted to sell itself to any of the several pathology companies that regularly advertise their interest in purchasing long-established pathology practices that own their own histology laboratory. In fact, from this perspective, the post-merger InCyte/Eastside pathology company is one to watch, for several reasons.
First, it is offering a business plan that is rooted in delivering general pathology services within the community, to both hospitals and office-based physicians. Second, it is a consolidator of independent pathology practices in the Northwest that promises any interested local pathology group that they can continue their practice of pathology and not have to deal with remote owners in a corporate office thousands of miles away.
Third, some perceptive pathologists may recognize that what Incyte/Eastside is doing now is the same type of regional consolidation that primary care and specialist physicians did in the 1990s, during the era of HMO capitated contracting practices. During the 1990s, pathologists fiercely defended their independence and resisted regional pathology consolidation.
Now, almost 20 years later, many smaller groups recognize that their small size is what makes it possible for national pathology companies to send sales reps into their cities and skim off the biggest sources of pathology specimen referrals.
Seen from that perspective, the InCyte/Eastside strategy is one attempt to provide smaller pathology groups a way to maintain their preferred way of practicing medicine, while also being part of a larger, regional pathology enterprise that offers the full range of pathology technology and subspecialty expertise that is in demand by physicians today.
Finally, readers should remember that one other large pathology enterprise is following similar, but not quite identical, strategies in Washington. That is CellNetix, Inc., of Seattle. It has 43 pathologists and has also stated its willingness to merge with, or acquire, pathology groups in the region.
Thus, once InCyte Pathology and Eastside Pathology complete their merger, the stage will be set for competitive battle royale in the Pacific Northwest! If competition is good for the marketplace, then the pathology services market in Washington State is about to see plenty of it in coming.