R. Lewis Dark: Growth Conundrum Confronts Quest and LabCorp

AFTER MORE THAN TWO DECADES of buying up almost every attractive laboratory asset that came up for sale�and with few lab acquisition candidates left to buy�Laboratory Corporation of America and Quest Diagnostics Incorporated find themselves in an interesting conundrum. As public companies, any increase in the value of their shares is directly linked to growth rates in specimen volume, revenue, and net profit.

On the other hand, simply because of their huge size relative to the laboratory services marketplace, the ability of the two blood brothers to achieve sustained rates of growth of 10% and 15% per year is a major challenge. Let me explain why the numbers work against them.

By year�s end, Quest Diagnostics will post revenue of around $7.7 billion. Revenue at LabCorp will be in the range of $4.5 billion. Thus, for each lab company to grow revenue by 10% during 2009, Quest will require $770 million in new business and LabCorp will require $450 million. That�s the need for $1.2 billion in new business between them, and in just one year!

Thus, as you will read on pages 10-16 in this issue, each of the national lab companies havemultiple strategies to generate new specimens,more revenue, and greater net profits. The days of rapid growth in revenue and net profits because of acquisitions and conversion of conventional Pap smear business to thin-layer Pap tests are long past. Both national labs must successfully execute a series of business growth initiatives to generate additional revenues and increased net profit in today�s competitive lab marketplace.

This is why the laboratory services marketplace has seemed rather quiet over the past year. The two national laboratories are adjusting to a market where growth-by-acquisition is no longer the primary strategy to achieve increased revenue and net profit. Now each company must craft a long-term business plan to deliver sustained growth that satisfies investors.

That is why the conversation is shifting at both LabCorp and Quest Diagnostics to new opportunities in genetic and molecular testing. It is why there are plans to serve the developing wellness and prevention emphasis in healthcare. That brings employers onto the radar screen as potential customers. And, I predict that Quest Diagnostics and LabCorp will steadily increase their presence and activity in other countries. LabCorp�s new agreement in Abu Dhabi is one example of this. (See Page 18.)

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Medi-Cal Hits Pathologist For $6.4 Million Payment

Medi-Cal Hits Pathologist For $6.4 Million Payment

CEO SUMMARY: Once again, government health bureaucrats are overreaching in their efforts to reduce spending and collect money from any source. A California pathologist has been hit with a Medi-Cal demand for $6.4 million in repayments, simply because he served as laboratory director for two lab companies that Medi-Cal knew had closed before auditors requested records. Without a successful legal challenge to this Medi-Cal position, a dangerous precedent may be set.

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Cytology Lab Uses Lean to Simplify Processes

First Lean project improves staff productivity while cutting 132 work steps in histology to just 82

CEO SUMMARY: Like many labs today, the gynecologic cytology laboratory at the University of Iowa Hospitals and Clinics had a pre- and post-analytical work flow with many complex steps. This work flow�heavily influenced by a legacy of previous information systems�was inefficient, contained unnecessary redundancies, and lacked systematic measures for preventing errors. That all changed when the Department of Pathology did its first Lean project, greatly improving work flow and staff productivity.

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LabCorp And Quest Report 3rd Quarter Financial Performance

Siimiillarr Sttrrattegiies�Achiieved by Diifffferrentt Tacttiics

CEO SUMMARY: In third quarter earnings reports, both national lab companies posted modest gains in specimen volume, revenue, and net profit. More telling is the relative quiet in the current market for lab testing services. With no obvious opportunities to fuel double-digit rates of growth, the two blood brothers are pushing forward with similar business strategies. However, each lab company is pursuing those strategies with uniquely different tactics and emphasis. Here's an in-depth comparison of events unfolding with Quest Diagnostics and LabCorp.

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LAB BRIEFS:
MASSACHUSETTS LAW MANDATES CPOE USE BY HOSPITALS IN 2012
HCA AND PAML EXPAND LAB OUTREACH VENTURE IN SALT LAKE CITY
MOVE TO HIPAA 5010 PROPOSED FOR APRIL 2010
LABCORP INKS DEAL TO ESTABLISH LABORATORY IN EMIRATE OF ABU DHABI

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INTELLIGENCE: Late & Latent

MEDTOX REPORTS REVENUE GAIN FOR THIRD QUARTER

GENOMIC HEALTH GROWS RAPIDLY

Commentary by R. Lewis Dark:
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Genome Sequencing Promises to be Disruptive
EVERYONE SHOULD CAREFULLY READ OUR LEAD STORY ON THE FACING PAGE. Titled
“Rapid Gene Sequencing Predicted by Mid-2009,” it is a revealing look at the
declaration of California-based Complete Genetics that, in less than eight
months, it will begin delivering full human genome sequences priced at
$5,000 each to interested customers at a cost of only $1,000 to itself!
Complete Genomics’ announcement represents the same paradigm shifting
earthquake in genetic medicine that occurred back on May 11, 1998.

That’s the day when J. Craig Venter, Ph.D., and his partner, Perkin-Elmer,
announced their plans to map the entire human genome for a cost under
$300 million and do it in within three to four years. At the time, the Human
Genome Project was about halfway through a 15-year, $3 billion project to
complete the first full sequence of the human genome.

THE DARK REPORT predicted that Venter’s effort would succeed and, as it
did, it would accelerate both the accumulation of genetic knowledge and the
speed with which it was converted into clinically useful molecular diagnostic
tests.We wrote: “Those laboratories and pathology practices which flourish
in the year 2005 will be the ones which were early implementers of
emerging genetics-based diagnostics.” (See TDR, June 15, 1998.)

Venter achieved his bold goal in just 25 months. It was June 25, 2000,
when President Bill Clinton publicly announced the successful sequencing
of the human genome and recognized the roles of both Venter and Frances
S. Collins, M.D., Ph.D., who had led the Human Genome Consortium, in
this accomplishment. For the lab industry, by 2005, a host of new lab companies
had emerged to offer a growing menu of molecular tests. Molecular
assays for infectious diseases and certain cancers were transforming clinical
practices, giving truth to THE DARK REPORT’s 1998 prophesy.

Now THE DARK REPORT sees a parallel moment of disruption in genetic
medicine. Complete Genomics and a host of competitors are about to transform
human genome sequencing, dropping price and speed while opening the
doors to vast amounts of new knowledge about DNA, RNA, and the human
proteome. Pathologists and lab directors should prepare for an accelerating
flood of new insights about genes and proteins. Many of these discoveries will
rapidly lead to new laboratory tests that offer physicians and patients more precise
tools for diagnosis, therapeutic decisions, and patient monitoring.

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Genome Sequencing Promises to be Disruptive..............Page 2

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Rapid Human Genome Sequencing
Predicted by Mid-2009 ..................................................Page 3

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ICD-10 Conversion Costs
Underestimated by HHS.................................................Page 7

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Hospital Labs Have New Options
For Molecular Diagnostics..............................................Page 9

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Molecular Dx Update:
LabCorp’s Ovarian Cancer Test
Generates FDAWarning Letter ......................................Page 12

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Lab Briefs: Siemens, BioImagene, Clarient
University of Pennsylvania,Mayo Clinic .......................Page 13

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Pathology Administrators’ Boot Camp
To Address Three Trends ................................................Page 15

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Intelligence: Late-Breaking Lab News ............................Page 19

 

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	R. Lewis Dark: Lean Six Sigma Takes Root in Labs & Hospitals LAST WEEK, MORE THAN 300 ENTHUSIASTIC LAB AND HOSPITAL PROFESSIONALS from 11 different countries around the globe crowded into Atlanta for the Second Annual Lab Quality Confab. They were gathered to hear the latest success stories and breakthroughs in how laboratories and hospitals are using quality management methods like Lean and Six Sigma. If anyone remains skeptical about the value of Lean and Six Sigma to improve outcomes and workflow in healthcare, more than 50 presentations and case studies by some of America�s first rank laboratories, hospitals, and health systems demonstrated the remarkable gains that well-executed process improvement projects generated for their organizations. Evidently I am not alone in believing in the value of Lean and Six Sigma management methods to play a role in meeting the healthcare system's challenges of improving quality, reducing errors, and lowering costs. The demand for experienced Lean and Six Sigma professionals to work in the nation�s hospitals and health systems is so great that management recruiters are struggling to find candidates to fill these positions.Healthcare magazines are writing stories about this staffing gap. Our Editor, Robert Michel, tells me that this year�s speakers at Lab Quality Confab displayed much more sophistication as they discussed improvement projects in every area of clinical laboratory and pathology laboratory operations. I take that as an early warning for those laboratories and pathology groups which have yet to implement Lean and Six Sigma. The competitive bar is being raised by your peers and colleagues! Just as GeneralMotors, Ford, and Chrysler found themselves outcompeted by Japanese car manufacturers (using these quality management methods) in the 1970s and 1980s, so also will those labs and hospitals who are slow to understand the power of Lean and Six Sigma to lift their performance�and their profits�find themselves at competitive disadvantage in the laboratory services marketplace. Across the American healthcare system, the pace of change and reform seems to be intensifying. Adoption of Lean and Six Sigma by labs, hospitals, and health systems is playing a major role in this transformation. In coming weeks and months, THE DARK REPORT and Dark Daily will bring you "the best of Lab Quality Confab" so you and your management team can learn from these top-performing laboratories, hospitals, and health systems. iTunes Business Model For Digital Path Scans Things heat up in digital pathology market as BioImagene introduces 99� per slide pricing CEO SUMMARY: If BioImagene's CEO is to be believed, the company is ready to deliver a digital pathology system that is robust and affordable, even in settingswith just two or three pathologists. One key to the BioImagene strategy is �per scan� pricing that avoids the need for upfront capital to acquire its system. Confident investors just pumped $26 million into BioImagene and, as of this month, its new CEO is a 20-year veteran of Siemens,who was leader of its Image and Knowledge Management business. Illinois Pathologists Dodge Medicaid CP Payment Cut Illinois Medicaid Program was prepared to end payment for clinical pathology professional services CEO SUMMARY: Pathologists in Illinois acted swiftly to this month's announcement that the Illinois Medicaid program would cease to directly pay pathologists directly for clinical pathology professional services.The newpolicywas to take effect on October 1, 2008. As this issue of THE DARK REPORT goes to press, there is breaking news that educational efforts by the Illinois Society of Pathology have led the state's Medicaid program to rescind implementation of the announced cuts to CP professional services. LAB BRIEFS: MED TECH SHORTAGE CAUSES DEVRY UNIVERSITY TO OFFER MT DEGREE, VOLUME GROWTH IN MOLECULAR TESTING BOOSTS TWO PUBLIC LABS, CANCER LAB CLERK FACES CHARGES IN PATIENT ID THEFT Implementation Date For ICD-10 Is Proposed Department of Health and Human Services publishes ICD-10 launch date of October 1, 2011 CEO SUMMARY: Even though the transition from ICD-9 to ICD-10 will not be required until 2011, laboratories and pathology groups should have a transition plan in place. ICD-10�s 155,000 seven-digit codes will replace the 17,000 five-digit codes of ICD- 9. Because of major changes in the design of ICD-10, extensive training of laboratory coders will be necessary to ensure a smooth implementation. Referring physicians and their staff must also be trained and ready for ICD-10 if labs are to minimize denied claims. Phlebotomy Automation Likely To Be Next Trend Goal will be to reduce variation in outcomes and raise the quality of individual work processes CEO SUMMARY: Here's a prediction that automation of work processes for phlebotomy, specimen collection, and specimen transport may be the next trend. Unfolding developments in the United States are creating a situation parallel to what was seen in Japanese hospital laboratories more than two decades ago�and led to the world's first automated solutions for clinical laboratories. Another factor to enable this trend are recent advances in technology and miniaturization. INTELLIGENCE: Late & Latent NANO BIOSENSORS CAN DETECT MICROORGANISMS ADD TO: Biosensors

R. Lewis Dark: Two Healthcare Trends Collide on These Pages

THIS ISSUE OF THE DARK REPORT YOU NOW HOLD IN YOUR HANDS demonstrates the perfect intersection of two trends. One trend, transparency in health outcomes and a public expectation of reduced medical errors, is a direct threat to laboratories which fail to deliver high-quality and accurate lab test results. The other trend is the way quality management systems (QMS) are being “pulled” into laboratory operations and healthcare.

This first trend is analyzed on pages 16-18, where you will read how the widely-publicized deficiencies of several labs and pathologists in Canada has become a public issue. To bolster public confidence in laboratory testing, pathologists with the Canadian Association of Pathology (CAP) are creating a voluntary proficiency testing program. It is starting with breast cancer testing for estrogen receptors (ERs) and progesterone receptors (PRs). As an interesting side note, Canada’s single-payer model health system has yet to step forward and pay for this proficiency testing program.

The second trend—involving the use of quality management systems, including "ISO:15189 Medical Laboratories"—is assessed on pages 3-5. This is one of the lab industry’s first alerts to this emerging development. Our Editor, Robert L. Michel, considers it important enough that he has assembled an impressive panel of experts to speak on QMS at the upcoming Lab Quality Confab http://www.labqualitycofab.com on September 24-25, 2008. That promises to be a revealing series of presentations and I recommend that clinical labs and pathology groups already confronting use of quality management systems be present at this unique event. First, it is not likely that this same assemblage of experts on ISO:15189 and similar quality management systems will be gathered at one time and place again soon. Second, Robert has a knack for pulling together a spectrum of experts, who, collectively, deliver an amazing amount of information and unmatched strategic wisdom. That’s a lot of bang for your buck!

I will also step forward with another recommendation. I suggest that you use the two intelligence briefings referenced above as discussion points for a strategic session in your laboratory or pathology group practice. I’ll bet that, as your leadership team talks through the implications of trend one—outcomes transparency and public expectations—and contrasts that with trend two—use of QMS to continuously improve quality, productivity, and performance—it is going to agree on some surprising new directions for your laboratory.

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First U.S. Labs Nearing ISO:15189 Accreditation

ISO:15189 likely to influence upcoming reform and revisions to CLIA licensing requirements

CEO SUMMARY: Laboratories, hospitals, and other healthcare providers in the United States will increasingly be required to adopt quality management systems (QMS) as part of their regular operational routine. This is consistent with trends in other developed countries. Several U.S. laboratories are in the process of gaining accreditation under "ISO:1519 Medical Laboratories." These developments will be discussed at the upcoming Lab Quality Confab in Atlanta next month.

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Independent Labs Won't Get Medicare PQRI Bonuses

Independent labs learn they will not get same Medicare PQRI payments as other pathologists

CEO SUMMARY: Medicare does not intend to make bonus payments this year to independent labs currently reporting quality information for breast and colon cancer cases. The federal claims payment system is unable to pay independent labs for participating in the federal physician quality reporting initiative (PQRI). But physician pathology groups participating in PQRI will receive the bonus payments as expected. CMS has yet to formally acknowledge this problem, leaving labs with unanswered questions.

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MT/MLT Distance Learning Goal of Collaboration

ARUP and Weber State team up to make it easier for interested lab staff to advance skills

CEO SUMMARY: To encourage more students to pursue medical technology (MT) and medical laboratory technician (MLT) degrees, ARUP Laboratories and Weber State University (WSU) are collaborating to promote the distance learning programs offered at WSU. Online students can work any shift and take courses anytime (day, night, or on weekends), thereby making education more accessible to prospective students. Distance learning is likely to be an important source of education for new technical staff for labs.

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NEWSMAKER INTERVIEW: Successful Laboratories in the Future Will Brand Themselves, Add Value

CEO SUMMARY: At the most recent Executive War College(see http://www.executivewarcollege.com), Kerry Kaplan, President of Healthcare Connections in Natick, Massachusetts, discussed the results of his national survey of managed care executives. In part one of this interview, Kaplan described the results of his survey, along with advice on how laboratories can build a positive, ongoing partnership with local managed care plans. In part two, he explains what steps pathologists and lab directors can take to become partners with their health plan customers to improve the delivery of healthcare. He also explains how labs have an opportunity to work more closely with payers that are interested in saving money on complex, expensive cases. Kaplan ends by stressing the need for labs to have a branding strategy.

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Canadian Pathologists Start PT Testing for ER/PR

Voluntary proficiency testing program created in response to public disclosure of test deficiencies

CEO SUMMARY: Experts point out that widely publicized episodes of lab testing deficiencies in several provinces are signs that chronic underfunding of lab testing services is a key factor in these failures. To restore public confidence in breast cancer testing, the Canadian Association of Pathologists is developing a voluntary pro ficiency testing system for hospital labs to improve the accuracy and reproducibility of breast cancer markers, including estrogen receptor, progesterone receptor, and other clinical IHC tests.

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INTELLIGENCE: Late & Latent

NEW BLOOD TEST FOR COLORECTAL CANCER

CALIF. REGULATORS SEND COMPLIANCE LETTER TO DNA DIRECT

R. Lewis Dark: Lab Testing Hits Two Home Runs For Patients

MANY OF US POINT OUT THAT LABORATORY MEDICINE is an undervalued and under-utilized asset within the American healthcare system. Lab testing is generally a minimal cost relative to the total episode of care, yet lab testing provides essential knowledge to help clinicians make a quick, accurate diagnosis and confidently select appropriate therapies.

Like the late comedian Rodney Dangerfield,many lab directors and pathologists feel like "I don�t get no respect!", particularly when negotiating contracts withmanaged care plans. Seldomis the true value of laboratory testing acknowledged by payers, particularly in the form of adequate reimbursement.

However, this situation may be on the verge of changing. In this issue of THE DARK REPORT, we provide intelligence briefings on two important home runs hit by laboratories during the past 24 months. First up is our coverage about the explosion in vitamin D testing. Labs across the country are reporting that vitamin D test volumes have doubled and tripled over themost recent 12months! ARUP Laboratories tells us that about one-third of the vitamin D test results indicate that the individual is vitamin D-deficient. This fact is evidence that physicians are using the test appropriately. (See pages 3-5.)

That remarkable lab testing home run is followed by the story of another, even * more amazing lab testing home run. At Washington Hospital Center (WHC) in Washington, DC, a rapid PNA FISH test for bloodstream infections, combined with real-time results reporting to the attending physician, has contributed to an 83% drop in patient mortality in ICU settings�and a 53% overall reduction in patient mortality related to bloodstream infections! (See pages 6-9.)

The unique twist to the WHC experience is that these dramatic reductions in patient mortality only came after the procedure for reporting the PNA FISH tests was changed to incorporate a personal phone call to the attending physician, to ensure he/she got the results in real time. Now comes the next challenge for the lab industry. Will Medicare and private payers recognize this value provided by labs to their referring clinicians?

Will Medicare and private payers establish reasonable reimbursement for these testing services? Too often in the past, payers publicly promote the importance of patients getting these tests, while, in private, they excoriate labs for not controlling test utilization and financially penalize them for the higher volume of testing that was performed.

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Vitamin D Test Volumes Doubled in Past Year

Growing awareness about vitamin D deficiency causes patients and physicians to order more tests

CEO SUMMARY: Across the nation, labs report a near doubling in the volume of vitamin D tests they are performing. This is a success for laboratorymedicine and an appropriate use of diagnostics tests as physicians strive for early detection and early intervention of vitamin D deficiency. However, the next chapter in this story will be equally important. Will Medicare and private payers recognize that, per evidence-based medicine guidelines, this testing is justified and labs should not be punished for increased utilization?

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53% Drop in Mortality From Lab Report Change

Study links use of rapid molecular test and real-time results reporting to improved outcomes

CEO SUMMARY: At Washington Hospital Center, it was unclear if the use of a rapid molecular assay for blood infections was changing outcomes until a new, real-time lab results reporting protocol required the lab to deliver the test results personally to the attending physician in real time. A study with a control group provided convincing evidence that use of the rapid molecular test, in combination with real time test reporting,may be associated with dramatic reduction in mortality and improved patient outcomes.

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NEWSMAKER INTERVIEW: Labs Should Build Payer Relationships To Improve Commodity Pricing

CEO SUMMARY: At the most recent Executive War College, Kerry Kaplan, President of Healthcare Connections in Natick, Massachusetts, discussed the results of his national survey of health plan executives on their attitudes toward clinical laboratories. It will be no surprise that these managed care executives consider lab testing services to be a commodity. What will be a surprise are Kaplan�s recommendations on how laboratories and pathology groups should develop partnerships with selected payers, rooted in added value services that generate ample reimbursement. In this first of a two-part series, Kaplan also delivers a dose of reality to laboratories as he advises them on how to prepare for the marketplace changes coming in the next five years.

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CMS Anti-Markup Rules Target In-Office Ancillaries

Changes ahead for specialist doctors using TC/PC arrangements or operating AP labs

CEO SUMMARY: Medicare officials are again attempting to rein in what they consider to be potentially abusive forms of inoffice ancillary services, including anatomic pathology. Proposed new rules published this month would clarify and perhaps expand the application of the Medicare anti-markup for purchased diagnostic testing services and for diagnostic tests provided by an ordering physician or supplier, including the professional and technical components.

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INTELLIGENCE: Late & Latent

GENOME PROJECT ADDS 3 COMPANIES

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