Pathology Visions 2007San Diego, CaliforniaOctober 21-23, 2007

ROBERT L. MICHELROBERT L. MICHELEditor In Chief

THE DARK REPORTSpicewood, Texas

rmichel@darkreport.comph: 512-264-7103fax: 512-264-0969

Information as Pathology’s Information as Pathology’s Ultimate Trump Card:Ultimate Trump Card:

Opportunities in the Opportunities in the Digital AgeDigital Age

My Goals Today!

One:One: Review primary trends currently Review primary trends currently reshaping healthcare and lab services. reshaping healthcare and lab services.

Two:Two: Relate these trends to appropriate Relate these trends to appropriate responses in anatomic pathology responses in anatomic pathology in coming years. in coming years.

Three:Three: Evaluate the “evolutionary” Evaluate the “evolutionary” versus “revolutionary” potential versus “revolutionary” potential for change in how pathology uses for change in how pathology uses digital technologies to add value.digital technologies to add value.

My Thesis… For pathology, digitization is For pathology, digitization is

a critical path to maintaining a critical path to maintaining and increasing the value propositionand increasing the value propositionto users of lab data.to users of lab data.

Multiple healthcare trends will create Multiple healthcare trends will create opportunities for digitized pathology opportunities for digitized pathology to increase its role and contribution to increase its role and contribution in the clinical continuum. in the clinical continuum.

Four Basic Sources of ChangeIn U.S Healthcare Market

One:One: Consumers as primary buyers of Consumers as primary buyers of healthcare. (Private and Medicare/Medicaid.) healthcare. (Private and Medicare/Medicaid.)

Two:Two: Major commitment to universal Major commitment to universal electronic medical record (EMR) and electronic medical record (EMR) and integration of healthcare data. integration of healthcare data.

Three:Three: New diagnostic & lab technology: New diagnostic & lab technology: genetic-based lab tests, automation, POCT.genetic-based lab tests, automation, POCT.

Four:Four: Widespread introduction of Deming- Widespread introduction of Deming-based quality management methods into based quality management methods into healthcare and clinical laboratory profession.healthcare and clinical laboratory profession.

Discussed at Executive War College

Drive to Universal EMR Change Agent Two

Federal government taking lead role in Federal government taking lead role in fostering development of universal EMR fostering development of universal EMR (electronic medical record). (electronic medical record).

Hospitals and health systems scurrying Hospitals and health systems scurrying to integrate existing data repositories to integrate existing data repositories and create “single view” patient record.and create “single view” patient record.

Enterprise IT integration is soaking up Enterprise IT integration is soaking up majority of hospital IT budgets.majority of hospital IT budgets.

Digitizing radiology images and work Digitizing radiology images and work processes is another expensive drain processes is another expensive drain on hospital IT dollars. on hospital IT dollars.

New Technology in the LabChange Agent Three

Steady stream of new diagnostic tests, Steady stream of new diagnostic tests, many based on molecular technologies. many based on molecular technologies.

Point-of-care testing (POCT) growing Point-of-care testing (POCT) growing regularly in tests and capabilities.regularly in tests and capabilities.

Different automation products Different automation products available for pre-analytical, analytical, available for pre-analytical, analytical, post-analytical. (Even middleware as post-analytical. (Even middleware as automation.)automation.)

Impact of these technologies magnified by Impact of these technologies magnified by enhanced informatics solutions. enhanced informatics solutions.

Remember: Labs’ end product is Remember: Labs’ end product is infoinfo!!

Quality Management Methods Change Agent Four

HealthcareHealthcare—pushed by employerspushed by employers—now using quality management systems. using quality management systems.

Savvy hospitals and labs are learning Savvy hospitals and labs are learning that Lean/Six Sigma provides competitive that Lean/Six Sigma provides competitive advantage, once the organization advantage, once the organization embraces these quality methods. embraces these quality methods.

Quality requires accurate measurements, Quality requires accurate measurements, more on this later. more on this later.

““First mover” to “early adopter” to general First mover” to “early adopter” to general adoption by labs and hospitals.adoption by labs and hospitals.

Lab Quality ConfabLab Quality Confab, Atlanta, Sept. 19-20., Atlanta, Sept. 19-20.

Importance of Information Technology Software is more sophisticated.Software is more sophisticated. Storage costs and computing costs Storage costs and computing costs

are declining steadily.are declining steadily. Wireless connections are ubiquitous Wireless connections are ubiquitous

and can handle higher volumes and can handle higher volumes of information.of information.

Advances in Internet technology Advances in Internet technology make it feasible to perform more make it feasible to perform more functions using a Web platform.functions using a Web platform.

Interconnectivity and integration Interconnectivity and integration continually easier to achieve.continually easier to achieve.

IT as Threat and Opportunity Information is the end product of all Information is the end product of all

clinical labs and pathology groups.clinical labs and pathology groups.

Hospitals working to integrate clinical Hospitals working to integrate clinical data into real-time patient EMR.data into real-time patient EMR.

Office-based physicians are Office-based physicians are implementing EMR systems. implementing EMR systems.

RHIOs (Regional Health Information RHIOs (Regional Health Information Networks) under development across Networks) under development across the United States and Canada. the United States and Canada.

Labs must integrate with these users.Labs must integrate with these users.

Pace of Change Accelerates

Laboratory medicine in the midst Laboratory medicine in the midst of an accelerating cycle of change.of an accelerating cycle of change.

Can identify six specific sectors Can identify six specific sectors within laboratory medicine undergoing within laboratory medicine undergoing major realignment.major realignment.

In each sector, rapid series of events In each sector, rapid series of events over the past six to 24 months.over the past six to 24 months.

Managed Care Contracting United Health does 10-year deal with United Health does 10-year deal with

LabCorp, excludes Quest Diagnostics.LabCorp, excludes Quest Diagnostics. Horizon BC/BS does exclusive contract Horizon BC/BS does exclusive contract

with LabCorp in New Jersey. Quest out.with LabCorp in New Jersey. Quest out. Aetna does exclusive with Quest, Aetna does exclusive with Quest,

excludes LabCorp.excludes LabCorp. Cigna renews national contracts Cigna renews national contracts

with both LabCorp and Quest, with both LabCorp and Quest, and does it early.and does it early.

LabCorp’s strategy of regional managed LabCorp’s strategy of regional managed care laboratory networks.care laboratory networks.

Lab Sector One:

Clinical Lab Acquisitions Sonic Healthcare Ltd enters USA. Sonic Healthcare Ltd enters USA.

In 24 months, spends $820 million In 24 months, spends $820 million to acquire 8 labs with $500 million to acquire 8 labs with $500 million in annual revenue.in annual revenue.

Apax Partners LP buys Spectrum Lab Network Apax Partners LP buys Spectrum Lab Network (November, 2005).(November, 2005).

Laboratory Partners, Inc. acquires Terre Haute Laboratory Partners, Inc. acquires Terre Haute Medical Labs and Cincinnati lab.Medical Labs and Cincinnati lab.

New investors bidding aggressively New investors bidding aggressively for laboratory assets and reshaping for laboratory assets and reshaping the market.the market.

Lab Sector Two:

Anatomic Pathology Services

Quest Diagnostics pays $2 billion for Quest Diagnostics pays $2 billion for AmeriPath (with $750 million in sales).AmeriPath (with $750 million in sales).

Aurora Diagnostics acquires Aurora Diagnostics acquires nine pathology groups in 12 months, now at nine pathology groups in 12 months, now at $60 million in sales.$60 million in sales.

Caris buys Pathology Partners.Caris buys Pathology Partners. Water Tower Equity Partners buys Water Tower Equity Partners buys

Lakewood Pathology Associates.Lakewood Pathology Associates. CBL Path raising lots of capitalCBL Path raising lots of capital

to fuel rapid expansion.to fuel rapid expansion.

Lab Sector Three:

Molecular Diagnostics Specialized startups, often with proprietary Specialized startups, often with proprietary

or patented diagnostic technology.or patented diagnostic technology. RedPath Integrated PathologyRedPath Integrated Pathology Signature Genomic LaboratoriesSignature Genomic Laboratories Access GeneticsAccess Genetics Roche’s hostile offer of $3 billion Roche’s hostile offer of $3 billion

for Ventana Medical Systems for Ventana Medical Systems ($282 million in sales).($282 million in sales).

Vision Systems Ltd: Ventana enters Vision Systems Ltd: Ventana enters agreement to buy; Cytyc offers more agreement to buy; Cytyc offers more money. Danaher (Leica) outbids both. money. Danaher (Leica) outbids both.

Lab Sector Four:

In Vitro Diagnostics Firms 5 of 15 largest IVD firms in world 5 of 15 largest IVD firms in world

have entered acquisition agreements have entered acquisition agreements in past 16 months.in past 16 months.

Siemens pays $14 billion for DPC, Siemens pays $14 billion for DPC, Bayer Diagnostics, and Dade Behring.Bayer Diagnostics, and Dade Behring.

GE buys Abbott for $8.1 billion, GE buys Abbott for $8.1 billion, then breaks the deal.then breaks the deal.

Hologix pays $6.1 billion for Cytyc Hologix pays $6.1 billion for Cytyc ($606 million in sales).($606 million in sales).

Lab Sector Five:

Health IT Companies Ongoing consolidation and product Ongoing consolidation and product

acquisition among IT companies.acquisition among IT companies. Per Se Technologies acquired Per Se Technologies acquired

by McKesson.by McKesson. Pathology Service Associates (PSA) Pathology Service Associates (PSA)

acquired by Med3000.acquired by Med3000. Data Innovations buys P.G.P. s.a. Data Innovations buys P.G.P. s.a.

of Brussels, Belgium.of Brussels, Belgium. Misys unloads former Sunquest product Misys unloads former Sunquest product

line to California investment group. line to California investment group.

Lab Sector Six:

Anatomic Path Under Siege

Collectively, these trends and market Collectively, these trends and market forces are having substantial impact forces are having substantial impact on anatomic pathology.on anatomic pathology.

Let’s take a closer look… Let’s take a closer look…

Landscape for Change-2000

Big Changes in Anatomic Pathology Emergence of national AP firms, such Emergence of national AP firms, such

as UroCor, DIANON Systems, IMPATH. as UroCor, DIANON Systems, IMPATH. Some consolidation of pathology groups Some consolidation of pathology groups

in large urban markets (related to in large urban markets (related to consolidation of hospital ownership).consolidation of hospital ownership).

Emergence of first specialty testing Emergence of first specialty testing companies in molecular diagnostics, companies in molecular diagnostics, such as Myriad Genetics. such as Myriad Genetics.

As a profitable, growing sector, AP As a profitable, growing sector, AP catches attention of two blood brothers.catches attention of two blood brothers.

Fast Forward to Year 2007 Looking at Anatomic Path Services

Quest Diagnostics and LabCorp Quest Diagnostics and LabCorp expanding into anatomic pathology. expanding into anatomic pathology. (Quest/AmeriPath now employees 800 to 900+ (Quest/AmeriPath now employees 800 to 900+ pathologists. LabCorp employs 400+ pathologists.)pathologists. LabCorp employs 400+ pathologists.)

Growing number of national AP labs, such Growing number of national AP labs, such as Bostwick Labs, CBL Path, Clarient, as Bostwick Labs, CBL Path, Clarient, Claris, Lakewood Pathology, OUR Labs.Claris, Lakewood Pathology, OUR Labs.

Specialty physicians, such as urologists Specialty physicians, such as urologists and GIs, establishing in-house anatomic and GIs, establishing in-house anatomic pathology services. pathology services. (TC/PC arrangements.) (TC/PC arrangements.)

Year 2007 Looking at Molecular Diagnostics

Steady growth in numbers of specialty Steady growth in numbers of specialty testing companies with proprietary or testing companies with proprietary or patent-protected diagnostic technology.patent-protected diagnostic technology.

Athena Diagnostics, Clarient, Athena Diagnostics, Clarient, Genomic Health, RedPath Innovative Genomic Health, RedPath Innovative Pathology are just a few examples.Pathology are just a few examples.

These firms want the specimens These firms want the specimens so tests can be performed in their so tests can be performed in their laboratories. Business goal is to be laboratories. Business goal is to be exclusive provider of these diagnostic exclusive provider of these diagnostic technologies.technologies.

Looking Forward from 2007 Dominant trends in Healthcare…continued

Patient safety and pay-for-performance Patient safety and pay-for-performance have one thing in common:have one thing in common:

Providers must closely measure Providers must closely measure outcomes, increasingly in real time.outcomes, increasingly in real time.

Providers must then use this data Providers must then use this data to improve outcomes.to improve outcomes.

Integration of healthcare IT makes Integration of healthcare IT makes this increasingly easier and cheaper.this increasingly easier and cheaper.

Laboratories produce information…these Laboratories produce information…these trends are both threats and opportunities.trends are both threats and opportunities.

Looking Forward from 2007 Dominant trends in Healthcare…continued

Increased scrutiny of outcomes and Increased scrutiny of outcomes and public ranking of providers by quality public ranking of providers by quality of outcomes motivates clinicians of outcomes motivates clinicians to use lab tests more effectively.to use lab tests more effectively.

Example: public release of cardiovascular Example: public release of cardiovascular surgery outcomes, by providers, in New surgery outcomes, by providers, in New York, starting in early 1990s.York, starting in early 1990s.

Opportunity for labs and pathology Opportunity for labs and pathology groups to increase their role as laboratory groups to increase their role as laboratory medicine consultants to clinicians. medicine consultants to clinicians.

Imaging Intersects with Pathology Consolidation / Integration of In Vitro & In Vivo DIagnostics

Siemens acquires:Siemens acquires: Shared Medical Services (SMS)–2000Shared Medical Services (SMS)–2000 Diagnostic Products Corp (DPC)-2006Diagnostic Products Corp (DPC)-2006 Bayer Diagnostics-2006Bayer Diagnostics-2006 Dade Behring-2007Dade Behring-2007

GE acquires:GE acquires: Triple G Corporation–2003Triple G Corporation–2003 Amersham PLC–2003 Amersham PLC–2003

(diagnostic imaging agents, protein separations)(diagnostic imaging agents, protein separations) Abbott Diagnostics–2007 Abbott Diagnostics–2007 (deal busts apart)(deal busts apart)

Philips Corporation—will it also acquire Philips Corporation—will it also acquire LIS and LIS and in vitroin vitro diagnostic companies? diagnostic companies?

Let’s Put Things Together

Fact: large purchasers of healthcare Fact: large purchasers of healthcare are making rapid progress in gathering are making rapid progress in gathering data about the cost of care and data about the cost of care and outcomes produced by individual outcomes produced by individual hospitals, physicians, laboratories, hospitals, physicians, laboratories, and other providers.and other providers.

These purchasers will use this data These purchasers will use this data to reward superior performers and give to reward superior performers and give poor performers a motive to change poor performers a motive to change or exit as a clinical service provider. or exit as a clinical service provider.

That is Lab Opportunity Laboratories are skilled at collecting data Laboratories are skilled at collecting data

and converting it into information.and converting it into information.

Referring physicians, under pressure Referring physicians, under pressure to improve outcomes and the “cost per to improve outcomes and the “cost per healthcare encounter”, will have motive healthcare encounter”, will have motive to give greater value to lab testing and to give greater value to lab testing and consultation services.consultation services.

Laboratory medicine has the technology, Laboratory medicine has the technology, knowledge, and experience to help knowledge, and experience to help clinicians improve outcomes, reduce clinicians improve outcomes, reduce unnecessary costs of care. unnecessary costs of care.

Quality Management Pace of these trends will be magnified Pace of these trends will be magnified

by wider adoption of Deming-based by wider adoption of Deming-based quality management principles.quality management principles.

As noted, Lean and Six Sigma As noted, Lean and Six Sigma techniques have passed through techniques have passed through “first mover” and “early adopter” stages.“first mover” and “early adopter” stages.

Now gaining acceptance across Now gaining acceptance across both the hospital and laboratory industry.both the hospital and laboratory industry.

Quality management, by its use of real-Quality management, by its use of real-time data to measure work processes, time data to measure work processes, reinforces wider trends in healthcare. reinforces wider trends in healthcare.

Evolution or Revolution?

We can argue about pace of change…We can argue about pace of change…

……but it is clear that the American but it is clear that the American healthcare system is preparing healthcare system is preparing to undergo a radical makeover to undergo a radical makeover during the next decade.during the next decade.

Change always creates new winners Change always creates new winners and losers.and losers.

Comment on Anatomic Pathology

Anatomic pathology is a sector of lab Anatomic pathology is a sector of lab medicine facing wrenching change.medicine facing wrenching change.

Most threatened: private pathology Most threatened: private pathology group practices serving community group practices serving community hospitals.hospitals.

For “rational reasons”, partners in these For “rational reasons”, partners in these groups are reticent to invest in their own groups are reticent to invest in their own business…nor consider regional business…nor consider regional consolidation.consolidation.

Growth in pathology profession Growth in pathology profession is already taking the form is already taking the form of salaried positions.of salaried positions.

Investors Changing Pathology In general, private pathology groups In general, private pathology groups

are not investing adequately are not investing adequately in technology and informatics.in technology and informatics.

Investor-owned pathology groups Investor-owned pathology groups areare investing in technology. investing in technology.

Any opportunity to increase revenues and build Any opportunity to increase revenues and build market share will be pursued by commercial market share will be pursued by commercial pathology firms.pathology firms.

Use of enhanced informatics Use of enhanced informatics and digitization is consistent and digitization is consistent with this strategy.with this strategy.

Why Investor Interest?

Less money, less time, less regulation Less money, less time, less regulation to bring a new diagnostic test to market to bring a new diagnostic test to market and earn profits.and earn profits.

Pharma: up to 10 years, $500 billion.Pharma: up to 10 years, $500 billion. IVD: 2-3 years, $30 millionIVD: 2-3 years, $30 million Sales of just $60 million/year make a Sales of just $60 million/year make a

new lab test a financial home run.new lab test a financial home run.

And There’s More for Investors!

Investors know demographics Investors know demographics and aging baby-boomers will fuel demand and aging baby-boomers will fuel demand for existing and new lab tests.for existing and new lab tests.

Priority of early detection, use Priority of early detection, use of personalized medicine, and increase of personalized medicine, and increase in pharmacogenomics/companion in pharmacogenomics/companion diagnostics only adds more demand.diagnostics only adds more demand.

Value proposition of well-researched clinical Value proposition of well-researched clinical benefit of a new lab test is generally benefit of a new lab test is generally accepted by payers—thus, ample accepted by payers—thus, ample reimbursement. reimbursement.

Necessary Responses Pathology groups need to develop Pathology groups need to develop

subspecialty expertise, especially subspecialty expertise, especially in genetics and molecular pathology.in genetics and molecular pathology.

Sophisticated informatics strategy Sophisticated informatics strategy is a must! is a must! (See next slide.) (See next slide.)

Regional consolidation of pathology Regional consolidation of pathology resources is the right strategy to create resources is the right strategy to create critical mass and market clout.critical mass and market clout.

Community hospital-based pathology Community hospital-based pathology groups must be willing to invest in their groups must be willing to invest in their own business (practice).own business (practice).

Pathology Informatics Healthcare is eliminating paper. Pathologists Healthcare is eliminating paper. Pathologists

must do the same, must do the same, in parallel.in parallel.

Pathology groups need to support Pathology groups need to support not just electronic claims and not just electronic claims and electronic reports, but direct interfaces with electronic reports, but direct interfaces with referring physicians.referring physicians.

EMR adoption by large physician groups is EMR adoption by large physician groups is key trend and requires key trend and requires bi-directional “interface gateways” bi-directional “interface gateways” with labs and pathology groups. with labs and pathology groups.

IT in Pathology With EMR use expanding and electronic With EMR use expanding and electronic

patient referrals increasing, demand patient referrals increasing, demand for full electronic pathology report for full electronic pathology report (with digitized images) will grow.(with digitized images) will grow.

Within pathology profession, needWithin pathology profession, needfor complex molecular work-ups for complex molecular work-ups to bring together data from several to bring together data from several sources reinforces use of digital images sources reinforces use of digital images and data. and data.

Pay-for-performance and evidence-Pay-for-performance and evidence-based medicine will require full digital based medicine will require full digital pathology record that supports data pathology record that supports data mining and research analysis. mining and research analysis.

Supporting Efficiency Pathologists must support both clinical Pathologists must support both clinical

and operational efficiency.and operational efficiency. Physicians won’t use labs that don’t Physicians won’t use labs that don’t

support physicians’ clinical workflow support physicians’ clinical workflow and operational workflow.and operational workflow.

That requires pathologists to support That requires pathologists to support the physicians’ evolution to full digital the physicians’ evolution to full digital implementation. implementation.

These are additional reasons why These are additional reasons why pathology groups should have a pathology groups should have a sophisticated informatics strategy.sophisticated informatics strategy.

It’s A Revolution in Pathology Status quo strategy no longer Status quo strategy no longer

sustainable for private pathology sustainable for private pathology groups.groups.

New winners emerging:New winners emerging: Investor-funded pathology companies.Investor-funded pathology companies. Regional, consolidated pathology Regional, consolidated pathology

“super groups”“super groups” Selected academic center pathology Selected academic center pathology

departments with a “market mindset.”departments with a “market mindset.” Owners of patented or proprietary Owners of patented or proprietary

diagnostic technology.diagnostic technology.-30-