General

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Information as Pathologys Ultimate Trump Card
Opportunities in the Digital Age
ROBERT L. MICHEL Editor In Chief THE DARK
REPORT Spicewood, Texas
Pathology Visions 2007 San Diego,
California October 21-23, 2007
rmichel_at_darkreport.com ph 512-264-7103 fax
512-264-0969
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My Goals Today!

• One Review primary trends currently reshaping
  healthcare and lab services.
• Two Relate these trends to appropriate responses
  in anatomic pathology in coming years.
• Three Evaluate the evolutionary versus
  revolutionary potential for change in how
  pathology uses digital technologies to add value.

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My Thesis

• For pathology, digitization is a critical path
  to maintaining and increasing the value
  propositionto users of lab data.
• Multiple healthcare trends will create
  opportunities for digitized pathology to
  increase its role and contribution in the
  clinical continuum.

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Four Basic Sources of ChangeIn U.S Healthcare
Market
Discussed at Executive War College

• One Consumers as primary buyers of healthcare.
  (Private and Medicare/Medicaid.)
• Two Major commitment to universal electronic
  medical record (EMR) and integration of
  healthcare data.
• Three New diagnostic lab technology
  genetic-based lab tests, automation, POCT.
• Four Widespread introduction of Deming-based
  quality management methods into healthcare and
  clinical laboratory profession.

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Drive to Universal EMR
Change Agent Two

• Federal government taking lead role in fostering
  development of universal EMR (electronic medical
  record).
• Hospitals and health systems scurrying to
  integrate existing data repositories and create
  single view patient record.
• Enterprise IT integration is soaking up majority
  of hospital IT budgets.
• Digitizing radiology images and work processes is
  another expensive drain on hospital IT dollars.

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Change Agent Three
New Technology in the Lab

• Steady stream of new diagnostic tests, many based
  on molecular technologies.
• Point-of-care testing (POCT) growing regularly in
  tests and capabilities.
• Different automation products available for
  pre-analytical, analytical, post-analytical.
  (Even middleware as automation.)
• Impact of these technologies magnified by
  enhanced informatics solutions.
• Remember Labs end product is info!

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Change Agent Four
Quality Management Methods

• Healthcarepushed by employersnow using quality
  management systems.
• Savvy hospitals and labs are learning that
  Lean/Six Sigma provides competitive advantage,
  once the organization embraces these quality
  methods.
• Quality requires accurate measurements, more on
  this later.
• First mover to early adopter to general
  adoption by labs and hospitals.
• Lab Quality Confab, Atlanta, Sept. 19-20.

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Importance of Information Technology

• Software is more sophisticated.
• Storage costs and computing costs are declining
  steadily.
• Wireless connections are ubiquitous and can
  handle higher volumes of information.
• Advances in Internet technology make it feasible
  to perform more functions using a Web platform.
• Interconnectivity and integration continually
  easier to achieve.

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IT as Threat and Opportunity

• Information is the end product of all clinical
  labs and pathology groups.
• Hospitals working to integrate clinical data into
  real-time patient EMR.
• Office-based physicians are implementing EMR
  systems.
• RHIOs (Regional Health Information Networks)
  under development across the United States and
  Canada.
• Labs must integrate with these users.

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Pace of Change Accelerates

• Laboratory medicine in the midst of an
  accelerating cycle of change.
• Can identify six specific sectors within
  laboratory medicine undergoing major realignment.
• In each sector, rapid series of events over the
  past six to 24 months.

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Managed Care Contracting
Lab Sector One

• United Health does 10-year deal with LabCorp,
  excludes Quest Diagnostics.
• Horizon BC/BS does exclusive contract with
  LabCorp in New Jersey. Quest out.
• Aetna does exclusive with Quest, excludes
  LabCorp.
• Cigna renews national contracts with both
  LabCorp and Quest, and does it early.
• LabCorps strategy of regional managed care
  laboratory networks.

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Clinical Lab Acquisitions
Lab Sector Two

• Sonic Healthcare Ltd enters USA. In 24 months,
  spends 820 million to acquire 8 labs with 500
  million in annual revenue.
• Apax Partners LP buys Spectrum Lab Network
  (November, 2005).
• Laboratory Partners, Inc. acquires Terre Haute
  Medical Labs and Cincinnati lab.
• New investors bidding aggressively for
  laboratory assets and reshaping the market.

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Anatomic Pathology Services
Lab Sector Three

• Quest Diagnostics pays 2 billion for AmeriPath
  (with 750 million in sales).
• Aurora Diagnostics acquires nine pathology
  groups in 12 months, now at 60 million in sales.
• Caris buys Pathology Partners.
• Water Tower Equity Partners buys Lakewood
  Pathology Associates.
• CBL Path raising lots of capitalto fuel rapid
  expansion.

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Molecular Diagnostics
Lab Sector Four

• Specialized startups, often with proprietary or
  patented diagnostic technology.
• RedPath Integrated Pathology
• Signature Genomic Laboratories
• Access Genetics
• Roches hostile offer of 3 billion for Ventana
  Medical Systems (282 million in sales).
• Vision Systems Ltd Ventana enters agreement to
  buy Cytyc offers more money. Danaher (Leica)
  outbids both.

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In Vitro Diagnostics Firms
Lab Sector Five

• 5 of 15 largest IVD firms in world have entered
  acquisition agreements in past 16 months.
• Siemens pays 14 billion for DPC, Bayer
  Diagnostics, and Dade Behring.
• GE buys Abbott for 8.1 billion, then breaks the
  deal.
• Hologix pays 6.1 billion for Cytyc (606
  million in sales).

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Health IT Companies
Lab Sector Six

• Ongoing consolidation and product acquisition
  among IT companies.
• Per Se Technologies acquired by McKesson.
• Pathology Service Associates (PSA) acquired by
  Med3000.
• Data Innovations buys P.G.P. s.a. of Brussels,
  Belgium.
• Misys unloads former Sunquest product line to
  California investment group.

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Anatomic Path Under Siege

• Collectively, these trends and market forces are
  having substantial impact on anatomic pathology.
• Lets take a closer look

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Landscape for Change-2000Big Changes in Anatomic
Pathology

• Emergence of national AP firms, such as UroCor,
  DIANON Systems, IMPATH.
• Some consolidation of pathology groups in large
  urban markets (related to consolidation of
  hospital ownership).
• Emergence of first specialty testing companies in
  molecular diagnostics, such as Myriad Genetics.
• As a profitable, growing sector, AP catches
  attention of two blood brothers.

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Fast Forward to Year 2007 Looking at Anatomic
Path Services

• Quest Diagnostics and LabCorp expanding into
  anatomic pathology. (Quest/AmeriPath now
  employees 800 to 900 pathologists. LabCorp
  employs 400 pathologists.)
• Growing number of national AP labs, such as
  Bostwick Labs, CBL Path, Clarient, Claris,
  Lakewood Pathology, OUR Labs.
• Specialty physicians, such as urologists and GIs,
  establishing in-house anatomic pathology
  services. (TC/PC arrangements.)

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Year 2007 Looking at Molecular Diagnostics

• Steady growth in numbers of specialty testing
  companies with proprietary or patent-protected
  diagnostic technology.
• Athena Diagnostics, Clarient, Genomic Health,
  RedPath Innovative Pathology are just a few
  examples.
• These firms want the specimens so tests can be
  performed in their laboratories. Business goal is
  to be exclusive provider of these diagnostic
  technologies.

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Looking Forward from 2007 Dominant trends in
Healthcarecontinued

• Patient safety and pay-for-performance have one
  thing in common
• Providers must closely measure outcomes,
  increasingly in real time.
• Providers must then use this data to improve
  outcomes.
• Integration of healthcare IT makes this
  increasingly easier and cheaper.
• Laboratories produce informationthese trends are
  both threats and opportunities.

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Looking Forward from 2007 Dominant trends in
Healthcarecontinued

• Increased scrutiny of outcomes and public ranking
  of providers by quality of outcomes motivates
  clinicians to use lab tests more effectively.
• Example public release of cardiovascular surgery
  outcomes, by providers, in New York, starting in
  early 1990s.
• Opportunity for labs and pathology groups to
  increase their role as laboratory medicine
  consultants to clinicians.

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

• Siemens acquires
• Shared Medical Services (SMS)2000
• Diagnostic Products Corp (DPC)-2006
• Bayer Diagnostics-2006
• Dade Behring-2007
• GE acquires
• Triple G Corporation2003
• Amersham PLC2003 (diagnostic imaging agents,
  protein separations)
• Abbott Diagnostics2007 (deal busts apart)
• Philips Corporationwill it also acquire LIS and
  in vitro diagnostic companies?

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Lets Put Things Together

• Fact large purchasers of healthcare are making
  rapid progress in gathering data about the cost
  of care and outcomes produced by individual
  hospitals, physicians, laboratories, and other
  providers.
• These purchasers will use this data to reward
  superior performers and give poor performers a
  motive to change or exit as a clinical service
  provider.

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That is Lab Opportunity

• Laboratories are skilled at collecting data and
  converting it into information.
• Referring physicians, under pressure to improve
  outcomes and the cost per healthcare encounter,
  will have motive to give greater value to lab
  testing and consultation services.
• Laboratory medicine has the technology,
  knowledge, and experience to help clinicians
  improve outcomes, reduce unnecessary costs of
  care.

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Quality Management

• Pace of these trends will be magnified by wider
  adoption of Deming-based quality management
  principles.
• As noted, Lean and Six Sigma techniques have
  passed through first mover and early adopter
  stages.
• Now gaining acceptance across both the hospital
  and laboratory industry.
• Quality management, by its use of real-time data
  to measure work processes, reinforces wider
  trends in healthcare.

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Evolution or Revolution?

• We can argue about pace of change
• but it is clear that the American healthcare
  system is preparing to undergo a radical
  makeover during the next decade.
• Change always creates new winners and losers.

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Comment on Anatomic Pathology

• Anatomic pathology is a sector of lab medicine
  facing wrenching change.
• Most threatened private pathology group
  practices serving community hospitals.
• For rational reasons, partners in these groups
  are reticent to invest in their own businessnor
  consider regional consolidation.
• Growth in pathology profession is already taking
  the form of salaried positions.

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Investors Changing Pathology

• In general, private pathology groups are not
  investing adequately in technology and
  informatics.
• Investor-owned pathology groups are investing in
  technology.
• Any opportunity to increase revenues and build
  market share will be pursued by commercial
  pathology firms.
• Use of enhanced informatics and digitization is
  consistent with this strategy.

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Why Investor Interest?

• Less money, less time, less regulation to bring a
  new diagnostic test to market and earn profits.
• Pharma up to 10 years, 500 billion.
• IVD 2-3 years, 30 million
• Sales of just 60 million/year make a new lab
  test a financial home run.

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And Theres More for Investors!

• Investors know demographics and aging
  baby-boomers will fuel demand for existing and
  new lab tests.
• Priority of early detection, use of personalized
  medicine, and increase in pharmacogenomics/compan
  ion diagnostics only adds more demand.
• Value proposition of well-researched clinical
  benefit of a new lab test is generally accepted
  by payersthus, ample reimbursement.

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Necessary Responses

• Pathology groups need to develop subspecialty
  expertise, especially in genetics and molecular
  pathology.
• Sophisticated informatics strategy is a must!
  (See next slide.)
• Regional consolidation of pathology resources is
  the right strategy to create critical mass and
  market clout.
• Community hospital-based pathology groups must be
  willing to invest in their own business
  (practice).

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Pathology Informatics

• Healthcare is eliminating paper. Pathologists
  must do the same, in parallel.
• Pathology groups need to support not just
  electronic claims and electronic reports, but
  direct interfaces with referring physicians.
• EMR adoption by large physician groups is key
  trend and requires bi-directional interface
  gateways with labs and pathology groups.

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IT in Pathology

• With EMR use expanding and electronic patient
  referrals increasing, demand for full electronic
  pathology report (with digitized images) will
  grow.
• Within pathology profession, needfor complex
  molecular work-ups to bring together data from
  several sources reinforces use of digital images
  and data.
• Pay-for-performance and evidence-based medicine
  will require full digital pathology record that
  supports data mining and research analysis.

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Supporting Efficiency

• Pathologists must support both clinical and
  operational efficiency.
• Physicians wont use labs that dont support
  physicians clinical workflow and operational
  workflow.
• That requires pathologists to support the
  physicians evolution to full digital
  implementation.
• These are additional reasons why pathology groups
  should have a sophisticated informatics strategy.

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Its A Revolution in Pathology

• Status quo strategy no longer sustainable for
  private pathology groups.
• New winners emerging
• Investor-funded pathology companies.
• Regional, consolidated pathology super groups
• Selected academic center pathology departments
  with a market mindset.
• Owners of patented or proprietary diagnostic
  technology.

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