In a series of previous notes, I discussed in-office histology labs whereby dermatology, gastroenterology, and urology practices construct a lab on the office premises and begin to prepare their own histology slides (see: Corrected Definition for a Pod Lab and a Look at In-Office Labs; Many Big Urology Practices Now Utilize an In-Office Histology Lab and Their Own Pathologist). These slides are then read by a pathologist who operates under a fee-for-service contract with the group. The office bills globally for the diagnostic service and the pathologist is compensated for his or her services performed in the laboratory. This usually means he or she receives the Medicare professional fee, less the practice expense portion of the professional fee, for a net of about $26 per slide. A pathologist will also receive a modest lab management fee. The clinical groups retains the technical component which is about $70 per slide.
There are approximately 9,000 office-based dermatologists practicing in the U.S. An estimated 15% currently operate full-service histology labs. The major driver for these practices to move in this direction is to increase office revenue to offset other reductions by Medicare and health insurance companies. I learned all of these facts in a recent teleconference sponsored by Laboratory Economics that featured Joe Plandowski (see: Webinar on the "Insourcing" of Pathology Specimens by Clinical Practice Groups). Joe co-founded In-Office Pathology in 2005. Over the past six years, IOP has helped to launch and manage 50 histology labs in 18 states for urology, gastroenterology, and dermatology practices.
Joe clarified one point during the presentation about which I was a little fuzzy -- exactly where the pathologists who staff these in-office labs were coming from. It turns out, at least in Joe's experience, that they are recruited from the local hospital pathology groups. In fact, this source is almost essential for this business model to work because the other members of the pathology group can cover the in-office pathologist when he or she goes on vacation. Interesting enough, Joe has also not experienced any difficulties recruiting histotechs to work for in-office labs despite an apparent shortage of them for hospital labs. Apparently the histotechs prefer the hours, environment, and focused work of these facilities.
If there is a "loser" with regard to this growth of in-office labs, it might be viewed as the hospitals. They capture the technical component (TC) when the histology work is done by them but lose it to the practices operating the in-office labs. So, you may ask, why would hospitals "tolerate" in-office labs in the community? Probably because there's not much they can do to stop the trend and also because they don't want to alienate the private practice physicians. Also keep in mind that, at some time in the future, hospitals may want to purchase these same practices (see: The Increasing Tempo of Physician Practice Purchases by Hospitals). The national surgical pathology reference labs are also aggressively marketing partnerships arrangements under which they manage an in-office pathology lab and perform and bill for professional services. Having local hospital pathologists staffing in-office labs may be perceived by hospital executives as preferable to providing an opportunity for these national reference labs to gain access to town business.
Here's a link to an article that Joe wrote about in-office labs in the CLMA journal (see: CLMR; Q1 2012; What's Up with In-Office Anatomic Pathology Labs?; Joe Plandowski). He makes another interesting point about the profit margins of in-office labs:
The economics of in-office anatomic pathology laboratories are very straightforward. For every dollar of revenue collected, the practice keeps about 50 cents after paying all the laboratory related expenses, including pathology. A pre-tax margin of 50 percent exists because in-office anatomic pathology laboratories do not carry expenses related to couriers, sales/marketing representatives, or sophisticated software programs. Couriers are not needed because tissue specimens do not leave the practice office. Sales/marketing representatives are not needed because by federal regulations only specimens from patients of the practice can be processed at the in-office anatomic pathology laboratory. Sophisticated software packages are not needed for data entry and results reporting because the in-office pathology laboratory software package is interfaced to the practice’s.