Taking on Goliaths, smaller practices find way to succeed
PSA facts and figures
April 2003 Karen Lusky
As a service company providing a full spectrum of sophisticated
business solutions to entrepreneurial-minded pathology practices,
Pathology Service Associates LLC, or PSA, is not so much an idea
whose time has come as an idea that has kept pace with the times.
“Today PSA’s
ultimate objective is to allow community-based pathology practices
to compete with the big commercial laboratories like Laboratory
Corporation of America, Quest, and to some extent AmeriPath,”
says PSA founder Louis D. Wright Jr., MD.
And that was precisely
the plan in 1995 when Dr. Wright launched the Florence, SC-based
PSA network as a “modified messenger model management services
organization” linking and supporting independent pathology
practices. Yet the execution of that idea has evolved from an emphasis
on the regional integration of practices to negotiate carve-outs
in the managed care arena to a focus on giving independent pathology
practices the infrastructure and business acumen they need to thrive
on their own.
In that regard,
PSA views itself as an alternative for pathologists caught between
the proverbial rock and hard place of trying to go it alone in a
competitive and increasingly consolidated marketplace—or becoming
an employee of a commercial lab, hospital, AmeriPath, or other entity.
“There are very few alternatives to those options, but PSA
is one of them,” says PSA’s chairman of the board Edward
W. Catalano, MD.
Today PSA is the
entire back office for some pathology practices and incrementally
for all of its practice clients. Its business utilities range from
full-service billing to coding and compliance assistance, marketing
and client services, business alliances with vendors of surgical
pathology and cytopathology services, risk management, market analysis,
access to technology, IT solutions, and more.
“And we have found that our practices are growing and making more money
today than in the past,” Dr. Wright says, “and we believe a lot
of that is due to their good business practices.”
Antithesis
to Wall Street approach
PSA got started in 1995 by selling equity shares to pathology practices
to raise just over $2 million in startup capital (a large portion
of which Dr. Wright says went to securities attorneys to handle
the deal). And the fledgling network was, at least to bystanders,
difficult to distinguish from the spate of physician practice-management
companies consolidating practices with a long-term objective of
heading to Wall Street.
“People
sometimes confused PSA with those enterprises,” Dr. Wright
confirms, the only one of which actually made it being AmeriPath,
which had the capital to pull it off. Yet, interestingly, PSA was
the antithesis of the Wall Street approach.
“Instead,
we were telling practices to consider their investment in PSA as
an investment in their own practice rather than as a get-rich scheme,”
Dr. Wright says. “We emphasized that their practice was what
would reap the great financial return for them if PSA became a successful
business support company.”
Both PSA and its
associated practices have since become steady and solid successes.
Last year, PSA’s gross revenues grew nearly 20 percent. Cumulative
annual growth for the past five years is nearing 50 percent. And
PSA’s pathology practices are, on their own, experiencing
double-digit growth in annual revenues, “so that’s at
least 10 percent a year,” reports Dr. Catalano, who is professional
director of stat laboratory and outreach services at Palmetto Health
Richland, Columbia, SC.
PSA stopped selling
units of ownership to pathology practices in 2000 once it had established
a steady revenue stream of its own and good credit with traditional
lenders. And though it was once willing to accept almost any pathology
practice, PSA now prefers to work only with those practices that
are a good fit with its entrepreneurial-spirited corporate culture.
“Fortunately, there are a large number of practices of like-mind to PSA
in terms of [an emphasis] on point-of-care services, high professional quality,
fiscal responsibility, and, most importantly, professional and moral integrity,”
Dr. Wright says. PSA also looks for practices with a willingness to invest in
long-term strategies to grow and nurture their pathology practices, eschewing
those that appear risk adverse and in search of a short-term fix.
Putting
the horse before the cart
PSA’s decision to shift gears from network building to providing
business utilities can be traced, in part, to the demise of managed
care as it was envisioned before consumers began to vote with their
feet in demanding more open access to providers.
“Since 1995,
managed care has changed its look more than I have,” Dr. Wright
quips, “and managed care got old faster than I did.”
He notes that
when PSA started out, its pathology practices felt a real threat
from the specter of big labs going to the Blue Cross/Blue Shields,
Cignas, and Aetnas, and walking away with all the business. “But
since 1999, more and more managed care organizations take ‘any
willing provider’ rather than having a closed panel where
LabCorp is the only player in town that they will deal with,”
he says.
Yet even before
that, PSA realized it was putting the “cart before the horse”
in bringing contracts to the table when many of its practices at
the time lacked the infrastructure to compete with LabCorp or Quest,
says the company’s chief operating officer Suzanne Galloway.
“Several
of our practices didn’t own their courier systems and they
did not employ client service representatives, which made them ever
reliant on hospitals for these support services,” Galloway
says. “So at that point in PSA’s life, we realized the
need to change our emphasis from contracts to one of how to provide
business support services.”
PSA’s product
and service line evolved then as it does today—through a continual
dialogue with its community-based pathology practices.
“One trend
PSA is hearing about now,” Dr. Wright says, “is ‘practices
in transition’ where senior partners—who used to be
content with a gold watch and a hug when they left the practice—are
now realizing, thanks to AmeriPath and similar deals, that their
practices are a real asset.”
In response, PSA
is building support tools to assist practices where young pathologists
are trying to buy in amidst senior partners’ perception of
high value. “We help them do that in a way that doesn’t
wreck the practice while remaining fair to the existing partners,”
Dr. Wright explains. As a specific example, PSA facilitates valuations
by outside third parties, “and we work with practices to reach
the best solution for the specific situation,” he adds.
To help its pathology
practices capture more market share, PSA has developed a sophisticated
market analysis program, known as MAP. “The practice gives
us the Zip codes. We provide the practice with a detailed analysis
of its market share in addition to an analysis of how much of the
market share is going to other providers and where the practice’s
opportunities are,” Dr. Wright says.
PSA and its practices
also learn from each other’s experiences, allowing them to
replicate what works well and sidestep the pitfalls. “Will
Rogers said good judgment comes from experience and most experience
comes from bad judgment,” Dr. Catalano says. “And either
PSA or its practices have made about every error in judgment you
can make, but our practices are entrepreneurial and always taking
risks, so that comes with the territory to some extent.”
For example, PSA learned firsthand the havoc of unmanaged growth, a lesson
it shares with its pathology practices. “We had one year of 50 percent
growth and found that affected our ability to provide services with our infrastructure,”
Dr. Catalano says. “When you grow, you expend resources and it takes time
to realize the financial return.” To catch up after the unprecedented
growth spurt, PSA suspended accepting new practices for six months and today
caps its annual growth at 20 percent.
Competing
in a consolidating world
Meanwhile,
the trend toward consolidation of clinical laboratory and pathology
practices continues at a steady clip, most recently with LabCorp’s
purchase of Dianon Systems and AmeriPath’s sale to a private
equity firm in what observers believe may be an attempt to position
itself for bids from Quest or LabCorp.
“LabCorp’s
purchase of Dianon doesn’t affect us directly, but it is another
move toward consolidation of the practice of pathology into big
economic enterprises,” says Dr. Wright, recalling how someone
pointed out to him recently that there are no mid-size or regional-level
reference laboratories left on the East Coast.
Even so, Drs.
Wright and Catalano believe that independent practices can and will
continue to compete—if they remain prepared. “In fact,
PSA practices are effectively competing with the national pathology
models today,” Dr. Wright says.
“Growth
in PSA practices is usually contiguous business, not the result
of marketing and competing against all comers in a large region
or nationwide,” he explains. “Why? Because our practices
respect the integrity of the community practice system.”
And on occasion,
well-equipped PSA practices will absorb business in adjacent areas
because they provide a better quality and more efficient service,
he adds.
PSA’s fraternity
of practices also help each other gain access to advanced technology,
which can be difficult for practices of one to three pathologists
to do on their own. For example, “the most respected immunohistochemistry
laboratory in the U.S. is a PSA practice [Phenopath Labs in Seattle],”
Dr. Wright says. “And, guess what? Sister PSA practices across
the nation utilize Phenopath.”
In addition, PSA
enables pathology practices to compete with commercial labs by giving
them the business tools to joint venture and partner with their
hospitals.
“The big
competition to commercial labs has been the hospital outreach programs,”
Dr. Catalano notes. “And if community-based pathologists can
be a partner to that—rather than a hospital employee—they
are in a much better position in terms of growing their independent
practices.”
Dr. Wright insists
that the practice of pathology needs to remain where the patients
are to ensure a better quality of care. “Relationships between
physicians are complex social and professional interactions,”
he observes. “And if you do not know who the pathologist is
you are talking to, how do you build trust? We are talking about
the safety and welfare of patients.”
Continuing consolidation
with its attendant “dial 1-800” approach to pathology
services moves ever farther from that community-based model. Moreover,
Dr. Catalano believes commercial laboratories’ buying spree
could adversely affect their ability to deliver quality services
in the long run as they become weighted down with acquisition-related
debt.
“Commercial
laboratories have to ensure good returns to their investors, and
they have highly compensated management teams,” Dr. Catalano
says. “So they are trying to do more and more with less and
less.”
Does PSA foresee
other companies taking a cue from its success and giving the company
a run for its money? Thanks to PSA’s slow-cooker approach
to growth and long-term investment in its success, Dr. Catalano
doesn’t see much chance of that. “I think we’re
unique,” he says, “and while there are other people
who’d like to do what we have done, they would want to do
it on an equity or venture capital basis. And to commit the effort
to put in place what we have going, they’re going to want
a return on that investment,” which takes time.
Dr. Wright notes,
for example, that PSA’s services are labor-intensive, requiring
more than 300 employees to develop products and provide services
such as coding training and audits. “We also have training
programs for practice sales and marketing reps, for example, lay
people trained to understand the practice and business of pathology,”
he adds. “We do all of that and have regular meetings and
retreats for our practices and employees.”
And all of it
in the name of point-of-care pathology, which is Dr. Wright’s
original and continuing passion: “It’s our whole raison
d’être,” he says.
Karen Lusky is a writer in Brentwood, Tenn.
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