When Michael Porter conceptualized the Value Chain in 1985, histology as an idea was at least 184 years old and the use of a microtome to cut sections was 155 years old. Now 35 years into value chain as an established lens for markets and firms to approach those markets, numerous publications and reports discuss the value chain of diagnostics, of digital pathology, and of laboratories as profit centers from a variety of sources and as a profitable business model. With the core tool—histology—being such an old technology, easily duplicated, and standardized for skill, quality, and output, can it create competitive advantage or be part of a firm’s value chain? The framework of diagnostic anatomic pathology services (for example, a histology diagnosis for cancer) as a profit model creates ethical questions around what the true value of these services are when the tool is so common. No one chooses to have cancer. Therefore, no one chooses to have a diagnostic procedure for cancer. Stated another way, the consumer’s choice for the product is a potential matter of life and death—that is not true of breakfast cereal. One of the most important features of a capital market is free choice by consumers to choose or not choose products and services. Today, there are people that get by with a flip phone that only makes phone calls and perhaps sends text messages while other people choose essentially supercomputers to carry around in their pocket; however, no one is going to die if they don’t have a telephone on their person. Without a diagnostic procedure for cancer—with histology serving as the primary tool—patients will commonly die from that disease; but with a diagnosis they have a chance of cure, a chance which increases greatly the more rapidly and the earlier in the course of disease the diagnosis is made. One paradigm of healthcare that differs from actual business sectors is an inverse relationship of cost to supply. As competition increases in business, prices are driven downward and reach a level barely above margin which sustains the supply of the goods but often requires the business to diversify or innovate to reach higher margins. In healthcare, costs for the same procedures which are standard of care have gone up, year over year, even while new innovations emerge at higher costs. From a business perspective, creating a feasible value chain around healthcare and, specifically histology, seems unlikely to be sustainable in the long run. However, patients are the center of healthcare and there is high value to patients in having services that meet their medical needs. In applying the concept of “value” and established value chain concepts to anatomic pathology, we shall assume that the maximum value the system can achieve is the shortest time interval from development of cancer in the patient to cure. Fortunately, this value lens mirrors the most efficient pathology laboratory system which would process and sign out large volumes of small biopsies. Coincidentally, that is also the best profit model.
Many countries and large segments of the population in general do not have access to diagnostic histology services due to a range of barriers and challenges that are specific to each site. In some instances, these systems simply do not exist, for example, on many island nations and some nations that are less than 2 million people. The reason for this absence in such settings is due to a massive cost of such services because economies of scope and scale cannot be achieved without a particular threshold of case volume which results in excessively expensive—and thus, unsustainable–services. In larger yet low-resourced countries, private diagnostic histology services with variable quality exist with the main barriers being the out-of-pocket costs of those services to patients although quality could be considered the more important barrier. In high income countries, impoverished patients and patients with insufficient insurance coverage may never be able to access services while others who can access services initially may be inundated with bills related to cancer care that lead to financial disaster. However, all of these “gloom-and-doom” anecdotal observations are not solving the large range of problems that can be found across the patient’s pathology value chain. In order to approach this in the spirit with which Michael Porter intended but framed for a patient, let’s look at the pathology value chain with our value being maximum benefit to the patient, frame it in the context of global health, and assign solutions based on the original Porter activities. This is part 1 of a 4-part series dissecting value chain and pathology in global health. The activities are inbound logistics, operations, outbound logistics, marketing & sales, and service. Let us look at inbound logistics in this part.
Inbound Logistics – This activity encompasses the “receiving, warehousing, and inventory control of a company’s raw materials.” For the lens of maximum value to the patient, from the moment a biopsy is taken until delivery to the laboratory should be minimized and, when the sample arrives, it should be able to be processed immediately with all reagents available. For anatomic pathology, this portion of the value chain includes controlled and uncontrolled raw materials. The controlled raw materials are all of the purchased reagents, supplies, and other consumables that are used in the process of histology and include hazardous materials, flammable materials, and bulky materials such that inventory control should be optimized for both maximum efficiency and value but also maximum safety of staff. “Stock outs”, which are relatively rare in high-income settings, on the laboratory side can include lack of any of the essential reagents and tools to process samples including formalin, alcohol, xylene, paraffin, glass slides, cassettes, etc. Stock outs are the most common challenge in LMICs followed by complete lack of supply chain or lost supply chain. In HIC, bulk purchases, long-term contracts, and volume pricing reduce the cost of the controlled raw materials and can create slight competitive advantage.
Uncontrolled raw materials are the inbound patient tissue samples which can range from minute to whole bodies (in the special case of autopsy) and may be “packaged” by a diverse set of suppliers (i.e., clinical teams) with variable resources. These materials are also “precious” in that they are unique to each customer, cannot be easily reobtained, do not have a fiscal loss value that is easily quantifiable, and may have a large impact on the patient from which they are derived. These materials are also “flawed” because the pre-analytic collection of them by individuals that are not part of the laboratory may create inadequate, insufficient, inappropriate, or damaged materials. In HIC, considerable effort goes into educating clinical teams on collection, creating referral networks, providing collection vessels, etc.; yet laboratories still receive inadequate or insufficient samples. When we consider low- and middle-income countries, observed delays/deficiencies in this part of the value chain are quite common. “Stock outs” on the clinical side can include lack of supplies of clinicians for obtaining biopsies from a specific patient such as sterile biopsy tools, surgical services, and adequate formalin. “Skill lacks” include insufficient training or understanding of the laboratory operations by the clinical team to obtain a biopsy from a patient or properly prepare it for delivery to the laboratory. “System lacks” include an absent or poorly functioning specimen transportation and/or communication system which delays or prevents samples from reaching a laboratory. For a given patient or even population of patients that are to be served by a clinical health system feeding to a specific laboratory, the value chain can be massively depreciated if these inbound logistics are not rectified. When encountered and depending on the specific gap in controlled or uncontrolled raw materials, the solutions can include training of clinical staff; local production of reagents; supplier contract negotiations; bulk ordering; collaborative ordering; cost cross-subsidization; public-private partnerships; capital investment in transportation; and coordination with other convenient transportation networks.
To summarize this part, inbound logistics for a pathology laboratory include controlled and uncontrolled raw materials that have variable costs, safety, inherent value, and flaws that must be considered when planning laboratory operations. With rare exception, these inbound logistics are standardized which leaves little opportunity for major competitive advantage. In LMICs, stock outs (complete or delayed) can invalidate the work of a pathology laboratory by creating significant time delays in diagnosis which make the final diagnosis useless to the individual patient and erode the clinical confidence in the overall system.
In part 2, we will look at operations.
Porter, M. (1985). The value chain and competitive advantage, Chapter 2 in Competitive Advantage: Creating and Sustaining Superior Performance. Free Press, New York, 33-61.
Histology. Wikipedia. https://en.wikipedia.org/wiki/Histology#:~:text=In%20the%2019th%20century%20histology,by%20Karl%20Meyer%20in%201819.
Thorpe A et al. The healthcare diagnostics value game. KPMG International. Global Strategy Group. https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/07/the-healthcare-diagnostics-value-game.pdf
Digital Pathology Market CAGR, Value Chain Study, PESTEL Analysis and SWOT Study|Omnyx LLC, 3DHISTECH Ltd, Definiens AG. https://www.pharmiweb.com/press-release/2020-06-30/digital-pathology-market-cagr-value-chain-study-pestel-analysis-and-swot-study-omnyx-llc-3dhistec
Friedman B. The Three Key Components of the Diagnostic Value Chain. Lab Soft News. January 2007. https://labsoftnews.typepad.com/lab_soft_news/2007/01/the_three_eleme.html
XIFIN. The Evolution of Diagnostics: Climbing the Value Chain. January 2020. https://www.xifin.com/resources/blog/202001/evolution-diagnostics-climbing-value-chain
Sommer R. Profiting from Diagnostic Laboratories. November 2011. Seeking alpha. https://seekingalpha.com/article/305931-profiting-from-diagnostic-laboratories#:~:text=The%20three%20year%20average%20operating,current%20operating%20margin%20of%2012.9%25.
-Dan Milner, MD, MSc, spent 10 years at Harvard where he taught pathology, microbiology, and infectious disease. He began working in Africa in 1997 as a medical student and has built an international reputation as an expert in cerebral malaria. In his current role as Chief Medical officer of ASCP, he leads all PEPFAR activities as well as the Partners for Cancer Diagnosis and Treatment in Africa Initiative.