In part 1, we reviewed Michael Porter’s Value Chain and looked at inbound logistics for pathology. Now we will turn to operations, or the production of diagnostic results.
In the United States, almost all cancer diagnosis and care are in the private sector. There are very few examples of diagnostic services that are provided for free. Because laboratories derive revenue from every specimen for the most part, there is a natural desire to increase the volume in the laboratory from management because volume equals revenue. Pathology also has inherent economy of scope and scale such that a basic system that could process 1 case per day for an operating cost of $500,000 per year, could process 200 cases per day for a cost of $4,000,000 per year (a 200-fold increase in volume with only a 8-fold increase in cost). It is important to note in this comparison that in the former, the cost per case is $2000 while in the latter it is $80 (a 25-fold difference). When we consider an allocated or operating budget to run a pathology diagnostic laboratory where revenue is not reflected to laboratory management, this desire to increase volume is lacking directly by laboratory staff (more work but no additional funding) but still may be desired by higher level administration for revenues that pay for other aspects of the system (cross-subsidization). Consider a laboratory that is asked to process 25,000 samples per year, has 6 support staff and 3 pathologists. This would equate to each pathologist signing out ~50 cases per day on average, Monday – Friday, with four weeks of vacation annually. If those pathologists are the direct recipients of the profits of the laboratory, such a high case sign-out rate may be acceptable. If they only receive their allotted salary with no potential for profit sharing, they are unlikely to maintain such a high rate of production. Moreover, they will likely demand higher salary and/or additional staff and will do so much more quickly as volumes increase than would pathologists who share in profits. When we transfer this concept to a public low-resourced laboratory setting in a low- and/or middle-income country where government salaries are lower, there are far fewer skilled personnel, and budgets are smaller, there is essentially no incentive for public/government-funded laboratories to increase volume because it results in more work for the existing staff with no benefit. Yet, with the small volumes we see in LMICs currently, their costs per case are much higher than in HICs. When we turn our lens to the patient and that patient’s maximum value, the profit-sharing model is likely to yield the shortest turnaround time for a given patient. There is a trade-off in this scenario between speed of results and amount of communication/coordination between the clinician and the pathologist. Allocated budgets and public laboratories may produce slower results that are of the same technical quality and, in academic settings, may include additional communication/coordination with clinical teams. Standards exist for a maximum turnaround time goal (i.e., for the College of American Pathologists, it is 3 days). Without external regulation and accreditation, laboratories may fail to provide value to the patient by delaying diagnoses until they essentially are useless. Turnaround times in LMICs may be considered “very good” at 2-weeks, a timepoint that would not be sustainable for HICs laboratories.
Operations – This activity “includes procedures for converting raw materials into a finished product or service”. For the lens of maximum value to the patient, from the moment a biopsy is received in the laboratory to the moment a final report is generated should be minimized and the report itself should adhere to quality standards internally and externally. Once all reagents and supplies are obtained and specimens are received, the operations process can be engaged which includes grossing, processing, embedding, microtomy, staining, special stains, immunohistochemistry, case professional review, and report production. In each step of this stepwise process, specific skilled personnel are needed, matched with specific reagents and supplies to complete the step. Laboratory efficiency and product quality can be dually achieved with highly trained personnel, functioning, well-maintained equipment, optimized workflow, continuous communication and data collection, and highly skilled management to control the process wholly and in parts. One of the challenges for HIC pathology laboratories or health systems are large resections (i.e., mastectomies, colectomies, etc.) and autopsies. The former is integral to cancer care for mid-stage cancers to inform margins and guide treatment; however, they require more personnel time to gross, process, and read, more physical resources to dissect and sample, and may have a series of challenges related to “what’s left in the bucket?” that do not occur when a small biopsy is entirely submitted (although standardization of grossing and reporting can often ameliorate this issue). For the latter (i.e., autopsies), the costs of these procedures are extremely high across the board and there is, to date, no reimbursement or payment for this final procedure in a patient’s medical journey. The value of the autopsy has been explained elsewhere but such value to healthcare systems and to individual and groups of patients is often not delineated enough to make these services a priority, unfortunately. Stepping back from operations, what is commonplace in HICs is that large academic center pathology laboratories most often associated with comprehensive cancer centers are evaluating major cancer surgery specimens as well as autopsies while their private practice and community hospitals focus on small biopsies. There are certainly private practice and community hospitals that evaluate large specimens, but they do so in the context of large biopsy volumes (i.e., cross-subsidization). Tertiary care center pathology laboratories receive referrals (secondary review of biopsies) and surgical samples without the large volumes of primary biopsies to provide off setting revenue. Without high volumes of biopsies to subsidize the costs of large resections, value chain for laboratories becomes quickly degraded and laboratories may even become cost centers, especially if complex immunohistochemical works ups are considered. For patients, care at academic centers and comprehensive cancer centers is viewed as superior with access to clinical trials, multidisciplinary teams, advanced technology, and highly complex diagnosis of rare entities; however, the bulk of pathology services provided, being standardized, are essentially task-shifted from for-profit high volume laboratories that could subsidize the costs to large health systems that cost more to run often without the benefit of the primary diagnostic biopsy material revenue flow.
It is quite easy to see how this part of the value chain can fail in an LMIC because pathology operations are large, complex, and interlocking. For example, if the single embedding center goes offline, manual processes, which are slower and produce poorer quality blocks must be used and efficiency is lost. If the tissue processor goes offline, the entire process is stopped until it is restarted. If there is one pathologist and they go on vacation or immigrate to another country offering better salary, the process is stopped indefinitely. As mentioned above, for a laboratory with a low volume and limited staff, increases in volume are a considered negative because incentivization is lacking. Because these laboratories are often the “only game in town”, they must deal with small biopsies, large resections, and autopsies but without the revenue streams seen in HICs to offset costs or create cross-subsidization (i.e., reimbursement, private pay, etc). This is due to limited access for patients and biopsy rates for the population that may be less than 20% (i.e., of all people that NEED a biopsy, less than 20% receive a biopsy due to access issues). There is a great need to achieve balance in this problem between the minimal volume a lab should process and adequate compensation for laboratory staff to achieve this volume. Modelling and projections expected for a given population can be used to inform governments and market makers about what number of services are needed and, subsequently, public-private partnerships become a primary tool to achieve the balance. For individual gaps such as lack of staff, the value of the operations can be improved with training, telepathology support, visiting pathologists, and management training and improve the overall value improved for the patient.
To summarize this piece, operations for diagnostic pathology has an inherent economy of scope and scale such that an optimal case mix exists which creates maximum value for the patient—shortest turnaround time with most accurate results—and creates a sustainable revenue stream for the laboratory operations (mix of biopsies and resections). Competitive advantage is complex in this space because speed and volume are contrasted with specimen complexity, all of which should be performed through a standard of care.
In the next part, we will look at outbound logistics or the outgoing report to the clinical team.
References
- 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.
Lablogatory 