The Pathology Value Chain and Global Health, part 4

In this last part of our four-part series on pathology value chain, where we are using the patient’s best outcome as the maximized value, we examine two areas: Marketing/Sales and Service. The former has inherent challenges, some of which were mentioned in the last blog on outbound logistics. The latter is becoming an increasingly important component of oncology care for which many pathology labs are grasping for solutions.

In traditional business budgeting, the first step is for the marketing and sales department of a firm to provide a projection of revenue for a given period based on their knowledge of trends, markets, prior years, competition, competitive advantage, etc. These projections are then paired with costing exercises to shoot for a margin of profit. If we are going to sell $1,000,000 in widgets and it costs us $750,000 in total to make those widgets available to our customers (including costs of goods sold, administrative expense, taxes, and interest), we would have a $250,000 profit to use as retained equity or to distribute to our shareholders. When we look at pathology services for cancer, a new laboratory with no prior history may find this process extremely challenging without an enormous amount of data. An existing laboratory with many years of work may have a much easier time and, short of drastic changes in supply prices, inflation, and taxes, could likely use a simple percentage growth approach for this calculation.

But unlike widgets or iPhones or Quarter Pounders or golf clubs, no one wants to have a tissue biopsy and certainly no one wants to have suspected cancer. If we turn to epidemiological data, we can predict (and do so below) the expected number of patients in a given population to likely have cancer in the coming year (although this is clearly not the only data point we need). For a new laboratory in a place where there are no other laboratories (e.g., a small low- to middle-income country with a new Ministry of Health mandate to fight cancer), such an estimate is important for determining both if we should even have a lab (or use a regional approach) and, if we do have a lab, what our maximum volume would be assuming 100% access. The former part has been addressed previously such that there is a threshold below which is difficult to justify a lab because of the cost per sample. The latter part, however, is crucial because a “marketing campaign” (i.e., patient education and clinician education about cancer, how to diagnosis it, and how labs are part of this process) is the only way to have any volume in this laboratory.

We would except it to start slow and build but we have a finite endpoint for cancer cases in mind. But note, importantly, that the marketing campaign described has nothing to do with the pathology laboratory itself. In an existing, highly-developed market (e.g., Boston, London, Montreal, Sydney), there is a population that we can assume represents our cancer risk pool but there are also many competing laboratories (and health systems), transient use of services (e.g., Ms. Smith from Iowa decides to go to Boston for cancer care), and levels of care (i.e., low-stage cancer care in a community setting versus later-stage cancer with comorbidities in a tertiary care setting). None of these things can a given pathology laboratory control if they are in that market, but must they use all of this information to understand the projected revenue and create their budget? Or can they just assume a percentage increase? From the patient perspective, all of this is irrelevant because patients most commonly do not choose the pathology laboratory that is going to see their biopsy as it is a function of the health system to which they subscribe for their care. In that context, marketing and sales for cancer diagnostic services is largely a negotiation between laboratories and clients (e.g., clinicians, hospitals, health plans) which is often contractual. Such contracts are difficult to negotiate, take a long time, and usually last for an extended period like 1 year or longer. This very concept is contrary to the activities of the marketing and sales department which must constantly pivot, update, and change their strategy to achieve their projected revenue. It is worth noting that in many poorly developed cancer systems, patients do directly take their samples to pathology laboratories of their choice and examples of systems with kick backs to shift these samples away from government laboratories toward private practice facilities (at a much higher cost to patients) are well documented.

In the Value Chain model, service is the after-market activities of a firm to maintain their product(s) for a customer, create customer loyalty and resales, and enhance their competitive advantage through maximized firm-customer relationships. The popularity of subscription services (e.g., Amazon Prime, Netflix, Massage Envy, car leasing) stems from the increased opportunity to interact with customers continuously in low-cost ways that enhance the customer’s experience with the firm. Although a service like rending a definitive pathological diagnosis may appear to be a one-time event, recent evolution in the practice of oncology and increasing research needs have created unique servicing opportunities for pathology laboratories. The emergence of biomarkers that dictate treatment unrelated to the diagnostic process has created gaps in quality due to inefficient systems, entry cost barriers, volume challenges, and intellectual disconnect from the traditional diagnostic process. However, streamlining the biomarker process, for example, can create a competitive advantage for a laboratory and improve client loyalty and rapport.

Marketing and Sales

This activity focuses on “strategies to enhance visibility and target appropriate customers.” This activity in diagnostic anatomic pathology specifically for cancer speaks to the first part of the value chain for the patient; namely, the timely presentation of a patient to the clinical system for evaluation of cancer at the earliest possible time. As such, whether a patient presents incredibly early or very late makes no difference to the pathology laboratory because the customer choosing the pathology service is either an independent clinician or a health system. Private practice pathologists may advertise or market to community hospitals or hospital systems in hopes of capturing their volume (and revenue). Marketing for second opinion review by a pathologist can also occur and may be directly to patients. This activity is challenged from the beginning, however, due to the small market. For every 1,000,000 patients in the United States, there are about 5500 cancers per year. Assuming the accuracy of a clinical decision to obtain a biopsy is around 50% (i.e., the “malignancy rate” – when a clinician decides a biopsy is needed for suspected tumor, 50% of the time it is cancer and 50% of the time it is not), that’s 11,000 suspected cancer biopsies per million per year. Extrapolating to the US population, we get 3.6 million biopsies per year. Given that there are ~10,000 anatomic pathologists, that equates to, on average, 361 biopsies per year per pathologist (or, roughly 1 per day). Since most pathologists could easily sign out 20 cases every other day working Monday – Friday with 4 weeks of vacation annually, that’s a ratio of 1:8 (average:capacity).

The point of all of this math is that the volume of pathology work in the US that is for cancer is small relative to the total biopsies performed (or capable of being performed) by the pathology community and, thus, the market for cancer diagnostic services appears saturated. We can adjust the dial of this to take the malignancy rate to 5% (i.e., massive over biopsy setting), and find that pathology would be overwhelmed at 130% capacity just for suspected cancers; however, as we move back towards 50% malignancy rate, the average capacity is around 25% for volume. If we move on the other side of 50% towards lower biopsy rates or “improved clinical acumen,” capacity quickly drops to below 9% with a great excess of pathologists. With the promise of artificial intelligence to assist pathologists in faster sign out of higher volumes, the capacity for cancer diagnosis increases possibly 10-fold. But if you ask your average pathologist if they are busy, they report that they are. This is because the pathology laboratory, as all laboratorians are aware, processes more than just suspected cancer biopsies. Medical kidney, medical dermatology, screening colonoscopy, colposcopy, breast core needles, melanotic and non-melanotic skin lesions create a huge portion of the volume that is not part of the specific calculation above that adds many millions more samples per year to the pathology revenue stream. One framing of this case pool is that cancer biopsies, because they aren’t technically elective, are cross subsidized by providing all of the other services which are equally billable. However, this large bulk of cases are still not through direct marketing to the patient but rather to providers or health systems.

As we turn this activity towards LMICs, we instantly have a problem. There is no system in most places to support routine services for medical kidney, medical dermatology, screening colonoscopy, colposcopy, breast core needles, melanotic and non-melanotic skin lesions (especially in Black patient populations for the last). Without the cross-subsidization that these billable biopsies bring in, pathology laboratories are left with the low volumes of suspected cancer cases. As mentioned above, these laboratories are often overwhelmed to begin with so the marketing and sales activity, which would theoretically increase volume, is likely not to be a priority. In these settings, however, what will increase volume and improve the quality of care for patients is large pre-analytical efforts by governments and other entities to educate the public and the general practitioner about cancer screening and diagnosis, community awareness about cancer care systems, specimen transport networks from the most rural directly to pathology laboratories, and government spending on prevention of cancer.

Service

This last set of activities are to “maintain products and enhance consumer experience.” For a diagnosis of cancer, once rendered, there are many potential touch points with both the patient and the treating clinician that can enhance the outcomes for the patient. These include maintenance of tissue in repositories for future studies, performance of future studies related to newly available treatments, access to clinical trials, and, as mentioned in the outgoing logistics, increased, and enhanced communications around the diagnosis and subsequent information. In LMICs, there is a great desire to provide such enhancements especially in settings where these activities can facilitate local research and generate much-needed local clinical trials with pharmaceutical and other industry partners. As the other steps of the value chain are improved, the continue service will come into focus and can include such activities as external quality assurance, laboratory accreditation, personnel certification, documented compliance with standards, awards, and other accolades.

To conclude, from the patient framework, the maximum value for a patient with cancer involves the earliest possible detection of the tumor and a rapid, accurate diagnostic report matched to treatment options that lead to survivorship. For a pathology laboratory, the best outcomes for patients and the best revenue model for the laboratory results from a high-volume of small samples (i.e., biopsies) reported with complete clarity. Cross subsidization of cancer diagnostic services (especially those for later staged, complex cancer patients) with other non-cancer, pathology-based reporting is crucial to create a sustainable revenue stream and ensure highest quality outcomes. Competitive advantage in pathology services specific to cancer are currently and will continued to be largely tied to the after diagnostic service and support to keep the patient on the most beneficial cancer journey.

References

  1. 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.
  2. Histology. Wikipedia. https://en.wikipedia.org/wiki/Histology#:~:text=In%20the%2019th%20century%20histology,by%20Karl%20Meyer%20in%201819.
  3. 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
  4. 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
  5. 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
  6. XIFIN. The Evolution of Diagnostics: Climbing the Value Chain. January 2020. https://www.xifin.com/resources/blog/202001/evolution-diagnostics-climbing-value-chain
  7. 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.
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-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.

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