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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.