Recasting IVD Strategies For Tomorrow's Markets

Messenger, Fall 1994, Vol. 21, No. 3, pp. 4

As managed care networks and health maintenance organizations (HMOs) consume a growing percentage of the hospitals and physicians' practices in the United States, the clinical laboratories are losing their autonomy as well. The trend toward centralized management of diagnostic functions for networks or HMOs offers opportunities for sales on a much bigger scale than in the past, but also dictates changes in the way in vitro diagnostics (IVD) manufacturers to business. To reach this "new" customer, these manufacturers must focus on developing different types of products, become sensitive to different forces driving the market, and radically revamp their approach to distribution and sales.

Until recently, each clinical laboratory functioned autonomously, as an overly customized collection of workstations with idiosyncratic methodologies and capabilities. Labor and facilities account for fully two thirds of diagnostic testing costs. Managed care organizations, looking for ways to cut costs, see the opportunity for economies of scale by integrating independent laboratories under the authority of one central decision maker. The laboratory director for a network or HMO may, for instance, be responsible for the diagnostic functions of 5 hospitals, 15 clinics, 2 ambulatory care centers, some day surgery centers, a home health nursing organization, and 20 group practices.

This central figure may have the same level of education and in fact may have previously directed an independent laboratory, but now his or her perspective and objectives are quite different. He or she must strive for optimal use of 60 or 100 work stations rather than 12 or 20.

Re-engineering each testing site to function as part of an integrated whole is a daunting task that includes updating and networking information systems, standardizing billing practices, planning transportation of specimens, and optimizing use of equipment and personnel. The thousands of transitions across the country are not likely to be orderly or even readily apparent to the casual observer, but they have far-reaching implications for the IVD manufacturer.

Centralized Clinical Laboratory Operations Drive Economies of Scale

To meet the needs of this buyer, manufacturers of diagnostic equipment will have to give up their myopic focus on automation, menu consolidation, and capital equipment repackaging. Racing to eke out incremental improvements in a crowded instrumentation market, diagnostics companies are investing in research and development at rates greater than 10% of sales. As instruments become more complex and expensive, reagent rental programs are harder pressed to recover the equipment cost.

The central laboratory director will not need complex, expensive machines that can each run 100 different types of tests. With centralized management, each instrument can be dedicated and operate at high volume. The new laboratory director may, for instance, choose to dedicate a system at only one site to running all radioimmunoassays for the network, knowing that results of such tests are not typically expected within less than 48 hours.

Standardization is key to optimizing the networked laboratory without walls. All sites will ideally use the same model of chemistry analyzer, so that normal ranges will be consistent. Data terminals installed on every floor, in every emergency center, and in every physician's office will capture test results so that they are available to whoever next treats the patient.

To ensure capture of data, the director might specify that all home health nurses bring patients' blood samples to the laboratory for analysis instead of using handheld analyzers. Since bedside blood glucose testing requires stringent quality control, training, and monitoring, the laboratory director may dictate that one type of handheld monitor be used at all sites within the network. Such a move allows institutionalization of a training program and, of course, negotiation of a rock-bottom price for the monitors and supplies.

Barriers to the Growth of Point of Care Testing - Technology, Clinical Utility, and Cost

Americans love speed. Our fascination with turnaround time is unequaled in any other world market. While STATs are clearly needed in the emergency room and intensive care unit, the value of speed in the outpatient setting is harder to establish.

Historically, diagnostics manufacturers have striven to re-engineer tests to allow point of care testing (POCT), regardless of whether the immediacy of results confers any added benefit. In the managed care setting, price performance and outcomes research are the new buzzwords replacing point of care.

Proponents of POCT justify the huge difference in cost -for instance, $0.22 on a chemistry analyzer versus several dollars on a handheld device for blood glucose testing - with the argument that POCT reduces the number of patient visits to the physician's office. In reality, results of most tests available in POCT format could be given over the telephone 24 hours later without any compromise in patient care.

In the hospital setting, interest in pneumatic tube systems is reawakening. Technologic improvements have eliminated some of the drawbacks that previously plagued these devices. A hospital equipped with a state-of-the-art pneumatic tube system can save money and maintain more stringent compliance with quality control standards, while still providing results within an acceptable time frame, by forgoing POCT in favor of traditional laboratory analysis.

The number of tests ordered and their timing is likely to change as well. In the current scenario, the physician orders a huge battery of tests, looks for results that are out of range, and then considers possible diagnoses in greater depth. HMOs and networks are already calling for revision of this standard operating procedure. One alternative is for the physician to order a narrow band of relatively inexpensive screening tests designed to pick up problems in the organ system he or she suspects as the root of the patients' problem. The laboratory then automatically follows up on any abnormal finding with the most sophisticated tests available. Proponents say such a system is a best-of-both-worlds compromise, controlling cost and yet taking advantage of the latest technology where appropriate. Ideally, the laboratory will transcend its role as a commodity provider - in which the commodity is a vast quantity of data - in favor of integration as a provider of meaningful information in the patient management process.

IVD Manufacturers Must Reposition Themselves to Survive

To adapt to this evolving market, IVD manufacturers must rethink their long-range business plans and market strategies. Business growth, traditionally driven by new products, now depends to a much greater extent on market access and competitive pricing. Pharmaceutical companies are already leading the way, investing in distribution channels and generic divisions, reducing the size of their sales forces and focusing on core markets even when such a move requires the jettisoning of profitable nonpharmaceutical businesses.

Negotiating huge contracts with managed care providers will require fewer but much more sophisticated salespeople. A completely different type of account representative, one who can provide a great deal of service and training, may be the key to maintaining an ongoing relationship with a large client. The largest IVD manufacturers will therefore most likely benefit by cutting their sales force. A second tier of IVD manufacturers, smaller than the top ten, will suddenly find themselves able to compete effectively with the former giants.

Options available to the smallest IVD manufacturers will change as well. Agreements with distributors, whose sales forces as a whole lack the depth of knowledge necessary to do business with the large-volume customer, may be less attractive than OEM partnerships.

Like pharmaceutical companies, IVD manufacturers will profit by focusing on core markets. They have too often flooded the market with copycat products, diluting the opportunity for profit in attempts to encroach on the niches of their competitors.

As IVD manufacturers reposition themselves to survive in a rapidly evolving market, they must abandon product development paths mapped out according to past perceptions. Short term goals and customer fads, including POCT and menu consolidation, distract from the big picture: cost effectiveness.

Robert Bauer is a managing partner of CaseBauer and Associates, a Dallas-based consulting and market research firm specializing in in vitro diagnostic markets. He is a member of the editorial advisory board for MD&DI's IVD Technology.

CaseBauer has 5 practices:
Market Modeling, Strategy / Business Development, Benchmarking, Market Research and Business Services.