The Regional Pathology Group not only contracts with eight hospitals to provide pathology services but also serves much of the region’s physician office outpatient market. While the eight hospitals comprise two hospital systems and two independent hospitals, all are amenable to allowing the pathologists to create a regional histology and cytology lab as a means of controlling histology costs and sending out immunohistochemistry tests. The pathologists’ consultant showed convincingly that the pathologists could achieve economies of scale, greatly increase the available immunohistochemistry menu, and create a positive margin while charging back to the eight hospitals total annual amounts that would essentially equal the current cost of operation of each of the smaller histology and cytology operations. The consultant also believed that the pathologists and hospitals would further benefit from the increasing expertise of the pathologists and faster turnaround time for difficult cases requiring additional studies.

Discussion: Obviously this not only represents an opportunity but also a challenge that the group must assess from financial, operational, and structural standpoints. Acquiring equipment and staff from existing operations would be a natural first proposal, but even before that can be done, some sort of operating entity must be created. Doing this within the structure of the practice might be possible, but would likely change the nature of their corporation or partnership. So, a new structure would need to be capitalized before space and equipment, much less employees, could be brought in. If the pathologists become the owners, as they are likely the source for the capital and operating experience in this case, they need to identify and think through possible future events, such as the addition of new partners and the departure of existing owners very carefully, and preferably with wise counsel. For small closely held companies such as the lab described here, valuation is difficult and can be costly to ascertain. Book, or liquidation, value usually underestimates the value, while revenue-based valuations may mistakenly overestimate the value by failing to consider various forms of market risk.