DAVID BUSH : A Test of Big Science : MetWest Is Out to Prove That Large Health Labs Do Best

The job of developing a major network of diagnostic laboratories in the western United States rests on the shoulders of David Bush, president and chief executive of MetWest, an 8-month-old Newport Beach company with big ambitions.

Since gaining its corporate independence from New Jersey lab giant MetPath, MetWest has embarked on an acquisition binge. So far it has purchased a laboratory operation in San Jose for $20 million, and it has agreed to pay $85 million for Central Diagnostic Laboratory, a laboratory chain based in Tarzana.

Bush, who was born in London, studied electrical engineering and accounting. One of his first jobs was with a British subsidiary of Corning Glass Works. He later transferred to its New York headquarters. He worked in a variety of management positions in the company’s medical products and laboratory glass units until 1984, when he joined MetPath in the data processing department.

A year later, Bush became that company’s chief financial officer, the position he left to take charge of MetWest. During his four years with MetPath, the company’s annual revenues almost doubled, from $180 million to to $350 million.

In an interview with Times staff writer Leslie Berkman, Bush said he believes there is an industry-wide consolidation going on as smaller and less cost-effective labs are being purchased by larger ones. Bush also outlined MetWest’s strategy to grow into a major regional operation while striving to maintain service convenient to local hospitals and doctors’ offices.

Q. Have you seen changes in the clinical diagnostic laboratory industry?

A. Yes. The industry is historically a very diffuse one with lots and lots of competitors. Laboratories started out as mom-and-pop operations--the wife worked in the lab and the husband sort of managed the office, or the other way around. As electronics and computer technology developed in the 1960s so you could do more tests outside university research laboratories, there was an enormous expansion of the business. Some of the big corporations started to get interested, and some pharmaceutical companies got into the business and started doing lab testing--people like SmithKline Bioscience Laboratories and Roche Biomedical Laboratories.

Q. Were the big companies able to operate the laboratories with greater cost savings?

A. Yes. Obviously the reason big companies came in was because they thought there was a business opportunity. The reason they were successful was that they had money in a very capital-intensive business. They could buy expensive equipment, and they had the management techniques to know how to run a large, complicated operation. By growing larger, they were able to become more cost-effective and improve quality-control procedures.

Q. Why were well-funded corporations better able to control the quality of test results?

A. Not only is there overhead involved in quality control, but there’s a danger that if you’re very small, you may cut corners because of costs. Also, if you put a large volume of testing through a machine, quality control is easier. I would argue that the big labs had better, more consistent results.

Q. Have efforts to curb the rising costs of medicine affected your industry?

A. Sure. Reimbursement has become an issue. No longer is the country comfortable with the continuing escalating costs of all medical care, and lab testing is one component of that. Part of the problem is that there are more tests to do. We are getting better health care, but that is not for free.

Q. Are physicians being more careful in choosing which tests need to be done?

A. People have argued that in physician-owned labs, the doctors may have a financial incentive to order more tests.

Q. Do you feel that doctor-owned laboratories should be outlawed?

A. It seems to me that there is an inability of the industry to manage its own affairs in an appropriate manner and there is a need for some sort of legislation to restrict some activities.

Q. Your laboratory is not owned by physicians. So would legislation against doctor-owned laboratories open up more business for you?

A. I suppose somewhat. Concern about doctor-owned labs is not just about whether the doctors are making excessive profits but that they are motivated to purchase tests from the labs because they have a financial stake in them and not because the test results are good or their testing capability is ideal. If legislation is enacted that forbids doctors from referring tests to laboratories they own, we will be able to compete freely. Our job is to be better; and if we are better we will get the business, and if we aren’t we won’t.

Q. Is there also a trend toward consolidation in the clinical laboratory business?

A. We are now seeing reimbursement decreasing, and because of genuine concerns about quality there are moves to increase regulation of the industry. Under the Clinical Laboratory Improvements Act, come 1990 every lab will have to be licensed federally and be subject to doing proficiency testing.

So with increased demand for quality and the increased cost of capital needed to buy and replace sophisticated equipment, the increased complexity of running it, and declining reimbursement, a lot of people in the business are going to find it harder and harder to survive and many people are deciding to sell. Only the very efficient are going to survive.

Also, a whole group of independent laboratory owners are reaching the age of retirement anyway because the industry started 30 years ago. A lab tech who started his own lab then is now between 55 and 65, and he’s ready to retire. So, for that reason, there’s a sudden flurry of buying and selling labs.

Q. Why is there more concern about the quality of laboratory test results? Is it because of cases such as that of Central Pathology Services Medical Group, which the state recently shut down because too many Pap smear test results were inaccurate?

A. I think what has happened is the major companies in the business have always pushed quality. There has been a steady gain in market share by the large labs over the smaller labs over the last 10 years. I think part of that is because they have been able to do a better job.

Q. Was Central Pathology a small operation?

A. It was a small part of a large lab. I do not know what happened in that case.

Q. One of the accusations in that case was that the lab technicians were overworked and trying to do too many tests a day. How could that have been prevented?

A. It is a question of each company’s internal policies. We have very strong policies about how many tests anyone can do. (Lab technicians) are all paid a salary and are not paid by the test. They have ongoing training programs. We rescreen 10% of everything we do at random.

Q. Is it legal to pay technicians by the test?

A. As far as I know, it is not illegal today, and some labs do it. We believe we should take that pressure off the technician.

Q. What regulations currently control the quality of test results in laboratories?

A. For a start, every major lab that does business with Medicare has to be licensed by Medicare, which makes routine inspections.

Q. Does the state also license labs?

A. It depends on the state. In California the regulation is very stringent.

Q. It seems that price competition in such a cost-conscious market could undermine quality.

A. We in fact have made the decision internally not necessarily to compete on price. Our list prices are significantly higher than some of our competitors,’ and we’ve said in order to provide a product we believe in--and we can stand behind and we can sleep at nights with--this is what we have to charge.

Q. Can you persuade insurance companies that they should pay your prices?

A. I don’t think insurance companies are a problem. They understand these things, and you can deal with them fairly rationally. The biggest problem is with the physicians. But many of them also understand. That’s why we are still in business.

Q. Do health maintenance organizations and other managed care systems negotiate directly with laboratories on prices?

A. Absolutely. Their contracts are competitively bid, and many of the HMOs are in financial difficulty. So they are very tough to negotiate with. We have walked away from a number of them.

There is a great attraction to an HMO because of the large amount of business involved. We have had to make some tough decisions. If we don’t think we can generate the sort of money from that contract that will allow us to maintain our quality standards and reinvest in the business in a way we feel is appropriate, we will walk away from it, and we have.

Q. What are your corporate goals?

A. What we want to do is to be the premier lab in the West. The way we’re set up, we really only operate in the western United States. We have a sister company, MetPath, that operates in the East. We are highly regionalized, highly decentralized and do as much as we can in facilities close to the client. But we do also have access to MetPath’s esoteric reference lab in New Jersey to do highly specialized tests.

Q. Will you focus on metropolitan areas? Or will you branch out to rural America?

A. Essentially our prime focus is in the metro areas, although we have samples coming in every day from outlying areas like Billings, Mont. Large metropolitan areas are where we are building labs and making acquisitions.

Q. Will increased size help give you name recognition in the market?

A. Name recognition is important, but size is mostly necessary to provide sufficient service. It’s tough to service a client if he’s two hours’ drive from anyone else. And so building a volume of business in one proximity allows you to be there whenever they want you. It is similar in dynamics to the problems of Federal Express.

Q. Who are your main competitors?

A. That varies city to city. In general there are three big guys: SmithKline Bioscience Laboratories, Roche Biomedical Laboratories and National Health Laboratories. And a second tier of people like Damon Clinical Laboratories. And then in every city, there is usually some local lab of substance and size who is a competitor. And then there are thousands of small labs, all of who can provide in a sense the best possible service because they are usually very close to their customers.

Q. Do you face competition in the many new home testing kits for such conditions as colon cancer and pregnancy?

A. I don’t see it as competition. I think there was concern at one time that some testing would move from the lab to the home. But now I don’t see it that way. These home tests are designed to be very easy to use and to give immediate information, but they do not provide a certain diagnosis. So if a person tests positive by using a home kit, the first thing he does is go to a doctor, and the doctor will draw a sample and send it to a laboratory.

The same thing applies to a kit used in a doctor’s office. The doctors know that even those have limitations, and the manufacturers acknowledge that they are only preliminary tests. So inevitably if someone tests positive, a sample goes to a lab.

Q. How are clinical laboratories doing financially? Hospitals are on the ropes. Is the clinical laboratory industry having troubles too?

A. My guess is that an industry analyst in the stock market would say on average it is not particularly good. As in any industry, there are wide fluctuations. There are a couple companies that do very well and many who are doing very poorly. I think there is a whole segment of the industry struggling to survive.

Q. Are they struggling because of the demand for cost containment?

A. I guess the question is whether the costs are too high and therefore they are having problems with the amount of insurance reimbursement, or is the reimbursement too low? I would argue that there are too many people in this industry and there are too many who are too small and aren’t efficient. I would be concerned about their cost-effectiveness and their quality. So I personally think that reimbursement is not an issue.

Q. So do you believe that the reimbursement that private and government insurers offer is sufficient?

A. Sure. We and our sister company MetPath indicated in congressional hearings that we would be supportive of some reduction in Medicare reimbursement given the size of the budget problems that the government has.

Q. Are you planning to issue more stock to raise funds to expand your company?

A. Not yet. I don’t think it would be appropriate. We’re just too new. When we complete our acquisitions in a couple of months, we will have revenues of about $130 million to $140 million a year. We’ll be bigger than Nichols Laboratories (in San Juan Capistrano) and a little bit smaller than Damon. Then we will be of more interest to stock analysts.

Q. Besides gaining access to public money, what are the reasons that you decided to establish a western company separate from MetPath?

A. We have an independent management that’s local. It’s headquartered here in California. It’s not headquartered in New Jersey. It allows us to move faster on our feet. MetPath has not done as well on the West Coast as on the East Coast.

It is a mistake for a laboratory company to try to be a national conglomerate because the business is regional. The doctor in L.A. really doesn’t care about how lab testing is done for the doctor in Chicago or the fact that you have a big lab in Chicago or New Jersey or anywhere else. The doctor in L.A. is worried about what happens to his tests in his town.

So, although we’re involved in multiple states, we actually operate in each city as if it is an independent market. Each has its own general manager, sales force and testing capabilities. And their job is to service their community.