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June 19, 2007

To Err is Human: Developing a Safer Laboratory System

Most patient safety reporting systems concentrate on analyzing adverse events; injury has already occurred before any learning takes place. Progressive systems exemplified by the aviation industry also concentrate on analyzing close calls, which affords the opportunity to learn from an event that did not result in a tragic outcome.  Failure Mode and Effect Analysis (FMEA) is a method long in use in engineering to proactively evaluate system and product vulnerabilities. FMEA is a new way of looking at problem-prone, high-risk processes before an error occurs. By proactively identifying potential failures, actions can be taken to prevent or minimize the effect of an error. As an engineering tool, FMEA is used during product or process design and is intended to inform designers of any changes to the product that will prevent errors from occurring after launch.

A hospital laboratory can be viewed as an existing process (e.g. already launched) with many observed, preventable errors. FRACAS (Failure Review and Corrective Action System) and RCA (Root cause analysis) are additional Engineering tools that have specifically been designed to deal with observed errors. Preventing errors that have never occurred is also an important purpose of FMEA.

Errors occur in the clinical laboratory, some with potentially devastating consequences for the patient. Traditionally, these errors have been thought to be because of individual human failure. We assume that, with adequate training, education, and orientation, technologists and other lab personnel will perform flawlessly. Laboratory processes are designed on the premise that nothing will go wrong. Most labs have in place processes to identify, capture, assess, and investigate events that deviate from accepted policy or procedure. We have methods for tracking and trending incidents, errors, and accidents.

Now, based on long experience in the engineering field, health-care workers are looking at new theories of error prevention. These are based on the assumption that everything will fail, humans err frequently, and the cause of an error is often beyond the individual's control.

TO ERR IS HUMAN

In 1999, in United States of America, the Institute of Medicine released a report entitled, ‘To Err Is Human’, that detailed significant problems with patient safety in our health-care system. The report cited two large studies, one conducted in Utah and Colorado and the other in New York that found adverse events occurred in 2.9% and 3.7% of hospitalizations. In Colorado and Utah hospitals, 6.6% of adverse events led to death, as compared with 13.6% in New York hospitals. In both of these studies, more than half of these adverse events resulted from medical errors and could have been prevented.

When extrapolated to the more than 33 million admissions to United States hospitals each year, the results imply that between 44,000 and 98,000 Americans die each year as a result of medical errors. These studies show that more people die because of medical errors than from motor vehicle accidents, breast cancer, or AIDS. Total national costs including lost income, lost household production, disability, and health-care costs of medical errors resulting in injury are estimated to be between $17 billion and $29 billion.

The Institute of Medicine report made several major points. The cause of accidental injury is most often not careless people but faulty systems. These systems must be redesigned, and patient safety must become a national priority. The concept that errors result largely from the failures of systems, not from individual carelessness or inadequacy, is fundamental to the new effort to address safety. This runs counter to the traditional focus of medical training on individual performance.

June 14, 2007

Microsoft TechMela 2007: Convergence of Communications

I have decided to spend three days attending the Microsoft TechMela being held at Mumbai from the 14th – 16th June. This is a great event and has high energy with about 2,000 mostly young developers participating enthusiastically in the technical sessions and trying out moves on the six Xbox 360 gaming consoles installed in the foyer.

What impressed me about Microsoft is that the company having just had a major launch of Vista and Office 2007 is already planning and preparing for the launch of its new products – more about these later. Truly, this is a company that not only has the ability to anticipate future trends, but also the clout make them happen.

From Day 1, the major takeaways from the sessions were:

·         The next major inflection point in software development is here – from products and applications for individual PCs to the client – server environment to Internet and now on to service oriented applications.

·         The Internet has now evolved to the next version – Web 2.0 – with a huge number of applications and services available on the Internet. User created content is on the rise.

·         There seems to be a conscious move by industry leaders to work towards convergence – the PC, the Mobile Phone and the TV will soon be working in a truly interconnected way – a change that could happen sooner than you think – A Unified Communications strategy is very much on the cards from Microsoft.

·         Hardware performance will continue to improve – no end in sight yet. This is being driven by even higher amounts of digital information being created every second – from data to images to audio and video.

·         I was impressed by the focus on a technology called ‘virtualization’ in which a single piece of hardware such as a PC or a Server can run multiple operating systems and environments. This is being made possible by advances on both the hardware and the software front.

·         More and more analog devices will shift to the digital format – it was music and photographs at first – now it seems to be the turn of the telephone. The speakers were of the opinion that since digitization supports software advances, the pace of change of the technology could be very rapid indeed and the world’s telecom network may be in for a major overhaul soon.

·         Broadband connectivity is improving in all countries of the world and so is mobile phone usage – this is potentially very disruptive to many companies and business models.

Like most other industries such as telecommunications, financial services and manufacturing, healthcare is not immune to these changes that are on the anvil. Surely better communication, lower total cost of ownership and better interoperability between disparate systems can only benefit our industry.

June 04, 2007

Valuation Methods and Goodwill

Investopedia.com says, "Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.".

Goodwill, being an intangible asset, is very difficult to value. Purchased goodwill is normally the balancing figure between the purchase price of an acquired entity and the total fair value of the acquired assets, both tangible and intangible, and liabilities (say, in the case of liquidation). Frequently, however, the goodwill represents over half of the total purchase price.

Since lab services are increasingly commoditised, the value of goodwill can sway considerably depending on the acquirer/ seller. There are various methods to compute a business valuation, most of them taking goodwill into account indirectly. Net asset value, discounted cash flow (of future earning estimate), price-earnings multiple, etc are popular options of business valuation.

A general rule of thumb in the service industry is EBITDA (Earnings Before Interest Tax Depreciation & Amortisation) multiplied by a commonly used factor (depending on the growth potential, country, etc.) For example, in US labs, the factor is 7 to 8. A lab with an EBITDA of $10 Million per year would sell for around $70 Million. Now if the resale value of all the tangible goods (building, equipment, fixtures, etc) was $45 Million, the difference ($25 Million) accounts for 'goodwill'.

Note: In India, since the market hasn't quite matured in terms of M&A (Mergers and Acquisition) activity, the price-earnings multiple is not standardised. The factor is usually based on historic transactions. Until sufficient data gets collected, the 'discounted cash flow' method is used. Though more complicated, it is a viable option. 

 

June 01, 2007

Getting Acquired: How to Increase your Valuation

The Indian Clinical Laboratory industry is largely a story of the individual pathologist’s practice multiplied manifold.  You have worked hard as an entrepreneur and have built up a fairly good practice and reputation. Your lab is well located and the real estate value of the laboratory office has increased out-of-sight. You would like to retire and put your feet up but the next generation may not be interested in the family business. Now you may be thinking it is a good time to cash out and get acquired by one of the big players on the prowl especially since many of your peers have already taken the step.

Fortunately for you this is still a seller’s market. However, there are a few simple steps that you can take to increase your valuation and get the best price for the business that you have built up so painstakingly.

This is not a comprehensive list, but from my experience with talking to other labs in your situation these are some basic steps that you should not ignore.

·         Get your financial house in order: Do not mix up personal and business accounts, but keep them separate and at arm’s length. You should ideally have the last 3 years Profit & Loss (P&L) and Balance Sheet prepared by a competent chartered accountant and all details should be verifiable. The acquiring labs will certainly have professional accountants doing a due diligence on your financials. This will form the basis of the valuation.

·         Demonstrate growth in the business: Your potential suitors would like to see a lab that is steadily adding test volumes and revenues especially over the last 3 years. Sales data should be broken down by segment and source. If you have steady business from corporate accounts that will be welcome.

·         Get accredited: Your quality may be great, but it is better if this is certified by an accrediting agency. This is also a good way of changing some processes and introducing systems into the lab. Generally the lab should not de dependant on a single individual (you) to take all the decisions – but it should be process driven.

·         Decide how you would like to participate in the future: You may very well be the lab’s single most valuable asset. Getting acquired does not mean that you do not work there anymore. The parent organization may be more than happy to leave you in charge. Some of the major acquisitions in India have left the owner / pathologist in charge of the center even after the change in ownership.

·         Prepare your team for the change: Certainly getting acquired may change the way business is done around the place. There may even be some lay-offs. You want the change in ownership to be as painless for everyone as possible and the maximum onus for making this happen is on you. The aim should be ensure that the customer / patient is not inconvenienced in any way due to the change in ownership.

·         Get professional help: During negotiations, do get professional help. You may already know some reliable financial advisors or there are expert companies out there who can help you get the best out of the deal and tie up all the legal angles. While these advisors will charge you a small percentage for the deal, it may well be worth it in the long run.

Mergers & Acquisitions is likely to be an emotive issue – we have seen examples in the media recently of clashes between the doctor owners and the large corporations that are moving in on the healthcare scene.

I welcome your comments on this issue.


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