Gordon Campbell on a desperate health system merger of lab testing services

The economic version of the sound of one hand clapping is a “market” with only one provider – and that is exactly what the three DHBs in the Wellington region now seem about to create, as they chase after cost saving “efficiencies” in laboratory testing.

On March 6, the three district health boards in the Wellington area are due to make a final decision on changing the way they purchase pathology services i.e. the laboratory testing of blood and tissue samples. This is an absolutely crucial cog in the health system. Over 70% of the healthcare decisions for diagnosis and treatment are based on laboratory results. Historically, it has been common for some labs to serve hospitals – and some to serve GPs, via what is called “community lab testing.”

Until last Monday, there were still two contenders in the running to become the single provider for all hospital and community lab testing in the region. Hutt Valley DHB and Capital and Coast DHB currently get their community lab testing done by Aotea Pathology, which is a joint venture (employing some 230 staff) between the New Zealand-listed company Abano Healthcare and the Australian-listed company Sonic Healthcare. These two DHBs run their own in-house hospital lab testing. The third player, Wairarapa DHB, gets both its hospital and community lab testing done via a separate contract with Sonic.

As I say – until last Monday, the three DHBs were on the brink of creating a single private provider for a new combined service, due to begin in November. As Tim Hunter explained in an excellent Dom-Post article published early last week the lab testing ‘market’ in this country is already dominated by only two (Australian-listed) companies, and the final selection was thought to have come down to a straight choice between Aotea and the Australian-listed private hospital operator Healthscope.

As Hunter pointed out, Healthscope already dominates the pathology business in New Zealand, with Wellington being one of the few major holdouts still in Sonic’s hands. As he adds, a 2013 report on lab strategy carried out for the DHBs had already noted that the market is “highly concentrated” and dominated by only two firms, Healthscope and Sonic. “Further concentration of the market,” the report said, “would reduce effective competition and might, in the long term, lead to collusion.”

Since then, Healthscope has mopped up Sonic’s last remaining service contract in Auckland – and this reportedly comes on top of Sonic’s failed tenders for pathology testing work of DHBs in Hawke’s Bay, Canterbury and the southern South Island. If Healthscope wins the Wellington contract, this would mean Sonic retains a national presence only in Palmerston North and Whanganui. Thus, Hunter concluded:

The fear in some quarters is therefore that Healthscope might bid unrealistically low in order to knock off a competitor and dominate the market by itself.

That seem to be exactly what has now happened. On Monday, Aotea withdrew its tender. As Aotea chief executive Karen Wood told RNZ on Monday in this RNZ interview, Aotea withdrew from the tendering process because a quality service could not be maintained for the funds allocated to the merger. In this separate (and probing) interview with RNZ’s Mary Wilson, Hutt Valley DHB chief executive Graham Dyer indicated that another bidder had claimed to be able to meet the tender conditions. On the same day, a group of 20 senior pathologists released a joint letter they’d written to Health Minister Jonathan Coleman, in which they claimed the proposed merger would do serious harm, and amounted to a process of privatisation to save money. Last week, the Association of Salaried Medical Specialists (ASMS) released the findings of a telephone survey of 15 local pathologists; all of whom confirmed that medical specialists had not led the process of determining what was needed for the region’s laboratories. Just 9 of the 15 specialists had had any formal involvement in the contract specifications for the mooted merger, although 8 out of those 9 were highly critical of the process. They described it as “non-specific”, “unclear”, “insufficient consultation”, “too little, too late”, and said they had not been involved from the outset “where it mattered”. All 15 said the contract specifications process had not been robust. Moreover:

All 15 believed or feared clinical risks would increase or be created if the DHBs went down this path. Risks included loss of breadth of diagnostic testing with the public then having to pick up the costs of excluded tests, loss of training capacity, a focus on profit rather than quality, loss of control by DHBs, financial and governance issues, adverse effects on infection control which would result in more hospital infections and longer patient stays, and job losses.

On March 6, the three DHBs will revisit the issue. They have already indicated there may be delays. The carrot for the DHBs is the prospect of signing up the tenderer – almost certainly Healthscope – for a price that will deliver short-term savings. By doing so, however, this will wipe out the last vestige of competition for lab testing in our health system – thereby delivering a business monopoly in a crucial public service to a sole private provider. What’s the bet that this lucky provider will then have our health system over a barrel and will then be able to jack up their prices?

Essentially, this process of full privatization of an essential public service is very similar to loan sharking. Starve an organization of funds from central government and you push them straight into the arms of the predatory lenders on Main Street who will get you out of your short-term jam, sure enough; but they will also charge you exorbitantly for doing so, and land you in a worse situation, a bit further down the track. Inevitably, private public partnerships (PPPs) in health end up costing the taxpayer big time – if only because central government can always access the necessary funds far more cheaply than the private sector. Given the anorexic state of the health system, privatisation can hardly deliver more for less, but something more like the exact reverse: a decline in services that will cost more in the long term. That’s because profit, not quality, is the name of that particular game.

The British health system has found this out the hard way. For a while, there was a fad in the UK for PPPs in public health – over there they call them PFIs. The litany of health privatization failures in the UK makes for very grim reading, and they keep on occurring. History has never stopped New Zealand though, from repeating an experiment in market ideology that has already failed overseas. The DHBs in the Wellington region seem to be hell-bent on an exercise of this nature, and for the usual reason – they’re being driven by a desperate, short term pursuit of cost savings, imposed by central government.

Fiona Apple, Revisited
Fiona Apple tends to be vastly under-rated, mainly because of her eccentric personality. Trying to describe her body of work is a ‘lightning in the bottle’ task, although a couple of years ago I did give it a shot. Apparently, Bob Dylan’s new album – which is a collection of lesser known Great American Songbook standards – includes his take on the Cy Coleman composition “Why Try To Change Me Now”. This reminded me that F. Apple has done what’s arguably the definitive version, available here:

In addition, here’s Apple’s great live version of her own “Parting Gift” This is one of those breakup-as-exorcism kind of songs, and it is as simultaneously painful and amusing as anything by Leonard Cohen…

ENDS