Public Brief on the proposed Mega Lab to Ontario Ministry of Health and Long-Term Care

Position

The proposed takeover of CML by LifeLabs to create a giant corporate Mega Lab should be rejected by the Ontario government as contrary to the public interest for its potential negative impacts on patients and on sustainable healthcare. Significant concerns of access, quality, and value for laboratory tests need to be addressed by good health policy, and not left to private stock market transactions. At minimum, public hearings must be held to understand the impacts of the proposed take-over. We are asking the Minister, who has broad powers to decide license ownership, terms and conditions, including market share, “in the public interest” to take the time to consider the prospects for:

  • longer waits and greater distances for patients
  • lost opportunity to get appropriate testing, quality and cost benefits from managed fair competition
  • Inefficiencies and inconvenience for doctors and other health providers
  • Excess control and public trust vested in a very large unaccountable private sector entity
  • Higher prices and/or lower services from the high costs and loss of diverse industry activity and insight
  • Negative impact on the government’s stated intentions for laboratory reform and wider health sector reform

Strategic Value of Community Medical Laboratories

Laboratory tests are the most common medical procedure in the province.

  • Lab tests are a factor in 75 % of medical decisions.
  • Approximately 60% of tests are conducted in community medical laboratories, all privately owned, while the balance of tests are done in either in hospitals or by public health labs.
  • The average requisition or list of patient tests from a doctor costs Ontario healthcare approximately $35 each in lab costs.
  • The total annual cost of tests for community patients to OHIP is approximately $700 million.
  • Tests done outside of OHIP and paid for by patients have doubled in value in the last 3 years to $80 million.
  • Large corporate labs are already among the largest recipients of health care funds, bigger than many pharmaceutical companies.

Yet today there is no strategic outlook for lab testing in Ontario in part because large corporate labs have thwarted each of several efforts at reform over the last 30 years. The Mega-Lab appears to be premised on exploiting existing weaknesses rather than fixing flaws which undermine the crucial contribution that community lab testing needs to make now and in the future.

Unresolved Questions About the MegaLab

1. How is making senior and sick Ontarians wait longer and go farther for their tests in the public interest?

Timely community testing and results saves lives, time and worry and maximizes scarce health resources. Yet corporate labs have been free to organize service in a manner that suits their interests, not that of patients or the health system. In a 2010 survey of physicians in Toronto, a majority expressed concern for their patients i) being significantly inconvenienced in getting tests, ii) not getting their tests done in a timely manner, and iii) not getting tests done at all due to the burden involved. Elderly and chronic care patients are disproportionately affected. The result is a higher burden at emergency rooms and hospitals.

Despite some recent efforts by government, Ontario remains vulnerable to unilateral lab service downsizing of service by a Mega-Lab to save costs and improve profit. In addition to official specimen collection centres (SCCs) Ontario has dozens of informal test collection centres across the province in multi doctor clinics. These unlicensed sites’ locations, let alone status, are not registered with the government, despite representing an estimated 30% of community lab services. Some locations of this latter type in Brampton were given notice of service termination by CML just recently in the runup period to the take-over bid.

2. How is eliminating choice and allowing the virtual monopoly of one Mega-Lab in the public interest?

Under the current system, the three largest corporate labs have each been guaranteed 30% market shares, regardless of the quality of service they provide – a flawed approach that the Ontario government was reviewing for change before the takeover proposal was tabled. The oligopoly experience has led to three inescapable conclusions: lower service to patients, much higher costs to government and very high profits to large corporate labs.

Allowing two corporate labs to combine creates a Mega-Lab controlling:

  • service to 62% of all Ontario community patients
  • 70% of SCCs in the city of Toronto
  • 100% of lab service to community patients in dozens of communities

Under the Mega-Lab 40 more Ontario communities will face monopoly service in their region for the first time (see Appendix). All areas falling under exclusive market control of the Mega- Lab would face potential service reductions through consolidation. There is no mechanism presently to reconcile private Mega-Lab decisions to local health care needs.

Provincially, the new entity would control every vote of the Ontario Association of Medical Labs, the private trade association whose board votes are weighted to market share. The OAML receives provincial funding and has up to now been recognized by successive governments as the industry negotiator of terms and prices, despite being controlled by the three biggest labs. Resulting prices have been 20 points above inflation over the past 15 years, despite the significant cost reductions realized by industry during that period.

In 1997 there were 28 active community medical labs in Ontario. Today there are only eight, largely due to the limits on fair competition. There is significant public trust vested in private labs, from daily determination of serious health problems to support during public health outbreaks. There is no proof from any other jurisdiction that putting most of our eggs i nto one private basket is a recipe for good outcomes for patients. Previous efforts to build bigger health care companies based on a lab franchise from the Ontario government, such as MDS and CML itself, have only led to reverses and retreats with no benefits to Ontarians for their “subsidy”.

Ontario still has a choice. There are labs willing and able to offer better service at better prices under a fair competition framework that could be readily put in place. There are opportunities to work with hospitals and hospital brokering networks in a collaborative fashion. There are opportunities for labs to innovate to assist doctors by providing increasingly precise timely and useful information about patients. To make this possible there should be a maximum limit of 35% of the market for the size any one company.

 3. How are prices on average 15-20 % higher than necessary in the public interest?

Most of the original OHIP payment schedule for laboratory services dates from 1984. Today some common tests are priced as much as double what they should be, as the result of advances in testing science. While others are underpriced, there is an overall imbalance in favour of the medical labs, much more so for the large scale corporate labs. In the chart below provided to government some months ago, the pricing vs. cost and implied profits of some common tests are shown with the actual tests and lab made anonymous for competitive reasons. It is possible to cite a few specific examples such as BCHG (Blood Pregnancy test), currently $15.51 each, and FSH (follicular stimulating hormone – linked to reproductive processes) priced at $11.37, that could be reduced in half while complete blood counts (CBC), now $6.72, and hepatitis, now $14.48, could be done for one third less.

Examples of Common Over Priced Tests

Test

Direct Cost
per Test

Cost per
Reportable

All Cost Cost +
Margin
Current
OHIP Fee
A $         1.51 $        3.00 $   7.50 $     9.38 $        20
B $          2.20 $        7.00 $ 17.50 $  21.88 $        33
C $          5.38 $      10.00 $ 25.00 $  31.25 $        52
D $          2.00 $        3.50 $   8.75 $  10.94 $        21
E $          1.45 $        3.00 $   7.50 $     9.38 $        23
F $          1.20 $        2.50 $   6.25 $     7.81 $        16

 

A modernization of pricing is needed to capture the efficiencies that have arisen from changes in science, technology and management for the government. Allowing a Mega-Lab could close the door to the opportunity to realize those benefits. Without real competition the government will lack the diverse sources of market information needed to set prices effectively, and most importantly, to ensure that quality is maintained. Fair competition and fair pricing are required to encourage continuous innovation and effective oversight. A Mega Lab will predictably offer selected short terms price cuts in areas of its advantage to gain approval knowing it can control prices in the long run.

4. How is locking in higher costs to government by sanctioning the sale of CML at an extravagant price in the public interest?

According to CIBC the book value of CML (the takeover target company) is 16 cents per share, yet the take-over offer price is $10.75 per share. The purchase offer by LifeLabs is also very high compared to EBITDA or gross earnings (12x). The perceived value seems to be based heavily on not only the guaranteed continuation of high flow through of cash to owners and or investors, but on even greater returns. The economics of the deal seem to require not only perpetuating the old inefficiencies to patients and government but developing the Mega-Lab into an actual monopoly provider.

OMERS ownership of LifeLabs puts any provincial government in the uncomfortable position of having to either pay too much for lab work — to sustain a “cash cow” as it was characterized by one business commentator in the Globe and Mail in 2011 – a or alternately jeopardize earnings at a public pension fund. The fundamental question needs to be asked: why should the sector require such high returns to deliver its services? Establishing fair competition instead would provide far better value than an inefficient monopoly or even a continuing oligopoly.

 5. How would layoffs of up to 12% of the provinces skilled laboratory workforce be in the public interest?

Safety and quality in the medical lab sector are due to the ex perience, ethics, superior training and dedication of the staff. With business analysts predicting $25 to 30 million in extra profits from cost cutting in the first year alone , an enormous disruption in the sector could be in the offing. In fact, just to meet OMERS’ 8% standard target for annual return on investment, total cuts inside the Mega-Lab will have to be $50 million on an estimated combined cost of $275 million. Further, without fair competition to guarantee quality, any measures by the government to modernize the OHIP schedule can only be achieved through still further cuts – up to an additional $40 million annually. That could mean as many as nearly a third of the existing 4,500 staff in the proposed combined company. 1,500 layoffs would affect the stability of training programs and the supply of future skilled technologists, the third largest healthcare work force in the province, for years if not decades to come. There is some pointed irony that in these still difficult e conomic times one part of the workforce stands to lose jobs and security in order to enhance the retirement incomes of another part.

6. The laboratory license of CML is provided by the Ontario government for a relatively small annual fee. How is a sale price tag of $720 and $850 million in the public interest?

The total purchase price offered for CML is $1.22 billion. At the end of 2012 the OHIP regulated lab business was responsible for 59% of CML’s revenue suggesting an implied purchase price of $720 million for the lab license work alone. That price may rise still further based on how much of CMLs diagnostic assets have been disposed of and the extra weighting that may be due the lab side by virtue of its higher profitability.

For the long standing owner operated community labs who have served the public professionally for over 40 years it has been disturbing to see the excessive unregulated profit taking in each wave of consolidation that leaves behind no productivity, service improvement or indeed any enduring benefit to the industry or the government.

7. How is delaying and inconveniencing the province’s doctors and other authorized health providers in the public interest?

Doctors depend on timely results. If they are late or have to be retaken then the doctor’s time is wasted. Moving testing centres out of communities and neighbourhoods creates delays and uncertainties. Recently the OAML, acting on behalf of large corporate labs, even requested that labs be paid additionally for the urgent notifications labs are required to make to health providers of serious test findings. This gives an indication at how remote a still larger Mega-Lab is likely to be in its thinking from the personal medical needs of individuals. When it comes to supporting the work of Ontario’s healthcare providers for patients, whether they are doctors, nurses, dieticians or others who rely on our tests, bigger is definitely not better.

8. How is this timing – a takeover and the creation of the mega lab while the government is in the middle of laboratory reform – in the public interest?

The Ontario government has undertaken reviews and had made clear that it intends to act to reform the sector, as recently as a sector meeting in May. Why wouldn’t the large corporate lab companies simply wait until the government has completed its deliberations? What are they afraid of? Should a company prepared to usurp the government’s prerogative be given the privilege of an even greater share of the market?

9. How is rewarding large lab companies that have effectively over-charged Ontarians hundreds of millions for their services over the past 15 years in the public interest?

Over the past 15 years, large corporate labs have been able to set prices and resist change. The result is an overcharging above fair pricing that is in the neighbourhood of $1.1 billion. As early as 1997 the Commissioner of the Competition Bureau of Canada wrote about excessive profits and the need for an efficiency deflator to stave off distortions such as over-consolidation and rewards for cost saving over true efficiency and effectiveness.

10. How is making the sector much less transparent in the public interest?

The new Mega-Lab will be even less transparent than the large corporate labs are today as the only publicly held Canadian company would shift into privately held hands. A third large lab company is owned by LabCo, one of the largest US lab companies. The Auditor General has twice called for changes to make the sector more, not less transparent as has the government itself in a general way in its Excellent Care for All act and its recent reform measures.

For more information please contact:
Ontario Coalition for Lab Reform
c/o 1262 Don Mills Road, North York
(416) 689-2166 info@oclr.ca

 

 

APPENDIX I

– Regional Impact – Communities that will enter into monopoly service for first time (in community or nearby in Region)

Communities County or Region
1 Trenton
2 Belleville Hastings county
3 Bancroft
4 Sarnia Lambton County
5 Point Edward
6 Owen Sound Grey County
7 Hanover
8 Georgetown
9 Oakville Halton Region except Burlington
10 Milton
11 St. Catharines
12 Port Colbome Niagara except Niagara Falls
13 Grimsby
14 Fort Erie
15 Welland
16 Niagara-On-The-Lake
17 Barrie
18 Collingwood Simcoe County except Orillia
19 Stayner
20 Alliston
21 Wasaga Beach
22 Bradford
23 Borden
24 Cornwall Stormont Dundas Glengarry except Winchester
25 Sudbury Entire District
26 Lindsay Victoria County
27 Cambridge
29 Kitchener Waterloo County except 1 in Kitchener
30 New Hamburg
31 Kitchener (except 1 of 6)
32 Guelph Wellington County
33 Fergus
34 Thornhill
35 Newmarket
36 Kingsway Metro Toronto
37 South Etobicoke
38 Agincourt
39 Malvern
40 Branson Bathurst
41 Bendale (Scarborough)