Backgrounder on Laboratory Services

Back in the fall of 2013, Albertans began to hear rumblings about the plan by Alberta Health Services to further privatize and centralize laboratory services in Edmonton and surrounding area. Since then, AHS has moved quietly through the process of putting out a Request for Proposals to secure a “preferred proponent;” Sonic Healthcare was chosen to be the private provider of lab services on October 17th, 2014.

Throughout this entire process, the previous government completely failed to present a reasonable case to Albertans explaining why the further privatization of this essential and integral part of our healthcare system is necessary. There was a lack of public consultation and involvement throughout the process for the $3 billion, 15-year contract that was awarded.
Most importantly, the previous government had not answered neither the question of who would make decisions about patient care, nor on what basis: the narrow interests of shareholders or the interests of patients and the public good?

Fast-track to July, 2015, and we have yet to receive answers; we continue to be in the dark as to how far along these contract negotiations have proceeded. What we do know is that the new government made a pre-election promise to do away with the ‘costly experiments in privatization of health care”. We are hopeful that they will fulfill this promise, and work to protect and expand our public health care.

What we have been able to find out:

• This “State-of-the-Art Lab” will also perform private sector and out-of-province testing.

• The RFP includes a number of mechanisms like co-pay or user pay “utilization incentives” that allow the bidder to increase its profit.

• Since it is a private-public partnership (P3) arrangement, the successful bidder will put up the financing for the land and the new lab facility, and Albertans will repay it with interest. If AHS does not extend the contract at the end of the 15-year term, Albertans will be stuck with the bill to pay a lump sum for the unamortized portion of the land and facility built by the bidder, and we will have to buy back the equipment.

• Almost all of the current routine hospital-based and private lab services for the city will be done in one core lab operated by the private corporation that wins the RFP bid.

• Small rapid response (STAT) labs, where results are ready in 45 minutes, will be located in hospitals and community health centers, and will be operated by the same corporation.

• The public sector lab, currently located at the University of Alberta Hospital, and which provides full diagnostic services, will cease to operate and all testing currently done there will be moved to the new private facility.

• Alberta Health Services and the previous government were positioning for the new lab facility to be the centralized site testing for Edmonton and North/Central Alberta lab services.

• Pathologists at the University of Alberta Hospital have publicly condemned a new private facility as not being in the interest of patients, saying it will impair timely patient safety and overall quality of care.

Overview of Sonic Healthcare:

• Sonic was a failing Australian mining company, with almost worthless shares, when it purchased Douglass Laboratories Pty Ltd in 1987. When privatization of the Australian healthcare system became entrenched in its social policy, owners of equity in Sonic began to profit enormously.

• In 2014, Sonic reported that their net profit for the year was up almost 15% on the prior year, at $365 million, with revenue growth of 12%, to $3.7 billion. Sonic’s EBITDA (net income with interest, taxes, depreciation, and amortization) margin improved by 17 basis points over the prior year.

• Per Sonic Health Earning Guidance (July 20th, 2015) and financial update:
“[Fiscal year] 2016 EBITDA (net income with interest, taxes, depreciation, and amortization) is expected to be in the range of $805-829 million [at current exchange rates], up approximately 20% on [fiscal year] 2015 expected statutory EBITDA. This guidance excludes future acquisitions and potential earnings from the proposed contract with Alberta Health Services, due to uncertainty around the commencement date.”

• Sonic is Australia’s largest provider of medical testing, with fifty subsidiaries operating in eight countries.

• Sonic’s Corporate Governance Overview (available on their website) indicates:
“[The] board of Sonic Healthcare continues to place great importance on the governance of the company which it believes is vital to its well-being and success. There are two elements to the governance of companies: performance and conformance. Both are important, but it is critical that focus on conformance does not detract from the principal function of a business, which to undertake prudent activities to generate rewards for shareholders who invest their capital.” [emphasis added]

• In May, 2013, 690 staff employed by the UK’s National Health Service (NHS) were told to either accept employment with the new private diagnostics company – the major stakeholder, a subsidiary of Sonic – or resign. Staff will lose their public pensions, childcare vouchers, and ability to live in NHS housing.

• In 2009, Sonic increased fees by 30% for some Australians, allegedly forcing some patients to pay up to $500 out-of-pocket after a hospital stay as part of a price dispute with insurers.

A brief history of lab services in Alberta’s major cities:

Edmonton

• In 1994, a $12 million dollar “State of the Art Lab” was opened in the Royal Alexandra Hospital (RAH).

• In 1995, various private, for-profit corporations amalgamated to provide lab services in Edmonton.

• By 1996 the RAH Lab was changed from full service to ‘stat’ or ‘rapid response’ when they contracted out the lab services to DKML (later renamed DynaLIFEdx).

• Then-Chief of Laboratory Medicine at the RAH, Dr. John Jacques, quit his job to protest the shutdown of the laboratory indicating that he had spent months trying to convince the government and the other players involved to centralize regional lab services at the RAH site. He was quoted as saying:
“I made my ace, but it didn’t really help. The government was very determined to privatize and their decision had not much to do with economics or with patient care.”

• In 2005, the privatization experiment was deemed a failure and all in-patient lab services in hospitals were brought back into the public sector, although DynaLIFEdx has continued providing testing outside of hospitals and urgent care centres.

Calgary

• In 1996, Premier Ralph Klein tried, and struggled, to get private, for-profit operators to take over lab services in Calgary.

• Due to lack of interest from the private sector, only three private corporations came forward, and they did not have enough capacity to take over the lab services from the public sector completely. The two corporations entered into a partnership with the Calgary Health Authority, which put up more than half of the funding and did much of the work.

• By 2006 the experiment was deemed a failure. The corporations pulled out, and all lab services returned fully to the public sector under Calgary Laboratory Services, which is a wholly owned subsidiary of AHS.