The pathology sector in Australia is no longer a cottage industry. It is dominated by a handful of billion-dollar enterprises that analyse blood, tissue and other samples. These tests enable timely diagnosis of a range of illnesses and allow clinicians to optimise treatment by ensuring patients get the right mix of medications for specific conditions.
The sector uses advanced technology, involving high-cost specialist equipment rather than individual pathologists equipped with a microscope. It’s big business. The overall Sonic group, which includes one of the two leading services, last year reported annual revenue of more than A$4 billion.
As last week’s Grattan Institute report and a new lobbying campaign indicate, it’s also a sector full of confusion and controversy.
Confusion and controversy
The controversy comes from the proposed removal of bulk-billing incentives for pathology tests, announced in December. Critics claimed the changes will adversely affect the disadvantaged (who would be left out of pocket) or inhibit clinicians from ordering appropriate tests.
Health Minister Susan Ley responded that Medicare exists to foster public health. It is not a gift from the taxpayer to pathology service providers.
Some of those providers are owned by private equity firms, some are listed companies such as Sonic and Primary, and one – dominant in Western Australia – is the health services conglomerate St John of God, a religious entity.
Controversy also reflects the regulation of the sector. Several major players operate internationally and have diversified. Some, for example, offer diagnostic imaging, medical software services, insurance, drug testing and paternity testing. Some are parts of conglomerates that include clinics and hospitals.
Canberra has taken a light-touch approach to regulation, on the basis that oligopoly (market domination by a small number of enterprises) results in economies of scale, administrative convenience (it’s easier for Canberra to deal with 50 rather than 5,000 players) and nationwide access to the tests that we take for granted.
Although bigness isn’t bad, it does raise concerns. The dominant players continue to acquire established businesses and market entrants, with occasional push-back by the national competition regulator. They have also engaged in incentive practices that in other industries would raise eyebrows.
Profits and services
The sector is currently crying poor. The dominant players, however, continue to grow.
That growth is attributable to acquisitions and to a focus on cost reduction – offsetting fixed costs for premises, equipment and consumables through a scale that allows them to run tests continually. Insiders refer to ongoing reduction and casualisation of the overall workforce, alongside debt-servicing attributable to the cost of overseas expansion.
In thinking about conflicting claims, it is useful to remember that pathology services in the private sector are business, not philanthropy. In fiscal terms, they are good business: strong cash flows, respectable profits (A$363 million and EBITDA of 20% for Sonic last year) and positive signs for future growth.
It is also useful to remember that pap smears and other tests are not a luxury. They are social rather than specifically individual costs; they should be publicly funded.