A pathology industry insider who wishes to remain anonymous has sent in the following post:
“Every year I have a chuckle at the annual reports of whoever is left standing in corporate pathology…..and this year is just the same…..it never seems to add up. All the info below is derived from the annual reports on the ASX web site and the stats released on Friday here.
The big three Australian labs have just finished reporting their annual results with all the usual fanfare of a listed company. The figures for their (Australian) pathology practices for 08/09 are:
Sonic: $ 881m (up 9%)
Healthscope: $272.5m (up 8%)
Primary: $737.5m (up 1%)
Total: $1,891m
I think the big three are claiming an increase in revenue of about $100m for 08/09 against 4.8% in market growth
This is against a back drop of the government statistics of approx $1 972m medicare benefits paid for pathology (up $97m) or $2 133m in medicare fees charged (up $110m) in 2008/09.
But what about the rest? Public pathology claims about 11% of the MBS fees. And then there are the other smaller operators, notably SJOG pathology (about $90m) and least another 20 providers including ARL (only just recently acquired and presumably not included in the Healthscope figures for 08/09), Medlab, Medtest, Moaven and Partners Pathology and Austech in NSW, Adelaide Pathology Partners, Perth Medical Laboratories etcetera – and at least a dozen more boutique labs (histology and fertility) which all account for a relatively small but significant proportion of the pathology MBS fees.
Public pathology: $217-235m
SJOG pathology: $90m
The rest: $130m
This is where we start running into problems…..that makes at least another $420m of pathology…..and now a total of $2 330m (versus the government’s view of $2133).
And then because we know that MBS funded pathology has only grown by 4.8% then, at the most, there is only an additional $10m that this non-corporate group could have grown by…..i.e. only 2.4%. But at least anecdotally that would not seem to be the case. For example, in Perth during the last couple of years, a new pathology provider has secured at least 5% of the Perth metro market. In NSW all have benefited from the recent merge of two very large laboratories (and one would expect that the smaller operators would have had a disproportionate gain).
All the current hubris between corporate pathology and Roxon probably means that the reality lays somewhere in the middle…..but as the paymasters only Roxon and the government know the state of play…..what’s really happening Nicola?”
Having worked in the industry for over 20 years…………its quite simple. MBS fees are only part of the large corporate revenue stream, there are non medicare tests and commercial arrangements (drug screening, private hospitals) which would not come from the feds.
However it is also obvious that the corporate and StJOG books are for show, arranged to impress investors rather than be honest about the true facts. Primary is a good example, if you add up what Primary made last financial year in pathology/medical centres and then add in what symbion would have made if they hadn’t been taken over (first half 2007-2008 and simply double it – a way underestimation) then it adds up to a lot more than Primary’s revenue for 2008-2009 !! And that doesn’t include the 4.8% organic increase for the year. The revenue loss is simply lost business at everyone elses gain.
The real issue in private pathology is the impass …………… just how much profit should a private pathology company make at the public expense? Nicola Roxon has stated that whilst company’s continue to brag about 19.5% EBITs then there will be room for cuts in the MBS.
Its obvious that the level of service in private pathology has been declining over the years as cuts are made to accommodate decreasing MBS revenue so institutional shareholders get their returns. Costs increase faster than the revenue so margins are continually squeezed. This was obvious 10-15 years ago and is still obvious now, yet the financial review never seems to get that fact that pathology is not a high risk business and so doesn’t “deserve” high returns.
The shame is that the government, by hammering corporate greed has made the smaller players (often more service driven) less stable. One can see another round of consolidation as smaller firms exit the increasingly difficult market.
Maybe its time for corporates and their investors to leave this area and go into mining companies.
Maybe its time for charities to enter the market, provide a true pathology service to customers, bring the care back into what was a healthcare industry and give their “surplus” to other charities so they can make adifference too. Now there’s a business model the government wouldn’t cut revenue on……………………
Anybody got a spare $500,000 ?
I agree with the sentiments of both. I think the short term strategy of pushing the share prices will only push Roxon into the medium term of reduced fees and tenders. I think the quality of the work from the corporates has clearly started a steady decline (you pays for what you get). It is going to be interesting times and I don’t think that $500 000 will buy you a place at the table. There is apparently a new muti-million dollar group starting up at the end of the year called Australian Diagnostics Group with serious venture capital (from Ironbridge) that will be opening labs in NSW (Bella Vista) and Victoria. I don’t know how pathology can get out of this rut.