Sonic Healthcare stock slides on announcement of Medicare Australia funding changes

In Australia, funding for pathology services and clinical laboratory testing is now undergoing review by the government health service. Last month, when news broke that the Australian Department of Health and Ageing was initiating a review of pathology funding, there was an immediate response by the stock market, as reflected in the lower price for shares of Sonic Healthcare, Ltd. (ASX:SHL), Australia’s largest provider of pathology services and clinical lab testing.

stocks down

Medicare Australia plans to scrap a 20-year-old funding system for clinical pathology labs but it has not decided exactly what will take its place. Uncertainty over how changes in pathology funding will affect profits caused Citigroup’s Alex Smith to cut Sonic’s stock rating from “buy/medium risk” to “hold/medium risk.”

The rating cut resulted in an immediate dip in the value of Sonic Healthcare’s shares, with the price fluctuating during the following two weeks from a high of $A14.76 on January 19, the day the rating drop was announced, to a low of $A14.05. This represented about a 4% drop from the January 19 price and a reversal of what has been a largely upward movement of Sonic’s shares during the last six months of 2009.

According to an Australian Department of Health and Aging discussion paper, the government “has decided to move away from price/volume agreements for the management of pathology expenditures.” Medicare Australia is considering different ways to reimburse for pathology services and clinical laboratory testing. The Medical Benefits Reviews Task Group will review three areas of pathology services:

  • One, to establish appropriate fee relativities for Medicare Benefits Schedule (MBS) MBS items for different pathology disciplines;
  • Two, to identify groups of pathology tests that might be appropriate for different funding arrangements; and
  • Three, to provide detailed options for implementing tendering for selected pathology services, including:  1. Single supplier arrangements that would extend a monopoly to the clinical laboratory for a supply of testing for a specified time   2.  Specialized supplier arrangements that might involve low volume, complex tests; and,  3.  Multiple supplier arrangements, using open tendering to allow any pathology laboratory meeting the defined criteria to provide lab tests at the established price.

Correcting inequities in the fee schedule could result in much lower profit margins for some tests, while improving the margin on others. With cost-cutting as a primary motive for the government, the net impact for pathology laboratories is likely to be negative. However, some niche or specialty labs that do significant numbers of under-reimbursed tests could see a positive outcome.

Also on the table is elimination of Australia’s controversial “patient episode coning rule” that limits payments to no more than three tests per episode if they are ordered in a non-hospital setting by a general practitioner. Pathology laboratories in Australia claim that this effectively reduces overall reimbursement by as much as 10%, even though the tests ordered by the physician (and not reimbursed by Australia Medicare per the coning rule) are medically appropriate.

The Department of Health and Ageing, which oversees Medicare Australia, says it will hold discussions with stakeholders this year and expects to have new funding rules for pathology tests in place for the 2011/2012 budget.

Australia’s national health service is attempting to cope with the steady increase in laboratory test utilization. It views the steady growth in annual spending on pathology testing as unsustainable when projected into future years. However, as seen in other countries, government health policy makers commonly fail to acknowledge that increased utilization of clinical laboratory testing is often a direct consequence of other government health initiatives.

These health initiatives encourage physicians to do a better job of detecting chronic disease, then managing those patients in a proactive fashion. In both situations, physicians will need to order larger volumes of pathology tests if they are identify patients currently undiagnosed for diabetes, cardiovascular disease, and other chronic conditions. Then, once diagnosed, these same patients will need more pathology tests to monitor their condition and demonstrate that expensive therapies are working.

To ensure the sustainability and quality of their companies, the clinical laboratory industry in Australia will need to provide clear, convincing evidence regarding costs and efficiency. And to prevent clinical labs from taking an unfair burden of cost cutting, the pathology profession must be able to demonstrate how its services contribute substantially to positive patient outcomes—with substantial reductions to the overall cost per healthcare encounter.

Related Information:

Review of Funding of Pathology: Pathology Review Consultation Committee

Sonic Healthcare Falls on Citi Diagnosis

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