Labtests succeeds Sonic’s DML as the primary lab test provider in Auckland area

One of the world’s most interest experiments in government contracting for clinical laboratory testing services is unfolding in Auckland, New Zealand. Next Monday, September 7, Labtests will assume full responsibility for testing approximately 12,000 patients per day in a brand-new laboratory facility that has only conducted testing on a limited basis since August 10, 2008.

On that same day, Diagnostic Medlab’s (DML) existing contract with the District Health Boards in greater Auckland will terminate. Earlier, on August 18, DML’s parent company, Sonic Healthcare Ltd. (ASX:SHL) of Sydney, Australia, announced plans to shutter DML’s laboratory facility and write-off its Auckland-based business division.

Long-Awaited Lab Contract Transition in New Zealand Happens Next Monday

These events mark the latest chapter in an unfolding story in New Zealand that has implications for laboratories anywhere in the world that are paid in a fee-for-service arrangement by a government health system. It is a story that starts back around 2000 when DML won a government tender to become the sole source provider in the Auckland region for five years. DML became the primary provider of laboratory testing for office-based physicians in the area. At that time, DML was itself formed by the combination of two competing independent lab companies in the Greater Auckland area. To serve the new contract, DML invested in an expanded and upgraded laboratory facility which it occupied in 2003.

Fast forward to July 2006. That’s when three district health boards (DHBs) awarded the next multi-year pathology services contract to Labtests. This company is a brand-new entrant in Auckland and did not have a laboratory facility in the region capable of handling the daily lab test volume covered by the contract. There were three aspects of this tender award which sparked plenty of controversy:

  • One: Labtests won the 2006 tender with a remarkably low bid. Executives at DML immediately went public with their opinions that, for that money, Labtests would not be able to provide lab testing services of comparable quality and patient access.
  • Two: Information immediately surfaced that the design of the tender and the tender process may have been compromised by the participation of a pathologist on the government planning teams who had a financial interest in the new Labtest business. DML filed a lawsuit challenging the tender award and the manner in which the bidding process was developed and conducted.
  • Three: as it became public knowledge of how Labtests planned to radically reduce the number of blood collection sites, patients, physicians, and the press expressed strong concerns about the ability of the new clinical laboratory to provide comparable lab testing services. These issues continue to get attention in local newspapers and media outlets.

Following several years of extensive and interesting litigation in the New Zealand court system, Labtest emerged the winner of the multi-year laboratory testing contract. During 2009, it has spent a considerable sum of money to construct a new laboratory facility. During the year, it has been hiring staff. Given the rancorous fight over the tender award, DML emphatically resisted selling its existing laboratory facility to Labtests.

The current chapter in this story began a few weeks ago. With the cooperation of the District Health Boards, Labtests began a three-step process to ramp up its laboratory operations. On August 10, it began service in the Counties Manukau region, which represents about one-third of the total patients served daily. Step two happened on August 24, when service was launched in the Auckland region. On September 7, LabTests initiates service in the Waitemata region.

The next milestone is September 7. On that day, Labtest assumes full responsibility for providing all collection services, courier and specimen transport, and lab testing for 12,000 patients per day. Because of extensive press coverage, the performance of Labtest in meeting this challenge will be closely watched.

Both Dark Daily and The Dark Report will be covering different aspects of these important developments. Editor Robert Michel, during his visit to New Zealand last March, was able to speak with many pathology leaders about this situation. The pathology profession in New Zealand recognizes how government health system contracting and reimbursement policies are undermining the integrity of laboratory testing services in this country.

Related Information:

First health district switches to Labtests

New Zealand Pathology and Sonic Earnings Update

Labtests Laboratory Quick Facts & Briefing Paper