Pathology changes to test St John of God

THE Perth-based chief of one of Australia’s leading medical sector players – St John of God Health Care CEO Michael Stanford – has warned of a shake-up in the pathology business as a result of changing federal government policy.

Dr Stanford believes that significant federal funding cuts last year, and the imminent deregulation of collection centre licences on July 1, will have a significant impact on the sector, including his own pathology business, which has more than 1,000 employees.

“We are obviously a little bit worried because, as one of the smaller operators, we don’t have the (bigger players’) resources,” Dr Stanford said.

St John of God is the fourth biggest pathology group in the country but significantly lags the giants of the sector, listed companies Sonic Healthcare, Primary Health Care and Healthscope.

The sector that has had to withstand a 4.5 per cent cut in funding at the last federal budget, as part of a $416 million reduction over four years, after a decade of slow squeeze by the Commonwealth.

The Australian Association of Pathology Practices says a parcel of tests conducted today would cost about 10 per cent less than a decade ago in actual dollar terms.

While the budget cuts announced last year hurt, it is the decision to deregulate licences (currently restricted by market share) that is something of a double whammy as bigger players, and potentially new sector arrivals, move into areas where they were previously restricted due to a lack of licences.

“Looking forward, I can see there will be a lot more collection centres popping up in regular shopping centres,” Dr Stanford said.

Nearly one sixth of St John of God’s national workforce of 6,500 is in pathology, and its revenue from the sector is expected to be $105 million out of a total for the group of $880 million.

In WA it has seven laboratories and 43 collection centres. It sits in second place to Western Diagnostics, owned by listed player Primary Health Care, which has 64 centres in the state.

Dr Stanford said St John of God was aiming for a more premium end of the market in the wake of these changes.

He said there were also opportunities for rationalisation with smaller players, potentially in the not-for-profit- sector, and admitted that while selling the group’s pathology practice was not on the radar, it could also not be ruled out.

Pathology is an interesting test case as the federal government seeks to extend its health sector reach to include 60 per cent of the funding for hospitals.

To date, the industry believes the policy for the past two decades has bred a competitive environment, which has lowered the unit cost to government despite a growth in services as medical technology has developed.

AAPP CEO Katherine McGrath said after a long-term approach that had incentivised big productivity gains in the sector, the federal government’s latest policy changes could dramatically alter the diversified market that had developed.

“We think the previous levers in place were extremely good until the latest budget,” Ms McGrath told WA Business News.

“Now you will see more collection centres going in where they are not really needed.

“We believe that will drive up demand and drive up the cost of pathology, big time.

“The government is cutting rebates at the same time it is driving up demand and costs and that doesn’t seem logical to us.

“The result will be increased competition. The smaller players will be challenged in that space.

“It is like pharmacies and service stations, you don’t want them on every corner. You don’t hear about a lack of access to pathology.

“We think there are new players in the bureaucracy and they understand history. I don’t think they realise the productivity gains of the past decade or more.

“I think it is pure competition theory and health doesn’t operate well on pure competition.”