Health-care firms seek to protect their market share as governments cut back
JOHN NICOL,STEPHANIE NOLENJune11998
The battle for medicare cash
Health-care firms seek to protect their market share as governments cut back
Mike Harris ought to love Joseph Kurian. The Ontario premier is a fervid fan of free enterprise and old-fashioned hard work. Kurian is both those ideals brought to life. He came to Canada from India in 1961 to study chemistry, and 10 years later opened a small medical testing business. Back then, he had just three employees, including his wife. But after years of working long hours and weekends, the original two-room lab grew into a prosperous company called Alpha Laboratories Inc., with 250 employees. Today, Kurian works out of gleaming facilities in Toronto with the latest diagnostic equipment. One of the commitments Harris brought to office in 1995 was a promise of less government interference so that businesses such as Kurian’s might flourish. In 1996, he sent Kurian a letter congratulating him on completing 25 years in business. But now, Harris is poised to close that business down.
Kurian’s lab does tests ordered by doctors, such as those for thyroid function and cholesterol levels. It has about three per cent of the Ontario market in medical testing, enough to turn a healthy profit. Until last year, Kurian planned to keep growing. But under a bizarre regulation set to kick in next month, Kurian will be required to roll back his business to the size it was in 1995—even though his market share has doubled since then. Furthermore, the portion of the cash that his company has received since March 31,1996, as a result of its sales in excess of the 1995-1996 fiscal year’s market share—$3 million, Kurian says—must be surrendered via the province to bigger laboratories whose market share shrank during the same period. With $3.5 million recently invested in new facilities, and his business cut in half, Kurian says his business will be imperilled. “If it wasn’t the government doing this, it would be totally illegal,” Kurian says. “This is price fixing and conspiracy.”
ey, not patients. Without public debate, the provincial government and representatives of the Ontario Association of Medical Laboratories (OAML) reached an agreement in January on the regulation. In essence, regulation O.Reg.2/98 says that the total billable amount for lab tests in Ontario is fixed (as it has been since 1986), and so are the proportions of that total available to each of Ontario’s 22 licensed labs, based on their shares of 1995 business. Anything earned since then in excess of their 1995 shares (such as Kurian’s $3 million) is taken back, and redistributed according to the 1995 breakdown. For 1998-1999, the total billing cap is $415 million plus g| an increase of 1.5 per cent (last year, labs billed $481 million, and were paid from a total $415 million).
The new regulation will not save the province money, but will guarantee revenue for a large lab company that has close connections to the Harris government. The lab fight in Ontario is illustrative of the cutthroat struggle developing as Canadian governments limit health-care spending, and private companies seek to ensure they hold on to a piece of the shrinking pie. It highlights a facet of the national debate about the privatization of health-care services. And the Ontario lab regulation has already had what doctors call a disastrous impact on patient care.
The new rule, a Maclean’s investigation revealed, is all about mon-
Kurian says that is just fine—his and other small labs have no problem working with that total envelope, as long as they can compete for business (by providing doctors with fast, accurate tests, for example). But he challenges the province to explain why an individual cap is necessary, why each lab should be restricted to the share of the market it had in 1995, and why he should be retroactively paying back his profits to Gamma-Dynacare Medical Laboratories Ltd. and the other large labs (Dynacare and Medical Data Sciences Inc., known as MDS, the two biggest lab companies in the province, have 60 per cent of the market between them; their market share has fallen since 1995.) ‘We provide good service, we are open on weekends and 24 hours, we do house calls, and we have many satisfied customers,” Kurian says. “We have been growing. And now the government wants to restrict us, and to redistribute our profits to large labs that haven’t been providing that service.” The federal competition bureau also questions the regulation: in December, 1997, it advised the provincial health ministry that “the implementation of the corporate cap proposal is likely to have a number of adverse effects in the private medical laboratory system in Ontario”—citing among them distortion of competition and inefficiency.
Kurian and owners of three other small laboratories launch an
effort to overturn the rule in court on June 5. Provincial Health Minister Elizabeth Witmer refused to comment, citing the pending court case. That leaves the small labs and the doctors with no answer for one big question: why an avowedly free-enterprise government is meddling in a private-sector industry? The truth may have little to do with health-care spending, but lots to do with politics. With an industry-wide cap, labs cannot increase their profits by doing more tests, so they need to protect their market share from erosion by competitors. With regulation O.Reg.2/98, the wealthy large labs have their future guaranteed.
The OAML says the cap on individual companies is necessary to bring stability to the industry. “The lab business is a service to the people,” says Virginia Turner, chief executive officer of the association, defending increased regulation by the province. But the small labs cry foul: when the idea of the retroactive cap was put to a vote at an OAML meeting in September, 1997, it was defeated 14 to 10. Nonetheless, the board of directors, over which the two largest labs exert considerable influence, agreed to it with the province. Ontario had designated the OAML as the exclusive negotiating agent for the labs, despite repeated opposition from Kurian and other small lab owners, who were not members when the issue of the cap was first raised (they have since joined).
Gamma-Dynacare is owned by the Latner family of Toronto who,
their critics say, have close ties to Harris and his senior political adviser Tom Long. A search of election finance records since 1995 reveals that the Latners, through various companies, gave the provincial Conservative party $41,400 (in the same period, they gave the provincial Liberals $3,100). The retroactive cap was the second policy initiative by the Harris government that directly benefited Latner family interests. In March, the Latners were part of a. consortium that made a successful bid to the province to build a $500-million permanent casino in Niagara Falls.
Toronto-based Dynacare is an international firm, also operating labs in Alberta and the United States. In British Columbia, MDS and B.C. Bio Inc. control two-thirds of the lab market. In Manitoba, MDS has a partnership with health-care unions to run the province’s labs. (Medical labs in Quebec and the Atlantic provinces are publicly owned.) Private-sector provision of health services is a lucrative business. For example, Canadian Medical Laboratories Ltd., Ontario’s third-largest lab, last week announced a 25-per-cent increase in earnings in the first three months of this year. With governments cutting or freezing spending, health-care businesses across the country are brokering regulations to protect their profits. Michael Rachlis, a health policy analyst and member of the Medical Reform Group, a lobby organization for public health care, says that “these deals tend to be
1 can't believe this is happening in Canada— and by a government that espouses competition'
made privately out of premiers’ offices.” The big medical companies go straight to the top, he says, rather than dealing with policy developers or even the ministry of health. ‘They say, “We’re high-tech, we’ll give jobs, give us exclusive access to your marketplace,’ ” Rachlis adds. ‘The concern is that these sweetheart deals aren’t best for the public.”
Colleen Fuller, research associate with the B.C. branch of the Canadian Centre for Policy Alternatives, and author of a forthcoming book called Caring for Profit, says the big labs have worked hard to court politicians, and indeed to hire them.
Brian Harling, Bob Ray’s executive assistant when Rae led the NDP government of Ontario, works for MDS, and Elizabeth Cull, former NDP health minister in British Columbia, is working as a consultant for the firm. That, says researcher Fuller, is just one of many examples of political connections.
The large lab companies are known for other business-bolstering practices. “One of the reasons that tests get done is that they are needed, but that is only one reason,” says Michael Decter, deputy minister of health in the former Ontario NDP government, now a health-care consultant. “In a system where labs are run by the private sector, you do need government initiatives for control.” It is an open secret in the medical community that labs offer doctors inducements to get their business. These inducements include free rent for doctors’ offices in buildings owned by labs, or the payment of highly inflated rents for lab space in doctor-owned medical buildings. Although such practices are considered conflicts of interest by the Ontario Medical Association, the doctors’ organization, Maclean’s interviewed nine doctors, all of whom confirmed that the practices continue. “The concern has always been that these practices could lead to unnecessary testing,” Decter says. “There is not a strong code of conduct for the industry.”
Doctors also say that Dynacare is aggressive in pursuit of profits. Mike McBane, national co-ordinator of the Canadian Health Coalition, an Ottawa-based umbrella group of health-care workers’ unions, says Dynacare is known for “cream-skimming”—doing tests that are profitable while leaving complex tests that cost a great deal to be performed by hospital labs or smaller companies that need the business. “They are privatizing the profits, and socializing the losses,” McBane charges. ‘They are not capable of functioning without sucking money out of the public system.” Dynacare declined to comment on those allegations.
If the Ontario government pushes ahead with the lab regulation, it is not just Kurian and his employees who will be affected. Since January, more than 130 doctors have been told by the labs that formerly did testing for them to send their patients elsewhere. The doctors say this sharply decreases the quality of the care they provide their patients, who must now wait longer or
travel much farther for tests. “Four weeks ago, our lab called us up and said they were not going to service us any more,” says Dr. Diamond Alidina, a family physician at the Pickering Urgent Care centre, 25 km east of Toronto, which was served by Canadian Medical Laboratories Ltd. “Then the Dynacare lab next door closed up shop. No one wants to do our work, and our patients are suffering. It’s a result of the corporate cap.”
Mark Freiman, the lawyer representing Kurian and the other small labs, says the big labs realize they no longer have to compete to guarantee themselves a large share of the market, and they are eliminating costly services to doctors such as house calls, picking up specimens, and operating collection centres in medical buildings. They can do a set number of tests in a limited number of sites over the year, enough to earn their fixed income, he says.
That means no more little perks for doctors. Alexander Jones, a family doctor in Toronto, had a venapuncturist—a technician who collects blood for tests—on-site at his family practice until the regulation was introduced. Gamma-Dynacare paid 60 per cent of her salary, and so got Jones’s lab business. But at the beginning of the year, the lab let the doctor know it would no longer be paying, citing the regulatory change as the reason. “Now I have to send 90-year-old pa_ tients to the hospital in taxis where 5 they wait for hours for tests,” says | Jones, who adds that he is alarmed by I the regulation. “The province is totalg ly misguided. This is going to cost “ them money, because people won’t go for tests, there will be no more preventive medicine, and the patients are going to get sicker and sicker until they end up in the hospital. A hospital stay at $1,000 a day or a $20 test? You do the math.” Doctors also worry that late in the year, when each individual lab has done enough tests to meet its billing limit, they will simply stop doing them. “In October, where am I going to get a blood test done?” asks Alidina, the Pickering GP. Since January, Kurian has taken on patients from the 130 doctors who were dumped by other labs. “I have no idea if we will get paid for these tests,” he says, “but I’m not going to turn patients away.”
The small labs in Ontario are hoping the courts will force the Harris government to repeal the cap regulation. “I can’t believe this is happening in Canada,” says physician Larry Nicholson, medical director at Reese Nuclear Laboratories in London, Ont. Like other small labs, Nicholson is sure his lab will have to close if it is restricted to its 1995 market share. “The amazing thing is that this could happen in Canada, and by a government that espouses competition as desirable.”
While the labs fight it out, Ontario patients are paying the price. If the government regulation stands up in court, it may send a warning to patients in other provinces about the perils of privateenterprise pressures in a public health-care system. □
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