Blood money: pathology cuts can reduce spending without compromising health

The Mid-Year Economic and Fiscal Outlook (MYEFO) set the cat among the pathology pigeons late last year. One of the government’s flagged changes, estimated to save around A$100 million a year, was to abolish the bulk-billing incentive Labor introduced in 2009.

The industry mobilised, threatening to charge consumers significant out-of-pocket co-payments for pathology tests for blood, tissue and other bodily fluids. The threatened increases were well in excess of the A$1.40 to A$3.40 cut to the bulk-billing incentive, which companies received for not charging patients out-of-pocket charges.

A campaign was organised, focusing on the increased cost of pap smears. It included a petition supported by more than 200,000 people.

Health Minister Sussan Ley escalated her rhetoric, pointing out that Medicare was not designed to be a guaranteed bankable revenue for corporations, nor a taxpayer-funded payment to cross-subsidise pathology companies for other costs of doing business.

The minister noted:

… complaints from stock exchange-listed pathology companies about this MYEFO decision have revolved around impacts on ‘shareholders’ – not patients – exposing what is really motivating these criticisms.

The MYEFO-induced furore about bulk billing provides context for a wider “root and branch” review of pathology payments. As the Grattan Institute’s report, Blood Money, published today, shows, there is money to be saved in pathology. This can be done in ways that don’t affect patient access to needed tests.

Industry profit

The Blood Money report addresses several questions. First, why is bulk billing on the agenda for pathology tests at all? All out-of-hospital pathology tests should be bulk-billed.

There should be no “incentive” for pathology corporations to bulk-bill. Rather, bulk-billing should be a requirement to participate in this market.

The place of co-payments in health care is highly contested. Those who argue for co-payments say they help to reduce demand, particularly for frivolous use of health care.

But consumers almost never initiate pathology services. Professionals order tests to assist them to make a diagnosis or to track a patient’s condition. In those circumstances, there is no theoretical argument to use financial disincentives for consumers, in the form of co-payments, to limit demand.

Industry consolidation and technological advances have completely reshaped the pathology industry over recent decades. But the way governments pay for pathology services hasn’t kept up.

Fee-for-service was originally a way for individual consumers to pay their medical practitioner for professional services. Health insurance then evolved to provide insurance for those costs. Medicare, when it was introduced, followed the same model.

But what was suitable for cottage-industry medical practice is not necessarily appropriate as a payment system for big corporations. More than three in every four Medicare-billed pathology tests are analysed by one of two big corporations: Sonic Healthcare and Primary Health Care. Both companies suffered a share price drop when the MYEFO cuts were announced.

Many parts of the pathology schedule are now highly automated. The large corporations benefit from economies of scale as the costs of an additional test to run through an analyser are trivial. But Medicare pays the same for the tests processed by the machine for the thousandth patient as it does for the first.

Same service, lower costs

A 2011 discussion paper on pathology funding proposed that Medicare negotiate with providers to share the benefits of technological change by discounting the schedule for high volumes by, say, 5%. The Commonwealth Department of Health should dust off this paper and use it as a basis for proper commercial negotiations with the big pathology corporations.

The bulk-billing incentives should be in the mix as well. Serious negotiations of that kind would save taxpayers about A$175 million per year; A$100 million from bulk-billing incentives, the balance from a 5% trim.

The government should also consider going to tender for the right to bill Medicare for out-of-hospital pathology. In other words, companies would bid to be involved in the out-of-hospital pathology market by offering to provide tests at particular prices.

The tender specification might incorporate provisions that the price to be paid by government goes down after a particular number of tests is performed.

A pilot scheme of tendering should be established in Victoria for 2017, with the scheme allowing for multiple successful winning bids to ensure continued competition in the pathology marketplace. Tenders could be rolled out in other states after an evaluation of the Victorian experience.

Tendering should generate greater savings than the 5% trim.

Tendering introduces price competition into the pathology market. Rather than companies responding to a government-regulated price, they would have to specify the prices at which they think they can operate. If a company bids at too high a price, they may not be among the group of successful tenderers.

The 2011 pathology discussion paper notes strong savings from other departments tendering pathology services:

• Victoria has tendered out most of its regional public pathology services for more than 20 years. Negotiated prices are 65-75% of Medicare fees, equating to a 10-20% saving.

• Defence tendered pathology services for military personnel. It settled at 80% of Medicare fees, without patient initiation fees. This was equivalent to a 5% discount.

Neither paid the equivalent of a bulk-billing incentive. Further savings, on top of a negotiated trim, could therefore be achievable.

There are savings to be made in pathology payments and they should come from narrowing the margins of profitable corporations, not from cutting services to the ill and vulnerable.

In a time of increasing deficits, the government must prioritise reforms that reduce spending without compromising the health of Australians. Pathology payment reform provides an opportunity to do this – an opportunity that should not be missed.