Steve Globerman says no
Senior fellow and Addington Chair in Measurement at the Fraser Institute
Private, for-profit companies operate labs across Canada for outpatient diagnostic testing. Public health labs and labs in hospitals and urgent care centres are government-run. Notwithstanding that private labs have been operating here for decades, they remain controversial. Opposition resurfaced again recently with Edmonton-based DynaLIFE’s takeover of community lab services from the provincial government. Critics claim the transition prioritizes profits over patient care.
The argument for privatizing diagnostic lab services is broadly the same as for private-sector provision of services such as road repairs, electricity and telecommunications. Namely, private owners have what economists call “high-power” incentives to be efficient. These, in turn, are linked to expected profits. In a competitive market with informed consumers, the only way suppliers can increase their profits is by being more efficient: by lowering costs and/or improving quality of output. In state-owned-and-operated enterprises, incentives to improve efficiency are weaker and more indirect. Namely, consumers and other stakeholders must lobby politicians and bureaucrats to effect change or must vote new politicians into office. Hence it’s unsurprising that research supports the proposition that private firms are more efficient than comparable state-owned firms.
Diagnostic labs in Canada aren’t directly compensated by final consumers. Rather, provinces negotiate contracts with private companies through a request for proposal (RFP) competition. Labs technically have only one primary paying customer, i.e., government. In the case of outpatient diagnostic testing, traditional competition within the marketplace is thus effectively replaced by competition for the marketplace.
In principle, competition for the market should produce outcomes similar to competition within it. Namely, the market should be served by the most efficient firm that offers the lowest quality-adjusted prices while providing acceptable returns to shareholders. Some critics argue profits represent forgone resources that could have been spent on patient care. But profits are incentives to innovate, which is the main avenue for long-run efficiency improvements. Conversely, the incentives in a government bureaucracy discourage innovation, since rewards to decision-makers in a bureaucracy are only weakly, if at all, tied to innovation, especially if it harms the financial interests of entrenched interest groups such as public sector unions.
An indirect benefit of RFP competition is the information provided to government about the costs of diagnostic lab testing. Companies’ responses to fee-for-service RFPs issued by the government provide insight to health ministries regarding reasonable budgets for diagnostic testing done by public labs.
The net benefits of privatizing diagnostic lab services depend on how well the government runs its bidding process. Still, evidence suggests that competition can be robust even when only two firms are competing in or for a market.
Ross Sutherland says yes
Author of False Positive: Private Profit in Canada’s Medical Laboratories
Our healthcare system would have more money for care, better integration, patient access and working conditions, and more democratic and transparent decision-making if it used only public, non-profit medical lab services.
For-profit companies such as Alberta’s DynaLIFE make most of their money from the public. Yet we don’t know how this taxpayer money is spent. What are the senior staff salaries and the profits paid to DynaLIFE’s parent corporations, LifeLabs and the US multinational LabCorp? We don’t know how the company’s compensation is calculated, its scope of services or other contract details. This business confidentiality reduces accountability and limits public policy discussions.
Government studies and academic research have long found that for-profit labs cost more. In 1995 Ralph Klein cut payments to private labs by 40 per cent. This—and the companies’ resistance to integration—led to the formation of the non-profit Calgary Laboratory Services, a recognized world leader. Similarly, in 2017, Medicine Hat’s for-profit lab was found to cost more, and the work was transferred to the public sector.
Why are private providers more expensive? Piecework rates, at the core of most private-sector contracts, increase marginal costs. It costs more for private companies to raise capital than for government to issue bonds. Profit taking and negotiating, renegotiating and litigating government contracts increase costs. Overuse is a consistent symptom of for-profit lab delivery. And more possibilities for corruption raise the cost of private providers. Meanwhile, the theoretical safeguard of contracting-out—competition—has disappeared. One or two companies dominate every publicly paid for-profit medical lab market in Canada. DynaLIFE’s Alberta monopoly is one of the tightest.
A broader concern with having two publicly financed lab systems (one public, one for-profit) is less efficiency and higher costs. Each requires its own government bureaucracy, payment system and managers. Different workflow patterns in hospitals and the community result in underutilized capacity. Managing data, processing samples and overseeing quality are harder.
Even in a scenario when a private lab pays workers less, reduces patient access, has less quality control and mainly processes only simple tests, thus keeping costs similar to the public sector’s, the structure required for a separate for-profit system would take significant money from patient care.
System fragmentation also ships work from smaller hospitals to centralized private labs. This can mean the difference between a small hospital providing the range of tests needed for a local ER and inpatient care, or cutting back services.
If all provincially funded medical laboratories were integrated into a public, non-profit system, costs would fall, efficiency would increase, patient access and working conditions would improve and we’d be making healthcare decisions only in the public interest.
Steve Globerman responds to Ross Sutherland
Ross Sutherland makes several arguments for having all medical laboratories in Canada be public, which effectively means owned and operated by provincial governments who already fund most diagnostic laboratory testing under provincial healthcare plans.
One argument is that while the services provided by privately owned labs are paid for with taxpayer money, the costs of private labs are not itemized and publicly disclosed, in deference to confidentiality considerations. Hence, taxpayers don’t know exactly how their money is being spent to obtain diagnostic services, e.g., on salaries, to owners in the form of profits and so forth. Sutherland sees this lack of transparency as creating risks of opportunism and even fraud by private labs.
This argument is puzzling, because politicians and bureaucrats act as agents for taxpayers when it comes to the provision of all sorts of publicly funded services. If politicians and bureaucrats can’t be trusted to contract effectively with private diagnostic lab companies and manage contracts to ensure that companies fulfill their commitments, why should they be entrusted with the responsibility to manage entire provincial health systems, among other programs?
It’s also economically illogical, because a precise itemization of costs at a specific lab would involve arbitrary allocations in the context of companies that do business in multiple provinces. Such companies have common costs, such as senior manager salaries, accounting, insurance and legal expenditures, and bulk input purchases that are shared by facilities across Canada. Any allocation of common costs to specific facilities would be arbitrary. Likewise, imputing profitability to individual labs, or sets of labs, is meaningless, since individual labs in a nationwide network aren’t run as individual profit centres. What should matter to taxpayers are the terms and conditions of the private bids for providing lab services, not the cost structure underlying the offer prices of the bidders.
What should matter to taxpayers are the terms and conditions of private bids, not the cost structure.
A more meaningful argument by Sutherland is that the limited number of companies that participate in the bidding process for contracts, usually two at most, makes for a non-competitive process, with resulting high costs and/or compromised service quality. He also asserts that the cost structure of private labs is higher than that of public labs, in part because governments can borrow money more cheaply than private companies can. To support this he cites two instances when provinces transferred work to public labs from private labs because expected cost savings weren’t being realized.
While a bidding process is likely to be more competitive when there are, say, four or five bidders rather than two, economic theory and empirical evidence don’t preclude a competitive outcome when as few as two companies compete to serve a market. Moreover, provincial governments have substantial market power as monopoly buyers of diagnostic lab services. In a bargaining environment where a single buyer is contracting for services from a small number of suppliers, a competitive outcome is certainly possible. Moreover, for-profit diagnostic labs have continued to operate over a long time in several regions of Canada. A reasonable inference to draw from this is that private labs generally deliver value for taxpayer money.
Sutherland worries about duplication of overhead costs such as management salaries in a system where a government finances and supervises public and private labs. In fact, one of the benefits of contracting out lab services is that it reduces the administrative burden on provincial bureaucrats, who would otherwise do more day-to-day administration and monitoring if all labs were public entities. The performance of private labs also provides insight to politicians and bureaucrats who administer health systems about whether public labs are operating efficiently. Indeed, benchmarking an organization’s performance against those doing similar activities is common in the private sector to assess whether the organization is performing as well as might be expected.
The assertion that all decisions would be made in the “public interest” if all diagnostic labs were public entities is belied by the long waits Canadians endure to see their family doctors (if they even have one) and specialists. Clearly politicians and healthcare bureaucrats are failing to respond to Canadians’ demand for timely access to medically necessary services. The suppression of private markets for basic healthcare services is contributing to wait times that many patients and physicians view as not being in the public interest. The lesson to learn from Canada’s broader experience is that expanding the role of the public sector bureaucracy in the operation of diagnostic labs would likely do more harm than good.
Ross Sutherland responds to Steve Globerman
Professor Globerman’s assertion that competition will drive cost savings, efficiencies and innovation in laboratory services is derived from abstract classical economic theory. In fact, this privatization defence has no relationship to the real-world history of for-profit medical laboratory companies or their impacts in Canada.
In the mid-1970s hundreds of small private labs were delivering publicly funded patient care. At this time of maximum competition, the five provincial governments using for-profit labs all had growing concerns about quality, conflicts of interest and escalating costs. Over the ensuing two decades many attempts were made to control utilization, limit fraud and conflicts of interest, make fees more reflective of actual costs and improve quality. All were stifled by for-profit company opposition.
By the 1990s uncontrolled private lab costs forced governments to unilaterally cut payments: by 11 per cent in Ontario (1993), 20 per cent in Manitoba (1995), 45 per cent in Alberta (1995) and 20 per cent in BC (2004). To limit private-sector-caused damage, Saskatchewan shifted most lab services to the public sector in 1995. The other provinces (NB, NL, NS, PEI, QC) have always primarily relied on non-profit providers.
Industry pressure to offset the payment cuts led to protected market share, less access for community patients to public hospitals, fewer community collection centres and new technology subsidies. All of these policies drove monopolization while undercutting patient access and entrenching system fragmentation. The changes also didn’t solve the problem of high costs.
Ontario’s 2015 Expert Panel Review recommended cutting a further $50-million from for-profit lab payments because of hospitals’ lower costs, the “significant profit margins” in for-profit labs and a “generous” payment structure. The 2013 BC Laboratory Reform Committee report echoed similar sentiments. Since the 1970s, in dozens of communities, the public sector improved access and optimized the use of expensive equipment. These programs included Hamilton’s Health Sciences Laboratory Program, the Hospitals In-Common Laboratories and Calgary Laboratory Services. All of these innovations were undermined by private-sector political campaigns.
Increasingly, governments are using requests for proposals to award long-term contracts for laboratory services. But proper government oversight, which Globerman notes as a requirement for the use of RFPs, has been tough to achieve. The inquiry into the 2013 multi-billion-dollar 25-year RFP for Edmonton’s community laboratory services found conflict of interest, a lack of transparency, poor record-keeping and undue influence from second-hand information. In addition, corporate confidentiality led to “doubts about the validity of the selection of the preferred proponent.” Concerns have also been raised about the RFP awarded to DynaLIFE.
Real-world experience in Canada shows that paying private, for-profit labs to provide services weakens care.
Diagnostic services are rapidly changing, with regular announcements of new tests and procedures and a fast-evolving healthcare system. In this context, the move to long-term contracts rather than promoting innovation is likely to create complex and expensive renegotiations with a sole-source provider and significant “barriers to entry” for other companies at the end of the contract.
Studies that indicate for-profit companies save costs are most often done by consultants hired by pro-privatization governments. Although the study results are released, the calculations and assumptions behind them rarely are. Studies that haven’t undergone public scrutiny can hardly be considered good evaluations of the information. Even when privatization savings are likely, they usually come at the expense of patients and healthcare workers.
Secrecy is also demoralizing to laboratory professionals, who should have significant input into major policy decisions yet are often cut out of the process. Similarly, backroom decision-making undermines public confidence in government.
Higher costs and the inherent inefficiencies of for-profit lab services take money away from other critically important initiatives, such as expanding the range of tests, increasing access points, developing new technologies, training staff and improving compensation to retain staff.
System fragmentation is particularly harmful to patients in small communities, whose samples are shipped to centralized private labs. This can increase turnaround times and lead to longer periods between specimen collection and processing, both of which affect quality.
Practical, real-world experience in Canada shows that paying private, for-profit lab corporations to provide essential medical services increases system fragmentation, undermines public healthcare, impedes innovation, costs often a lot more and undercuts democracy. Our healthcare system is stronger when all publicly paid lab services are non-profit and focused solely on the public interest.
