Audacious Lab Contract Shows Downside Risks

Auckland patients and physicians now coping with the “lowest cost” laboratory testing company

CEO SUMMARY: In Auckland, New Zealand, unfolding events may soon reveal the answer to a long-standing question in pathology: is there a point where deep cuts to payment for lab testing causes such a decline in quality and service that other health services undergo disruption? District Health Boards, to save about 20% of their lab budget, replaced a highly-rated lab testing company with a new entrant to Auckland. Since the changeover on September 7, patients and doctors have voiced their complaints.

EVENTS NOW UNFOLDING in Auckland, New Zealand, represent probably the single most audacious laboratory contracting project in a developed country during the past few decades.

In recent weeks, the negative consequences of this lab testing contract have become visible to patients and physicians in the Auckland region. Problems with the new lab testing provider are featured daily in the national news.

Contract Award In 2006

It was back in 2006 when, to further drive down the cost it paid for laboratory testing, bureaucrats at the three District Health Boards (DHBs) in Auckland awarded an exclusive, eight-year contract to LabTests, a division of Healthscope Limited of Australia.

Two problems were immediately obvious to any informed observer. The first problem was reimbursement. LabTests, as the winning bidder, had offered a price that was 20% less than the existing laboratory provider. Experienced laboratory professionals wondered how LabTests would survive on that reimbursement, since, among other things, it would have to spend money to build and staff a lab in Auckland that it didn’t have at that time.

The second problem is more interesting. The plan to implement the new, exclusive, eight-year lab testing contract would require LabTests to build a lab facility big enough to test 12,000 patients per day. On the contract start date, which turned out to be September 7, 2009, it would activate this empty new lab facility and start testing. Call this a “cold start,” as contrasted with a laboratory that is already in operation and must expand to absorb additional specimens (“warm start”).

On paper, this plan might appear reasonable. But, to the knowledge of THE DARK REPORT, there is no precedent for the “cold start” of a lab that would immediately handle 12,000 patients per night. In fact, in the United States, a lab that size would rank in the top tier of labs by daily test volume.

Thus, both LabTests and the DBHs were committed to a “mission impossible.” LabTests would have to build a brand new lab facility, as well as patient service centers. They would have to install new analyzers and instruments, then validate each instrument’s operation. Similarly, each of the hundreds of assays to be run in the lab would have to be validated and correlated.

At the same time, LabTests would have to implement a laboratory information system (LIS) along with the interfaces required to support electronic test ordering and lab test reporting with clinics and physicians’ offices. Of course, hundreds of experienced laboratory professionals would have to be hired and oriented to the laboratory’s scientific protocols and operational procedures.

Did Auckland’s District Health Boards violate the public trust by awarding an exclusive multi-year contract to a new laboratory company which had neither the laboratory facility nor the technical and operational staff in Auckland—and agreeing to a “cold start” of that laboratory on September 7?

From first public news of the contract award back in 2006, DHB officials were warned by a range of experts that their decisions were likely to: 1) put the health of thousands of patients at risk; 2) disrupt the smooth daily functions of a respected regional healthcare system; and 3) cause more money to be spent coping with the problems resulting from this audacious decision than would be realized from the expected savings.

Events Prove Critics Right

Now the events of recent weeks are proving the critics of the contract award and “cold start” approach to be right. Even though LabTests was allowed to avoid a “cold start” by starting transitional service to some areas on August 10 and August 24, problems surfaced immediately.

As reported by various press sources in New Zealand, these problems are numerous, exactly what an experienced pathologist or laboratory expert would predict. For example, to survive on 20% less money than the previous contract lab, LabTests reduced the number of patient service centers in Auckland from the 81 sites maintained by DML to just 56 collection centers. That’s a 30% reduction in sites and contributed to overcrowding and long waits as LabTests became operational.

Recruiting Outside Auckland

Next, to hire the hundreds of people needed to staff the new laboratory, LabTests recruited abroad. Patients were quick to complain about phlebotomists. Complaints included a lack of skill, collecting the specimen wrong so the patient had to return a second time, and a lack of good language skills.

Pathologists may be interested in how LabTests organized its medical staff. DML had 25 full-time pathologists. As reported in the New Zealand Herald, LabTests planned to start with 17 pathologists. Many of these were recruited overseas. On September 15, the Medical Council announced that six of the pathologists listed on the LabTests web site were not yet registered to practice in New Zealand.

Turning to clinical accuracy, the press is full of stories about cancer patients waiting weeks to get a diagnosis, of delayed access to pathologists to discuss test results, of lengthy waits for test reports, and of patients getting lab test results for another person.

Now that LabTests is operational and the inadequacies of its testing operation are visible to patients and physicians, the attention will shift to the District Health Boards. LabTests will get additional time to fix the problems. But what if these fixes are not enough? Anxious to protect their credibility and save face, it is unlikely that the DHBs would do something as simple as voiding the LabTest contract and signing a new contract with Diagnostic Medlab.

Unfortunately, regardless of how the DHBs resolve the current problems with lab testing in Auckland, they have already eliminated effective competition in lab testing from the region. That fact will greatly limit their options in coming years.


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