Alberta Picks Sonic Health for $3 Billion Lab Contract

Other respondents to the lab test RFP were DynaLifeDx, Quest Diagnostics, and Mayo Clinic

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CEO SUMMARY: For more than a year, Alberta’s C$3 billion RFP to develop an integrated laboratory testing service for Edmonton and surrounding regions has been the focus of intense interest. On October 17, health officials announced that Sonic Healthcare Limited was the preferred proponent. The two parties will now enter into negotiations to finalize an agreement. Several hurdles need to be overcome before a deal is signed and construction begins on a new medical lab facility in Edmonton.

AT $3 BILLION, it’s the world’s biggest RFP for clinical lab testing services and, based on the October 17 announcement by the Alberta Health Service (AHS), Sonic Healthcare Limited will be in the driver’s seat for the next step in the RFP process.

At stake is a 15-year lab testing contract that covers Edmonton and the central and northern regions of Alberta. It involves 27 million tests per year and will pay C$200 million per year to the winning lab company. The process was launched in late 2013. (See TDR, September 30, 2013.)

In April, Edmonton newspapers reported that three commercial laboratory companies had responded to the RFP, along with Mayo Clinic. The lab companies were DynaLifeDx Laboratory Services, Quest Diagnostics Incorporated, and Sonic Healthcare.

DynaLifeDx holds the existing contract with AHS for lab testing in Edmonton. It is a joint venture between Dynacare, Inc. (a division of Laboratory Corporation of America) and LifeLabs Medical Laboratory Services of Toronto, Ontario.

Mayo Clinic’s proposal to AHS was for a different management and consulting arrangement involving lab testing services. For that reason, AHS officials decided to defer any decision on Mayo’s proposal until the established request-for- proposal process is completed.

Distinctive Aspects to RFP

There are several interesting aspects to this RFP for lab testing services. First, it is a rare example of a government health program willing to pursue full integration of clinical laboratory and anatomic pathology services in a large metropolitan area by contracting with a for-profit lab company.

Second, it is equally rare for any government health program to issue a sole-source lab testing contract for a period of 15 years. It is a sign that AHS sees value in selecting a compatible laboratory provider for the long term. Further, it is believed that the RFP includes an option for both parties to renew the contract for an additional period of years.

Third, this may be the first time that the world’s three largest publicly-traded laboratory companies have gone head- to-head for such an exclusive, government-issued lab testing contract. Because of that fact, after the final decision about awarding the contract is made, there will be keen interest among investors to learn what factors swung the decision to Sonic versus DynaLifeDx (LabCorp) and Quest Diagnostics.

 Unified Regional Lab Service

Fourth, THE DARK REPORT believes this is the most extensive effort to create a single, unified regional lab testing service by any government health program in the world. Population of the Edmonton metropolitan area is about 1.2 million and as many as 600,000 people live in the surrounding regions to be served by the proposed new lab testing service.

Should AHS and its selected lab partner successfully integrate lab testing services as planned, this may become a template for health systems in other countries to emulate. However, the scale of the challenge is not to be underestimated.

AHS officials have stated that the goal is to create a modern central laboratory in Edmonton that not only does the routine and reference testing for inpatient, outpatient, and ambulatory settings, but also supports the academic mission of the Edmonton University Health Centre and the University of Alberta in Edmonton, including medical training programs, research and development, clinical trials, and esoteric testing.

Bringing Tests to Alberta

AHS CEO Vicki Kaminski addressed exactly this point during a press conference. She was quoted by CTV News as saying, “We looked at things like cost and quality and the ability to do tests other than what’s currently being done. We do send a number of tests outside of Alberta and we’d like to get those tests done back in Alberta.”

Pathologists and lab administrators in the United States should take note of this statement. The use of reference and esoteric testing labs is much more extensive in the United States than in Canada. This is probably one reason why AHS wants to select a laboratory partner that is capable of expanding and managing the menu of new and future esoteric tests performed within Alberta that are needed to provide appropriate care to patients in the province.

AHS already operates an integrated lab testing service in southern Alberta. Calgary Laboratory Services is wholly-owned by AHS and serves the academic center, hospitals, and outreach providers in the city and surrounding regions. Thus, the lab testing business model proposed for Edmonton has been developed to be consistent with this experience and the lessons learned.

So why would AHS bring in an outside laboratory partner if it already has a working, integrated laboratory service in the southern region of the province? One reason could be to access the capital that outside parties could bring to this project.

Capital in Short Supply?

Assuming that the demand for capital within the AHS strips the available supply of money, it could be a wise strategy to engage outside parties to contribute the capital needed for the AHS to create a state-of-the-art lab and pathology testing service for almost 2 million people.

That could explain the 15-year term of the proposed agreement. It would allow the private lab company and any affiliated enterprises to fund the modern lab test infrastructure and earn an acceptable return on investment. Meanwhile, the physicians and people of Alberta get a top-flight, modern lab testing service that might just turn out to be the envy of people living in other provinces of Canada. For all these reasons, Alberta’s lab contract strategy may provide a road map that government health programs in other countries could decide to study and copy.

 

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