The business models of the major pathology companies are in the crosshairs of government and systemic reform.
The departure this week of Healius CEO Maxine Jaquet and the subsequent market optimism and share rally for the group says much about deeper systemic problems facing all three major pathology groups in Australia, as technology and government start challenging their long-standing business models.
Ms Jacquet, previously the CFO under previous CEO Malcom Parmenter (now CEO of GP corporate Partnered Health) was a serious casualty of bad timing.
Healius, like all the other pathology groups, had been hitting the government during covid with various tricks which pushed up the number of covid tests being processed at very low cost. Revenue post-covid inevitably had to plummet.
But Healius, unlike its major competitor Sonic, took a decision just over three years ago to offload its medical centre business to private equity group BGH. That decision, under Mr Parmenter, turned out to initially be genius, but it probably is also impacting revenues now for reasons outlined below.
Healius took $500 million for a business that may be worth near nothing thanks to issues it faces with various state revenue offices over potentially very large payroll tax liabilities based on their past operational structures.
ForHealth (the renamed Healius Medical Centres) believes strongly that it has restructured its centres in a manner that will allow it to defend any SRO payroll tax audits, but now it looks like that position is going to need to be tested in court.
It’s a headache that previous Healius CEO Mr Parmenter might have foreseen when he sold the business. In its prior incarnation (before Healius) as Primary Healthcare, the business had significant trouble with the ATO and had to pay back millions for upfront payments it made to GPs for what it said was the acquisition of their businesses but which the Federal Court ended up saying was effectively five-year-long work contracts.
Sonic has the headache that Healius would have had if it had retained its centres, as its corporate GP arm, IPN, is the largest GP corporate group in Australia, and it too is now in the crosshairs of every SRO in the country for payroll tax.
But there was also a big downside for Healius in selling its medical centres, which Mr Parmenter must have realised but took a gamble on.
Both Sonic and Healius had originally acquired their medical centres with the key aim of controlling and channelling pathology ordering from general practice to their own pathology labs. It was thought that the GP centres business never made a profit. It was primarily there to channel business upstream to the pathology businesses of the group.
In addition, both Sonic and Healius had positions in, or fully owned, the software patient management systems being used by GPs which created the pathology orders.
This isn’t to say that these vendors were involved in any channelling, but if you own the software, the GP practice and the upstream pathology group, and your business model is to channel to your own pathology labs, you are going to optimise every process you can to support that business model.
Sonic still owns 30% of Best Practice which is thought to command a nearly 70% share of the desktops of all GPs. At one point Healius fully owned Medical Director. It sold it to private equity in 2016 for $155 million and that group sold it to Telstra Health in 2021 for $340 million.
In 2016 Medical Director had a nearly equal share or more share of GP desktops than Best Practice, but this share position has diminished significantly over the years, possibly adding to the problems of the past model of channelling that Healius had in place for obtaining orders from the GP market.
Ms Jacquet became CEO at the same time that the channelling from its previous GP medical centre group was almost certainly starting to wear thin after not owning downstream GP medical centres for three years.
The other timing problem that Ms Jacquet ran into was that covid had kick-started telehealth in the GP sector.
Telehealth was almost fully funded during covid for GPs and following covid the government realised that it needed to keep some rebating of telehealth in place in primary care because it was so efficient.
With that decision foot traffic across all GP practices was destined to drop and stay lower per GP forever.
The obvious problem for all the big pathology companies here was that each had spent many years sub-letting space within GP practices so they could capture that foot traffic into their channel. Why would you walk a few blocks to a different pathology provider if you could one on the way out?
Pathology rents became the second highest income earner for GP practices after the commission each practice took from its contracted doctors. The advent of telehealth put a very big dent in this channelling strategy for all the pathology groups.
As most Healius GPs were already sending their patients mostly to Healius labs via branded request forms, or by sending them next door to a co-leased facility, there was a certain amount of continuing momentum in the channel that Healius had when it sold its centres.
Mr Parmenter may have bet that what had been put in place over many years of pathology group ownership in terms of channels would continue for a long time after not owning the downstream GP channel itself.
Patients are allowed to have their pathology done at a lab of their choice. But no patients are aware of this. Instead, if they are visiting an IPN GP practice they are given branded paperwork that directs them to a Sonic lab, or that practice will have a Sonic lab on site at the practice.
The same is true for co-located Healius and ACL labs.
It is not legal to formally channel patients to a particular lab as it is not legal for a doctor to channel a patient to a particular pharmacist. But for decades all the major pathology labs had managed to secure business through informal and structural (eg, co-location) means of getting GPs to channel patients to their labs.
Part of Ms Jacquet’s demise was that this model for various reasons was starting to break down.
After the announcement of Ms Jacquet’s departure the Healius share price rallied and some analysts expressed optimism around the leadership change, suggesting the new CEO Paul Anderson, who like Ms Jacquet had been the CFO, would put the company on a new path after a comprehensive strategic review.
But it is doubtful that such market optimism is warranted for the group just based on a change of leadership, because the market dynamics for all the major pathology groups moving forward all point to some sort of breakdown of their traditional stranglehold on a very inefficient system of pathology ordering and service.
Leave aside that Healius no longer has a downstream vertically integrated group of GP centres they can use to channel their orders, that average pathology rents are likely to rise, not drop, and that more and more telehealth and virtual care, both private and public, is going to result in less foot traffic so their co-location strategy is going to be under continuing downward pressure.
The most significant threat to future revenues of these businesses is a federal government that is fed up with the inefficiency of pathology ordering and is now developing a nationwide electronic requesting infrastructure for pathology with a view to taking most of those inefficiencies out of the system.
The government specifically wants to introduce technology and regulation that (a) reduces significant re-ordering of the same tests for the same patients by healthcare providers who have no clue the test has already been ordered because the system is so disconnected, and (b) not enough other information about a patient to order the right tests in the first place.
The Department of Health and Aged Care and The Australian Digital Health Agency are leading the charge on this through the first stage of comprehensive new strategy to create a far more digitally interoperable healthcare system through a test project to develop national pathology eRequesting.
A recent vision paper released by DOHAC on eRequesting states:
“Studies from the UK’s NHS indicate that up to a quarter of all pathology requests may be duplicates or unnecessary. eRequesting has the potential to dramatically reduce over-requesting and improve the selection of appropriate services. This will drive down MBS spend, reduce consumer burden and free up time for clinicians.”
It’s the sort of statement that must have sent a chill down the spine of every big pathology CEO in the country and should certainly be on the mind of Mr Anderson as he moves for a “comprehensive strategic review” of the group.
Twenty-five percent is a hell of a lot of business to be targeting in companies that have been reporting profit margins of between 15%-25% over the past few years.
In essence the government is staring down the major pathology providers and telling them they are going to need to comprehensively look at how they’ve been doing business and adapt to a much more modern, open and seamless sharing of important healthcare data moving forward.
In the past the big pathology providers have been hugely powerful politically. They employ a lot of people in the regions and because most pathology is concentrated to only three providers, they can create havoc in the system if they want to try to get their way.
This has always tended to stay the hand of government in how hard they pushed the pathology groups to behave.
But times and technology are changing. And fast.
In the US, which has a seriously messed up healthcare system, a government desperate for more efficiency moved on developing much more open sharing of patient data between providers and providers and patients more than 10 years ago. Today, if providers (hospitals, insurance companies, GPs and so on) do not have modern cloud-based systems in place that enables much more effective and free sharing of important healthcare data, theoretically that provider can go to jail.
It’s not likely that the Australian government is going to get that heavy-handed. But one senior policy person in Canberra told HSD recently that there simply was no reason why better technology could not to be in place for data sharing to make the Australian healthcare system more effective and efficient.
When asked about the power of the pathology providers to create political trouble or block initiatives via their hold on the sector, this person said that they thought the government was not going to back down on this issue.
“If they don’t play, we won’t pay…”, were the words used.
Such a scenario is not likely to play out, as its entirely in the government’s interest to bring the major pathology providers along with them on their proposed journey to a more efficient system.
But the government is openly putting pressure on the pathology groups to change their ways.
Currently it is requiring all of them to upload all their results in near real time to the My Health Record, by the end of 2024.
At the moment none of them do this comprehensively, or at all. They are naturally resisting because this is not their traditional business model of channelling and control. But the government is so far sticking hard to its deadline on this step.
It should give the big pathology providers a lot of pause for thought about how long they can resist technology and systems that are very obviously in the best interests of the system and the patients.
Mr Anderson has a lot more thinking to do than the analysts are suggesting he might have in their optimistic forecasts when he conducts his comprehensive strategic review in the coming weeks.