Ontario’s system for funding private medical laboratories has been controversial since it was set up almost two decades ago.

Now, facing critics who have only gotten louder, the government may be considering reform. In her mandate letter after last year’s election, Premier Kathleen Wynne asked Health Minister Eric Hoskins to “explore opportunities to optimize quality and value in community laboratories.”

‘Community’ or ‘outpatient’ lab tests are ordered by doctors and nurse practitioners and include everything from blood sugar to kidney function to pregnancy tests. Across Canada, there are many different models for delivering these tests, involving public and for-profit providers.

In Ontario, a set number of government dollars is divided among seven companies. (The Ministry of Health hasn’t licensed a new private outpatient lab provider since the 1970s.) The government pays each company per test but decides the maximum amount of money each corporation can receive in a year. This cap is based on the company’s market share in 1996. We spoke to four laboratory executives and all said they always exceed their cap.

Effectively, this means that payments to private companies are fixed and “there’s no competition,” says Ross Sutherland, a registered nurse who has written a book about private lab companies in Canada.

Laboratory insiders in other provinces question Ontario’s system. “Human nature would have it that you won’t actually be as accommodating to the patient,” says Dr. Jim Cupples, a surgical pathologist with the Fraser Health Authority and former owner of a private lab in BC.

Canada’s Competition Bureau foresaw problems with fixed per-company “caps” back in 1997. The Bureau recommended against locking in each company’s market share, arguing the caps would “reduce the incentive to provide good service” and would “protect the less efficient firms.” (The government chose to go ahead with the cap system, saying funding to private labs shouldn’t be “prepared strictly from a competition policy perspective.”)

Gerard Kennedy, CEO of Toronto-based Alpha Laboratories, argues the Bureau’s fears have come to bear. Several private Ontario labs maximize profit by “cutting and reducing pickups,” he says, as well as by “restricting hours and staffing levels, increasing turnaround times for some tests [and] lowering notification criteria.” Additionally, companies have little incentive to innovate in new areas like genetic testing, says Kennedy, the spokesperson for Coalition for Ontario Lab Reform. (Kennedy’s interest is a vested one. By locking in each company’s historical market share, the caps make it difficult for Alpha and other small labs to expand.)

Sue Paish, the CEO of Lifelabs, Ontario’s largest lab company with a market share of almost 70%, vehemently disagrees with Kennedy. “The corporate cap does not diminish or incent innovation. What incents innovation is a company’s commitment to do the right thing,” she says. Paish adds that her lab offers services that many others don’t, such as home pick-ups of samples. Lifelabs also lets patients access test results and book appointments online, reducing the time they spend in a waiting room.

Paish also points out that the government recently introduced performance-based funds that are awarded only if a lab meets various patient access benchmarks. Still, these funds represent only eight per cent of the approximately $600 million the government spends each year on private labs.

An executive at Ontario’s second-largest lab also thinks the per-company caps should remain in place but adjusted to be more reflective of companies’ current testing volume, rather than their historical market share. With “open, crazy competition,” Naseem Somani, president and CEO of Gamma-Dynacare Laboratories, worries companies will spend excessive amounts on opening up new locations to out-compete rivals, rather than improving technology and quality.

In an email, government spokesperson Shae Greenfield explained the government has set up an advisory forum made up of “broad representation from the community, hospital and public health sectors; professional organizations; and Local Health Integration Networks.” This forum, he wrote, will “explore opportunities …for improved value, quality and access.”

Does Ontario’s private lab system need more competition?

The Ontario government’s reasons for bringing in per-company caps in the late 1990s simply don’t hold water today, many sources argue. According to the Competition Bureau document, the caps aimed to “encourage reduction in overall utilization” and to “ensure the viability of the laboratory system through reduced upfront costs.”

The idea that companies would control utilization by policing unnecessary ordering of tests “makes such heroic assumptions about the behavior of the companies,” says Christopher McCabe, a health economist at the University of Alberta. After they have sunk money into expensive equipment, IT systems and so on, it costs major lab companies very little to run individual tests, he says, so they aren’t likely to mind doing tests beyond what they’re paid for. (Interestingly, there could actually be a benefit to testing beyond the cap: Lifelabs, for one, has pointed to its annual volume increases to call on more government funding in the past.)

Furthermore, where private companies do have an incentive to reduce tests, they would want to discourage tests with the lowest profit margins, not necessarily the most inappropriately ordered ones, McCabe argues.

Richard Hegele, a professor of laboratory medicine and pathobiology at the University of Toronto, adds that private laboratories aren’t likely to embark on the research necessary to recommend against certain tests, as they’re not paid for such research. The high-profile example of the Ontario government delisting vitamin D tests, he points out, was based on research undertaken by the government.

The second argument for the per-company caps – that they prevent companies from gaining so much market share that new entrants can’t compete – also doesn’t make sense today, says McCabe. Given the high costs of testing equipment and robotics, and the long-term efficiency dividends they bring to companies that can go big, the laboratory industry is one that “naturally leads to a monopoly,” McCabe says. But, he argues, this isn’t something to be feared in a single-payer system where “the monopoly power can be regulated in such a way to stop it from being abused,” he says. For example, if the provider cut services or raised fees, the government can make laboratory services public or call on companies to bid on the contract, he adds.

Edmonton is currently doing just that. Last year, four providers put in their bids to deliver lab services for the region. Tammy Hofer, vice president of laboratory services at Alberta Health Services, said the model gives patients “access to proprietary innovations” in areas like genetic and other complex testing. The vying international corporations have already invested in these technologies, ones that, as a small province, Alberta “doesn’t have the purchasing power” to access otherwise, she says. Edmonton’s upcoming contract has, however, been heavily criticized. As the leading contender is an Australian company, many fear profits and jobs will go out of the country.

Is Ontario overpaying for outpatient laboratory services?

In the absence of competitive bidding to ensure low prices, it’s up to the government to set its per-test prices. But the government’s price list is inflated and outdated, many sources told us. While the price of the odd test has been adjusted, most of Ontario’s test prices haven’t changed since 2001.

Meanwhile, technology has been rapidly changing, making most tests much cheaper. According to US data, the cost per weighted unit of laboratory analyses decreased by 45% between 1998 and 2010. Most of the private labs in Ontario have found cost savings by “automating the crap out of their labs,” and consolidating testing and collection sites, according to Kris Bailey, CEO of In-Common Laboratories, a non-profit that provides various services to hospital and community labs in Canada.

We don’t know how Ontario’s spending on community labs compares with other provinces. The Canadian Institute for Health Information (CIHI) isn’t able to compile this information, partly because outpatient and inpatient tests are defined differently across the country, explains Adam Rondeau, senior analyst at CIHI.

According to several sources, however, a review of private laboratory spending, involving auditing firms Deloitte and KPMG, has been ongoing since 2010. The government confirmed a review is ongoing but said the audit reports are not public due to their “sensitive nature,” as Greenfield put it.

Paish says she’s been “grilled” by the auditors but admitted that the ongoing review is the first in “many, many years.” Indeed, in a 2007 report, the Auditor General criticized the Ministry for failing to “analyz[e] the underlying actual costs of providing laboratory services so that this information could be utilized in negotiating the fees to be paid for private laboratory services.”

Why can’t the public sector compete?

In addition to lacking competition and having an out-of-date per-test fee schedule, many criticize Ontario’s outpatient lab system for excluding the public sector. Ontario is the only province where the private sector is expected to provide all outpatient tests.

In BC, according to Dr. Cupples, competition between the public and private sectors in the community lab sphere has led to “both being more available, more responsive to patient needs.” As one example, public labs in BC use software developed by the private sector that allows patients to view lab test results electronically. Meanwhile, public sector presence has spurred Lifelabs to expand hours and access points to compete, Dr. Cupples says.

The other reason to allow the public sector in community laboratory testing is that it can fill in gaps left by private companies in rural and northern areas, argue advocates like Bailey and Sutherland.

This gap-filling seems to be happening in BC. According to Dr. Cupples, the private sector provides the lion’s share of community laboratory testing in urban areas, while the public sector does at least 70% of the work in the interior.

In Ontario, meanwhile, private labs ship samples from rural areas to central processing facilities, Sutherland says. “So if a family doctor is worried about someone and needs a lab test processed quickly, they have to send them to the [local hospital’s] emergency room,” he explains. Because the hospital isn’t paid for the outpatient tests, it comes out of their overall budget, representing an added, unfair cost for rural hospitals, adds Bailey.

In short, the Ontario government has serious challenges to address regarding outpatient laboratory testing. The per-test fees haven’t substantially been updated in over a decade, despite cost savings brought about by rapidly evolving technology. Private lab companies appear to have little incentive to provide more accessible service to Ontario patients, and hospitals are sometimes picking up the slack without adequate compensation.

Though he’s biased, Kennedy raises an important point. “The private sector imperative would be competitiveness in the public interest,” he says. “Otherwise, why are they there?”