A bloody fight for growth

More and better medical tests, improving technology, even increased litigation protection strategies – the trends may be promising, but fierce competition in the pathology sector promises to keep the major players battling. By ROBERT BRYANT

By Robert Bryant

More and better medical tests, improving technology, even increased litigation protection strategies – the trends may be promising, but fierce competition in the pathology sector promises to keep the major players battling

Pathology services were at the heart of one of the biggest corporate plays of the year – Primary Healthcare’s $3.5 billion takeover of rival Symbion, which was completed in February.

Symbion’s pathology division was one of the biggest prizes for Primary; acquiring the business gives Primary a 36% market share of the Australian market, just behind Sonic Healthcare’s 38% share and well ahead of the third biggest player in the market, Healthscope, which also tried to buy Symbion.

The bloody battle for Symbion emphasises the extremely competitive nature of the sector. IBISWorld estimates that the industry grew at an average annual rate of 2.9% during the five years to 2007-08.

The number of services provided by pathologists is estimated to have increased due to a number of reasons, including an increase in the range of tests, doctors trying to gain some protection from negligence claims, and of course the ageing of the population.

But despite relatively strong growth in higher-priced services, the average fee and Medicare rebate per service is predicted to have declined as a result of government funding and competitive pressures.

The consolidation of the sector by Primary and others has helped improve profit margins in the sector, as has the construction of large central laboratories and the introduction of other efficiency initiatives such as labour-saving technologies. As a result, industry employment is expected to have slightly decreased.

The outlook for the industry is slightly better over the next five years, with IBISWorld forecasting that this sector will grow at an average annual rate of 3.2% over the five year period to 2012-13.

It is predicted that the total number of pathology services provided under Medicare, and Medicare rebates for these services, will increase. Population growth, rising household incomes and an ageing of the population will result in higher demand for medical services.

An increase in the range of tests available, the growing exposure of doctors to litigation, and the rise in doctors’ professional indemnity insurance premiums, has led doctors to order more precautionary tests and this trend is likely to continue.

The industry is hopeful that the Government’s stated emphasis on preventative health will provide opportunities for the industry and the US trend of patients ordering and paying full-price for early detection/prevention tests may appear in Australia, bolstering industry activity. Genetic testing is also expected to be an area of strong growth in pathology testing over the outlook period.

However, there are also potential dark clouds on the horizon. The Federal Government could put in place measures aimed at reducing demand for Medicare-funded services and the Government intends to address the increasing use of pathology services by educating GPs on the use of pathology tests.

And while technology generally boosts demand for pathology services, some new services/products that can be used by GPs and/or at home by patients could pose a threat to the industry.

Key success factors for operators in the industry

• Business expertise of operators. A high level of business and entrepreneurial skills to successfully run and market the practice.
• Having a good reputation. Establishment of a strong reputation and relationship with referring doctors and hospitals.
• Having links with suppliers. Establishment of a strong reputation and relationship with referring doctors and hospitals.
• Economies of scale. Larger operators can defray expenditures on new labour saving equipment and on marketing over a larger sales base.
• Proximity to key suppliers. Location of collection centres near to referring doctors and readily accessible to the public. Proximity of collection centres and laboratories within or near a hospital is also desirable.
• Must comply with required product standards. Obtaining and maintaining laboratory and quality systems accreditation.
• Must have licence. Obtaining licences for laboratories and an adequate number of collection centres.
• Effective product promotion. The ability to attract hospital work. Smaller hospitals and hospitals seeking tests may outsource pathology tests. Private clinics also provide in-hospital collection and testing facilities, with some hospitals providing both ancillary staff/facilities.
• Ability to quickly adopt new technology. The ability to keep pace with advances in the field so as to maintain a high quality, up-to-date service. New technology can also reduce costs (such as labour) and bolster capacity.

Products and service segmentation

Pathology services provided under Medicare

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au