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Issues Paper

APRIL 2006 - PRIVATISING OTAGO AND SOUTHLAND HOSPITAL LABORATORIES

Summary of Main Points
The ASMS opposes the privatisation and believes the Minister should decline the recommendation because:

The Boards’ decision does not conform to the objectives of the government in the health sector in that:

1. there is an absence of independently verifiable demonstrable benefits;
   
2. they have failed to adequately involve clinicians;
   
3. the decision conflicts with government policy of greater co-operation between DHBs nationally and regionally; and
   
4. the decision conflicts with the government objective of enhancing the capacity of DHBs to provide secondary and tertiary health services.

Outline of the Paper
This paper is divided into seven sections:

Section 1: What’s Happening Nationally with Community and Hospital Laboratories?

Section 2: Otago and Southland DHBs - The First Attempt at Privatisation

• The Otago and Southland DHBs had made an earlier attempt to privatise their hospital laboratories by giving the contract to the merged SCL and MedLab. This failed when the Commerce Commission refused permission for the merger because it would decrease competition.
• The process used by the DHBs was murky and has given rise to a reasonable suspicion that the almost successful bid from the hospital laboratories was leaked to the private laboratories that then cut their price to an unsustainable degree.

Section 3: Otago and Southland DHBs’ Second Attempt at Privatisation.

The privatisation will be irreversible because the length of the contract which means that no potential competitor will have any incentive or capacity to preserve or build up infrastructure.  Neither will either Board keep the capability to do the work internally.

• There is every reason to be suspicious of the pricing because the original price was lower, the merger (intended to cut costs) did not go ahead and additional pressures on the price such as attempts to cap community testing costs, new tests or diseases may reopen the price that the DHB is paying and will tempt the private provider to recoup their losses.
• The private provider will be the sole provider and the DHB may have no option other than to pay them what they ask rather than risk the service not being provided.  In any event any supposed savings are likely to prove illusory.
• If the private provider looks like going bankrupt the taxpayer will have to bail it out because though community tests can be sent elsewhere hospital laboratories are necessary for acute services and surgery.  Like the bail out of the privatised Air New Zealand the private company gets the profit but socialises the loss.
• The privatisation risks the loss of hard to recruit staff, setting up conflicting cultures and priorities between staff and risking the training of registrars.

Section 4: The Government’s Objectives

• The proposal shows no benefits that would “increase the health and independence of New Zealanders”.
• Proposed benefits are speculative rather than the “demonstrable” benefits required by the Government’s protocols.
• The proposal is inconsistent with the Government’s objectives of DHB capacity building in secondary and tertiary services and enhanced regional collaboration between DHBs.
• The proposal is inconsistent with the Government’s objective of enhanced collaborative involvement of clinicians in decision-making.

Section 5: The Health Professional Led Approach

The health sector unions, through the Council of Trade Unions, have proposed to the Minister that he engage in a new strategic direction where clinicians lead a collaborative process to plan co-ordinated secondary and tertiary care for acute and chronic illness on a national or regional basis.  If the Minister accepts the Boards’ privatisation proposal it would make such a health professional led approach impossible because it is based on opposite principles and processes and would gut its credibility.

Section 6: Over-Riding Employment Agreement Obligations and Responsibilities

• The Boards have ignored their obligations and responsibilities under the NZ District Health Boards Senior Medical & Dental Officers Collective Agreement (1 July 2003 – 30 June 2006) (the MECA) to:

1. engage with the ASMS over the development of terms of reference for reviews (including seeking an endorsement);
2. involve affected employees in any review which may result in significant changes to the structure, staffing or work practices affecting them; and
3. establish whether affected employees and the ASMS have serious professional or clinical concerns over a review’s recommendations and establishing a disputes resolution process where there where such concerns.

• The Boards have breached wider obligations in the MECA to ASMS to maintain our trust and confidence and to deal with us fairly.
• Their actions were also a breach of their good faith obligations under the Employment Relations Act and the Health Sector Code of Good Faith.
• The ASMS is pursuing compliance with the MECA’s requirements through the mechanisms of the Employment Relations Act.  The Minister’s approval of the privatisation proposal would threaten the capacity of our affected members to exercise their rights derived from their employment agreement.

Section 7: What is the Way Forward?

• The Minister should turn down the recommendation to privatise the hospital laboratories in Otago and Southland.
• The Minister should require the Boards to either reconsider the hospital laboratories proposal or keep the hospital laboratories in public ownership while seeking tenders for the community work.

SECTION 1: What’s Happening Nationally with Community and Hospital Laboratories

1.1      Prior to the formation of DHBs in 2001, hospital laboratories were funded by the
          DHBs’ largely public hospital based predecessors and community laboratories
          were funded by the Ministry of Health.  In the main public hospitals provided
          hospital testing while private businesses in most cases provided community
          testing for tests required by general practitioners.  When DHBs took over
          funding responsibilities for both laboratory services it was business as usual for
          a time as the DHBs inherited the fixed term funding contracts with private
          businesses.

1.2      Community testing, however, caused some problems for the DHBs as the 
          contracts with the private laboratories were uncapped and demand driven. This
          has caused some financial angst.  For instance, while approving the Otago 
          DHBs 2004-05 District Annual Plan, the then Minster of Health authorised 
          one-off additional funding of $3.2 million which was in part due to the impact of
          the uncapped SCL contract for community testing.

1.3      The problem was common to many DHBs but none have exhibited the same 
          determination to privatise as Otago and Southland or the same ‘all-or-nothing’
          approach (see table below summarising the various responses).

1.4      Difficulties in the demand driven and uncapped funding mechanism for 
          community testing has been the major challenge facing DHBs but only Otago 
          and Southland have taken the extraordinary quantum leap of using it as the 
          pretext for privatisation of hospital laboratories.  Privatisation of hospital 
          laboratories is not required to address this challenge.

SECTION 2: Otago and Southland DHBs - The First Attempt at Privatisation

2.1      This is the second attempt by the Boards of the two DHBs to privatise the 
          hospital laboratories.  The previous attempt in 2005 was scotched by the 
          Commerce Commission when they turned down the proposal by SCL and 
          MedLab to merge into one company, LabCo.

2.2      Two bids had been made—LabCo (MedLab and Southern Community 
          Laboratories) and the DHBs’ own hospital laboratories—both bids were for all
          laboratory testing (there was no other option).  The latter bid, from the DHBs’
          hospital laboratories, also included support from the Canterbury DHB in limited
          areas where there were capacity concerns.

2.3      The formal recommendation to the DHBs was delegated to a group comprising
          the two board chairs, the two chief executives and the two general managers of
          the funding and planning divisions.  Despite the predisposition of the process
          towards some form of privatisation, such was the robustness of the proposal
          from the DHBs’ own hospital laboratories that they agreed to recommend its
          proposal rather than that from LabCo.  This was the advice forwarded to the
          Ministry of Health in the week leading up to the 2 June 2005 announcement
          discussed below.

2.4      However, in an extraordinary decision, at around 5pm, 1 June, the evening
          before the two boards were to receive the recommendation supporting the
          proposal from the DHBs’ hospital laboratories, a new offer was tabled from
          LabCo which significantly undercut its previous proposal on price.  This led to a
          new recommendation to the boards in favour of LabCo which was then quickly
          accepted by them.  The hospital laboratories were never given the opportunity
          to respond to this second bid and, along with the Ministry of Health, were
          perplexed and bewildered by this turn of events.  The evaluation team did not
          have the opportunity to consider this new proposal.

          So what happened? Information obtained by the ASMS under the Official
          Information Act provides some clarification.

“Extreme operational difficulties associated with bringing a laboratory service back in-house means that this risk is very difficult to mitigate” (Brian Rousseau CEO Otago DHB and Gershu Paul CEO Southland DHB)

2.5      A joint paper (dated 28 May 2005) from the two chief executives Brian
          Rousseau and Gershu Paul to the two boards recommended that the DHBs
          accept the hospital laboratories proposal to be the single laboratory supplier in
          the regions.  It is interesting that they were wary of the private laboratories
          because they acknowledged that should this recommendation be accepted there
          was a serious risk of “potential litigation by LabCo [which] will potentially place
          the community laboratory service continuity at risk.”

2.6      The chief executives noted that the evaluation group over a month earlier had
          considered that, with one exception, LabCo headed off the hospital laboratories
          in all areas (not surprising given that these were largely about community
          testing).  The evaluation group was chaired by the author of the previous pro-
          privatisation proposal mentioned above and had no New Zealand hospital
          pathologists among its membership (further the full group hardly met and its
          deliberations were largely shaped by its chairperson).  The one exception was
          price (the hospital laboratories were considerably lower cost).  However,
          following interaction with both bidders, by 28 May the chief executives were
          confident that the hospital laboratories had addressed all the concerns raised by
          the evaluation group whereas LabCo had not on price.

2.7      The chief executive’s paper then goes on to identify a series of critical risks
          should the DHBs fully privatise the laboratories [to LabCo]. These serious risks
          include:

• There were “no guarantees that Provider Arm [hospital laboratory] staff will agree to work for LabCo.”
• “Knowledge of hospital service provision will not be as good as” the hospital laboratories, at least until the service is well established.
• “If the LabCo proposed price is too low, there is a risk that the contract will be unsustainable, and the DHBs will be faced with the difficulty of contracting the service in-house or increasing the price.” 
• “Negative reaction by the hospital staff who have provided a good service for many years, as well as by senior medical staff opposed to contracting out public services.”
• “Loss of core competency in provision of laboratory services in the Provider Arm” given the length of the contract (10 years).  That is, “once a service has been contracted out, it is operationally extremely difficult to bring back in-house.”
• “A significant risk of the LabCo proposal is that of reduced market competition in the long term.  The trend is for laboratories to amalgamate to improve critical mass, and lack of competition in the marketplace at the time of renegotiating the service could result in the DHBs being placed at a disadvantage.”
• “Loss of flexibility: with a private contractor, any changes (e.g. new technology, changes to models of care, etc) to the contract mid-life require negotiation.”

2.8      In summary, they stated that:

2.9      But, on 1 June at 4.50pm, LabCo amended its proposal by lowering its price
          (the fiscal details are blanked out in our copy of this letter).  Even though the
          letter only addressed price and not any of the serious risks raised in their
          briefing paper to the boards, the chief executives did a complete flip-flop and
          changed their recommendation to support LabCo (subsequently renamed
          Southern Pathology) and privatisation.  This is also despite the fact that in their
          briefing paper they had specifically warned against too low a price because of
          the longer-term fiscal risks.

2.10    The confidential session of the minutes of the Otago board on 2 June
          commencing at 10.15 am (around 18 hours after receipt of LabCo’s revised
          offer) went as follows.

2.11    Mr Thompson’s alarm is consistent with the ASMS’s initial speculation (Otago
          DHB Chief Executive Brian Rousseau disputed this in public but his Board chair
          in effect confirmed it privately) that there had been some form of inappropriate
          tip-off.  Mr Thompson then went on to raise his “concern that some Board
          Members had been approached and/or met with LabCo management and/or
          directors.”

2.12    Although some Board members acknowledged contacts by LabCo, they
          affirmed that they had not been compromised by this.  Notwithstanding these
          affirmations Mr Thompson commented that:

2.13    Later in the meeting Mr Thompson observed that:

2.14    Despite all these misgivings and the fact that the serious risks identified in the
          chief executives’ original recommendation were not addressed in the
          mysterious second LabCo offer (its only change was price), both boards voted
          to support the full privatisation.  Again this reaffirms the shallowness of the
          boards’ decision-making processes.  They were committed to privatisation and
          the facts were not going to stop them.

2.15    The merger between the parent companies of the two laboratories, which in
          Otago and Southland were to form LabCo, required clearance (under the
          Commerce Act) from the Commerce Commission.  This was declined by the
          Commission because:

              the proposed acquisition would reduce the number of likely potential private
              provider bidders in each region from two vigorous competitors in the counter
              factual, to one in the factual.  …The DHB provider arm in each region is
              unlikely to provide constraint on the joint ventures [1]

          In addition the Auditor–General was asked to review the decision.  Neither the
          terms of reference for the complaint or the report from his office are, as yet,
          publicly available.

          The Commerce Commission’s decision meant that as a consequence the
          privatisation proposal as originally planned could not therefore proceed.

SECTION 3: Otago and Southland DHBs’ Second Attempt at Privatisation

3.1     This gave the Otago and Southland DHBs an opportunity to rectify the mistakes
          they had made.  Instead, due to their predisposition towards privatisation, they
          chose to repeat them by:

• Pretending once again that they were two separate organisations; one seeking tenders for the work and one bidding for it.
• Ignoring their legal requirements to consult their employees despite making assurances that they would do so.
• Not seeking the views of their own in-house experts, the hospital pathologists and other laboratory staff, including managerial staff with direct operational responsibilities, over the decision.
• Opting for an ‘all-or-nothing’ approach where they asked for bids for both hospital and community work.
• Ignoring long-term risks for illusory short-term gain.
• One could be forgiven for assuming that the process was chosen to illicit the predetermined outcome of privatisation.

3.2      On 1 December 2005 the Boards considered how to proceed to make decisions
          on laboratory testing.  Once again they opted to seek tenders for both hospital
          and community laboratory work together and once again to erect a wall of
          commercial sensitivity between themselves and their own expert staff.

3.3      On 23 February 2006 the DHBs announced that SCL had been successful in
          their bid to take over hospital laboratory services at the Otago District Health
          Board.  ASMS members employed in the Department of Pathology received
          letters stating that, if Ministerial approval is gained, as of 1 June 2006 they will
          be transferred to a new employer, SCL.

          MedLab has since announced its withdrawal from Southland.  It has not had any
          presence in Otago.  SCL now has a monopoly in the region.

The Risks: An Irreversible Decision for Short-Term Gains

3.4      If the privatisation proposal proceeds the decision is almost certainly going to
          be irreversible because the length of the contract (10 years - to the best of our
          knowledge the longest that has ever occurred) means that no potential
          competitor will have any incentive to preserve or build up any infrastructure. 
          Neither will either Board keep the capability to do the work internally because
          of the privatisation.  There has been some suggestion that this infrastructure
          could be rebuilt internally given sufficient notice; this is unlikely.  In Southland,
          for instance, it has taken up to five years to recruit replacement pathologists.
          Rebuilding the overall skilled workforce is likely to be too costly and too lengthy
          a process and will preclude any serious attempt to bring the laboratories
          in-house.

3.5      One of the tendencies of a number of senior health managers and, more so,
          board members when under fiscal pressure in particular is to focus on the
          short-term with attempts to shift cost and risk.  Their period of involvement in a
          particular DHB tends to be less than health professionals (especially hospital
          specialists) and they have a greater propensity to adopt short-term responses
          to challenges that require a considered approach to implementation beyond
          their short shelf life!  This was a characteristic of public hospital based decision
          -making in the 1990s and remains the modus operandi of both the Otago and
          Southland boards.  Health professionals, on the other hand, focus more on the
          medium to long-term implications, a consequence of both their professionalism
          and longer ‘shelf life’.  One of the outcomes is that those responsible for
          imposing privatisation of the hospital laboratories are highly unlikely to be
          around when the consequential risks begin to materialise.

The Risks: Can SCL Keep to the Price?

3.7      There is every reason to be suspicious of the pricing.  The initial process
          showed the hospital bid as much lower; then ‘coincidentally’ the merged private
          laboratories came in with a lower bid.  This must suggest that the price has
          been set at least at a lower level than the laboratories consider acceptably
          profitable.

3.8      Presumably the proposed merger between the two private laboratory
          businesses had been entered into for commercial reasons to institute
          economies of scale and rationalise functions.  The Commerce Commission has
          prohibited this going ahead.  It is inconceivable that this will not have an effect
          on the businesses internal costs or they would not have contemplated the
          merger in the first place.

3.9      There will be a number of additional pressures on the price; community testing
          has been demand driven; the private provider will be obligated to try and
          contain these demands.  Any new tests or diseases (for instance a flu
          pandemic) will reopen the price that the DHB is paying and (particularly if the
          laboratories under bid as we suspect) will tempt the private provider to recoup
          their losses.

3.10    The national laboratory worker (public and private employers) MECA
          negotiations which have recently commenced may also drive up the cost of
          labour.  This would not have been anticipated in the costings of the privatisation
          proposal and a factor that may impact on fiscal viability.

3.11    The Commerce Commission, in the course of their decision on the failed
          laboratory merger, observed that “the Commission considers that the DHBs
          may accept a considerable price increase before they would be willing to take
          on the substantial risks and costs associated with bringing all testing back in
          house.”[2]

          The private provider will be the sole provider and the DHB may have no option
          other than to pay them what they ask rather than risk the service not being
          provided.  In any event any supposed savings are likely to prove illusory.

3.12    The private pathology market has undergone major changes in recent years. 
          The previously prevalent small private pathology partnerships have largely
          disappeared in New Zealand as private pathology has become monopolised by
          two main companies. 

3.13    The rationalisation trend in the private sector has been profound in recent years
          and the public sector is also not divorced from this process.  Although
          somewhat speculative in terms of how much and by when, it appears inevitable
          that the trend towards greater rationalisation and regionalisation of specialised
          pathology services will continue and increase. 

3.14    In the brittle fiscal situation that private laboratories are presently in, the
          viability of the private monopoly is also potentially at risk should other DHBs
          succeed in their objective of capping the current demand driven arrangements
          for community testing.

          The government, the ultimate funder, cannot allow the private provider to
          collapse no matter what future demands it may make on price to keep the
          business going.  Though the community testing may be relocated to some
          degree elsewhere (collection would still have to take place locally) the public
          hospitals cannot continue to offer the range of services they do at present with
          out hospital laboratories.  Registrar training cannot continue without
          laboratories, neither can much of the acute work or surgery survive.

          If the private provider looks like going bankrupt the taxpayer will have to bail it
          out.  Like the bail out of the privatised Air New Zealand the private company
          gets the profit but socialises the loss.

The Risks: Losing or Failing to Recruit Skilled Staff

3.15    Some of the dedicated professionals committed to working for the publicly
          provided health system have advised us that they do not wish to work for the
          privatised venture and are looking at other options.  Given the shortage of
          pathologists in New Zealand DHBs these options along with early retirement are
          realistic.  In the event that it happens it would only take a small loss of
          pathologists to have a significant effect on the viability of the privatisation.

3.16    The DHBs have paid insufficient attention to the full impact of the obligation to
          provide the same terms and conditions of employment for staff.  This includes
          rights to continue in the Government Superannuation Fund which would almost
          certainly require special legislation to ensure.  If the same conditions cannot be
          ensured then either the privatisation cannot go ahead (the same terms and
          conditions are a legislative requirement in the Employment Relations Act 2005)
          or possibly redundancy payments must be made; costs which have not been 
          factored into the DHBs’ consideration.

The Risks: Loss of Integration and Conflicting Cultures

3.18    The pathologists at the hospital laboratories are presently heavily integrated
          with other hospital and university staff.  Logically due to the nature of their work
          which is closely aligned with the laboratory, the two haematologists at Otago
          should continue to be employed by the DHB.  However, there are reports that
          such is the desire to widen the scope for SCL as a cost-cutting mechanism, that
          haematology will also be privatised along with pathology.  It is a matter of
          alarm, let alone another example of treating the Minister of Health’s role as a
          rubber stamp, that the Otago DHB has referred all laboratory and related
          appointments to vacant positions to SCL for approval; SCL has been given what
          amounts to a power of veto.  It has already attempted to use this to block the
          filling of a vacant third haematologist position that the Otago DHB had been
          endeavouring to fill for some time.

3.19    Further, some pathologists have partial university appointments, which creates
          additional confusion over what the employer and associated accountabilities
          were.  They also serve on hospital wide committees through which they make a
          valuable contribution to the functioning of wider hospital services.  However,
          this would be thrown into uncertainty as it would not readily fit in with the
          inevitable narrow working to contract approach that SCL would be expected to
          adopt.

3.20    The privatisation proposal assumes that most of the professional interaction of
          laboratory staff is among each other.  While this is significant, they also have
          strong regular interactions with other specialists.  In fact, it is the needs of other
          specialists that are the main driver of their work.  The proponents of
          privatisation fail to appreciate that the clinical and professional interaction
          between hospital laboratories and other hospital services is inevitably greater
          that that between hospital and community laboratories.  This is hardly surprising
          given that this involves highly connected secondary and tertiary services.

3.21    The privatisation proposal will see some specialists (pathologists) working for
          one employer and others (those the pathologists work alongside, including
          some closely aligned services such as infection control) working for another
          (the DHB) thereby increasing internal organisational barriers and obstructions. 
          Over time their respective terms and conditions of employment will vary
          because most specialists will be covered by the MECA, but not pathologists.

3.22    The overall cultural difference between the public sector and the private may
          however prove to be the most serious; the privatised laboratory will work to the
          letter of the contract, the public sector must work to patient need.

The Risks: Training of Junior Doctors

3.23    The original privatisation proposal was for registrars (doctors training to be
          pathologists) to continue to be employed by the DHB.  We understand that the
          current proposal is to have them employed by SCL, something that all the
          indications are will be unattractive for recruiting registrars.

          There are serious questions about the ability of the proposed privatised
          venture, regardless of whom the employer is, to be sufficiently attractive for
          resident medical officer training, including vocational registrar training in
          pathology and other aligned specialties, compared with the rest of the country.
          This risk will be enhanced if our concerns about the recruitment and retention of
          pathologists materialise as we believe they are likely to.  This also poses risks
          for the Medical School.

SECTION 4: The Government’s Objectives

4.1      The proposed privatisation of the hospital laboratories conflicts with four key
          government objectives:

• Its protocol for private involvement in DHB provided secondary and tertiary services.
• Enhanced regional collaboration between DHBs over service provision.
• Capacity building in service provision.

4.2      The government has in place a protocol for private involvement in health
          services publicly provided by DHBs which requires that public provision is
          preferred other things being equal.  To succeed in gaining the Minister of
          Health’s approval any proposal to privatise (outsource) public health services it
          must be demonstrated that privatisation would be the most effective option to
          achieve gains in health and independence for New Zealanders.  As we have set
          out elsewhere in this paper the Boards’ proposal falls well short of this standard
          and in fact generates considerable risks for the crown and for patients.

4.3      The proposal also rests uncomfortably, and is in contradiction, with the
          government’s expectations of increased DHB collaboration.  In particular, part
          of the rejected hospital laboratories’ proposal involved collaboration with the
          Canterbury DHB’s laboratories.  Under the privatisation proposal collaboration
          would become more complicated with an additional player in the mix motivated
          by different imperatives (working to contract and maximising potential profits)
          than DHBs and operating under a significantly different and conflicting culture. 
          The logic of provision of laboratory services in the South Island is for increased
          co-operation between all the DHBs but the proposed Otago-Southland
          privatisation would obstruct this objective.

4.4      The government has a laudable objective of further building the capacity of
          DHBs’ hospital and related services to provide services.  The most recent
          examples are the increased funding initiatives for orthopaedic joints and
          cataracts.  In both cases the government’s expectations were in the first
          instance each DHB should look to provide the service itself or where this was
          not possible look to another DHB to do it.  Only if these avenues were not
          achievable should the more expensive option of private sector involvement be
          considered.

4.5      The Minister of Health’s most recent letter of expectations to DHBs also
          emphasised improving clinician involvement and building relationships of trust. 
          He says (while speaking initially of elective surgery):

              In this and other areas decisions will be best informed when clinicians are
              involved at all levels of the decision making process.

          The privatisation proposal for the Otago and Southland laboratories has not fully
          involved the relevant clinicians (the opposite occurred as the process adopted
          deliberately excluded them) and has also severely tried the relationship
          between the ASMS (as the representative of the specialists) and the two DHBs
          as they continue to blatantly ignore the MECA provisions.

4.6      One of the greatest ironies in this controversy was the statement by Chief
          Executive Brian Rousseau at the first meeting in 2005 of the Otago ASMS-DHB
          Joint Consultation Committee that the new national DHB collective agreement
          (MECA) with its theme of the empowerment of senior medical and dental staff
          meant that the period of managers making decisions on their own (ie, without
          effective engagement with clinical staff) was now over.  But all the actions of
          the Otago Board and its Chief Executive over hospital laboratories have made
          this statement a cynical piece of mockery.

4.7      The proposal would be the largest privatisation of secondary care since the
          former government’s pro-privatisation ‘health reforms’ were introduced in 1993,
          both in terms of extent and duration.  Such a privatisation would send a
          message to the rest of the DHBs both in laboratories and in other services that
          privatisation is an acceptable alternative when they find themselves financially
          stretched.  It would also be a signal for future privatisation of other Otago DHB
          core health services.  The Chief Executive (in a presentation to unions last
          month and to the ASMS-DHB Joint Consultation Committee) has already
          indicated that he sees merit in repeating the laboratory process in other
          services every two years or so.

SECTION 5: The Health Professional Led Approach

5.1      As part of the Council of Trade Unions (CTU) briefing to the new Minister of
          Health when he took office, in October 2005 the CTU proposed that the
          Government adopt a health professional led approach to service development
          in New Zealand.

5.2      The most successful and comprehensive example of a health professional led
          approach, relevant to New Zealand, was in New South Wales with the special
          clinician-led taskforce established to examine acute (and some chronic)
          services in metropolitan New South Wales.  Within a three year period it made
          recommendations to the state government, the overwhelming majority of which
          were approved.  These have led to practical sustainable improvements across
          the state.

5.3      The government’s focus to date, including fiscal and capacity building, has been
          on primary care (and also population based care).  This is essential to the long-
          term future of health care delivery and it is important that it continues. 
          However, it must be recognised that while this focus will lead to improving
          quality of life and effectiveness of care, it will not for the foreseeable future
          have a discernible effect on reducing pressures on secondary and tertiary care.
          These pressures have had to be managed with proportionately less of the
          increased health funding that has gone to secondary and tertiary care.  And yet
          the tangible gains from improved access to quality secondary and tertiary
          services are generally more immediate and transparent than those from
          primary care and population based health.

5.4      The CTU and ASMS believe that to manage these challenges New Zealand
          needs a new strategic direction that is consistent with government goals and
          that ensures that within the next three years that:

• Health professionals have confidence that there are tangible improvements in access to and quality of health services at the frontline of clinical services.
• The public perception of the health system is that it is improving rather than deteriorating.

5.5      The proposal is that this new strategic direction should be health professional
          led.  There is enormous capacity, skill, experience and commitment for this
          among health professionals of all descriptions.  However, health professionals
          are largely cast in a reactive role and are an under-utilised resource (perhaps
          the greatest irony of our health system).  Health professional leadership is the
          most effective means of ensuring that health needs are met in a fiscally
          responsible way.

5.7      The ASMS has proposed to the Minister of Health that he adopt this health
          professional led approach in order to reap the benefits and achieve the
          objectives discussed above.  As a first step it is proposed that he establish a
          steering group to develop a three year time limited strategy to ensure that
          health professionals have confidence that there are tangible improvements in
          access to elective, chronic and acute services and improvements in the quality
          of health services in secondary and tertiary care, and that the public perceives
          that the health system is improving rather than deteriorating. 

5.8      As well it was proposed that processes for developing and strengthening
          national and regional clinical networks to ensure the provision of high quality
          and accessible elective, chronic and acute services and for achieving
          sustainable and effective specific recommendations on resource utilisation,
          organisation and provision of elective, chronic and acute services in each of the
          DHBs be developed.

          The Minister is investigating this proposal and has commented to the ASMS that,
          though uncertain of its ramifications, he was nevertheless excited by it and
          wishes to engage further over it.

5.9      The differences between the approach of the Otago and Southland DHB to their
          hospital laboratories and the CTU/ASMS health professional led approach could
          not be more marked. The Otago-Southland approach is based on top-down
          bureaucratic imposition of decision-making that excludes health professional
          engagement and without sufficient reference to quality standards.  On the other
          hand, the health professional led approach is based on bottom–up active
          engagement with health professionals on how to better ensure effective and
          fiscally responsible sustainable resource utilisation and marrying this with
          enhancing quality standards.  Should the privatisation proposal go ahead it will
          be clear that a health professional led approach is not on the government’s
          agenda.

          Instead of looking at the long-term health needs of New Zealanders guided by
          the doctors, nurses and other health professionals who understand them, the
          government will have opted for short-term ( and highly questionable) fiscal
          solutions.  The talk of increased clinician involvement will have been proved to
          be just talk and nothing else.

SECTION 6: Overriding the Employment Agreement

6.1      The Boards have blatantly disregarded the consultation requirements of the
          national DHB collective agreement for senior doctors (MECA) that they were
          bound to by law.  These include engagement with the ASMS over the
          development of terms of reference for reviews (including seeking our
          endorsement), consultation with the members involved, establishing whether
          the ASMS and affected members had serious professional or clinical concerns
          over a review’s recommendations and a dispute resolution process where there
          were such concerns .  Despite the ASMS having formally advised both DHBs of
          their contractual obligations under the MECA, both have deliberately ignored
          them.  The ASMS is pursuing compliance with the MECA’s requirements through
          the mechanisms of the Employment Relations Act.

6.2      The failure to consult was part of a wider series of breeches of the DHBs
          obligations under the MECA.  The Boards breeched its obligations to the ASMS
          and to our members:

• to maintain our trust and confidence and to deal with us fairly – Clause 8.1;
• to behave towards us in a manner that strengthens that trust, confidence and fair dealing – Clause 8.2;
• to be a good employer – Clause 8.3;
• to consult us in the manner required by Clause 44; and
• their actions were also a breech of their good faith obligations under the Employment Relations Act and the Health Sector Code of Good Faith.

6.3      The ASMS is insisting that the Boards fully discharged their obligations to
          consult both the ASMS and affected members and have initiated mediation as
          the first step in this process.  If the Boards continue to fail to fully discharge
          their obligations under the MECA then other remedies are available for us to
          pursue.

6.4      During the previous failed attempt to privatise the hospital laboratories, the
          ASMS took pains to point out to the DHBs the requirements of the MECA and
          their obligations under the Employment Relations Act.  This has included at
          meetings of the Otago ASMS-DHB Joint Consultation Committee (on 13 
          September 2005 a commitment was made by the DHB’s Chief Operating Officer
          to comply with the consultation provisions of the MECA), by email and by letter.

6.5      Underpinning the DHBs’ obligations under the MECA are the themes of
          empowerment of senior medical and dental staff and constructive engagement
          between them and DHBs.  In the introduction to the MECA it is stated that:

              District health boards (DHBs) as employers benefit from these employees
              having significant influence in their internal decision-making…

              Both the Association [ASMS] and DHBs are committed to working together to
              establish and strengthen this engagement with and empowerment of senior
              medical and dental officers.

              Both the Association and DHBs recognise that a relationship between DHBs
              and senior medical officers based on constructive engagement between them
              and empowerment of the latter has positive benefits for both recruitment and
              retention of employees.

          Despite these strong and positive expectations the Boards have deliberately
          and persistently disengaged and disempowered senior medical staff involved
          with the hospital laboratories.

6.6      The MECA has several strong pertinent provisions that require a relationship of
          good faith and constructive engagement between the DHBs and ASMS.  For
          example, Clause 44.3 of the MECA states that:

              Before the employer undertakes any review which might impact on the
              delivery or quality of clinical services, it shall consult and seek the
              endorsement of the Association as to the purpose, extent, process and terms
              of reference of such review and will give due regard to the ASMS’s advice.

          This has not happened and our formal dispute with the DHBs requires that it
          does happen.

6.7      Another example is Clause 44.2:

              In accordance with this acknowledgement and commitment [to involve
              employees], when an employer proposes any review that might result in
              significant changes to either the structure, staffing or work practices affecting
              employees the employer shall invite the employees concerned to participate
              in the review at the earliest practical opportunity.

          Again this has not happened and our action against the Board seeks to ensure
          that this requirement is complied with.

6.8      Further, Clause 44.4 states:

              The employer will advise the Association and affected employees of the
              recommendations of any concluded review in order to ascertain whether
              there are any serious professional or clinical concerns.  In the event of such
              concerns the employer will either endeavour to satisfactorily resolve them
              with the Association and affected employees or reach agreement over a
              process for resolution.

          Again the DHBs have failed to comply with this requirement.

6.9      The ASMS has also raised with the DHBs the impact of the amendments to the
          Employment Relations Act (ERA), in particular Schedule 1B which contained the
          Health Sector Code of Good Faith.  Instead of replying in any constructive way
          they have chosen to ignore these points.  The Boards have suggested that any
          redundancy that occurs in this situation would be a technical redundancy only
          due to the technical redundancy provisions in the MECA.  The MECA was settled
          prior to the ERA amendments and required only “the same or similar terms”
          and conditions of employment for the technical redundancy provision to exclude
          redundancy.  The ERA amendments override the MECA and require “the same”
          conditions.  Based on the responses of the DHBs so far, they appear not to
          have factored this into their costings.

6.10    Such is the uncertainty and lack of preparation of the DHBs that they are also
          now suggesting that the hospital laboratory staff might be employed on
          individual agreements by SCL, contrary to the promotion of collective
          agreements under the ERA and by the government.

6.11    Terms and conditions of employment include coverage by the MECA,
          superannuation commitments including obligations under Government
          Superannuation Fund and National Provident Fund and the protection of service
          should our members wish to take up employment at another DHB and the
          protection of any other service based entitlements and the same job
          description.  The DHB is not in a position to discharge these obligations under
          the Employment Relations Act and it is highly unlikely that SCL is able to do so
          either.  It is likely that maintaining access for employees of SCL to GSF and
          NPF will require the government to pass special legislation. The DHBs have
          previously been oblivious to this requirement and have allowed the RFP to
          proceed without addressing them in any way.

6.12    The next stage of this employment dispute is mediation.  If the mediation does
          not resolve the dispute then the dispute will need to be referred to the
          Employment Relations Authority.  If the Minister of Health was to approve the
          privatisation recommendation then he would be overriding the employment
          rights of the specialists employed in the hospital laboratories.  This would be
          inconsistent with respect for the sanctity of contract and may be subject to
          other legal challenges.

SECTION 7: What is the Way Forward?

7.1      While acknowledging that the Minister of Health’s approval is required, the
          DHBs have given the impression that his role is a rubber stamp.  For example,
          they are attempting to declare affected laboratory staff “surplus” even though
          the political go-ahead has not been given and have allowed SCL to block the
          filling of a much needed haematology position.

7.2      The Minister of Health should be alarmed not only with the failure of the Boards
          to seek the expert advice of their own professional and operational experts on
          the implications for the hospital laboratories but also with how the future
          configuration and organisation of the proposed privatised venture is
          proceeding.  In particular, operational details are being left in the hands of the
          planning and funding division of the Otago DHB, which is devoid of expertise in
          this area, and SCL which is inexperienced in the running of a full hospital
          laboratory and which will be driven by its own fiscal and shareholder interests.

7.3      The ASMS is agnostic on whether DHBs should provide community testing
          (it is ‘horses for courses’ and depends on whether the hospital laboratories can
          provide an at least as effective and efficient service as current private
          providers).  In particular the ASMS does not have a view on whether the
          hospital laboratories’ proposal for taking over community testing should be
          accepted.  In principle we do not object to it but, equally so, are not wedded to
          it.

7.4      It is incomprehensible that the Minister of Health would approve the
          privatisation proposal at the very least because of the following factors:

• It would represent the largest known privatisation of a core health service since at least the last 15 years and would be a green light for other DHBs to follow the lead in both laboratories and other core health services.
• The overriding agenda behind it is cost-cutting without sufficient regard to concerns of cost effectiveness and quality of service and there is every reason to believe that privatisation was a predetermined outcome (the process was loaded to achieve this outcome).
• Those with the clinical and practical operational expertise in running hospital laboratories have been deliberately excluded.
• The two DHBs have taken an extreme and inflexible ‘all-or-nothing; approach compared with other DHBs.
• The proposal contradicts and undermines key government objectives.
• There are considerable fiscal, viability and quality of service risks to the Crown.
• It would undermine the credibility of the health professional led approach to the effective and sustainable organisation and delivery of secondary and tertiary health services that has been proposed to the Minister of Health by the CTU on the initiative of the ASMS.
• It would undermine and threaten the due process of the action taken by the ASMS over the DHBs breech of its obligations under the national DHB MECA.

7.5      Consequently, the Minister of Health should first decline to approve the
          proposal from the Otago and Southland DHBs to privatise the hospital
          laboratories.

          Then he should require the Otago and Southland DHBs to either:

          1.  proceed with the hospital laboratories proposal, inclusive of support from
               the Canterbury DHB, to take responsibility for community testing; or

          2.  negotiate with a private provider(s) for the continued provision of
               community testing but use the funding contract to address the fiscal
               problems created by the current demand driven nature of community
               testing.

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