The Sonic Boom: How Alberta Became an “Offshore Business” in the Pathology Market

Why does Stephen Mandel, the newly minted Minister of Health, think it’s a good idea for Alberta taxpayers to support the lifestyles of wealthy Australian businessmen who earn more than $13 million a year, their executive teams who get ridiculous bonuses and stock options and the Australian economy as a whole with corporate tax contributions?

This is the bizarre consequence of the Health Minister’s decision to award a $3 billion 15 year lab services contract to a single service provider—Sonic Healthcare Limited.

Sonic who?

Sonic is a $6.7 billion company based in Sidney, Australia. It describes itself as “a leading participant in the pathology markets in Australia, the USA, Germany, Belgium, Switzerland the UK/Ireland and New Zealand, and in diagnostic imaging, medical centres and occupational health in Australia.”*

Sonic lab with logo in centre

Sonic refers to its non-Australian holdings as “offshore businesses” (which is appropriate given that Australia is the centre of Sonic’s universe but somewhat unsettling out here in the hinterland).

Sonic has a very simple business model. It provides lab services, administration services and facilities management services to medical practitioners. These services are paid for by patients, private health insurers or governments.

A serious risk to Sonic’s profitability is a government’s decision to reduce the cost of healthcare by implementing fee reductions or reducing the number of tests it will cover.

And therein lies the rub!

While the Alberta government is desperately trying to reduce the cost of healthcare (and its tax burden on Albertans) Sonic wants to increase the cost of healthcare with higher fees and more tests because these increase revenue which in turn increase profits.

And heaven help the offshore business that fails to deliver revenue as expected.

A Sonic “bust”

Sonic’s financial results took a hit in 2014 because its US offshore business suffered an unexpected drop in revenue.*

The US failed to meet revenue expectations because of currency fluctuations, weak macro economic conditions, Medicare fee cuts in Jan 2013, Apr 2013 and Jan 2014 (how dare they!) and Superstorm Sandy which devastated the eastern US in 2012 and depressed “volume growth” (Sonic’s term for more lab tests) because people had no heat, light, food or shelter (poor things were just trying to survive—how dare they!)

Superstorm Sandy

Not to worry, said Sonic’s CEO, I’m on it. He executed a $60 million “cost-out” initiative that he billed as the “most aggressive such undertaking ever”. Anyone who has worked in the corporate world knows that “cost-out”is code for slashing services and axing people.

Given that economic downturns, government changes to fee schedules and freaky climate conditions can strike anywhere, it is just a matter of time before Sonic will make a similar reference to the “Alberta offshore business” in a future Annual Report.  Something like:  Alberta had lower than expected revenues as a result of falling oil prices, federal/provincial fee reductions and massive flooding (or wildfires) in Northern Alberta. This will be followed by the CEO’s assurances that the Alberta offshore business losses will be offset by a mega-million dollar “cost-out” initiative similar to the one successfully deployed in the US.

Stephen Mandel

In Sonic’s world, fee adjustments and fewer tests curb growth. Luckily for Sonic, we likely  gave up the ability to reduce healthcare costs by agreeing that Albertans can be punished by “cost-out” initiatives if Sonic can’t make up the lost revenue elsewhere.

Oh and another thing…

While we’re on the topic of the lunacy; consider how much of the $3 billion Albertans will fork over for lab services will be diverted to cover the following expenses:

  • Taxes: Sonic’s effective tax rate is 25%. Alberta’s corporate tax rate is 10%. It doesn’t take a tax expert to figure out that some of the $3 billion will go directly into the coffers of the Australian Taxation Office.
  • Debt: Sonic is carrying almost $2 billion in debt. Its interest expense is around $60 million. Its carrying costs run as high as 8.74%. The Alberta government can borrow money at 2% to 6% interest. It will cost Albertans significantly more for Sonic to borrow the money necessary to make the land purchases and build the superlab that underpins the lab services contract than if the government had borrowed the funds itself.
  • Profit: Sonic’s profit for 2014 was $385 million. This was a 15% increase over 2013. Good news for Sonic’s shareholders but irrelevant to Albertans who won’t see a penny unless they hold Sonic stock.**
  • Executive compensation: Sonic will hire an Alberta-based CEO and management team to run the Alberta offshore business under the watchful eye of the $13 million man (sorry CEO) and his well paid executives. The Alberta executives will receive salaries, bonuses, stock options and severance contracts commensurate with the private sector. Déjà vu anybody?

Tell me again

So on behalf of all Albertans, I ask Stephen Mandel a simple question: ”This is a good idea, why????”

*Sonic’s fiscal year runs from June to June. All Sonic data taken from the 2014 and 2013 Concise Annual Reports

** http://www.youtube.com/watch?v=HugKKpfix4o

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35 Responses to The Sonic Boom: How Alberta Became an “Offshore Business” in the Pathology Market

  1. Well done Susan! I sure hope you run again in 2016 and can choose your party carefully so that you can win a seat in the legislature. Your comments are consistently well written and researched. I remain very impressed.

  2. Tom McPherson says:

    Can Mandel be stopped Susan? seems he always gets his way (short comment- have been a little shaky today Susan)

    • Tom, thanks for the comment. Even short ones are good ones.
      So in answer to your question, here’s a little background. One of the other bidders in this process was Dynalife. They’ve provided lab services to Edmonton and Northern Alberta for years pursuant to a contract with AHS. Their contract expires in Mar 2016. AHS latched on to this fact as part of its rationale for the need for a new lab services provider. Of course the expiration of Dynalife’s contract means nothing, AHS could have renewed it if it wanted to. Dynalife is convinced that the AHS bidding process was biased against them and asked Health Minister Mandel and Premier Prentice for help. Dynalife’s CEO said: “We have let our concerns be known to the Minister and Premier, and are asking for all options and next steps be reconsidered by government. We are determined to stand up for the many Albertans who have built this company into the local success story that it is.”
      The response from Mandel and Prentice? Dead silence.
      The only way to stop this from proceeding is to write to all the opposition leaders and tell them that the PCs through AHS made a bad decision and we want it reconsidered. Ironically, had Albertans had voted for someone other than the PCs in the recent by-elections, particularly Mandel’s riding, the PCs may have been more prepared to listen.

      • laurie thiesen says:

        Susan, I would like to set the record straight here. Dynalife has not been an Alberta company for at least 25 years, if not more. I have been a lab technologist for 33 years, and there was no Dynacare, Dynalife, or Dyna anything when I entered this field. 3 Alberta doctors each started their own private labs (Hansen, Kasper, and Stirrat). These businesses were all sold individually to other companies. Hansen’s was sold to Dynacare. Stirrats was sold to MDS, and I’m not sure if Kasper’s was sold or not. In 1995-96, with the Klein cutbacks in the lab services, these 3 companies amalgamated into one company, which became known as DKML (Dynacare Kasper Medical Laboratory). DKML has since morphed into Dynalife. The major owner of Dynalife is Borealis, an investment arm of the Ontario Teacher’s Pension. The minor owner of Dynalife is Labcorp out of the States, and has been convicted of fraudulent billing, and they have have to pay millions of $ in restitution. Don’t be fooled by the word minor, it just means they own less than Borealis, but I believe Labcorp owns just under 50% of Dynalife. Dynalife is as Albertan as Mickey Mouse! There is really nothing left of the Albertans who started these businesses. Those doctors cared more about patient care than they did the all mighty dollar. As far as Dynalife being a local success story, I still remember when the hospital labs were privatized in 95-96 by Dynalife, and how AHS had to buy them back from Dynalife because the hospital labs were in such a mess…..this is Dynalife’s local success????? I think Dynalife is wondering what they are receiving for all their major contributions to the Alberta PC party

      • Laurie, thank you for this clarification. It’s very helpful. I was aware of the Borealis/Labcorp ownership relationship and the mountain of litigation launched against Labcorp in the US, but I didn’t realize that Dynalife’s connection to Alberta (one that they’re playing up for all its worth by the way) was so tenuous. Given that Dynalife appears to have gotten zip for its support of the PC party, I’m really hopeful that it will turn to the courts to challenge this decision, if for no other reason than the public will get a chance to see how the Alberta government and its supposedly independent agencies make decisions that will impact Albertans for decades to come.

        You mentioned the 95-96 failed privatization experiment. It never ceases to amaze me that the PCs continue to push for privatization when history shows, both here and elsewhere, that privatization of public services just doesn’t work for anyone–except for those with friends in high places.

  3. ryan says:

    Rumor has it somebody owns a few shares in sonic health care!

    • Ryan: I wouldn’t be surprised! If that “somebody” bought those Sonic shares after the decision to award the contract to Sonic was made but before the decision was made public, they could be in big trouble for violating securities laws.

  4. GoinFawr says:

    How has it become the ‘norm’ that politicians can commit their constituents to agreements/contracts with renewal dates that extend decade(s) past the next test of their mandate?
    Shouldn’t spending decisions that involve such vast expenditure and lengthy timelines be tested by, at the very least, referendums?

    • GoinFawr: I wholeheartedly agree. A multi-billion dollar pipeline application has to go before the regulator to see if it’s in the public interest, but a multi-billion dollar 15 year contract for lab services rates nothing more than a couple of paragraphs in a government press release. The Opposition parties tried to get the previous Health Minister (Fred Horne) to explain the business case for why Albertans needed to fork over $200 million a year for 15 years. The best Horne could come up with was the existing contract with Dynalife (which provides 60% of northern Alberta’s lab services) was expiring in March 2016 and the volume of lab tests was going up by 6% a year. Interesting facts but hardly a business case. Why does the government need to go to a P3 arrangement which will cost more. Why a 15 year contract? Who bears the risk if Sonic falls on hard times? Why is Dylark shut out (at least they’re an Alberta company and not under the control of a foreign company on the other side of the planet). Lots and lots of questions and the Health Minister has nothing to say on the subject. Shameful.

  5. Claudette says:

    Thank you Susan for another well researched and thoughtful article that sheds a light in this perpetual darkness.

    • Thanks Claudette. I’ll be watching how Dynalife works its way through this. Dynalife asked Mandel and Prentice to reconsider this decision (good luck with that). It’s also appealed the AHS award to Sonic arguing that the bidding process was biased because it failed to consider the risks and costs of transition from Dynalife to someone else. This is a very good point. Transition should have been part of the RFP requirements. Interestingly if transition risks and costs had been considered Dynalife would have been well placed to win the contract. I don’t think Dynalife will be successful in its appeal, the AHS CEO already said she the RFP process was fine, so Dynalife’s only recourse now is to take AHS to court. There is a lot of case law on how to conduct an RFP properly, I’d love to see the AHS RFP process dissected under a legal magnifying glass.

  6. Carlos Beca says:

    Susan you are asking the wrong question. Why is this not a good deal if it is going to enrich even more those that own or run this Sonic disaster? The world has changed considerably and as long as someone is getting more money, who cares about the province or Albertans? In the eyes of people like myself, this is criminal. Yes I am surprised that Mandel is ignoring this issue. I am forming a different picture of the true ex-mayor of our city. As far as Prentice, it is exactly what I expected. Conservatism these days means rampant barbaric corporate capitalism and the total annhialation of common good. Society does not exist is the logo, the creation of their Saint Margaret Tatcher. Conservatism is no longer an ideology, it is now a cult and we all know what extreme cults can do. Their goal is now profits and money. If you imagine yourself in that frame of mind, you can easily answer your question and realize that to these people life could not be any better.
    I have no doubts whatsoever that many people in this story are benefiting personally from this deal. As far as the rest of us, those they call the people, we just have to get used to one more obvious corporate take over of our resources and another nail on our already moribond so called democracy. This is exactly what the Neo-cons believe in. Government and regulations and transparency are just obstacles in the way to their paradise – the true market fundamentalism.

    • Carlos, Sonic’s Annual Report reinforces your comments. The focus (as you’d expect) is on shareholder value. Sonic has 3 stakeholders: its staff who work in a quality workplace (I wonder how well this was received by the US offshore business that was cut by $60M), its “customers” who are clinicians and patients and (3) shareholders who expect ongoing “superior returns”.

      Sonic says it will grow (1) “organically” by increasing the number of tests, introducing new tests, particularly genetic tests, and focusing on preventative medicine (more screenings?), (2) acquisitions of more “offshore businesses” and (3) contracts like this one which in Sonic’s view reflect a global trend on the part of governments “to seek outsourced healthcare services from reputable private sector providers, in order to improve services and reduce costs.”

      Reading Sonic’s Annual Report one can’t help but wonder how Sonic will increase the number of tests and introduce new tests (necessary to drive up revenue) while at the same time improving services and reducing costs in order to hit its long term growth target of 5%. Something’s got to give and if the PC government expects to keep its promise that the cost of lab services will be no more than $200M for the next 15 years, I suspect the thing that’s going to break first is access to and quality of lab services in northern Albertans.

  7. Me says:

    A 1% kickback is 3 million dollars. Sayin’.

  8. Clark Wagar says:

    This other article was written just prior to Sonic being awarded the contract. I especially like the part that reads: “However, if the bid is successful, we anticipate the contract to commence by 1 July 2015 and to include the construction of a centralised laboratory in Edmonton, potentially funded under a shared cost arrangement with AHS.”

    http://analysisreport.morningstar.com/stock/research?t=SHL&region=aus&culture=en-US&productcode=MLE

    • John Smith says:

      Thank you for the very informative link. How is this even legal?

    • Thanks for the link Clark. There are lots of issues surrounding the construction of the Edmonton lab (also known as the “Superlab”) including whether it will be located close to the UofA to ensure that access is relatively unchanged or whether it will be moved further out of town to take advantage of lower land values. Whatever happens if Sonic is financing the acquisition of the land and construction, it will cost significantly more than if the government financed it because the government can borrow money at a much lower rate than a for-profit entity. Which gets us back to: why is the government outsourcing this in the first place?

  9. John Smith says:

    Thank you Susan for shining a light on this corrupt mess.

    I think I know now why Mandel came out of “retirement”.

    • John, you asked about the legality of all this. Unfortunately this is a typical P3 arrangement where the government strikes a deal with the private sector to “deliver” a public service. It becomes all the more lucrative for the private sector when it includes the right to construct, maintain and operate the facilities required for the public service. Our only recourse is to put pressure on the Opposition MLAs to get as much detail about this as possible. Rachel Notley would be a good place to start. She says P3s are just another way to hide debt. Our long term strategy should be to vote the PCs out of power in 2016.

  10. Lulymay says:

    We here in BC are facing a government out of control as well. Promises out of thin air and with no intention of delivering. Always look after friends first is their motto. Our major problem is that the media is in fact silent, except of course when their very favourite Public Affairs Branch sends them their news all nicely typed up for some newbie on local TV to read out as if it is fact. One thing I found interesting is that a major investor in Dynalife is the Ontario Teachers Pension Fund and we all know how much any right wing government just loves those Unions. Could it be that a prosperous pension fund is not welcome in Thatcher-thinking land?

    • Carlos Beca says:

      Lulymay in a Thatcher-thinking land there is no society. There are only individuals that fight each other with legal guns for domination. I believe that the objective is a society like Somalia except the rich are protected in Castle like areas. A return to serfdom and very God like half a dozen. 🙂

      • Carlos, to add to the irony, in a Thatcher-thinking world, the government thinks it’s fine to subsidize the “free market” with low corporate taxes and low royalties, but heaven forbid that someone suggests a progressive tax structure to stabilize our revenue stream.

    • Lulymay, I was talking to a friend from BC the other day. She too had a pretty dim view of the BC government. She said that during the election whenever Christie Clark was asked a question her answer was “LNG”. As in: Q: What is your government going to do about homelessness? A: LNG. When the LNG plants come we’ll have so much money there will be no homelessness. Q: What are you going to do about the lack of accessible healthcare? A: LNG. When the LNG plants come we’ll have so much money we’ll be able to afford more hospitals and doctors. Etc, etc, etc. You make a very good point about the media failing to do their jobs. We found the same thing here during our election. The media’s lack of insightful coverage of the issues was appalling. The big question the media should have been asking was: How are you going to pay for all your promises of new schools, hospitals, and long term care beds? But they didn’t and the PCs swept all four ridings in the recent by-election. Sad.

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  12. Elaine Fleming says:

    Susan thanks for this cross examination of the government’s deal with Sonic. We should also be asking what is the backup plan if they don’t meet standards or go belly up, which businesses are known to do. If they are providing an essential service, which no one can argue medical lab services aren’t, this is even more of a concern.

    One example that shows the folly of for-profit provision of necessary services was in the UK in 2011. Their largest long term care provider, the Southern Cross corporation went bankrupt in 2011, leaving 37,000 frail seniors and 41,000 employees in the lurch. They were huge, they were aggressive, and they went kaput.

    Then closer to home in 2010, we had the private surgical centre HRC (Networc) who had government contracts to do surgeries (1/3 of all Calgary hip and knee surgeries) but ended up en route to bankruptcy, with hundreds of patients left in limbo. This, after receiving a sole-source contract, steady remuneration with taxpayers’ money, patients, and even the Grace Hospital provided for them- the latter being one of the Calgary public hospitals Ralph Klein conveniently decommissioned in 1996. The Alberta government stepped in “to ward off the proceedings—which would have forced Networc into bankruptcy—and promised to pay for the costs of an interim receiver along with at least $2 million to keep the centre operating until January, when AHS anticipates a new surgical tower at the Foothills Medical Centre will be operational.”http://www.vueweekly.com/bankrupt_politics/
    More background in the Toronto Star, http://www.thestar.com/news/canada/2010/05/11/steward_bankrupt_beacon_of_privatized_healthcare.html

    Surely, Alberta has the talent and resources to provide these kinds of services for ourselves. Whatever happened to the aspiration for Edmonton to become the “Mayo of the North”? We should be providing more opportunities for our workforce, especially our new grads in the health and related occupations, along with diversifying our narrow-based economy. Aside from these benefits of resuming control over our lab services, we as patient-citizens would once again have a publicly accountable service with continuity and the mandate of caring for the populace, not a group of shareholders’ profits.

    • Bingo! As you so astutely point out Elaine, our landscape is littered with examples of failed sole source “ventures” that blew up in our faces. I’ve seen nothing in the Sonic deal to convince me that we’ve taken steps to avoid the same thing from happening here. Although truth be told, I’ve seen very little on the Sonic deal because the government is hiding the whole thing under a bushel (which doesn’t exactly inspire confidence).

      Your comment about “Mayo of the North” is very important. Alberta must do everything it can to break out of its single minded dependence on the oil and gas industry. Pittsburgh learned this lesson after the steel industry collapsed and thousands of people were thrown out of work. It took decades for the Rust Belt to recover, but recover it did. Pittsburgh now has world class medical facilities and teaching hospitals as well as Carnegie Mellon, a globally recognized research university with a computer program so outstanding that Google agreed to set up a local office there when the CM graduates refused to move to California. Compare this to Alberta’s mad rush to develop the oilsands as fast as possible. In the words of Dr. David Schindler, this “…just reinforces the old image of Canadians as simpleton hewers of wood and drawers of water. It appears that’s the only vision our leaders have for us.” It does indeed.

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  15. Hi Susan, are you planning a follow-up post with the recent announcements?

    • I thought about doing a follow up on this post, but have’t come up with any more information other than what I’ve seen in the press. Good move on Health Minister Hoffman’s part. She took a bold step when she decided to put a stop to the Sonic deal. I found the press coverage here in Calgary to be quite misleading. It implied that Ms Hoffman’s decision would cost taxpayers $3 million without specifying that the bulk of this expense was run up by AHS under the former PC government, specifically Fred Horne.

  16. Tom McPherson says:

    Very informative, All I know about the situation is that dynlabs have provided very good service to my wife and I, the lab is on 104th and 81st ave. I said to my wife that this looks very bad with Mandel involved. Think the electors are waking up so maybe some concrete action will evolve.

    • Tom, I believe you’re right. Albertans will hear more and more about these Tory projects that served the interests of a few at expense of the majority of Albertans. It will take a lot of effort on the part of the ND government to get Alberta back on course after the waste and inefficiency that’s crept into the system during the Tory years, but Rachel Notley has four years to get us back on track. If anyone can do it, she can.

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