AUSTRALIAN COMPETITION TRIBUNAL
Australian Association of Pathology Practices Incorporated  ACompT 4
TRADE PRACTICES – exclusive dealing – conduct whereby private in-patients in NSW public hospitals restricted to receiving pathology services from public pathology providers – whether conduct should be authorised pursuant to s 90 of the Trade Practices Act 1974 (Cth) (‘TPA’) – whether conduct third line forcing – whether the tests in s 90(6) and s 90(8) of the TPA are the same – whether public benefits arising from conduct outweigh detriments – tests are different, s 90(8) test not limited to benefits and detriments arising from a lessening of competition – nevertheless benefits outweigh detriments in relation to the conduct – authorisation granted subject to a condition
Trade Practices Act 1974 (Cth) s 45, 47(2), 47(6), 47(10), 88(1), 88(8), 88(10), 88(13), 90(6), 90(8), 101, 101(2)
ACCC v IMB Group Pty Ltd (in liq)  FCA 402 considered
Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395 discussed
Jones v ACCC (2003) 200 ALR 234 distinguished
Paul Dainty Corporation Pty Ltd v National Tennis Centre Trust (1990) 22 FCR 495 considered
Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357 applied
Re Media Council of Australia (No 2) (1987) ATPR 40-774 distinguished
Re Queensland Independent Wholesalers (1995) ATPR 41-438 distinguished
Re Queensland Co-operative Milling Association Limited (1976) ATPR 40-012 cited
Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 36 FLR 134 considered
Re Rural Traders Cooperative (WA) Limited (1979) ATPR 40-110 explained
Re Obadiah Pty Ltd (The Locksmith’s Case) (1980) ATPR 40-176 cited
File No 2 of 2003
File No 3 of 2003
RE: APPLICATION FOR REVIEW OF THE DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 27 JUNE 2003 GRANTING AUTHORISATION IN RELATION TO APPLICATIONS A90754 AND A90755 (PATHOLOGY SERVICES FOR PRIVATE IN-PATIENTS IN NSW PUBLIC HOSPITALS)
BY: AUSTRALIAN ASSOCIATION OF PATHOLOGY PRACTICES INCORPORATED
BY: NEW SOUTH WALES DEPARTMENT OF HEALTH
HELY J (Deputy President), MR G F LATTA and DR J E WALKER
7 APRIL 2004
AUSTRALIAN COMPETITION TRIBUNAL
Nos 2 and 3 of 2003
APPLICATION FOR REVIEW OF THE DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 27 JUNE 2003 GRANTING AUTHORISATION IN RELATION TO APPLICATIONS A90754 AND A90755 (PATHOLOGY SERVICES FOR PRIVATE IN-PATIENTS IN NSW PUBLIC HOSPITALS)
AUSTRALIAN ASSOCIATION OF PATHOLOGY PRACTICES INCORPORATED
NEW SOUTH WALES DEPARTMENT OF HEALTH
HELY J, MR G F LATTA & DR J E WALKER
DATE OF DETERMINATION:
7 APRIL 2004
THE TRIBUNAL DETERMINES THAT:
1. Subject to the imposition of modified Condition C1 (see below), an authorisation be granted to the public health organisations named in par 2(b) of the application for authorisation A90754 to make and give effect to contracts, arrangements and understandings:
· between public health organisation and its private in-patients that the patient’s pathology service requirements will be supplied by a pathology practitioner appointed by the public health organisation; and
· between each public health organisation and Senior Medical Practitioners exercising the right of private practice as well as Visiting Medical Officers that such practitioners should refer pathology service requirements for private in-patients treated by them to a pathology practitioner appointed by a public health organisation.
2. The authorisation referred to in par 1 applies in relation to persons falling within s 88(10) of the Trade Practices Act 1974 (Cth).
3. Subject to the imposition of modified Condition C1 (see below), an authorisation be granted to the public health organisations named in par 4 of the application for authorisation A90755 to engage in the following conduct which may or would constitute exclusive dealing:
· the supply of non-pathology medical services by a public health organisation to private in-patients of public hospitals in NSW on condition that patients acquire pathology services from a pathology practitioner appointed by a public health organisation; and
· public health organisations requiring Senior Medical Practitioners exercising a right of private practice and Visiting Medical Officers to refer private in-patients in public hospitals in NSW to a pathology practitioner appointed by a public health organisation.
4. Modified Condition C1 be that:
Public health organisations shall allow referring salaried Senior Medical Practitioners and Visiting Medical Officers in the treatment of private in-patients to refer pathology tests to, or to seek second opinions from, private pathology laboratories where the referring doctor:
· considers that it is in the best interests of the patient; and
· unless impractical for medical reasons, obtains an acknowledgement in writing from the patient that she or he will pay any out-of-pocket expense incurred in connection with the test or second opinion.
5. The authorisations relating to applications A90754 and A90755 are granted for a period of five years from the date hereof.
AUSTRALIAN COMPETITION TRIBUNAL
Nos 2 AND 3 OF 2003
APPLICATION FOR REVIEW OF THE DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 27 JUNE 2003 GRANTING AUTHORISATION IN RELATION TO APPLICATIONS A90754 AND A90755 (PATHOLOGY SERVICES FOR PRIVATE IN-PATIENTS IN NSW PUBLIC HOSPITALS)
AUSTRALIAN ASSOCIATION OF PATHOLOGY PRACTICES INCORPORATED
NEW SOUTH WALES DEPARTMENT OF HEALTH
REASONS FOR DECISION
1 The New South Wales Department of Health (‘the DOH’) facilitates and administers the public health system in New South Wales. Among other things, the DOH is the policy, planning and assessment body for the public health organisations (‘PHO’) which provide hospital, health and ancillary services to the public in NSW. PHOs include area health services (‘AHS’), statutory health corporations (‘SHC’) and affiliated health organisations (‘AHO’) which together constitute the public health system. An AHS is principally concerned with the provision of health services to residents within its geographical area; SHCs provide health services and health support services other than on an area basis; AHOs are non-profit religious, charitable or other non-government organisations providing certain health services or health support services which facilitate the operation of the public health system.
2 During 2002/2003 there were 197 public hospitals in New South Wales operated and managed by PHOs. All in-patients treated at a public hospital must make an election to be treated as a public patient or as a private patient.
3 When a patient elects to be treated as a public patient, the hospital is obliged to provide the patient with comprehensive medical, diagnostic and nursing treatment through its own staff or by other arrangements, without raising any charges to the patient. A patient who elects to be treated as a public patient is treated by a doctor appointed by the hospital.
4 When a patient elects to be treated as a private in-patient in a public hospital the patient is charged fees for his or her medical treatment and accommodation. If the patient is eligible for Medicare, fees charged to the patient will attract Medicare benefits. Where a patient is a private in-patient, the patient is entitled to claim 75 per cent (‘the Medicare benefit’) of the Medical Benefit’s Schedule fee (‘the schedule fee’) from Medicare.
5 Private health insurers offer Medicare eligible patients insurance for:
(a) the difference between the Medicare benefit and the schedule fee;
(b) any additional amount above the schedule fee where applicable, ie where this has been negotiated between the relevant health insurance provider and the service provider; and
(c) additional benefits for hospital accommodation and other hospital charges depending on the level of health insurance coverage of the patient.
6 Services to private non in-patients attract a rebate of 85 per cent of the schedule fee, with a maximum gap between the schedule fee and the benefit of $50.90 (indexed annually).
7 Where a treating medical practitioner requires pathology services for the proper diagnosis and treatment of a private in-patient, the patient is entitled to claim payment for that service, or a contribution towards the cost, under Medicare.
Public Hospital Medical Practitioners
8 Public hospitals in New South Wales employ or acquire the services of medical, nursing, health professionals, technical, administrative and other relevant staff. Some of the medical staff are employees of the relevant PHO and others are visiting practitioners providing services as independent contractors under contracts for services.
Senior Medical Practitioners – Staff Specialists (‘SMP’)
9 Senior medical practitioners (‘SMP’) (who are specialists, and include pathologists) are employees of a PHO engaged to treat patients in the hospitals for which the PHO is responsible. In the case of pathologists, they also provide services to other PHOs. Specialised medical staff who are employees of PHOs are covered by the Staff Specialists (State) award and are now known as Staff Specialists. Until a recent change in the name of this award they were referred to as Senior Medical Practitioners.
10 In addition to treating public hospital patients, SMPs may exercise a ‘right of private practice’ under which they may treat private in-patients and privately referred non in-patients. Allowing specialists to earn additional income through the exercise of rights of private practice assists in attracting and retaining SMPs.
Rights of Private Practice
11 We summarise in the following paragraphs the entitlements of SMPs to derive income from the exercise of the right of private practice and the manner in which that income is accounted for and applied. It is necessary to do this in some detail, as it will be germane to a number of issues which the Tribunal will address later in these reasons.
12 The Salaried Senior Medical Practitioners’ Determination (‘the 1998 Determination’) sets out rights of private practice arrangements for all SMPs treating private patients in public hospitals. There were earlier rights of private practice arrangements in place prior to the 1998 Determination.
13 The 1998 Determination provides that SMPs must ‘elect to participate in a Level arrangement, i.e. either a Level 1, 2, 3, 4 or 5’. This election is valid for one year, unless it is varied by mutual agreement between the SMP and the PHO.
14 SMPs in level 1 are generally those who have more limited private practice opportunities. Levels 2 – 5 cater for SMPs with progressively higher private practice earning capacity.
15 The levels are as follows:
An SMP who elects a Level 1 arrangement is paid the relevant award salary rate plus the 17.4 per cent special allowance. In addition, the SMP is entitled to a further allowance of 20 per cent of the combined salary and special allowance in return for the assignment of the billings from the SMP’s private practice directly to the PHO.
An SMP who elects a Level 2 arrangement is paid the relevant award salary rate plus the 17.4 per cent special allowance. In addition, the SMP is entitled to an allowance of 14 per cent of the combined salary and special allowance. A Level 2 SMP is also entitled to drawing rights from private practice billing revenue up to a maximum of 24 per cent of the combined salary and special allowance. An SMP who elects a Level 2 arrangement is guaranteed drawing rights of 11 per cent if private practice billings on behalf of the doctor are not sufficient to permit drawings of up to 11 per cent, or where private practice billings make possible drawings of over 11 per cent but less than 18 per cent, the guaranteed supplementation is 18 per cent.
An SMP who elects a Level 3 arrangement is paid the relevant award salary rate plus the 17.4 per cent special allowance. In addition, the SMP is entitled to an allowance of 8 per cent of the combined salary and special allowance. A Level 3 SMP is also entitled to drawing rights from private practice billing revenue up to a maximum of 36 per cent of the combined salary and special allowance (and is guaranteed drawings rights of 17 per cent if private practice billings on behalf of the doctor are less than this amount).
An SMP who elects a Level 4 arrangement is paid the relevant award salary rate plus the 17.4 per cent special allowance. A Level 4 SMP is also entitled to drawings rights from private practice billing revenue up to a maximum of 50 per cent of the combined salary and special allowance (and is guaranteed drawing rights of 25 per cent if private practice billings on behalf of the doctor are less than this amount).
An SMP who elects a Level 5 arrangement is paid 75 per cent of the relevant award salary rate plus the 17.4 per cent special allowance on the reduced salary. A Level 5 SMP is also entitled to drawing rights from private practice billing revenue up to a maximum of 100 per cent of the combined salary and special allowance at the non-reduced rate.
Private Practice Revenues
16 The 1998 Determination requires all accounts for services rendered to private patients by an SMP working under Levels 1 – 5 to be issued by the PHO acting as the agent for the SMP.
17 Fees received from private in-patients (other than in response to billings by Level 1 SMPs) are paid into a trust fund known as the No 1 Account. SMPs at Levels 2 – 5 are entitled to draw funds from the trust fund to supplement their salaries. These drawings are in accordance with the different levels as outlined in the 1998 Determination.
The No 1 Account
18 This account was previously referred to as the Private Practice Trust Fund.
19 Schedule 3 of the Health Department Circular 2000/106 defines the No 1 Account as:
‘No 1 Account – An account administered by PHOs, or such other organisation as agreed, into which all rights of private practice receipts are deposited, and from which drawings and infrastructure charges are paid.’
20 Charges are made against the No 1 Account in the following order, to the extent that there are sufficient funds available:
(i) monthly infrastructure fees, to compensate the PHO for the provision of services and the use of facilities used in generating private practice revenue;
(ii) approved costs for Levels 2 – 5 specialists, which are accounting costs for partnerships and the reimbursement of the costs of obtaining medical indemnity insurance in respect of the provision of services to private patients; and
(iii) drawing rights for Levels 2 – 5 SMOs.
21 Any residual funds that remain in the No 1 Account at the end of each financial year are, after allowing for GST if applicable, paid into a No 2 Account.
The No 2 Account
22 The Board of each PHO is responsible for the expenditure of funds from the No 2 Account.
23 The funds in the No 2 Account are applied as follows:
(i) under clause 5 of the 1998 Determination, all SMOs are entitled to be paid Training, Education and Study Leave (‘TESL leave’) each year. The TESL leave entitlements of Levels 2 – 5 SMOs is the first charge on the No 2 Account, provided that there are sufficient funds in the No 2 Account to meet these costs.
(ii) The second charge on the No 2 Account is the annual audit and accounting costs for the Account.
(iii) The remaining funds in the No 2 Accounts are used for purposes that will advance the health service and the level of clinical services provided by it: these purposes are primarily education, research and the purchase of special equipment. Health Department Circular 2003/63 puts forward the following examples of appropriate expenditure:
· the purchase and/or lease of special equipment/software for the PHO (any such purchased equipment becomes the property of the PHO;
· research funding, including equipment, scholarships or fixed term project funding;
· travel/study grants for persons performing research within the PHO;
· donations to research organisations;
· financial support for libraries within the PHO;
· membership of organisations which support research and professional development;
· support for visiting experts who may provide lectures or demonstrations to staff;
· books, journals, and electronic information sources; and
· the payment of costs associated with the generation of income through the exercise of the rights of private practice arrangements which apply to SMPs.
Visiting Medical Officers (‘VMO')
24 A VMO is a medical practitioner, practising in the public or private sector, appointed after passing the relevant hospital’s accreditation process under a service contract to provide services as a visiting practitioner for or on behalf of the PHO. VMOs are obliged by their service contracts to treat public patients of PHOs. VMOs are able to treat private patients, and to charge fees either directly or through the PHO for services provided to those patients.
25 Pathology is a highly specialised branch of clinical medicine. It involves understanding and providing diagnostic data on the causes and processes of diseases in humans and providing scientific analysis which forms an essential basis for medical diagnosis and treatment.
26 Pathologists are specialist medical practitioners who have successfully qualified for a degree in medicine at a recognised university, and, after internship, have undertaken specialist post-graduate training and examination in pathology.
27 The role of a pathologist is to carry out or supervise the carrying out of tests on samples of tissue, blood and other body secretions in order to identify the cause of an illness, or to monitor therapy, and to provide the results, and appropriate interpretation of those results, to the medical practitioner responsible for treating the patient for whom the pathology tests have been undertaken.
28 Pathology can be divided into a number of generally recognised sub-specialties: anatomical pathology, chemical pathology, genetics, haematology, immunology, microbiology and cytology. Pathologists usually work in laboratories. A comprehensive laboratory will have a range of clinical divisions. Each division within a laboratory has its own personnel and specialist expertise and undertakes a range of services within that clinical discipline. There are about 1200 different pathology tests conducted by public pathology laboratories around Australia, ranging from common routine tests to the extremely rare. Most laboratories do not conduct the full range of tests – the Pathology and Laboratory Medicine Service of the Northern Sydney AHS (PaLMS), which is a major public pathology laboratory, only conducts around 600 different tests. For the more specialised and highly skilled tests there are generally a small number of ‘reference laboratories’, such as PaLMS, recognised for their particular skill and expertise in that area, to which other pathology laboratories will refer specimens for testing.
29 Pathology tests vary considerably in the degree of skilled input required by the pathologist. Some tests have become highly automated and routine in recent years, utilising ‘mass production’ technology, while others still require a high degree of skilled manual input by the pathologist. The Tribunal was given as an example chemical pathology assays, which are highly automated, compared to histopathology assays, which are considerably labour intensive.
30 Pathology testing is required by patients and doctors in both community and hospital settings and is provided by both private and public pathologists. Some test results, particularly in a hospital setting, will be required urgently, for example for diagnosis during surgery, while others will be less urgent.
31 The combination of technology, specialisation and variable degrees of urgency in pathology testing has resulted in a ‘hub and spoke’ structure of service provision in both the public and private sectors of the pathology industry. Specimens for pathology testing may be collected in doctors’ surgeries, hospitals or ‘collection centres’ owned by the pathology provider and then couriered to the laboratory for testing. Routine automated and non-urgent tests, as well as the more specialised tests, are conducted in large scale ‘off site’ laboratories to capture economies of scale and scope; while more urgent tests are conducted at smaller laboratories on hospital sites.
Market Failure in Pathology
32 From an economic perspective, market failure occurs where the operation of a competitive market fails to produce an efficient allocation of resources. The pathology industry, like most health services, is characterised by a number of well recognised ‘market failures’. This was acknowledged by both expert economists (Ms Smith and Dr Abraham), either in their statements and/or in their oral evidence.
33 A cause of market failure in this context is that the provision of pathology services is characterised by ‘moral hazard’ associated with the existence of insurance (both private health funds and Medicare) since the existence of insurance cover tends to make patients relatively insensitive to the price of medical services and hence consume too much. Patients will, of course, ultimately pay for their collective consumption of pathology services, either through insurance premiums and/or through taxation and the Medicare levy, but the link is indirect and not proportionate.
34 A second cause of market failure is the principal-agent problem intrinsic to the asymmetry of information in the patient-doctor relationship. The patient goes to a doctor precisely because they do not have the expert knowledge required to diagnose and treat their condition, or to know what pathology tests need to be conducted or who should conduct them. The doctor orders the tests they consider necessary from a medical perspective, but they do not pay for those tests, and hence will not generally consider the marginal costs and benefits of them.
35 The provision of pathology services also has some characteristics of a ‘public good’. A public good, from an economic perspective, is one in which there is no rivalry in consumption, and where everyone can consume the total output. Common examples are lighthouses and national defence. While individual pathology tests are clearly ‘private goods’ which are uniquely consumed by the individual, the knowledge that a public pathology service exists to provide services when required provides everyone with a sense of security, which individuals value to a greater or lesser extent. Like many goods and services, pathology has both private and public good characteristics.
36 In addition to this broad ‘safety net’ aspect of public pathology services, certain individual pathology services also share some public good characteristics. For example, pathology testing to detect and control the spread of infectious diseases and the provision of autopsies and forensic pathology services to assist in law enforcement services. It could also be said that there is a broad public benefit and/or externality arising from the improved health of the population and productivity of the workforce, which arises from the provision of a public health system.
37 From an economic perspective, resources are efficiently allocated to public goods when the sum of the marginal benefits received by all consumers are equal to the marginal cost of production; as compared to private goods, which are efficiently provided when individual marginal benefits are equated to marginal cost. Public goods cannot be efficiently provided through a market mechanism because to exclude those who do not pay is in itself inefficient; and because everyone has an incentive not to reveal and pay for the value they place on the public good, but rather to let others pay for it and then to benefit from its provision.
38 Accordingly, public goods are generally funded through public taxation and expenditure, but there are still inherent problems in determining the optimal level of output and raising taxes which themselves minimise the distortions to the allocation of resources. Furthermore, the public finance system is used to pursue goals of equity as well as efficiency. Indeed, another aspect of the public health system, including public pathology, is that it can be characterised as a ‘merit good’, where community values override consumer sovereignty and income is redistributed in part through the provision of merit goods on a free or subsidised basis.
39 Finally, the training and education of pathologists, which may in part be characterised as a public good, also involves private externalities and associated problems of ‘free riding’. An externality is a cost or benefit which bypasses the market and hence is not taken into account by individuals making their production and consumption decisions. The training of pathology registrars involves a period of several years (generally five) study and practice in a laboratory setting under the supervision of qualified pathologists. Clearly this is a relatively costly exercise for the pathology laboratory providing the training, involving the payments to the registrar and their supervisors and the provision of materials and equipment. Once trained, however, the pathologist can leave to go and work for another pathology laboratory, who then receives the benefit of their training without paying for it.
40 Research and development in relation to pathology services is also characterised by problems associated with public goods and externalities. The benefit of such research, as opposed to the particular pieces of equipment and testing agents which result from it, is clearly a public good which can be enjoyed by all laboratories without impeding the ability of others to consume those benefits. While public goods involve generalised externalities, there is also, like the training of pathology registrars, a particular private externality involved when one pathology provider, and their patients, benefit from research and development conducted by another pathology provider, except to the extent that those developments may be covered by patent protection.
Regulation and Public Provision of Pathology Services
41 The pathology industry, like the health sector generally, is characterised by a high degree of regulation and by extensive public provision and public funding of pathology services. This section discusses regulation, and much of the information has been sourced from the Background Paper to the Review of Commonwealth Legislation for Pathology Arrangements Under Medicare, provided by the Australian Competition and Consumer Commission (‘the ACCC’) as Document 40.
42 Pathologists, pathology providers and pathology laboratories are subject to regulations concerning the standards of testing and the ethical provision and promotion of pathology services. These arrangements were introduced following the recommendations of the Pathology Services Working Party in 1977 and the Joint Committee of Public Accounts 1985 report on medical fraud and over servicing in pathology. An Approved Pathology Practitioner (‘APP’) is a medical practitioner who has signed an undertaking to the Federal Minister for Health; an Approved Pathology Authority (‘APA’) is an entity, person, state or territory who has signed an undertaking; and an Accredited Pathology Laboratory (‘APL’) is a pathology laboratory that has been inspected and accredited under a scheme jointly administered by the National Association of Testing Authorities, Australia (‘NATA’) and the Royal College of Pathologists of Australasia (‘RCPA’). The regulation of standards is tied to the funding of pathology services through Medicare, because Medicare payments can only be made in relation to services provided by or on behalf of an APP in an APL owned by an APA.
43 Expenditure on public pathology services in New South Wales is provided through the Australian Healthcare Agreement (‘AHCA’) between the Commonwealth and New South Wales. This five year agreement, and its predecessors, provide for the joint funding of the public health system, including the public pathology service, by the Commonwealth and State governments, on the basis of approximately equal shares. However, no specific amount of funding is allocated to pathology services.
44 Medicare payments for pathology services are regulated by the Pathology Services Table (PST) of the Medicare Benefits Schedule (‘MBS’). The PST includes over 300 ‘items’ for which Medicare benefits are payable. These include both items for specific pathology tests and items for ‘patient episode initiation’ (‘PEI’) fees and ‘specimen referral’ fees. The latter covers those more specialised tests which need to be referred to another laboratory for testing. Certain tests, generally those which are either new or rare, are not funded under the MBS. Some other pathology services, such as autopsies and second opinions, are also not funded (a second opinion here is a reference to a situation where a second pathologist provides additional interpretation of material provided by the first pathologist, as distinct from where a repeat test is ordered from a second pathologist, see further par 78 below).
45 The PEI fee was introduced in 1991/92 to cover overhead type costs associated with the collection and transportation of specimens for any particular patient episode (see ACCC Document 62). At the same time the MBS fees for individual tests were reduced, and the differential between MBS fees for tests conducted by private and public pathologists was abolished. Public pathologists are not eligible to receive the PEI. The basis for this distinction is apparently that public pathology laboratories are considered to be funded for these overheads through the block funding provided by the AHCA. However, it appears that to the extent this was ever the case, it is now widely recognised that there is no real basis for the distinction and all sectors of the industry now support the extension of PEI payments to both the private and public sectors. Nevertheless, the distinction remains in place for the moment.
46 Pathologists are not price regulated, but Medicare benefits are only payable for 85 per cent of the MBS fee for testing in the community and 75 per cent of the MBS fee for testing of private patients in hospital. Health funds will then pay the remaining 25 per cent, or more where there is a Medical Purchaser Provider Agreement (‘MPPA’) in place which may provide for ‘no gap’ cover to an amount exceeding the MBS rate. Evidence was given to the Tribunal indicating that approximately 80 per cent of patients in private hospitals are covered by an MPPA.
47 It appears that the MBS fees were originally based on some notion of the relative cost of providing different pathology tests. However, over time technology has significantly reduced the costs of providing some tests, while others remain labour intensive. Changes to the MBS fees do not appear to have kept pace and fee levels appear to be the outcome of a bargaining process as much as any scientific estimate of relative costs. There appears to be a broad consensus that some tests are accordingly more profitable than others, when charged at the MBS fee. Professor Burnett, the director of PaLMS, gave evidence that there is currently work being undertaken to bring the MBS fees into line with the average costs of conducting various categories of tests, as measured by the benchmarking program, but the results of that work are not yet available.
48 Furthermore, to the extent that the MBS fee was originally based on some notion of relative cost, it was average not marginal cost, and accordingly the gap between the MBS fee and the marginal cost of different tests will vary – in particular, tests which involve higher levels of fixed costs (such as capital equipment and fixed labour) will have a larger gap than those which involve largely variable costs (such as materials and variable labour).
49 Payments for pathology services under Medicare are also regulated in a number of other ways. For example, the patient must use the pathologist nominated by the referring doctor; payments will only be made for services provided by accredited pathology providers and laboratories; and referral pads that are used to order pathology tests must not include a ‘tick box’ list of pathology services.
50 General practitioners (‘GPs’) are no longer eligible to receive Medicare payments for specimen collection. This change was introduced to limit over-servicing by GPs. However, it encouraged the spread of ‘collection centres’ where specimens are collected by pathology providers. In a further attempt to limit over-servicing in pathology, restrictions were introduced on the number of collection centres which any particular pathology provider could operate. The original scheme of ‘licensed collection centres’ (‘LCCs’), introduced in 1992, is gradually being replaced, over the period 2001-2005, by an ‘approved collection centres’ scheme (‘ACCs’) (see ACCC documents 37, 40 and 50). The ACC scheme differs from the LCC scheme in that it shifts the emphasis somewhat away from control over the number of collection centres onto the regulation of standards. However, the number of collection centres which any given pathology provider can operate is still restricted according to their history of service provision, in terms of the number of Medicare or Medicare-like episodes, which tends to favour incumbent providers and erect barriers to new entry. Public pathologists were not allowed to operate LCCs but are permitted to operate ACCs.
51 Finally, global expenditure on pathology services under Medicare has been regulated in recent years through a series of industry wide Pathology Quality and Outlays Agreements, which limit the growth in Medicare payments and link this to structural reviews and reform. The third agreement is currently under negotiation and the Tribunal was told that one element in these negotiations is the provision of specific funding for additional registrar training places.
Public Pathology Services
52 PHOs provide pathology services through public pathology laboratories to in-patients and non-inpatients, both public and private, in NSW hospitals. These pathology services are funded by:
- public funding under the AHCA received as a ‘fee for service’ in relation to pathology testing for public patients referred by PHOs; and
- fees received from private patients under rights of private practice exercised by public pathologists.
53 Most public pathology laboratories are departments of public hospitals. They operate as part of AHSs. However, within this system they are required to operate as independent business units, operating on a commercial basis in their dealings with the area health service and associated hospitals, receiving payments on some form of ‘fee for service’ basis from the various PHOs in relation to the provision of pathology services for both public and private patients. The majority of pathologists in NSW public hospitals are SMPs.
54 In some areas and regions in NSW government owned pathology laboratories are organised in a network with the major laboratory being located at or attached to a large hospital in an area and subsidiary laboratories located at smaller hospitals. An example is PaLMS, which has its central laboratory located at Royal North Shore Hospital and smaller laboratories located at other hospitals and health care facilities. This system is the public sector version of the ‘hub and spoke’ network discussed in par 31 above.
55 There is significant interaction between the public and private sectors in the area of pathology. A number of AHSs use individual private pathologists as consultant clinicians in areas such as haematology. Similarly, a number of private hospitals across NSW use government employed pathologists, either in addition to pathologists in private practice, or in substitution. However, as with other medical disciplines, teaching and research in pathology tend to be concentrated in the large public teaching hospitals.
56 The number of private patients in public hospitals in Australia has been declining over recent years, from 36 per cent of insured separations in 1993/1994 to 19 per cent in 1998/1999 (ACCC Document 64) and 14 per cent in 2001-2002 (Australian Institute of Health and Welfare, Australian Hospital Statistics 2001-2, Table 6.5). The total number of private patient separations from public hospitals in NSW in 2001-2002 was 235,049, of which 148,555 were privately insured and 15,757 were self-funded (Australian Institute of Health and Welfare, Australian Hospital Statistics 2001-2, Table 6.1), with the remainder covered by workers’ compensation, insurance, or special arrangements for veterans and prisoners. The total value of private practice billings to hospital inpatients by public pathologists in NSW in 2002-2003 was $23,782,437.
57 The structure of the public pathology service in NSW is currently the subject of a review by Paxton Partners, with a view to increasing the efficiency of service provision, perhaps through the merging of area health service based pathology services into larger networks. The particular ‘merged entities’ model which has been proposed in the draft report would provide for three public pathology services, each covering multiple AHSs and each as big as any of the private sector pathology providers, allowing the realisation of increased scale economies. The goal of this merging is to allow the public providers, who were described by Professor Burnett as typically much smaller than private pathology providers, to operate on a larger scale.
58 Private pathologists are the principal providers of pathology in the community and in private hospitals.
59 No data was provided to the Tribunal on the total amount billed for pathology services in the community. However, Medicare data indicates that $465 million was paid in total Medicare benefits for pathology, and the associated total billings would be higher, while only $63 million was billed to hospital in-patients.
60 Developments in the technology of pathology testing, as well as regulation of the number of pathology collection centres, have encouraged considerable consolidation in the private sector over the last decade (ACCC Documents 27 and 40). The industry has transformed from one characterised by private partnerships to one characterised by large corporations and it has been estimated that four companies now account for over 80 per cent of Medicare pathology payments (ACCC Document 40).
61 The provision of pathology services in private hospitals is subject to a variety of arrangements. However, the most common is that a more or less limited number of pathology providers are ‘credentialed’ (see below) at any particular hospital and there is one ‘preferred’ or ‘incumbent’ provider, with an exclusive on-site laboratory and often a ‘Service Level Agreement’ with the hospital, who tends to receive the majority of referrals. In the case of co-located hospitals, such as North Shore Private and Royal North Shore Hospital, this will often be the co-located public pathology service. Other pathologists will be credentialed, either on a permanent or temporary basis, to enable referring doctors to exercise choice in their use of pathologists. The total value of private pathologists billings to private hospital inpatients in NSW in 2002-2003 was $39,036,365. However, the bulk of private pathology provider billings are derived from tests conducted in the community, with 60 per cent of referrals being from GPs (ACCC Document 27).
62 Credentialing is a process undertaken by public and private hospitals appraising medical practitioners for the right to admit and treat patients at these hospitals. The primary purpose of credentialing is to ensure that medical staff are of the appropriate expertise in the medical fields that are required by the hospital. The process of credentialing is mandated by hospital accreditation requirements.
63 Professor Burnett provided the following explanation of credentialing:
‘Credentialing is undertaken by a hospital’s medical appointments advisory committee which makes recommendations to the board of the relevant PHO. The credentialing process not only involves an examination of the skills and qualifications of the practitioner, but is directed to:
(a) ensuring that practitioners with suitable experience are placed in suitable positions within the hospital;
(b) ensuring that practitioners provide clinical services appropriate to the particular role of the facility;
(c) ensuring that the hospital has available to it the necessary range of clinical services including relevant specialities and sub-specialities to perform its particular role; and
(d) facilitating the hospital’s requirement to manage clinical and other services to ensure their proper coordination and delivery to patients in a clinically effective manner.’
64 For many years it has been the policy of the DOH that public hospital derived pathology should ordinarily be processed through the public sector. The rationale for the policy (which appears to date back to about 1977) was described in a letter of 7 September 1987 from the Regional Director of the South West Region to the Secretary of the Department as follows:
‘Public sector laboratories must have the financial support of the public hospital system if it is to retain competent staff, upgrade services and purchase contemporary equipment in order to remain competitive with private laboratories.’
65 On 4 January 1989 the DOH issued Circular No 89/1 (File C1121) (‘the Circular’). The Circular was designed to reinforce and clarify previous policy on the provision of pathology services in public hospitals. Clause 4 of the Circular provides as follows:
‘In terms of the actual examination of specimens, Regional and public hospitals/areas must refer all inpatient and outpatient specimens to the appropriate Regional or Area Group Pathology Service. Specimens may only be referred on to laboratories in the private sector when these services are not available in the public sector.’
66 On 14 May 1999 the ACCC wrote to the DOH asserting that the ACCC had received advice from counsel that the DOH policy of insisting that all patients of public hospitals exclusively use the diagnostic services provided by the hospital was in breach of both s 45 and s 47(2) of the Trade Practices Act 1974 (Cth) (‘the TPA’). The letter noted the possibility that the DOH might seek authorisation for the conduct at issue.
67 On 1 November 2000 the DOH lodged two applications pursuant to subsections 88(1) and 88(8) of the TPA seeking authorisation for what may broadly be described as the DOH’s policy of requiring private in-patients in NSW public hospitals to obtain pathology services from NSW Health pathologists.
68 Application A90754 was made pursuant to subsections 88(1), (10) and (13) of the TPA for an authorisation:
· to make a contract or arrangement or arrive at an understanding, a provision of which would have the purpose, or would have or might have the effect, of substantially lessening competition within the meaning of s 45 of the TPA;
· to give effect to a provision of a contract, arrangement or understanding which provision has the purpose, or has or may have the effect, of substantially lessening competition within the meaning of s 45 of the TPA.
69 The application included the following brief description of the contract arrangement or understanding:
‘(a) Contracts, arrangements or understandings between each public health organisation and its private in-patients that the patients’ pathology service requirements will be supplied by a pathology practitioner appointed by a public health organisation; and
(b) Contracts, arrangements or understandings between each public health organisation, and SMPs exercising the right of private practice as well as VMOs that such practitioners should refer pathology service requirements for private in-patients treated by them to a pathology practitioner appointed by a public health organisation.’
70 Application A90755 was made pursuant to subsections 88(8), (10) and (13) of the TPA for an authorisation under those subsections to engage in conduct that constitutes, or may constitute, the practice of exclusive dealing.
71 The following description was given of the conduct that would or might affect competition or constitute the practice of exclusive dealing:
‘Public health organisations requiring senior specialists exercising a right of private practice and VMOs to refer private in-patients in public hospitals in NSW to a pathology practitioner appointed by a public health organisation.
The supply of non-pathology medical services by a public health organisation to private in-patients at public hospitals in NSW on condition that the patient acquire pathology services from a pathology practitioner appointed by a public health organisation.
These conditions implement Circular 89/1 “Policy on Provision of Pathology Services in Public Hospitals” issued by the Department on 4 January 1989. A copy of this circular is attached to the Supporting Submission to this application.’
72 By determination dated 27 June 2003 the ACCC made a final determination in the following terms:
‘8.1 The New South Wales Department of Health (NSW Health) lodged applications for authorisation A90754 and A90755 with the Australian Competition and Consumer Commission (the Commission) under section 88(1) and 88(8) of the Trade Practices Act 1974 (the Act) respectively. NSW Health also sought to extend authorisation to:
· future parties to the arrangements pursuant to section 88(10); and
· other arrangements in similar terms, pursuant to section 88(13).
8.2 Broadly, these applications seek authorisation for NSW Health’s policy of requiring private in-patients in NSW public hospitals to obtain pathology services from NSW Health pathologists. This policy is referred to as the “NSW Health Pathology Policy” in this determination.
8.3 The Commission issued a draft determination on 21 October 2002 proposing to grant authorisation to the applications for a period of one year to provide a transition period for removal of the policy.
8.4 In accordance with the test set out in section 90 of the Act, and for the reasons outlined in Chapter 7 of this determination, the Commission is satisfied subject to conditions that, with one exception relating to the extension of the applications to similar arrangements pursuant to section 88(13), the arrangements covered by application for authorisation A90754 and A90755 are likely to result in public benefits that outweigh the public detriment constituted by any lessening of competition that would be likely to result from the arrangements.
8.5 Accordingly, the Commission grants application for authorisation A90754 – subject to the conditions specified below and except to the extent to which it relates to similar arrangements – to make and give effect to a contracts, arrangements or understandings:
· between public health organisation and its private in-patients that the patient’s pathology service requirements will be supplied by a pathology practitioner appointed by the public health organisation; and
· between each public health organisation and SMPs exercising the right of private practice as well as VMOs that such practitioners should refer pathology service requirements for private in-patients treated by them to a pathology practitioner appointed by a public health organisation.
8.6 The Commission grants application for authorisation A90755 – subject to the conditions specified below and except to the extent to which it relates to similar arrangements – for conduct which may or would constitute exclusive dealing for:
· The supply of non-pathology medical services by a public health organisation to private in-patients of public hospitals in NSW on condition that patients acquire pathology services from a pathology practitioner appointed by a public health organisation.
· Public health organisations requiring SMPs exercising a right of private practice and VMOs to refer private in-patients in public hospitals in NSW to a pathology practitioner appointed by a public health organisation.
8.7 Applications for authorisation A90754 and A90755 are granted subject to the following conditions:
C1: Public Health Organisations shall allow referring Salaried Senior Medical Practitioners and Visiting Medical Officers to seek second opinions from private pathology laboratories on pathology test results initially provided by Public Health Organisation pathology laboratories where referring doctors:
· state in writing to the Public Health Organisation that this is in the best interests of the patient; and
· unless impractical for medical reasons, obtain the patient’s consent in writing if the fee charged by the private pathology business will be above the relevant Medicare benefit payable to the patient.
C2: Public Health Organisations shall ensure that the fee charged to private in-patients treated by Salaried Senior Medical Practitioners and Visiting Medical Officers is no more than the relevant Medicare benefit payable to the patient for the pathology service.
8.8 The Commission grants the authorisation under section 88 of the Act for a period of five years from the date on which the authorisation comes into force.
8.9 Authorisations A90754 and A90755 extend to future parties to the arrangements covered by the authorisations pursuant to section 88(10).
8.10 This decision is subject to any application to the Australian Competition Tribunal for its review.
8.11 This determination is made on 27 June 2003. If no application for review of the determination is made to the Australian Competition Tribunal, it will come into force on 19 July 2003. If an application is made to the tribunal, the determination will come into force:
· where the application is not withdrawn – on the day on which the Tribunal makes a determination on the review; or
· where the application is withdrawn – on the day on which the application is withdrawn.’
(emphasis in original)
73 The Executive Summary accompanying the ACCC’s determination includes the following:
‘In its final determination, the Commission has concluded that NSW Health’s pathology policy generates significant public detriment as its policy enables it to charge a significantly higher price for pathology services to private in-patients in its hospitals. Given that the price rise would be covered by private health insurance in most cases, this detriment would manifest itself in higher costs for insurance companies and therefore ultimately higher insurance premiums for consumers.
The Commission received conflicting views on whether NSW Health’s pathology policy improves or reduces the quality of service provided by its pathology laboratories. Broadly, public pathologists support the former view and private pathologists the latter.
Generally, the Commission is inclined to the view that competition improves quality. However, it recognises that a conclusion that private in-patients and public patients – as they are all served by the same pathology services – are currently receiving a poorer service because they are confined to NSW Health pathology would be one of considerable significance, and not one to be reached lightly. The Commission is not satisfied that, on the evidence before it, it could reach this conclusion. It is also not satisfied that it can safely conclude that NSW Health’s pathology policy results in private in-patients receiving a higher quality of service than they would if there were multiple pathology providers. Ultimately, the Commission concluded that the quality of service provided to private in-patients in NSW Health is largely unaffected by NSW Health’s pathology policy.
NSW Health submitted that its pathology policy generated a public benefit by providing substantial funding for its pathology service. The Commission considers it appropriate, as a regulatory body, for it to primarily focus its analysis of anti-competitive conduct generating financial benefits on economic efficiency considerations. Consequently, it concludes that the transfer of funds from private pathology businesses to NSW Health, in itself, is not a public benefit. However, the Commission considers that NSW Health’s pathology policy is likely to generate a small benefit from administrative cost savings, essentially arising from the simpler nature of a single pathology provider system.
Overall, the Commission has concluded that NSW Health’s pathology policy generates significant public detriment and a small public benefit. However, it is possible to grant authorisation in this situation if appropriate conditions can be imposed that will ensure that the public benefit does outweigh the public detriment. In this case, the Commission considers this is possible.’
74 The ACCC therefore granted authorisation subject to the conditions C1 and C2 referred to above.
75 Condition C2 was imposed because the ACCC was under the impression that were it not for the policy, the fees charged by PHOs to private in-patients for pathology services in public hospitals would have fallen to the level of the relevant Medicare benefit, whereas the fee actually charged was the schedule fee. The DOH later produced data which established that only about one per cent of patients in private hospitals were bulk billed (ie charged at the Medicare benefit rate) and that the average charges for private pathology services provided to private in-patients in NSW were approximately 116 per cent of the relevant Medicare benefits schedule fee (ie 16 per cent higher than the corresponding public pathology services provided to private inpatients in public hospitals).
The Application for Review
76 Two applications were made to the Tribunal pursuant to s 101 of the TPA for a review of the ACCC’s determination. One application for review was made by the applicant for the authorisation to which the ACCC’s determination relates, the DOH. The other application for review was made by the Australian Association of Pathology Practices (‘AAPP’). The AAPP represents private pathology practices throughout Australia, including private pathology practices which would, if it were not for the conduct authorised, be able to provide pathology services to private patients in NSW public hospitals. The Tribunal is satisfied that the AAPP has a sufficient interest to apply for a review of the ACCC’s determination. Accordingly, the Tribunal is obliged to ‘review’ the ACCC’s determination, but the ‘review’ is a rehearing of the matter (s 101(2)) in which the Tribunal makes up its own mind as to whether authorisation should be granted, whether on conditions or otherwise, upon the basis of the evidence before the Tribunal.
77 The application to the Tribunal for review lodged by the DOH included the following (‘modified Condition C1’):
‘The Department is willing to accept the following condition:
“Public Health Organisations shall allow referring salaried senior medical practitioners and Visiting Medical Officers in the treatment of private in-patients to refer pathology tests to, or to seek second opinions from, private pathology laboratories where the referring doctor:
· considers that this is in the best interests of the patient; and
· unless impractical for medical reasons, obtains an acknowledgement in writing from the patient that she or he will pay any out of pocket expense incurred in connection with the test or second opinion.”’
78 The Tribunal requested clarification of a number of aspects of this condition, and we were informed by the solicitors for the DOH as follows:
‘1. The reference to a second opinion is a reference to a second pathologist providing second or additional interpretation of material prepared by the first pathologist. Typically this will involve an examination by the second pathologist of microscope slides prepared and examined by the first pathologist. There is no MBS item number for such second opinions.
2. The reference to “out of pocket expense” is a reference to any amount payable by the in-patient in respect of a pathology service which is not covered by Medicare and any private insurance held by the in-patient.’
79 The condition to which the DOH offers to submit differs from Condition C1 imposed by the ACCC, as the proffered condition is not confined to the seeking of a second opinion. However, the modified Condition C1 does not give a private in-patient a completely free choice as to the pathologist to be engaged, inasmuch as the patient may only be referred to a private pathologist if the referring doctor considers it to be in the best interests of the patient that he or she should be so referred. The term ‘best interests of the patient’ where used in the proffered condition is unconfined. The ‘best interests of the patient’ are not necessarily confined to medical matters. As the discretion is one given to the referring doctor, it may well be that the occasion for its exercise will usually be considerations of patient welfare. However, the condition will be enlivened where the referring doctor considers that his patients’ best interests, whether medical, financial or otherwise, would be furthered by a reference to a private pathology laboratory.
80 The ACCC accepted as appropriate the modifications proffered by the DOH in its application for review. Modified Condition C1 otherwise received little attention during the hearing of the applications until final submissions. In his final submissions, counsel for the DOH, Mr Yates SC, accepted that the proffered condition was not simply a fall back position, but was put forward as effectively modifying the arrangements or conduct for which authorisation is sought.
81 At least as a matter of language, modified Condition C1 represents a substantial departure from the terms of the policy recorded in the Circular, but we were told by Mr Yates that it accords with the way in which pathology services are rendered in reality; although the evidence does not establish the existence of a general practice conforming to the terms of the proposed condition. There was some evidence from Professor Burnett that in the case of PaLMS (which provides pathology services for the North Sydney AHS), that in practice the policy is not an impediment to the referral of specimens for testing to a private pathologist if that is necessary for patient welfare.
82 Depending on the way upon which modified Condition C1 is administered in practice, it may go some way towards ameliorating any consequences of the restriction of freedom of choice which is inherent in the policy, but at the same time leakage of pathology services to the private sector through the operation of the condition might result in a diminution in the benefits which are claimed to accrue from there being a single supplier of pathology services to a public hospital. None of the witnesses who gave evidence as to benefits and detriments flowing from the implementation of the policy made any reference to the proffered condition, or as to its likely effect.
83 Doctor Geoffrey Watson, a senior Staff Specialist pathologist working mainly at a large NSW public hospital, participated in the proceedings before the Tribunal, although he did not give evidence. Dr Watson supported the authorisation granted by the ACCC, but did not support either of the conditions imposed by the ACCC. In Dr Watson’s final submissions he contended that the proffered condition ‘virtually negates having an Authorisation’. In his final submissions, counsel for the AAPP, Mr O’Bryan SC, contended that modified Condition C1 is ‘bizarre’ because it calls into question the whole purpose of the policy.
84 It will be necessary for the Tribunal to revisit these questions as they are more conveniently dealt with when the Tribunal comes to consider particular benefits and detriments which are said to flow from the arrangements and conduct for which authorisation is sought.
Application of the principles in Jones v ACCC (2003) 200 ALR 234
85 The AAPP contends that the applications should be rejected in limine as authorisation can only be granted for contracts, arrangements or understandings or conduct which might give rise to a breach of relevant provisions of the TPA, and not for government policies. In the AAPP’s submission, s 88 of the TPA does not enable authorisation to be given to a code of conduct; an authorisation authorises the applicant (or, if relevant, the person(s) on whose behalf the applicant applies) to do something contemplated by s 88(1)(a) or (b) or s 88(8) of the TPA.
86 We accept that authorisation can only be granted to do something contemplated by s 88(1)(a) or (b) or s 88(8) of the TPA, and not for government policies as such. However, the applications for authorisation in the present case were made on behalf of the AHSs nominated in the applications as well as on behalf of St Vincent’s Hospital Sydney Ltd (an AHO) and the Royal Alexandra Hospital for Children (a SHC). In their terms, the applications seek authorisation to do things contemplated by s 88(1)(a) and (b) or s 88(8) of the TPA, although the applications disclose that the matters for which authorisation is sought implement the policy referred to in the Circular.
87 Authorisation is sought with respect to the future, and it is not incumbent on the applicant for authorisation to show that PHOs have, in the past, engaged in the practices for which authorisation is now sought, nor is it necessary for the applicant to adduce evidence as to how the policy inherent in the Circular would be enforced legally in the real world. The AAPP’s submissions to the contrary should be rejected. It may be that private in-patients in NSW have not been told in the past that they were admitted to the public hospital subject to the terms of the policy referred to in the Circular, but this does not bear upon the competence of the applications for authorisation, nor does it indicate that they should be dismissed in limine.
88 The AAPP’s submissions that the applications for authorisation are incapable of being lawfully granted, and for that reason, should be dismissed in limine, should be rejected.
Whether the tests in s 90(6) and s 90(8) of the TPA are the same
89 The AAPP contends that the conduct for which authorisation is sought constitutes third line forcing within the meaning of s 47(6) of the TPA, rather than conduct falling within s 47(2). Conduct falling within s 47(2) is not proscribed unless it has the purpose, or has or is likely to have the effect of substantially lessening competition: s 47(10). Conduct falling within s 47(6) is per se unlawful.
90 If the conduct in question is third line forcing, then the test for authorisation is that referred to in s 90(8), rather than that referred to in s 90(6) which would be applicable to conduct falling within s 47(2).
91 Section 90(6) of the TPA, when taken in conjunction with s 101(2), requires the Tribunal to be satisfied before granting an authorisation pursuant to that section that the relevant conduct would be likely to result in a benefit to the public which would outweigh the detriment to the public constituted by any lessening of competition that would be likely to result if the proposed conduct were engaged in. Section 90(8), when taken in conjunction with s 101(2), requires the Tribunal to be satisfied before granting an authorisation pursuant to that section that the relevant conduct would be likely to result in ‘such a benefit to the public’ that the proposed conduct should be allowed to take place.
92 There is an obvious difference in the wording of the two subsections, although statements can be found in earlier decisions of the Tribunal that ‘the tests are the same’ irrespective of whether s 90(6) or s 90(8) applies: see eg Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357 at 42,654; Re Media Council of Australia (No 2) (1987) ATPR 40-774 at 48,418. Observations to this effect need to be considered in the context in which they were made. They have their origin in the decision of the Tribunal in Re Rural Traders Cooperative (WA) Limited (1979) ATPR 40-110 where at 18,123 the Tribunal stated that the phrase ‘such a benefit to the public’ refers to a net or overall benefit after any detriment to the public resulting or likely to result from the conduct for which authorisation is sought has been taken into account.
93 Re Rural Traders and subsequent cases have proceeded upon the basis that where the phrase ‘such a benefit to the public’ is used in s 90, the reference is to a net benefit even though the subsection does not specifically designate a weighing of benefit and detriment. We agree with that view. But it does not follow, with respect, that the two tests are precisely the same. That is because s 90(6) limits the consideration of detriment to ‘the detriment to the public constituted by any lessening of competition’ resulting from the relevant conduct, whereas no such limitation is to be found in s 90(8).
94 In the present case, the AAPP relies upon alleged detriments to the public which arise from the arrangements or conduct for which authorisation is sought arising otherwise than by a lessening of competition. If those detriments are established, then in our view, they should be taken into account in determining pursuant to s 90(8) whether the proposed conduct is likely to result in such a benefit to the public that the proposed conduct should be allowed to take place. The cases to which we have referred do not decide otherwise, as they do not directly address the question. Rather, they were cases in which the relevant detriment was constituted by a lessening of competition, and for that reason it was correct to say that in the particular circumstances of those cases, there was no significant difference between the practical effect of subs 90(6) and subs 90(8): cf Re Obadiah Pty Ltd (The Locksmith’s Case) (1980) ATPR 40-176 at 42,431.
95 Ordinarily, the Tribunal decides an application for authorisation on public benefit grounds without conducting a preliminary inquiry as to whether or not the conduct if engaged in would result in a contravention of the TPA. However, where the test to be applied by the Tribunal may be different if the conduct for which authorisation is sought falls within subs 47(6) of the TPA rather than within s 47(2), the Tribunal must necessarily consider whether the exclusive dealing for which authorisation is sought may fall within s 47(6). The DOH accepted that the Tribunal has to look at the conduct identified in the application and come to a view as to whether or not it constitutes third line forcing. The DOH also did not dispute the proposition that under s 90(8) account may be taken of any detriment to the public flowing from the conduct for which authorisation is sought whether or not the detriment is constituted by a lessening of competition. The ACCC made a submission that the tests posed by s 90(6) and s 90(8) are the same. This submission should be rejected for the reasons which we have given.
96 However, in Mr Yates’ submission any exclusive dealing arising from the conduct described in the applications is within s 47(2) rather than s 47(6) because what is being supplied by a hospital to a patient is an inseparable bundle of services, albeit some services may be provided by the hospital directly and others by medical practitioners who are credentialed by the hospital to supply those services.
Whether the conduct is third line forcing
97 The pathology services which are provided to private in-patients in NSW public hospitals are provided by individual public pathologists in the exercise of their right of private practice. The AHS issues an invoice in the name of the pathologist to the patient showing the pathologist’s Medicare provider number (sometimes, for convenience, the provider number of one only of the pathologists in a department may be used). An invoice is issued in this way in order to ensure recovery of Medicare rebates in respect of pathology services supplied to private in-patients. The payment of the pathology service is banked into the No 1 account in the manner discussed in par 17 and following above.
98 The AAPP submits that the third line forcing is constituted by the AHSs requiring their patients to take pathology services only from public pathologists who exercise rights of private practice at relevant public hospitals. Adapting the language of s 47(6) to the circumstances of the present case, in the AAPP’s submission:
‘[AHS] … engages in the practice of exclusive dealing [as] the [AHS]:
(a) supplies, or offers to supply [hospital services] … on the condition that the [patient] to whom the [AHS] supplies …the [hospital services] … will acquire [pathology services] directly or indirectly from [a public pathologist].’
99 In the AAPP’s submission, the pathology services are not provided by the AHS itself. The individual pathologist (or a partnership of which he or she is a member) provides the pathology services as principal. The AHS acts as a provider of infrastructure, for which it bills the relevant public pathologist, and as a collection agent for the pathology service fees. The AHS collects the fee as agent for the pathologist who provided the service.
100 On the evidence, the AHS and the public pathologist are separate entities, inasmuch as the public pathologist provides his or her services to the private in-patient in the exercise of a right of private practice, rather than as agent for the AHS by whom he is employed.
101 However, third line forcing requires two distinct goods or services with the supply of the first by one party being conditioned on the acquisition of the second from a different party. Where a single package of products or services is supplied, there will be no third line forcing even though different, unrelated organisations produce the various goods or services making up the package. As Drummond J stated in ACCC v IMB Group Pty Ltd (in liq)  FCA 402 (‘IMB’) at :
‘In order to establish third line forcing, there must be two discrete products or services, with the supply of the first being conditional on the purchaser acquiring another product or service directly or indirectly from a third person. But the courts have refused to find that exclusive dealing is made out where a single package of products or services is supplied, even though different, unrelated organisations produce the various products or services making up the package and even though there is no reason, apart from the lead supplier's insistence on supplying only a bundled package, why the purchaser could not have made separate arrangements for acquisition of the different components of that package.’
102 In Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395 (‘Castlemaine’), the provision of beer on a delivered basis was found not to constitute third line forcing. Gibbs CJ (with whom Wilson and Dawson JJ agreed) stated at 400:
‘[T]he condition was not that the retailer should accept the services of [the deliverer]. The condition was that the appellant should arrange the carriage of the beer and should deliver it … at the retailer’s premises…In other words the condition was that the appellant would deliver the beer which it sold to its destination in North Queensland. It was of course clear that if the appellant had itself carried the beer there would have been no exclusive dealing within s 47. The position was not altered when the appellant arranged for a third person to carry on its behalf. In those circumstances the services were acquired by the appellant and not by the retailer. No doubt in a loose sense the retailer received a benefit from the services, but in truth what the retailer acquired was the beer and not the services of the carrier.’
Brennan J (with whom Deane J agreed) made comments to similar effect (at 405-406):
‘The brewer does not seek to force licensees to accept the services of a carrier nominated by the brewer. The brewer simply asserts its right to choose the carrier to deliver its beer to the point of sale at the licensee’s premises in discharge of its obligation to the licensee to deliver the beer there. The position is no different from what it would be if the brewer’s own employees delivered the beer.’
Importantly, Wilson J thought it necessary to emphasise this conclusion (at 403):
‘Here the transactions under scrutiny encompassed no more than the supply of goods. The beer was to be supplied at the premises of the retailer. Each supply was a single transaction which could not be broken up into its several elements of sale and delivery without doing violence to the reality. Delivery to the premises was an essential and therefore inseparable concomitant of the supply of the beer. In different circumstances it might well be appropriate to characterise the delivery of the goods as the supply of a service. But not here. No question of supplying a service arises.’
103 The Court in Castlemaine distinguished Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 36 FLR 134 (‘Ku-ring-gai’). In that case, Deane J had said (at 168):
‘It was not contended on behalf of the commission that any contravention of s 47 would be involved if the condition as to insurance was restricted to coverage of the interest of the relevant applicant, as mortgagee, in the mortgaged property. It would seem a condition which was so limited would not be within s 47(6) for the reason that it would relate to acquisition of the relevant services by the applicant itself through the member as its agent.’
104 In Paul Dainty Corporation Pty Ltd v National Tennis Centre Trust (1989) 22 FCR 495 the Full Court (Woodward, Northrop and Sheppard JJ) held that the provision of an entertainment venue inclusive with ticketing services did not contravene s 47(6). Their Honours made the following comment about the conduct in that case (at 515):
‘The contract for the hire of the venue is, on its face, a contract between principals for the hire of a ticketed venue – one which provides all its own ticketing facilities. It is a “package deal” which in addition to ticketing, covers such matters as catering, program selling and security services.’
105 As Drummond J noted in IMB, these cases show that (at ) ‘it is essential to correctly characterise the subject matter of the supply or the offer said to involve a contravention of s 47(6)’. His Honour also noted that it has been the practice of courts in this area to come to a decision based upon (at ) ‘the entire factual matrix in which the conduct said to infringe the subsection occurred.’
106 The broad language in which s 47(6) is couched makes it possible to express just about any tripartite commercial relationship in terms of a ‘supply on condition’. There is no doubt that it is possible to express the relationship between the AHS, the patient and the public pathologist in that way. However, it is also possible to regard the AHS as supplying either directly through its staff or contractors or indirectly through specialists which it credentials, the full range of services required by an in-patient in a hospital. The choice made by the AHS as to the persons who may supply pathology services in the relevant hospital does not amount to a conditional supply of AHSs services to its patients. The fact that two contracts come into existence – one with the AHS and the other with the pathologist in exercise of a right of private practice – is a consequence of the patient’s election to be treated as a private patient or the desirability of the patient receiving the Medicare benefit, rather than being indicative of a supply on condition.
107 Which of these competing views is the correct view involves a question of law upon which the Tribunal, as an administrative body, cannot give a decision which binds the parties. The conduct for which authorisation is sought is described in the application in terms which might be within either s 47(2) or within s 47(6) depending upon whether one analyses the tripartite relationship as involving supply by the AHS of bundled services or otherwise. In those circumstances, the practical and preferable course is for the Tribunal to determine whether it is satisfied in terms of both s 90(6) and s 90(8) assuming that the proposed conduct may be conduct to which either s 47(2) or s 47(6) applies. In doing so, we reject the submission put by the ACCC that an authorisation was only sought in terms of s 47(2).
108 Market definition is the process of identifying the relevant area of competitive activity, the sellers and/or buyers that constrain the firm (in this case the DOH) in relation to the conduct at issue. While market definition is based on an analysis of substitution in demand and supply – that is, the extent to which buyers can switch to other sources of supply and the extent to which suppliers of other products or in other locations can switch to supplying the relevant product to the firm’s customers – the analysis does not take place in a vacuum. The Tribunal and the Courts in Australia have traditionally adopted both a ‘purposive’ approach to market definition and one which reflects ‘commercial reality’.
109 In its final Determination, the ACCC discussed the question of market definition but determined that (at par 7.40) ‘…it is not necessary to conclusively define the relevant market(s), as the ACCC’s conclusion on public detriment (see paragraph 7.64) is likely to be the same regardless of the market definition chosen.’
110 Nevertheless, the ACCC requested an expert witness, Ms Rhonda Smith, to focus on the issue of market definition in her statement to the Tribunal. After extensive consideration of the relevant issues, Ms Smith concluded that a strict application of the SSNIP (small but significant and non-transitory increase in price) test would lead to the conclusion that the relevant market was one for pathology services provided to private in-patients in public hospitals; but that ‘given the extent of market failure and taking into account the extent to which alternative supply is actually offered by private pathologists, it may be more “commercially realistic” to extend the market boundaries to include the private pathologists.’ Ms Smith also felt that ‘absent the NSW pathology policy, private pathologists seem likely to constrain the decision-making in relation to public pathology services to private in-patients in public hospitals’.
111 In relation to the geographic market, Ms Smith concluded that ‘the market is no broader than NSW but depending on the circumstances may be narrower than this.’ We note that in relation to an earlier notification of exclusive dealing by the Prince of Wales private hospital, the ACCC adopted the Sydney metropolitan area as the relevant geographic market for pathology services (see ACCC Decision in respect of notifications N30764 and N30765 lodged by South Eastern Sydney Area Health Service and Mayne Nickless Ltd; 12 August 1998).
112 The DOH, while not calling an expert witness, contended in their submissions that ‘the relevant market is the supply of pathology services in New South Wales. A segment or “sub-market” of the relevant market is the supply of such services to private in-patients in public hospitals.’ This view was essentially based on arguments relating to supply side substitution across pathology services, but recognised that any anti-competitive detriment is confined to the identified ‘sub-market’.
113 The AAPP, by contrast, submitted that the relevant market is ‘the market for the provision of pathology services to private in-patients in NSW public hospitals’.
114 The AAPP’s expert witness, Dr Abraham, agreed with the ACCC’s Determination that conclusions on anti-competitive detriment do not hinge on the market definition adopted. He broadly agreed with Ms Smith’s approach to the question of market definition, but argued that since the immediate effect of the conduct relates to the provision of pathology services to private in-patients in NSW public hospitals, this is the relevant market for purposes of considering the benefits and detriments of the conduct.
115 During the ‘hot tub’ and in final submissions, notwithstanding the different market definitions proffered, both experts and each of the parties were fundamentally in agreement that identification of the relevant market was not critical to an evaluation of benefits and detriments. All were agreed that to the extent that there was anti-competitive detriment arising from the conduct, its effect was felt by private in-patients of NSW public hospitals using pathology services. The Tribunal is broadly in agreement with this sentiment.
116 There is one other issue which must be addressed in relation to market definition. This is the question of whether pathology services are in fact relevantly considered to be a separate market, or whether they would be better considered part of a ‘cluster market’ for hospital services, whereby hospitals compete to attract both doctors and patients on the basis of a bundle of both medical and non-medical services, such as surgery, anaesthesia, radiology, pathology, accommodation and meals services.
117 This question was discussed by both experts, to some degree in their statements and further during questioning by the Tribunal in the ‘hot tub’. Both experts agreed that while competition for the bundle might impose some constraint on the pricing of pathology services within the bundle, since expenditure on pathology services would represent a small proportion of total expenditure on the bundle of hospital services for most patients, that constraint was unlikely to be a close one. The view of both experts was that neither the price nor quality of pathology services was likely to be an important factor in the choice of hospital. In this way, the situation could be distinguished from that considered by the Tribunal in Re Queensland Independent Wholesalers (1995) ATPR 41-438, where the Tribunal determined that indirect competition between the vertically integrated grocery chains and independent grocery retailers would effectively constrain the pricing of wholesale groceries by a single wholesaler to its independent retail customers.
118 It is also the case that pathology services can be distinguished from other components of the ‘hospital services’ bundle, in that unbundling costs are lower, because of the relative ease of transportation of pathology samples – unlike other services such as radiology - the service provider and the patient do not have to be in the same place. The unbundling costs also appear to be decreasing with developments in communications technology, enabling the electronic delivery of results. Cluster markets are generally associated with the presence of significant unbundling costs (see Ian Ayres ‘Rationalizing Antitrust Cluster Markets’, Yale Law Journal, 1985, Vol 95, No 1 and Deena Shiff, Henry Ergas and Mitchell Landrigan ‘Telecommunications Issues in Market Definition’, Competition and Consumer Law Journal, 1998, Vol 6, No 1).
119 While we accept these propositions, as Ms Smith pointed out, consistent with the evidence before the Tribunal and with the market failures discussed above, price competition does not appear to be critical in determining the choice of pathology provider. Rather competition, for both referring doctors and patients, occurs primarily in relation to service and quality. Particularly because of the pivotal role played by doctors in determining the choice of hospital and pathologist, we think that this ‘indirect’ competition should be taken into account, if only as an ultimate constraint on the conduct for which authorisation is sought. If authorisation of the conduct was to result in a significant deterioration in the quality of pathology services offered by NSW public pathologists, both doctors and patients would have the option not only to refer pathology samples to an alternative private pathologist, but also to move to an alternative private hospital.
120 The initial reason for the controversy, such as it was, over market definition, appeared to hinge on the proportion of the market the conduct was said to affect. Under one approach, the DOH was able to claim that the policy affected less than five per cent of the relevant market: 4.8 per cent of all pathology services supplied to private patients in NSW during 2002-2003, or an unspecified lower percentage of the nominated ‘market’; while under the other approach the AAPP could claim that the conduct affected the whole market (and indeed delineated the market itself by blocking substitution and creating a monopoly). The Tribunal does not consider this line of argument to be a fruitful one. However the market is defined, the policy potentially affects half a million private patients in public hospitals and 17,558,616 pathology tests billed at $23.8 million per annum.
121 In summary, then, the Tribunal is of the view that nothing very much hinges on the question of market definition.
The parties’ submissions as to public benefit and detriment
122 The AAPP contends that the detriments to the public arising from the policy are those which arise in any case where all possibility of competition in a market is eliminated by monopoly. An absence of competition leads to an absence of those factors which promote the following benefits and consumer interests:
(a) freedom of choice;
(b) price competition;
(c) service competition;
(d) maintenance of the highest quality standards; and
(e) incentives to derive efficiencies in all aspects of the service/price/quality matrix.
123 In particular the AAPP contends that public detriments which arise from an absence of competition have been manifested in the market for pathology provided to private in-patients in NSW public hospitals in the following ways:
(a) there is a lack of choice of pathologist by both patients and their treating physician, which can have a detrimental effect on patient care;
(b) there is a discontinuity of pathology care, impacting on the standard of patient care and the efficiency with which pathology services can be provided;
(c) the discontinuity can manifest itself in inconsistent results, which may require the wasteful and inefficient repetition of tests to ensure patient care is not compromised; and
(d) AHSs implement an extraordinarily complicated, costly accounting policy to determine their charges for pathology services in NSW. The methodology has nine separate charging policies that need to be implemented at any one time, even for the same test. Such inefficiencies would be unlikely to survive in a contestable market.
124 The AAPP also contends that the policy gives rise to other public detriments which do not arise solely out of a lessening of competition. In particular the AAPP contends that implementation of the policy contradicts and thereby undermines the patient election procedures in NSW; resulting in a breach of NSW’s obligations under the AHCA, and misleading and deceptive conduct inasmuch as persons electing to be treated as private patients are not told that their entitlement to be treated by the doctor of their choice does not apply in relation to pathologists.
125 The DOH’s response is that theoretical concerns attending a restriction on competition have not translated into any public detriment in relation to the supply of pathology services by public pathologists to private in-patients in public hospitals. Contrary to theoretical concerns, public pathology providers in NSW provide a comprehensive range of pathology services to a high standard (no less than the standard of private providers) at fees which are substantially less than the fees which are charged by private providers for similar services to in-patients in private hospitals.
126 The DOH relies upon the following matters as indicating that implementation of the policy is likely to result in real and substantial public benefit. The DOH claims that the benefits are reflected by each of, and also by, the combination of the following matters.
127 The policy avoids a multiplicity of providers in the in-patient environment. A multiplicity of providers in that environment is likely to lead to:
(a) an increased risk of lost, misplaced and misallocated specimens;
(b) an increased complexity in the interpretation of test results in relation to in-patient pathology in the clinical environment; and
(c) an increased risk of unnecessary cost; and in particular in administrative costs in creating and providing a system of dealing with the multiple ordering and reporting of pathology tests in the hospital clinical environment.
128 In addition, there are no information systems currently operative in public hospitals in NSW which cater for multiple pathology providers, and it will be some years before such systems can be put in place.
129 Further, the DOH contends that the ability of public providers of pathology services to carry on a right of private practice, with substantially exclusive access to private in-patients of public hospitals, provides a crucial source of revenue which is utilised:
(a) to partially fund the provision of pathology services in the public hospital system in NSW;
(b) to provide salary supplementation for pathologists employed in public pathology departments;
(c) to provide capital for the acquisition of pathology equipment; and
(d) for teaching and educational purposes; and
(e) to conduct research.
130 In the DOH’s submission, about one half of the $24 million derived in fees from the provision of pathology services to private in-patients in the 2002-2003 year would be lost if the DOH was required to abandon the policy in the Circular. Unless that revenue shortfall was made up in some way, it would materially damage the public pathology practices in NSW as:
(a) their ability to continue to train pathologists and other staff would be seriously impaired;
(b) the average cost of supplying the current mix of pathology services to public patients would increase; and
(c) the ability to retain staff and supply the full range of services to public patients would be reduced.
131 Dr Watson submitted that loss of authorisation would have its greatest effect on the teaching hospitals which generally deal with the more complex cases, and whose staff are involved academically with the universities, as well as in training and research. In Dr Watson’s submission, the public does benefit from viable teaching hospitals, as they constitute centres of excellence that are available to everyone.
132 Further, Dr Watson contended that ‘cherry-picking’ is a significant concern in this area. Dr Watson maintained that the AAPP wants its members to have the opportunity selectively to perform only the tests which the members consider profitable, leaving for the public laboratory the poorly remunerated, high complexity cases or cases which are otherwise unattractive. Whilst the DOH referred to ‘cherry-picking’ in its opening submissions, it did not lead any evidence specifically designed to establish the existence of an environment that is likely to be conducive to ‘cherry-picking’. In Dr Watson’s submission, without an authorisation to buffer themselves, the NSW teaching hospitals would be ‘cherry-picked’, unable to match the marketing power of the private laboratories, and having quality as the only platform for competition.
Evaluation of the Public Benefits and Detriments of the Conduct
133 It now falls on the Tribunal to set out its own evaluation of the benefits and detriments claimed by the parties. In so doing, we find it convenient to consider benefits and detriments together, since some of the same issues arise on both sides of the ledger and they may be more constructively considered together.
134 As discussed above, the Tribunal takes the view that if there is any real prospect of the conduct for which authorisation is sought being captured by the third line forcing provisions in s 47(6) of the TPA, then we should properly apply the broader test of public detriment in assessing the conduct.
135 As the Tribunal has stated on many occasions before, the concepts of ‘public benefit’ and ‘public detriment’ should be given their widest possible meaning. In Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357 at 42,677 the public benefit was thought to include (quoting from Re Queensland Co-operative Milling Association Limited (1976) ATPR 40-012 at 17,242):
‘Anything of value to the community generally, any contribution to the aims pursued by society including as one of its principal elements … the achievement of the economic goals of efficiency and progress.’
In the same case, ‘public detriment’ included (at 42,683):
‘Any impairment to the community generally, any harm or damage to the aims pursued by the society including as one of its principal elements the achievement of the goals of economic efficiency …’
136 In considering the benefits and detriments claimed to arise from the conduct, the Tribunal is required to adopt a forward looking approach. If authorisation is granted, it will apply in the future and hence it is to the future benefits and detriments that we must look. In so doing, the Tribunal adopts the usual practice of considering the ‘future with and without’ the conduct to assess the likely benefits and detriments to which it will give rise.
137 This forward looking approach is of particular importance in the current matter. As discussed above, by incorporating modified Condition C1 into the conduct for which authorisation is sought, the conduct appears to be quite fundamentally altered from that described in the policy. We must consider the likely effects of a policy with modified Condition C1 in the future compared to a future with no such policy giving preference to the public pathologists.
138 During the hearing, there was some consideration of what such a ‘future without’ might look like. One possibility was that all pathology services in public hospitals, for both public and private patients, could be put out to competitive tender, and that this could include requirements to provide certain levels of research and teaching capability. While this is clearly possible, and moves have already been made in this direction in Victoria, the Tribunal takes the view that this would require a fundamental change in public health policy in New South Wales. The draft report of the Paxton review states that outsourcing would involve considerable risks in implementation, would be unacceptable to stakeholders and would likely be resisted. It is not the Tribunal’s role to re-design public health policy in this manner.
139 Rather, we take the view that our job is somewhat more straightforward. It seems to us that looking to the future, with or without the policy with modified Condition C1, while the public pathologist will remain the incumbent and/or ‘preferred’ pathology provider, PHOs will have to credential, either on a permanent or temporary basis, alternative private pathology providers. Just as happens in private hospitals, different hospitals may take different approaches. Some may credential only a limited number of alternatives, while some may be more relaxed.
140 The critical difference between the future with and without the policy supplemented by modified Condition C1, is that in the future with the conduct, the public pathologist is essentially designated as the preferred provider and doctors who wish to refer pathology tests to an alternative provider may do so only if the interests of the patient so require, and then only in consultation with the patient, who must agree to meet any out of pocket expenses. The policy essentially inserts a hurdle in the way of the referring doctor sending pathology tests elsewhere. As discussed above, whether this hurdle turns out to be large or small will affect both the extent of the claimed detriments and the extent of the claimed benefits.
141 In a future without the conduct, the DOH, based essentially on the evidence of Professor Burnett, has claimed that the public pathology service could lose up to half its private practice revenue. However, Professor Burnett also stated that he believes PaLMS receives 90-95 per cent of pathology referrals from the North Shore Private Hospital, where PaLMS is the ‘preferred provider’ and Dr Guerin stated that he would expect the public pathologist as the incumbent provider to retain most of the pathology business from the hospital. These statements suggest that the loss of revenue would be somewhere in the range of zero to 50 per cent. This is not a benefit (or detriment) of the policy as such, rather we must consider what benefits and detriments might flow to the public as a consequence. Furthermore, the comparison being made by these witnesses was between a future with the existing policy and a future with no such policy, whereas the Tribunal must consider a future with the policy with modified Condition C1 with a future without any such policy. The impact of modified Condition C1 on private practice revenue will depend on the extent to which the hurdles it creates to outside referrals are successful in minimising revenue leakage.
142 We find it convenient to discuss the detriments and benefits which are claimed to arise from the conduct under the following headings:
· service and quality;
· consistency of test results;
· cherry picking;
· transactions costs;
· other efficiency issues;
· education and training of pathologists;
· funding for public pathology services; and
· detriment to the public arising otherwise than from a lessening of competition.
143 It is worth noting here that competition, while it is the cornerstone of the TPA, is not an end in itself. Competition is valued for what it can deliver in terms of allocative, productive and dynamic efficiency. There was a tendency at times during the hearing to claim competition as a benefit in itself (or the reverse, that any restriction on competition must be a detriment). It is clearly the case that competition does not always maximise efficiency, particularly in cases of market failure such as this. The very fact that authorisation is available under the TPA for conduct that might otherwise be considered anti-competitive, is recognition of this. This was acknowledged by Dr. Abraham in his statement and in oral evidence in the ‘hot tub’, but he did not consider these market failures to be particularly relevant to the conduct for which authorisation is sought.
144 The foregoing is intended to demonstrate that the standard which the Tribunal must apply to the conduct is one of public benefit and detriment, not one of competition as such. The AAPP, in closing submissions referred to an analysis performed by Phillip Williams that was submitted to the Tribunal in Re 7-Eleven Stores Pty Ltd (1994) ATPR 41-357, where he stated that competition generally drives efficiency and ‘there doesn’t seem to be anything odd or special about this industry that requires the particular arrangements.’ As was discussed earlier, there are several things which are odd and special about the health industry. Whether the particular arrangements for which authorisation is now sought produce a net public benefit is the question which the Tribunal must now address.
145 One of the principal detriments claimed by the AAPP is that the Policy removes the patient’s and/or doctor’s choice over which pathologist they want to refer specimens to. This lack of choice may have implications in relation to price, quality and service, efficiency and transactions costs, which will be discussed further below. However, it may also have a more direct impact on the quality of patient care by its impact on the working relationship between the referring doctor and the pathologist.
146 The DOH made much of the fact that in practice it is the referring doctor rather than the patient that normally exercises choice in relation to pathologists, and that this is enshrined in both the Medicare system, which requires that patients attend the pathologist nominated by the referring doctor in order to be eligible for a Medicare rebate, and the policy of the RCPA. This situation is essentially reflective of the information asymmetry and principal-agent problem which exists between patient and doctor that was referred to earlier. Most patients are simply not in a position to evaluate the relative worth of alternative pathology providers and accede to their doctor’s choice.
147 Notwithstanding these problems, given that a private patient does entrust their care to a referring doctor of their choice, it will often be in their best interests to accept that doctor’s choice of pathologist where it has implications for patient care. This was acknowledged by both experts. If, however, the patient, or the referring doctor as their agent, was to take full account of the costs and benefits of making a particular choice, the result may not always be the same.
148 Unfortunately, the issue of lack of choice was largely explored in the context of the policy as it has operated in the past and not on the basis of the policy as it will necessarily be changed by modified Condition C1. It seems to the Tribunal that once the policy is modified to allow referring doctors to use an alternative private pathologist where this is regarded as being in the patient’s best interest, any detriments associated with lack of choice must necessarily be diminished. Of course the extent to which this is actually the case will depend on how modified Condition C1 is implemented in practice, but taken at face value it would appear to go a long way to meeting these concerns.
149 One of the principal detriments that would normally be expected to arise from a restriction on competition is that prices will rise and resource allocation will be impaired as a result. However, as discussed above, pathology like other health services suffers from problems of moral hazard, which tend to produce a lack of price sensitivity among consumers and the allocation of excessive resources to their supply.
150 The ACCC’s original determination, with its condition restricting the prices that could be charged to the Medicare rebate (ie 75 per cent of the schedule fee), was premised on a misunderstanding of the benchmark competitive price charged in private hospitals. The ACCC took the global figure of 85 per cent bulk billing for pathology services as indicative of the competitive benchmark. However, as the ACCC now acknowledges, this figure failed to distinguish between pathology tests undertaken in the community and pathology tests undertaken in hospital. In relation to hospital in-patients, only one per cent of services are bulk billed. According to figures derived from Medicare data, which were presented by the DOH and not disputed by the AAPP, the average fees charged by private pathologists to patients in public hospitals in 2002-3 was 116 per cent of the schedule fee.
151 Accordingly, and putting aside issues of quality and service for the moment, the historical record suggests that there has been no price detriment to private patients in public hospitals in relation to their pathology services from the implementation of the policy, even under the more restrictive policy which was then operating.
152 It was suggested by counsel for the AAPP that the lower prices, which involve no out of pocket expenses to the patient, actually increase problems of allocative inefficiency associated with moral hazard, because they will take no account of the real costs of additional pathology tests. However, given the pivotal role of the referring doctor in determining the range of tests, and the fact that the doctor does not pay the costs of the services with or without the policy, such an effect seems unlikely.
153 Looking forward, the policy with modified Condition C1 will open the door to increased price competition from the private sector, such as it is. Referring doctors can refer samples to a private pathologist where the price will be lower or the test represents better value for money despite the higher charge (perhaps because of faster turnaround times or better feedback from the pathologist). Clearly this would satisfy the condition of being in the patient’s best interest, and the requirement for patients to acknowledge liability for any out of pocket expenses incurred will necessarily bring issues of price into consideration.
154 While no evidence was led on this, and we can make no finding in this regard, it seems to the Tribunal quite likely that the higher prices charged by private pathologists are reflective of the market failures inherent in the provision of health services including pathology, which can result in an excessive emphasis on non price competition.
Service and Quality
155 The Tribunal heard evidence from both private and public sector pathologists. While historically there may have been differences in the quality of testing between the two, all witnesses were in agreement that there is no longer any significant difference, with both sectors subject to the same regulatory regime discussed above.
156 As with price competition, looking forward the modified policy will expose the public pathology service to increased competitive pressure, as referring doctors are now able to refer samples to private sector pathologists where the standard of testing or the level of service is regarded as superior in terms of patient care.
157 The effectiveness of this constraint is reinforced on an individual SMP practicing pathology in the public sector by the way in which his or her salary supplementation is determined. As detailed earlier, depending on the level elected, an SMP may derive considerable income from their rights of private practice. This provides an incentive for the SMP individually to provide private patients and their referring doctors with a good service, or risk losing referrals, with a direct and visible impact on the SMP’s own earnings.
158 However, as discussed above, in situations of market failure such as this, more competition is not necessarily a good thing for efficiency. To the extent that increased exposure to competition results in excessive non-price competition by private pathologists (for example, increased advertising and promotion to referring doctors, excessive provision of specimen collection and courier services), the modified conduct may actually reduce the efficiency benefits claimed for the conduct.
Consistency of test results
159 It was generally agreed by pathology witnesses from both the public and private sector that there can be differences between pathology providers in the means by which they test for certain things. Sometimes it may be necessary to compare sequential test results to aid in diagnosis, and results obtained from alternative testing regimes may not be comparable. Professor Burnett gave the example of Troponin testing, used in the diagnosis of heart attacks, where either the Troponin ‘T’ test or the Troponin ‘I’ test can be used, but the two tests are incomparable, being measured in different units. Furthermore, different pathologists may use different ‘reference ranges’ for results when using different testing equipment, so that a result which causes concerns from one type of testing equipment would be ‘normal’ if it had been derived from another type of equipment. Professor Burnett gave the examples of Amylase and Lipase testing. While agreeing with these statements, Dr de Lambert and Dr Guerin pointed out that these tests are the exception rather than the rule across the broader range of pathology testing. However, all witnesses agreed that use of different pathologists for these types of tests on any given patient could have adverse implications for patient care.
160 This issue was raised by both the DOH as a benefit and by the AAPP as a detriment of the conduct. The DOH pointed out that if multiple pathology providers were used in a single hospital, the use of different testing protocols by those providers could lead to confusion and error in the interpretation of results by doctors, especially if the different results related to the same patient. In some cases, results from different pathology providers simply cannot be compared.
161 By contrast, the AAPP pointed out that for many hospital patients, pathology testing will be carried out both before and after as well as during their hospital stay. According to Dr Guerin, the breakdown on average is that 30 per cent of testing occurs pre-admission, 60 per cent during the hospital stay and 10 per cent after discharge, for any given episode of care. Professor Burnett agreed that these figures are generally accepted in the industry, and he agreed that it may be important for patient care to have continuity of testing through these three stages of treatment.
162 The Tribunal takes the view that differences in testing regimes are an industry wide problem which may result in problems for patient care or require extra effort on the part of the referring Doctor in the interpretation of results. However, we see no net benefit or detriment arising from the conduct in relation to this issue. The problem raised by the DOH would seem overstated, since one would expect the referring doctor to be aware of such issues and to use a single pathology provider where problems might arise. Furthermore, public hospitals could require credentialed private pathology providers to provide all testing for any particular patient. The problem raised by the AAPP could have been a significant issue under the policy as previously applied. However, it seems to the Tribunal that the Policy with modified Condition C1 does not prevent the use of an alternative pathology provider in order to ensure continuity of testing in the community and hospital environments, where this would be in the best interests of the patient.
163 ‘Cherry picking’ was used to refer to the practice whereby private pathologists could pick off the most profitable tests from public hospitals, leaving the public pathology provider as the service of last resort, performing the less profitable work. According to Mr Hickson, who was involved in the original formulation of the policy, this was one of the problems identified at the time and which gave rise to the policy’s adoption.
164 This problem could arise from the structure of pricing and costs in the pathology industry and in particular the relationship to the MBS fees contained in the PST. While pathology providers are not price regulated by the MBS, it tends to be the benchmark for prices, because it determines what patients can recover from Medicare and their health fund. The Tribunal was shown examples of two pathology MPPA’s, providing for no gap cover, in which prices are also set as a percentage of the MBS fees. As noted earlier, the cost structure of different types of tests varies considerably – some are characterised by relatively high fixed costs and others by high variable costs. This will result in a variable gap between the marginal cost and the MBS fee for any given pathology service – services with relatively high fixed costs will tend to be characterised by a larger gap. Furthermore, as noted previously, it appears that over time the MBS fees have moved out of line with even average costs, as revisions to the PST have failed to keep pace with technological developments in pathology testing. Since the tests which have been subject to the greatest automation and associated reductions in average costs will tend to be those with relatively high fixed costs, this will tend to exacerbate the problem.
165 While no evidence was presented to the Tribunal on the current extent of the cherry picking problem, and circumstances may have changed considerably since the time the original policy was formulated, it is clear to us that the incentives for this to occur are inherent in the cost-price structure of the industry. To the extent that it would occur in the future without the conduct, there would clearly be some detriments to efficiency, and hence some benefits from retaining the policy. These efficiencies would arise from avoiding excessive overlapping courier and collection services operating in any given hospital and from avoiding the expenditure of resources by private pathologists in ‘rent seeking’ – such as advertising and promotion activity directed at securing these more lucrative tests from referring doctors. Furthermore, for any given item on the PST, the complexity of the sample and the work required by the pathologist to analyse it will vary. Accordingly, it may be profitable for outside pathologists to expend resources identifying and targeting not only the most profitable services but also the most profitable patients – this latter cost may be referred to as a ‘sorting’ cost. Sorting costs have been associated with a variety of market contexts and are often minimised by market practices which require buyers to accept a ‘basket’ of variable quality goods (see Yoram Barzel ‘Measurement Cost and the Organisation of Markets’, The Journal of Law and Economics, 1982, Vol 25, No 1, pp 27-48). The concept is, however, equally applicable on the supply side of some markets, as in the current context. Of course the loss of volume to the public pathologist would also reduce the contribution of the lost tests to fixed costs, particularly since these are likely to be the higher margin tests, but this would be offset by an efficiency gain to the private pathologist.
166 The question naturally arises as to why the cherry picking problem has not been identified and addressed by private hospitals in their use of pathology services. As discussed earlier, the most common practice in private hospitals is to have a single preferred or incumbent on-site provider, but with freedom for referring doctors to send samples to alternative pathology providers, as long as those providers are credentialed. There would seem to be three potential, and not mutually exclusive, answers to this question.
167 First, to some extent private hospitals do address this problem. The on-site pathology provider generally has an exclusive lease of laboratory space on the hospital site, which tends to give them an advantage in securing the majority of pathology work referred from the hospital. The extent of exclusivity varies across private hospitals with some having more restrictive policies than others.
168 Second, while it might be expected that the incumbent preferred provider would secure the bulk of business in the absence of exclusivity, this may be more so for private pathologists as compared to public pathologists. This arises from the fact that public pathology providers conduct only limited pre-admission testing in the community. This is at least partly a consequence of the fact that until recently they have been unable to establish collection centres and they still cannot claim the PEI fee. To the extent that continuity of pre-admission and in-patient testing is an issue for patient care, referring doctors will be more likely to use the incumbent private pathologist during a period of hospital care than they would be an incumbent public pathologist.
169 Third, given the principal-agent problems involved in the patient-doctor relationship, doctors play a pivotal role in the choice of hospital by patients. Accordingly, competition between private hospitals is often as much about attracting doctors to practice there as it is about attracting patients directly, because the doctors bring the patients. This competition occurs through the provision of the best facilities and the latest equipment, referred to as the ‘medical arms race’ (ACCC Document 63 pp 73-77), and may result in ‘excessive’ levels of such investment, particularly given the moral hazard problems associated with the health industry, which make patients insensitive to the prices which must be charged to recover the costs of such investments. In the current context, this may be expected to result in private hospitals adopting what might otherwise be considered inefficient practices, involving multiple pathology services, in order to meet the demands of admitting doctors for freedom of choice in pathology referrals. The additional costs of any inefficient practices may be incurred by the hospital and/or the pathology providers, but both can pass these through to private patients relatively easily given the moral hazard and price insensitivity associated with health insurance.
170 Accordingly, while evidence on the extent of the problem was lacking before the Tribunal, we accept that the incentives for cherry picking are inherent in the structure of costs and prices and that to the extent it occurs in practice in the absence of the conduct, it will give rise to some inefficiencies. However, we have no basis on which to quantify that impact. Having said that, it must be noted that to the extent that the door has been opened to leakage by incorporating modified Condition C1 into the conduct for which authorisation is sought, the problems associated with cherry picking will also occur to some extent in the future with the conduct. The extent of the net benefit will depend on the extent to which modified Condition C1 establishes a hurdle or deterrent to outside testing.
171 Transactions costs can be defined as any costs incurred in negotiating, writing, monitoring and enforcing contracts between independent parties. Transactions costs are recognised by economists as a primary reason for the emergence of vertical integration or other types of vertical relationships, including exclusive dealing, in some industries. By avoiding or minimising these costs, such vertical relationships can be efficiency enhancing, notwithstanding that they may sometimes also have anti-competitive effects.
172 The conduct for which authorisation is sought includes exclusive dealing conduct, whether it can be characterised as third line forcing or not. It is not surprising, therefore, that the issue of transactions cost efficiencies has arisen. Although this terminology was not used by the DOH, the issue of transaction costs was explicitly recognised by both expert witnesses. The issues which can be characterised as transactions cost issues are the administrative cost savings identified in the ACCC’s determination, the related issue of information technology interfacing, and the issues relating to accurate identification and tracking of samples in the interface between the hospital and the pathology provider.
173 In relation to the first issue, the Tribunal was told that for a hospital to use multiple pathology providers would entail additional costs in terms of staff time allocated to using and learning the different systems adopted by each provider and in locating test results for a given patient. It should also be noted that the extent of these cost savings could be minimal and may even be eliminated, depending on the extent of ‘leakage’ created by incorporating modified Condition C1 into the policy and associated conduct for which authorisation is now sought. The policy as implemented historically would also save costs in relation to the credentialing of multiple pathology providers, but it seems to the Tribunal that with the changes to the policy inherent in modified Condition C1, any cost savings of this nature arising from the conduct would now be minimal.
174 The DOH also claimed that there are currently considerable difficulties involved in the effective management and utilisation of electronic information from multiple pathology providers. The Tribunal heard from Dr Brown, a witness called by the DOH who is involved in the development of IT systems for use in hospitals. According to Dr Brown, a system which allowed for the integration of private pathology providers and the hospital IT system, such that results can be correctly identified, matched to patients and presented with all other relevant health information in a ‘single view’ for the patient’s referring doctor will take 6-8 years and an estimated $25 million dollars per AHS.
175 Clearly there are additional transactions costs involved in the management of electronic information from multiple sources, which will either manifest themselves in the financial cost to the PHO of establishing such systems, or in additional costs to treating doctors in locating and taking account of all relevant information for patient care. Private pathologists who gave evidence before the Tribunal indicated a willingness to shoulder these costs by adapting their own systems to fit in with the hospital, but this does not negate the real resource costs that would still be involved. However, it seems to the Tribunal that, depending on the degree of ‘leakage’ resulting from the adoption of modified Condition C1, these costs will in some measure be borne with or without the conduct for which authorisation is now sought, and indeed the evidence of both Dr Brown and Dr Guerin indicates that both the public and private sectors are in fact moving in this direction, with the adoption of a common messaging format and the development of suitable software, albeit with varying degrees of speed.
176 Finally, much was made by the DOH, and particularly Professor Burnett, of the potential for errors to occur at the interface between the hospital and the laboratory, in terms of correctly identifying and tracking pathology samples. While no data was presented to the Tribunal, it seems self evident that either the potential for error will increase or the costs of avoiding such errors will increase, the larger the number of pathology providers that are used in any given hospital.
177 Professor Burnett also gave evidence regarding his research into the extent of transcription errors occurring when samples are received in laboratories. While the numbers were somewhat alarming, it does not seem to the Tribunal that this particular problem will be affected one way or the other by the use of multiple pathology providers, since the errors occur once the samples arrive at the laboratory. However, the more general point which can be drawn from his research is that it is often very difficult to identify and gauge the extent of errors associated with identifying and tracking samples and transcription of information without engaging in some systematic study.
178 The Tribunal accepts that the conduct is likely to give rise to some transactions cost savings associated with the accurate tracking of pathology samples. However, the extent of the saving will depend on the extent of ‘leakage’ which arises as a consequence of the adoption of modified Condition C1.
Other Efficiency Issues
179 A broad issue which arose on the detriments side of the efficiency ledger was the downward pressure which can be expected to be exerted by competition on the costs of doing business, and particularly the pressure to achieve dynamic efficiencies by adopting new methods and ways of doing things. The latter issue was given particular emphasis by Dr Abraham in his evidence to the Tribunal.
180 As a general economic and business principal, the Tribunal accepts this proposition. However, there was no clear evidence that such pressures had in fact been lacking in the provision of public pathology services. It may be that a combination of budget pressures and the ‘professional diligence’ of public pathologists has provided a reasonable substitute for competitive pressures, though no evidence was put in this regard.
181 The AAPP pointed to the Paxton inquiry as evidence of a lack of efficiency in public pathology, but it could equally be regarded as evidence of a willingness to secure maximum efficiencies. The Paxton report itself recognised that no further substantial efficiencies can be derived without a restructuring and consolidation of the service:
‘ … many public pathology providers indicate that they have exhausted efficiency initiatives available to them within their AHS, and now require larger scale to take advantage of material opportunities for efficiency gains …
182 The AAPP also pointed to the ‘extraordinarily complicated, costly accounting policy to determine their charges for public pathology services in New South Wales’, and claimed that if NSW public pathologists were forced to compete in a contestable market, such inefficiencies would be unlikely to survive. As counsel for the DOH pointed out in their closing submissions, the number of charging policies is actually less than the nine claimed by the AAPP, and in any case the Tribunal is not convinced that the reason for multiple charging policies is the absence of competition, rather than the nature of the public pathology service as a non profit service required to provide services to disadvantaged groups and incorporating equity goals into its charging policies.
183 In a similar vein, the AAPP complained more generally about the complicated and unsatisfactory accounting methods employed in relation to private practice trust funds. While we have some sympathy with these comments, it seems to the Tribunal that such creative accounting is not confined to the public sector, and that it is likely to continue or change in the future with or without the conduct, in order to maximise the retention of private practice earnings within the pathology service and in order to maximise tax and other advantages.
Education and Training of Pathologists
184 As noted earlier, the training of pathology registrars involves a lengthy period of time and not insignificant costs. Once qualified as practicing pathologists, they must engage in ongoing professional training and development in order to keep up to date with the latest trends and developments. Additional pathology training is also engaged in by more junior medical students, which will be relevant if they later progress to specialise in pathology or if they pursue another medical specialty which will require them to order and use the results of pathology tests in the diagnosis and management of disease.
185 The Tribunal heard evidence that the public pathology laboratories, particularly those attached to the major teaching hospitals, are currently the major source of registrar and undergraduate teaching and training – of 72 trainees in NSW in 2002, 67 (93 per cent) were in the public sector. This is not surprising, given the problems associated with externalities and free riding. If a private pathology laboratory trains a registrar, they may lose them to another pathology provider, whether private or public, who will then free ride on their investment. This is likely to be less of a problem for ongoing professional development, as such factors may actually assist in retaining staff.
186 Furthermore, the large public teaching hospitals tend to see the more complex and rare disease states, which will provide pathology registrars with a broader exposure to the complete range of pathology tests. Although private hospitals are becoming increasingly sophisticated and dealing with a wider range of illnesses and emergencies, the large public teaching hospitals seem likely to retain an advantage for registrar training, as centres of excellence across the spectrum of medical disciplines, including pathology.
187 This teaching activity is not explicitly funded by Government. While the defined functions of an AHS include teaching, no funds are specifically earmarked for this purpose. The AHCA does not appear to make any specific reference to the funding of training, research and development, only to the funding of health care services and quality improvement. Accordingly, public pathologists must fund these activities through a combination of the surplus of the fees levied on the PHOs for the treatment of public patients and any private practice income retained in the No 2 Account.
188 It is impossible for the Tribunal to determine accurately how much is contributed to teaching activities from private practice revenues which accrue as a result of the policy. What data is available is incomplete and does not distinguish between revenue derived from in-patients (who are affected by the policy) and out-patients (who are not affected by the policy) or between private patient revenue derived from public hospitals and private patient revenue derived under contracts with private hospitals, such as the co-located private hospitals. We were told by Dr Watson that the absence of such funds in Queensland has resulted in inadequate teaching resources being available and the loss of accreditation by some teaching hospitals. On the other hand, we were told by the AAPP that no such problems have occurred in other states where the policy is not in place, though Dr Watson told us that the pass rate for pathology registrars in NSW was double that in other states. The Tribunal has insufficient information available in relation to other states to know what other factors may be at work. We accept that there is likely to be some increase in revenues available for teaching as a result of the policy, though the extent of this in the future will depend on the extent of ‘leakage’ arising from the implementation of modified Condition C1.
189 As discussed earlier, the market failures associated with the training of pathologists are in one sense internal to the industry and its customers. Currently it can be said that the private sector free rides on the provision of registrar training by the public pathology service. In another sense, it is also part of the public good and merit good problem associated with the provision of an effective public health system.
190 The issue of funding the public health system will be addressed further below, but to the extent to which the benefits of training are enjoyed by the industry and its customers, rather than the public at large, there would seem to be a reasonable case for ‘taxing’ the private sector for a contribution to the costs entailed. As will be discussed below, it is not clear that the policy really amounts to a tax on private pathologists, though there is clearly a reservation of some pathology activity and the associated profits to the public sector. While it may not be a ‘first best’ solution to the free rider problem, it is not obvious that the funding of such training by block grants from general revenue, as is currently being discussed in the context of the new pathology agreement, is necessarily more efficient, to the extent that the benefits of teaching accrue primarily to the industry and its patients. It appears to the Tribunal that the use of private practice funds to supplement funds available from the public health system for training of pathologists is a reasonable ‘second best’ solution, particularly since the public teaching hospitals have some advantages as centres of excellence exposing students to a broader range of pathology testing.
191 We were told that as part of negotiations over a further industry pathology agreement, the AAPP, the National Coalition of Public Pathology and the RCPA have jointly requested that the Federal Government provide $35 million to fund an additional 35 pathology registrars over the next four years. These funds have not yet been secured and they appear to be directed at addressing the shortage of pathologists which has emerged as a global problem, by providing for additional training places, rather than providing a substitute source of funds for existing training. Accordingly, the Tribunal does not see the possibility of these funds becoming available as negating the public benefit which is derived from the conduct.
192 This issue is very similar to the question of pathology education and training and the appropriate way to fund it. Again, the large teaching hospitals, as centres of excellence exposed to a broader range of pathology testing, appear to be natural locations for research. Again, such research is specified in the functions of an AHS but no funds are specifically earmarked, and again the private sector can free ride on the product of this research, to the extent that it is not protected by patents. Again, this appears to be partly a public good issue and partly an externality internal to the industry, whereby the private sector and its customers benefit from research conducted in the public sector.
193 Accordingly, the Tribunal’s analysis of the benefits or detriments associated with this issue parallels that in relation to education and training. While we have no exact figures, we accept that the policy contributes to the funding of research in the public pathology service and that the private sector is likely to benefit directly from this activity. While it may not be a first best solution to the market failure, reserving an area of what might otherwise be private sector activity and profits for the public pathology service appears to the Tribunal to be a reasonable way to address this problem.
Funding the Public Pathology Service
194 A number of the benefits claimed for the conduct are best considered collectively as comprising a cross-subsidy from private practice funds to the provision of a public pathology service. These include a proportion of the ‘facility fees’ paid out of the No 1 Account to cover the costs of providing the pathology tests (which includes a contribution to cover the public pathology service fixed costs), the system of supplementing SMP earnings through private practice drawing rights from the No 1 Account to attract and retain staff, and expenditure on new pathology equipment from the No 2 Account. As discussed above, there are also elements of the funding of teaching and research activities which contribute to the provision of a public health service.
195 The AAPP claimed that salary supplementation should be considered a purely private benefit to the SMPs concerned. While the recipients clearly receive a private benefit, the public benefit that is claimed is that salary supplementation helps to attract and retain SMPs in the public pathology service and that in its absence, alternative funds would have to be found or the public pathology service would lose staff and the quality of service would decline. The Tribunal considers that this claim is best considered as part of a claim that the policy helps to fund the public pathology service. Dr Abraham agreed with this perspective. Whether this means of funding represents a public benefit is the relevant question.
196 The public health service is both a ‘public good’ in the economic sense discussed earlier, in that it provides everyone with a safety net and the security which comes with knowing it is there when they need it, as well as providing certain specific services which benefit society as a whole; but it is also a private good in the economic sense, when large numbers of Australians actually consume specific medical services in the public health system on a daily basis. However, it is a private good which is supplied as a ‘merit good’ through the general tax system, redistributing income from taxpayers to users.
197 As discussed earlier, there are inherent difficulties with funding the provision of public goods and determining the optimal allocation of resources to their supply. There are also difficulties with determining the optimal way in which to fund the provision of merit goods and to redistribute income with minimal distortions to resource allocation.
198 Clearly the bulk of funding for the public pathology service is provided from general revenues through the AHCA, but the use of private practice funds to supplement this funding is not insignificant. According to Professor Burnett, an average of 70 per cent of private practice revenue is taken as infrastructure fees, though the exact number depends on the composition of tests conducted, since the charge is set as a different percentage for different types of tests. As discussed earlier, private practice drawing rights can contribute significantly to SMP earnings. The significance of contributions to capital expenditure are difficult to gauge, but clearly Dr Watson attached importance to those contributions. Professor Burnett also stated that capital contributions from the trust fund were significant at PaLMS. However, Professor Burnett’s statement should be treated with caution since the funds he referred to include revenues derived from the supply of pathology services to the North Shore private hospital, that is funds which do not derive from the implementation of the policy.
199 Given the problems inherent in the optimal funding of public goods and merit goods, it is not obvious that the use of private practice funds in this way is particularly inefficient. Importantly, these difficulties mean that we cannot be at all confident that the funds from private practice trust funds would necessarily be replaced by alternative funding in the absence of the policy, or that if they were this would necessarily be a more efficient outcome.
200 The AAPP appeared to claim that the policy amounted to a tax on the private sector and that all taxes necessarily distort resource allocation. While the latter statement is certainly true (apart from lump sum taxes), the former is not obvious. While cross subsidies in the provision of regulated services have been characterised as ‘taxation by regulation’ (see Richard A Posner “Taxation by Regulation’, Bell Journal of Economics and Management Science, 1971, Vol 2, No 1, pp 22-50), the situation here is more complicated. While there are clearly cross subsidies in one sense, it is not clear to the Tribunal that reserving an area of pathology activity to the public sector can be correctly characterised as a ‘tax’ on the private sector. This characterisation of regulated cross subsidies as taxes generally relates to situations where some consumers are paying inflated prices to subsidise others, but as discussed above, private patients in public hospitals actually pay less for their pathology services than they would in private hospitals. One sense in which the policy could be characterised as a tax is to the extent that it restricts the ability of private pathologists to capture maximum economies of scale. However, any such loss will necessarily be matched by a gain in the public sector.
201 Dr Abraham placed particular emphasis on the manner in which funds were allocated from the No 2 Account for investment in equipment and this was also emphasised by the AAPP’s closing submissions. Such investments are apparently not subject to any rate of return analysis, rather the No 2 Account essentially provides a bucket of funds for use in various ways, including spending on new equipment, which provides no guarantee that such investment is justified in an economic or business sense. While this is true, the same could be said for capital spending from general revenues or from funds allocated to the public pathology service for the provision of services to public patients. The extent to which this is or is not the case will depend on the procedures in place to allocate spending from either general revenues or the trust fund, and the latter is not inherently worse.
202 Accordingly, the Tribunal takes the view that the use of private practice revenues reserved for the public sector in this way should be seen as a benefit to the public, since it provides supplementary funding, in a way that is not obviously inefficient in a second best sense, for a service which has been identified through the political process as being a public good and a merit good worthy of funding.
Detriment to the public arising otherwise than from a lessening of competition
203 AAPP’s final submissions related to a contention that the conduct for which authorisation is sought gives rise to public detriments which do not arise solely out of a lessening of competition. The AAPP submits that detriments in terms of public policy, and detriments in terms of patient welfare, are properly to be taken into account. In particular, in addition to the potential detriments discussed above, the AAPP contends that:
- the conduct for which authorisation is sought contradicts and thereby undermines the patient election procedures in NSW. Private in-patients are entitled to choose their doctor. Yet on admission into a NSW public hospital, private in-patients are not told that their entitlement to the medical practitioner of their choice does not apply in relation to pathology services that they may require while they are in hospital;
- there is thus misleading or deceptive conduct as the failure to tell patients the facts in relation to the supply of pathology services may affect patients in making their election whether to be treated publicly or privately; and
- for the DOH or the PHOs to engage in the conduct for which authorisation is sought would be contrary to clauses 10(a), 38 and Schedule E (clauses 2, 4 and 5) of the 2003 AHCA.
204 It may be that in the past, persons contemplating admission as a private in-patient in a NSW public hospital have been told that they were entitled to be treated by medical practitioners of their choice, but without being informed that this entitlement does not extend to the provision of pathology services. But the Tribunal’s concern is with the future, and with detriments which are likely to arise in consequence of the engaging in of the conduct for which authorisation is sought.
205 If the Tribunal grants the authorisations sought, that does not provide a warrant for any person to misdescribe the benefits or entitlements which accrue to a person electing to be treated as a private patient. The possibility always exists that some person may misdescribe those benefits or entitlements, and be liable accordingly, but this does not arise from the conduct which the Tribunal is asked to authorise.
206 Under cl 10(a) of the AHCA, NSW undertakes to ensure that public hospital services are provided in accordance with that agreement. Under cl 38 of that agreement NSW is to ensure that persons elect to receive admitted public hospital services as a public or private patient. The election is to be exercised in writing before, at the time of, or as soon as possible after the admission, and must be made in accordance with the national standards for public hospital admitted patient election processes as set out in Schedule E. Clause 49 provides that private patients may be charged an amount for public hospital services as determined by NSW. Schedule E contains the national standards for public hospital admitted patient election processes. Clause 2 of Schedule E sets out the minimum matters which are to be included in the admitted patient election forms. Those matters include (cl 2(e)) a ‘clear and unambiguous explanation of the consequences of private patient elections’. This explanation should include advice that private patients:
‘(iii) are able to choose their doctor(s), providing the doctor(s) has private practice rights with the hospital’.
207 The proviso referred to in cl 2(e)(iii) of Schedule E is found in the patient election forms which were tendered in evidence before the Tribunal.
208 Again, it seems to us that the terms of the AHCA to which we have referred, do not provide a reason for declining to grant the authorisations sought if the applicants otherwise established the requisite public benefit. It may be that the obligation in Schedule E cl 2(e) to provide a clear and unambiguous explanation of the consequences of private patient election may require some explication in relation to pathology services if the authorisations sought are granted, but this is not a matter upon which it is appropriate for the Tribunal to express an opinion.
209 The Tribunal has considered whether it should impose as a condition of any authorisation a stipulation that putative private in-patients should be informed of the impact which the authorisation may have upon their entitlements as a private in-patient, but we have come to the conclusion that it is not appropriate for such a condition to be imposed, as neither the applications nor anything nothing which the Tribunal does in relation to them would authorise any form of misleading or deceptive conduct, or any breach of the provisions of the AHCA to which we have referred. It is therefore neither necessary nor appropriate for the Tribunal to stipulate that authorisation is conditional upon the non-occurrence of these matters. Rather, it is for the DOH to take whatever steps are necessary to ensure that information provided in connection with the making of a patient’s election is informative, accurate and not misleading.
210 On balance, the Tribunal is of the view that the conduct is likely to give rise to a net public benefit. The detriments arising from the conduct, as varied by modified Condition C1, appear to be minimal, while the benefits are likely to be significant. The major benefits comprise efficiency gains and funding for education and research, as well as the public pathology service more broadly. How large the benefits are likely to be under the conduct with modified Condition C1 is not clear. It depends to what extent the hurdles imposed in the way of free choice by referring doctors are effective in preventing leakage from the public pathology service. However, the Tribunal is not required to determine the size of the gap between benefits and detriments, only that there is a net benefit which justifies authorisation of the conduct. Of that we are satisfied.
211 Finally, it was submitted by the ACCC that we should impose a further condition on authorisation, C2. This condition would require the DOH to charge no more than the MBS fee to private in-patients for pathology services. We can see no reason to impose such a condition. In the first place, it seems to us that modified Condition C1, which is now intrinsic to the conduct for which authorisation is sought, brings into play a market mechanism for constraining pathology charges by the public sector, to the extent that such constraints are effective in the context of the market failures identified. Secondly, there is no basis for believing that the MBS fees are in any sense efficient prices, so that even if price regulation was thought to be desirable, this does not provide a sound foundation for it. The historical record under a more restrictive policy has shown that the DOH has been restrained in its pricing of these services, no doubt a consequence of its public sector status, and there is no reason to believe this will change. If, however, circumstances did change in this, or any other regard, it might be appropriate, pursuant to s 91B of the TPA, to review the authorisation.
212 It therefore follows that, subject to the imposition of modified Condition C1, the conduct under review should be authorised. As an addendum, it should be noted that the ACCC granted the applications for authorisation except to the extent to which they involved s 88(13) of the TPA. No submissions were put to us that the authorisations should be extended in the manner provided for by s 88(13). In the absence of such submissions, it has not been necessary for us to consider this question.
I certify that the preceding two hundred & twelve (212) numbered paragraphs are a true copy of the Reasons for Decision of the Tribunal.
Dated: 7 April 2004
Counsel for the New South Wales Department of Health:
D Yates SC
Solicitors for New South Wales Department of Health:
Blake Dawson Waldron
Counsel for the AAPP:
N O’Bryan SC, R Miller
Solicitors for the AAPP:
Counsel for the ACCC:
Dr G Watson
Date of Hearing:
9-11, 16-17 March 2004
Date of Reasons:
7 April 2004