Health Minister Jonathan Coleman has asked the three lower North Island district health boards seeking to merge their pathology lab testing for an explanation after one of two bidders for the contract walked away from the tender.

The minister has asked the Capital - Coast, Hutt Valley and Wairarapa DHBs why Aotea Pathology withdrew from the bidding this week, he said in an emailed statement. Aotea, a joint venture between Abano Healthcare and Sonic Healthcare, left the process saying the proposed terms of the contract weren't in the interests of its staff, clinicians or shareholders and would result in "an outcome that was clinically unsound and financially unsustainable" leaving the provider carrying all the risk. That leaves Australia's Healthscope as the only bidder.

"It is very important that there is clinical buy-in, and that there is a clear understanding of the wider cost and benefits of any change and not just the financial implications," Coleman said. "I have asked the DHBs to work with the Ministry of Health to prepare a report for me - updating me on how this process is going."

The government wants DHBs to cut the cost of pathology testing as part of a broader strategy to slow the increase in the health budget. Coleman has already taken a knife to the health sector's procurement, scrapping Health Benefits Ltd from June this year and agreeing to look at a proposal for healthAlliance, owned by the four northern North Island DHBs, to manage the government's shared-services programme in their region.

The three lower North Island DHBs sought expressions of interest from third parties to provide lab services in October 2013 in a bid to develop integrated systems across their region. Among the goals was to cut annual lab-testing costs by about 8 percent.

In a joint statement, the DHBs said they would press ahead with the project and will decide on March 6 whether to proceed to the next stage and make a provisional decision on a provider. The boards will consider Aotea's withdrawal, but still has "a viable and comprehensive proposal on the table," Hutt Valley and Capital - Coast DHB chair Virginia Hope said.

Healthscope, which already provides pathology service to about 65 percent of New Zealand's population, declined to comment on the tender. When the company listed on the ASX last year, it said it would contest new DHB contracts when they came up and considered itself to be well-positioned to win them.

Abano chief operating officer Richard Keys said Aotea's decision to withdraw wasn't taken lightly, but that staying would endorse the process the DHBs were taking.

"We felt we couldn't condone the process so we have chosen to withdraw," Keys said.

Abano, which owns 55 percent of Aotea, has pulled back its exposure to government contracts, including the recent sale of its orthotics unit, because of the uncertainty of funding.

"The issues we're seeing in health funding is the lack of tenure, which means you're unable to invest in staff and give staff certainty and you're not able to invest in equipment and capital over the required period," he said. "Building a brand new laboratory, which is what this proposal was looking at, is a long investment period, and so you need the tenure to enable that to be returned, and you need a commercial return."

Keys said pathology has been treated as a consumable product, when it's actually a medical profession and requires highly skilled people who need the certainty of a longer tenure.

The DHBs appointed a working group to advise on the lab services strategy, which reported back in August 2013. When canvassing stakeholders, the group found most saw potential for closer integration of the DHBs' lab services, but were concerned about the appropriate management of change.

Community lab providers, of which Aotea was one, suggested increasing the length of future contracts to 10 years, saying five-year terms were too short to take long-term approaches on capital intensive investments, the report said. Hospital lab providers agreed that more certainty was required to allow for investment in equipment, infrastructure and staff.

The report's authors said capital expenditure was essential to develop and maintain reliable lab infrastructure, and barriers to that include the length of community provider contracts, and spending for hospital labs being complicated by the wider health system.