Dept renews action on pathology rent compliance

By an AGPA writer

Medical Practices which rent rooms to pathology and/or imaging businesses can expect renewed compliance activity by the Department of Health in 2021 after a lull during the Covid pandemic. But there are a couple of legal obstacles for the department which might help practices. These will be explained later.

The Department, which began compliance activities in 2018, is advising that GPs should expect another round of requests for information early in 2021 as it continues in enforcing those sections of the Health Insurance Act which prohibit benefits flowing between a medical practice and a pathology business, especially in the form of the pathology or imaging business paying above market rent to the medical practice on the basis that they can expect greater traffic if their business is in that location rather than as a stand-alone.

Most patients, of course, are aware that they can fulfill their pathology or imaging requirements at any accredited pathology or imaging business. However, the sheer convenience for patients obtaining those services under one roof gives a pretty big incentive to those businesses locating there.

A recent Department of Health email to the Australian GP Alliance says that since 2018 the department has conducted four rounds of requests for information covering 730 lessors and 23 Approved Pathology Authorities. The department has told 220 of them (30 per cent) that no further action will be taken over their rental arrangements.

The department has “identified particularly concerning behaviour in a few cases that we consider warrants further investigation”.

That leaves 70 per cent in the dark. But the email says more requests for information will go out in the new year.

“We are also continuing to monitor the pathology sector including closed, updated, reopened and new ACC arrangements to ensure ongoing compliance with the prohibited practice provisions of the Health Insurance Act 1973,” the email said.

“The Department continues to take a measured approach to enforcing the prohibited practices provisions in cases where the parties have provided further information and the Department remains concerned they may be in breach.

“Our actions may include:

·         accepting voluntary compliance undertakings from parties that have expressed their commitment to compliance; and

·         considering whether it would be appropriate to institute legal proceedings when there is continuing concerns of a serious breach. . . . 

“Under a voluntary undertaking, a lessor or APA will make a legally binding commitment to take steps aimed at improving compliance with the prohibited practices provisions with respect to rents and/or other benefits  offered, asked for, accepted or provided in relation to the use or occupation of premises as an ACC.

“The Department will make voluntary undertakings publicly available by publishing them on its website.”

The email made it clear that the department would not shy away from legal action if necessary.

The Health Insurance Act prohibits cosy deals under which pathology and/or imaging businesses pay more than market rent for space within a medical practice in the expectation they will get more business. The theory is that this is anti-competitive and against the public interest because the extra cost paid by the pathology business in the form of higher rent will inevitably be passed on to patients.

The Act specifically outlaws rent payments “related to the number, kind or value of requests for pathology services or diagnostic imaging services made by the requester [the GP]”.

The Act, however, says that payment of rent by a pathology service to a medical practice is not prohibited provided “the amount of the benefit is not substantially different from the market value of the property, goods or services”.

The regulations set out how to determine “market value”. And this is where it gets interesting.

The explanatory statement published with the regulations says the method of determining market value is the common law position set out by the High Court in the 1907 case of Spence v The Commonwealth. Essentially it is what a “willing purchaser will have to pay . . . to a vendor who was willing but not anxious to sell”.

It is the best price that can be reasonably obtained in the “general market”. The Act uses the words “not substantially different” from market value. The regulations have put that at 20 per cent. So a practice could charge rent at 120 per cent of market value and not run foul of the Act.

The Pathology Rent Regulations are here.

But what if there is no “general market”. In the case of renting rooms in a medical practice, there is no “general market”. Of its nature it is a highly specialised one. The only people who would want to rent such space are providers of medical services. 

The department might want to consider what the GPs in the practice are paying in rent in the practice as an indicator of the “market price”. But this might not hold up. A pathology or imaging business might want much less or much greater space than a GP’s room and so it would be a comparison between apples and oranges.

The explanatory statement acknowledges this. It says, “Where the vendor knows that the potential purchaser values the property, goods or services in a special way, this usually means that the property, goods or services will sell and the market value will be at the higher end of the usual market value range.”

How much higher? Surely the “special way” in which a pathology or imaging business “values the property” is precisely because of its location under the roof of a medical practice. Location, after all, is one of the most critical things in valuation.

Most Practices are now using tender processes to establish “market price” for leases in the first instance, and while there have been no cases to test the validity of this approach it seems to be a reasonable one. 

Issues that can potentially arise are where the agreements have a right of renewal at “market rates” but no mechanism to determine this. This in turn raises the risk of using an agreement provided by the pathology provider rather than providing an agreement as a landlord to a tenant. This requires a Practice to obtain specialist legal advice, but allows the Practice to protect itself from clauses that may cause issues under the regulations and also those clauses that allow the pathology tenant to arbitrarily withdraw from the commercial tenancy arrangement. 

The mere fact a practice rents space to a pathology or imaging business at a significantly higher rent per metre than it is charging its GPs is unlikely of itself be enough to show that the practice is in breach of the Health Insurance Act.

From the departmental email it seems that the department is more interested in getting voluntary compliance with what is its interpretation of the law than in prosecutions, despite its protestations that it will take legal action if necessary. That statement is more likely a statement to encourage voluntary “compliance” rather than a definitive course of action.

All that said, any arrangement where rent is related to the tenant’s profits – such as those in shopping malls – will definitely be a breach of the Act.

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