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August 21, 2018

PATHOLOGY RENT COMPLIANCE–HAS ANYTHING REALLY CHANGED?*

As part of the 2017 Budget, the Australian Government announced its commitment to strengthening compliance under the Prohibited Practices Provisions as they relate to Pathology Approved Collection Centres (PACCs).

The key words in the above paragraph are “commitment to strengthening compliance”

The Government is not enacting “new laws” per se.  It has merely made a commitment to ensure that laws and Regulations previously passed, in 1973 and 1975 and updated in 2008 and 2010 are complied with.

Which Laws Are the Subject of This Compliance?

Part IIBA of the Health Insurance Act 1973 (the Act), supported and updated by subsequent legislative instruments, contains laws aimed at preventing inducements to request pathology and diagnostic imaging services.  On 1 March 2008, changes to the laws prohibiting inappropriate commercial relationships between requesters and providers of pathology and diagnostic imaging services were introduced via the Health Insurance Amendment (Inappropriate and Prohibited Practices and Other Measures) Act 2007.[1]  These are the Prohibited Practice Provisions.

What is the Purpose of these Laws? 

These laws were introduced because health practitioners are tasked with the responsibility of looking after the health of their patients, and in doing so, are responsible for, and indeed expected to refer their patients to other healthcare providers. Examples include but are not limited to, referrals to pharmacies for dispensing medications, and referrals to diagnostic service providers such as pathology and radiology clinics. 

Allowing these referrals to be influenced by the payment of benefits in any form, for example, but not limited to, money, property, or services between the referrer and the provider, or the making of a threat, may be illegal and/or unethical. It can also compromise patient outcomes and lead to over servicing.[2]

Another purpose for the introduction of these laws was to “ensure that competition between providers of pathology and diagnostic imaging services is based on the quality of service and costs to patients and is not skewed in favour of those who provide benefits to requesters of pathology and diagnostic imaging services.”

It is not, however, intended that the legislation capture or prohibit legitimate commercial transactions.  A provider may lease premises from a requester, provided that the amount of rent paid aligns with the market rate for those premises.  It is not permitted for the amount of rent paid to be linked in any way to the number, type, or value of the services requested amongst other prohibited practices.[3]

Who is the Subject of these Compliance and Enforcement Activities?

The Prohibited Practices Provisions affect anyone who can request or provide a Medicare-eligible pathology or diagnostic imaging service and various related parties.   Typical requesters include, but are not limited to, general practitioners, medical specialists, dental practitioners, podiatrists, physiotherapists, osteopaths, chiropractors and nurse practitioners.[4]

These Provisions potentially impact a broad range of stakeholders, individuals, and incorporated entities in addition to those who either directly request or provide pathology services.  The Provisions were broadened to take into consideration, familial and personal connections as well as the various models of medical practice that exist today, including organisations that provide both medical and diagnostic services whether they be private or publicly listed entities.

Commonly, the relationships between referrers and pathology providers may emanate from the following, albeit non-exhaustive, scenarios;

  • A business that owns both the general practices and the pathology collection centres and houses them in the same building.
  • A “chain” of General Practices which may not have an ownership interest in a specific pathology provider’s business but may enter into some form of occupancy arrangement with one or more pathology collection centre providers and thus provides these pathology collection centres with accommodation within the General Practice Clinics
  • Health practitioners that provide referrals may own or have a head lease over premises from which pathology collection centres seek to occupy.

 

The Unrelated “Third Party” Landlord

A potential anomaly is the case where the pathology collection centre wishes to enter into a lease in a property owned by a completely unrelated third party.  Someone who has no relationship with the doctors that provide the referrals or the provider of the services and would therefore not be subject to these Provisions. 

The example of the knowledgeable “third party” unrelated Landlord raises the following queries.

  • Assuming such an unrelated party understands the value that, service providers attribute to proximity to referrers, is it likely that pathology providers will be paying this “third party” landlord a rental commensurate with that which it would pay a landlord who is a potential source of referral?  Assuming similar parameters exist, the answer should be yes.  The rent paid to the third party should be representative of market forces, that is, the rent is set by the competition for that location between possible occupiers.
  • Should a practitioner, who is also a landlord, be expected to accept a lesser rent from a service provider than a landlord who is not a referrer, assuming that the referrer is not partaking in prohibited practices?  After all, the rent negotiated by a third party who is not related to a referrer or provider would be an “arm’s length” market value negotiation.  As stated previously, it is not, intended that the legislation capture or prohibit legitimate commercial transactions. 

 

What is a “Market Rent”?

At the time of the introduction of the 2007 Amendment, there was debate about how, a rental paid by a provider to a requester would be deemed to be substantially different from market value, and therefore a “prohibited practice”.

An approach being considered by the Department at the time was that the market value for property meant an amount that was within 10% of the average of two valuations obtained from an appropriate person/s.

The valuations would be made based on the value of the property without adjustment to reflect any additional value that any party to the arrangement might attribute to this space because of its proximity or convenience to any source of pathology or diagnostic imaging requests.[5] 

There was a subsequent debate about the appropriateness of ignoring the value added because of proximity or convenience to any source of pathology or diagnostic imaging requests.  It was argued that not being able to take into consideration proximity was, in essence, altering the commonly held definition of market value.

In much the same way that specific retailers “jockey” to be near other businesses that are likely to generate additional “traffic” to their stores, businesses such as pathology collection centres are likely to benefit from being near the sources that provide them patients.  That benefit, in most similar situations, results in increased rents being paid.  That is the nature of the market and an influencer of market value.

Another matter debated was whether the rents paid by pathology firms should be commensurate with that paid by other parties that might occupy similar space, for example, allied health professionals, therefore having no regard for the specific nature of the pathology business model.

Recent articles that have appeared in the media compare the rents that are paid by pathology with other types of business; the comparison is made on a rate per m2 basis.  The problem with doing this, and then making a judgement as to whether rents are “excessive”, is that amongst other things, these calculations take into consideration the area occupied by the tenant. 

Rents that tenants pay, across all industries, can vary significantly from industry to industry.  Reasons for this can often be traced back to the business model for that industry.  Ultimately, tenants are unlikely to pay more rent than they can afford; and what they can afford depends on the industry they are in, the income they can generate, the expenses they must pay, and the size and location of the premises they require to perform their functions, amongst other things. 

There is no point comparing the rent per m2 of office tenants in the city with industrial tenants in the suburbs, just as there is little to be learned from comparing the rents per m2 paid by allied health professionals with that paid by medical specialists or dentists.  Some businesses, even though they may come under the banner of “health providers”, merely have greater income generating capacity than others, and therefore a greater capacity for expenses including rent. 

A feature of pathology collection centres is that they generally require far less space to undertake their services than many if not most other types of businesses.  A collection centre need not be greater in size than an average room in its most basic form.  Hence the reason the rent per m2 paid by pathology collection centres often bears no relationship to other industries.  The lower the denominator (in this case the area of the premises), the higher the ratio.  Therefore, it would seem that the most appropriate way to determine if a pathology rent is within “market range” is to compare like with like. 

Finally, rents currently paid by pathology companies have often been established by the pathology companies themselves, particularly those established in a competitive environment.  As with other market scenarios, the rent a tenant offers is presumably one which it believes it can afford to pay.  If a tenant can achieve a rental lower than what they have budgeted for, why wouldn’t they, and these scenarios do occur.  However, in a typical market competitive environment, they may end up paying rents at the top end or above their budget so as not to lose out to a competitor.  Isn’t this the essence of “market”?  That is why there are numerous examples of pathology companies paying rents in the hundreds of thousands of dollars.  Provided these agreements did not include elements that are prohibited by these long-standing laws, then these transactions are presumably a legitimate example of the value the market places on these leases.

Many pathology providers are sizeable commercial entities, whose ultimate aim is to achieve profit.  Why would they agree, with a degree of frequency, to paying rents in the hundreds of thousands of dollars, if they weren’t in a position to afford that?  Conversely, how profitable would a pathology practice be if it wasn’t afforded the opportunity to be in close proximity to referrers, but its direct competitors were?

Are there Other Beneficiaries to Collocated Services?

The beneficiaries, in this case, being the patients.  It is incredulous to expect a patient who is ill, perhaps not fit to drive, to have to jump back in their car to find a pharmacy to fill the script provided by the doctor, or to obtain diagnostic tests requested by the doctor.

Are the Laws Warranted?

In many areas of business, there are a plethora of situations where the possibility of a person/s choosing to abuse circumstances exist.  It is often said that laws are created to dissuade the minority (a very small percentage of society) from the temptation to abuse circumstances, which would otherwise be considered advantageous to the greater population.  These circumstances are no different.  That reason alone warrants laws intended to dissuade the potential nefarious actions of the minority motivated by personal gain.

It has been the intent of the Health Insurance Act 1973, and subsequent Regulations and Amendments, to ensure that referrals made are done so purely for the benefit of the patient, their clinical needs and best interests. 

Should Referrers be Concerned about the Current Compliance Resume?

No, provided that the parties to the transaction are not in breach of the Prohibited Practice Provisions.

The laws relating to the current compliance program were first enacted over 40 years ago and updated since. Despite debating the possibility of redefining “market value” over the years, the Government has chosen not to do so. 

To establish a reasonable parameter for what might be considered an unreasonable benefit provided to or from a referrer by way of rent, the Government has adopted a measure or rent that differs from the market value by not more or less than 20%.  This sounds reasonable.

It is important to understand that in recently announcing its desire to strengthen compliance to these pre-existing laws, the Government has stated that ’Market value’ does not have a special meaning under these laws.  Instead has its ordinary common law meaning, and, amongst other things, in determining market value, it may be that some value could be attributed to the convenience of the location.

“We acknowledge that the majority of Rents for Approved Collection Centres will be compliant and that the affected sector, as a whole, wants to comply.”[6]

 

*This is an Opinion Piece and should not be relied upon for accuracy or as advice.  The author of this paper is neither a Property Valuer nor legally trained.  As suggested by the various guidelines, should you have any doubts as to your circumstances, it is recommended you seek appropriate valuation and/or legal advice.

 


[1] Guidance on Laws Relating to Pathology and Diagnostic Imaging – Prohibited Practices

[2] Guidance on Laws Relating to Pathology and Diagnostic Imaging – Prohibited Practices

[3] Explanatory Guide to the Health Insurance Amendment (Inappropriate and Prohibited Practices and Other Measures) Act 2007

[4] Guidance on Laws Relating to Pathology and Diagnostic Imaging – Prohibited Practices

[5] Explanatory Guide to the Health Insurance Amendment (Inappropriate and Prohibited Practices and Other Measures) Act 2007

[6] Guidance on Laws Relating to Pathology and Diagnostic Imaging – Prohibited Practices