Pathology collection centres: Responding to DoH “please explain” letters about rent

06 November 2019

The Australian Department of Health has sent “please explain” letters to parties to hundreds of leases for pathology approved collection centres, as part of its new commitment to strengthening compliance with the “prohibited practices regime” under the Health Insurance Act 1973 (Cth) (Act).

Although enacted in 2008, until recently, the prohibited practices regime has been largely unenforced and is thought to have been widely unfollowed. Many medical centres, hospitals and dental clinics have routinely charged rents substantially above market rates to pathology collection centres co-located on their premises.

Prohibited practices laws

Part IIBA of the Act creates civil penalties and criminal offences relating to “prohibited practices.”In a nutshell, these are arrangements under which actual or potential benefits pass from pathology service providers or diagnostic imaging businesses (“providers”) to medical centres, health practitioners and related parties (“requesters”) which are:

  • Reasonably likely to induce a requester to request pathology or diagnostic imaging from a provider; or
  • Relate to the provision of pathology or diagnostic imaging services.

The Act also covers arrangements between individual and entities which are “connected” (as defined) to providers and requesters. As such, an arrangement need not be directly between a provider and requester to fall foul of the prohibited practices regime. Health care practitioners are “connected” to the operator of any medical centre at which they practice, regardless of the business structure.

The Act specifies certain commercial arrangements between providers and requesters (and those connected to them) which are not prohibited. These “permitted benefits” include:

  • A provider (such as a pathology collection centre) leasing or sub-leasing premises from a requester, unless the rent charged is over market rates (defined as >20% above market rates); and
  • A provider making a payment to a requester in exchange for property, goods or services, so long as the payment is not substantially different from market value.

However, no arrangement is permitted which:

  • Depends on the number, kind or value of requests for pathology or imaging services made by the requester; or
  • Involves the provision of staff or equipment at the premises of the requester, for the purpose of providing pathology or diagnostic imaging services.

Breach of the Act can lead to civil penalties of $126,000 for individuals and $1.26M for corporations, or a criminal penalty of up to 5 years imprisonment. In some circumstances, a person can be held liable for the unlawful conduct of a person or entity “connected” to them, in particular, if they are aware of an arrangement which contravenes the Act.

The rationale behind the regime is that the prohibited practices are a form of kickback, which do not increase the value of the referred service, but which increase the price for payers – the consumer and Medicare. They may also constitute a conflict of interest, if a referral is made on the basis of receipt of a kickback, rather than the best interests of the patient.

The practices prohibited under the Act can also breach:

  • The Competition and Consumer Act prohibitions against substantially lessening competition; and
  • The Medical Board of Australia’s Good medical practice: A code of conduct for doctors in Australia prohibition on offering inducements or entering into arrangements that could be perceived to provide inducements, and on failing to manage a conflict of interest.

If this has been illegal since 2008, why is it an issue only now?

These prohibitions have been legislated since 2008 but have not been enforced.

In 2016, the Federal Coalition Government took a policy to the election of removing bulk-billing incentives for pathology. Pathology Australia, which includes big players such as Genea and Sonic Healthcare Group among its members, campaigned vigorously against the measure. The Government struck a deal with Pathology Australia: in return for Pathology Australia ceasing its campaign, the Government would maintain its policy of removing bulk-billing incentives for pathology but, in return, it would better enforce the prohibited practices regime. This aims to ensure that pathology service providers who have co-located their collection centres inside medical centres or other health facility buildings are charged “fair market value” rents.

These changes may cause a significant drop in revenue for medical centres, private hospitals and dental clinics charging “outlier rents”.

The Red Book, and the new enforcement regime

At the start of 2018, the Department released an updated version of the “Red Book”, a guide to the prohibited practices regime, which outlines the new enforcement strategy. The Department’s current focus is on rents paid by approved collection centres co-located with the pathology service requesters, most often at a medical centre. Under the strategy:

  • From 1 July 2018, it has been necessary for all “new leases” for co-located pathology collection centres to be lodged with the Department for review. New lease is an undefined term, but it seems to include not just a totally fresh lease but also old leases that have been materially amended; and
  • In addition, the Department is proactively contacting parties to applicable leases, through “please explain” letters, where data suggests the possibility of non-compliance.

Where the parties to these leases do not voluntarily reduce rents to market rates, or if there is evidence of a deliberate and systemic non-compliance with the Act, the Department may take enforcement action, which in more serious cases could include commencing civil or criminal proceedings.

How to respond?

We have assisted a number of clients to respond to “please explain” letters over the past year. However, to date we are not aware that the Department has issued any responses. So, it is not yet possible to have a strong feel for how the Department might exercise its considerable discretion. The Department has been clear that it will engage in a dialogue with the pathology provider and the medical centre or health facility before deciding to take any action. Our approach is to put what we believe is our client’s best foot forward, based on our understanding of the regulatory and practical issues, and then engage in dialogue with the Department as necessary.

Given the Department’s more active approach, we recommend reviewing all leasing arrangements involving a co-located approved collection centre to check for compliance with the Act.

If you have received a “please explain” letter and would like advice on how to respond, or would like advice about whether a lease or other commercial arrangement complies with the Act, please contact us.

This article was written by Geoff Bloom, Partner and Meghan Carruthers, Special Counsel.

Meghan Carruthers

Special Counsel | Sydney
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