Pathology collection centres: responding to DoH "please explain" letters about rent

The Australian Department of Health has sent “please explain” letters to parties to 450 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). This represents just under 10 percent of all pathology approved co-located centre leases in Australia.

Although enacted in 2008, 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 other commercial rates to pathology collection centres co-located on their premises.

Prohibited benefits laws

Part IIBA of the Act creates civil penalties and offences relating to “prohibited benefits”. In a nutshell, these are benefits from pathology collection centres or diagnostic imaging businesses (“providers”) to medical centres, doctors and related parties (“requesters”) which either:

• If they relate to how much rent a provider pays, are over market rates (defined as >20% above market rates);
• Depend on the number, kind or value of requests for pathology or imaging services made by the requester; or
• Breach 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.

The rationale behind the prohibitions is that they 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.

These practices 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 leading providers such as 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 take action to exert downward pressure on pathology rents. The action has been to 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:

• 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, the Department states that it will commence civil proceedings.

How to respond?

As these letters have been recently sent, there are few examples of resolution of the issues raised. So, it is not yet possible to have a strong feel for how the Department of Health 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 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 the dialogue.

If you have received a “please explain” letter and would like advice on how to respond, please contact us.

This article was written by Geoff Bloom, Partner.