Rents will tumble: Medical centres, hospitals and dental clinics forced to charge market rate rent to co-located pathology collection centres

The following article was co-written with William Buck.

Since being enacted in 2008, “prohibited benefits” laws have been unenforced and 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. A new regime of enforcement by Medicare will start to bite from 1 July 2018, when all new leases will have to be lodged with Medicare for review. The financial profitability, or even viability, of many medical centres and dental clinics is at stake.

Prohibited benefits laws

Part IIBA of the Health Insurance Act creates offences relating to “prohibited benefits”. In a nutshell, these are benefits from pathology collection centres or diagnostic imaging businesses (providers) to requesters (eg, doctors or dentists who refer patients for these services) which either:

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

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 only now an issue?

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 properly enforce the prohibited benefits 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 will cause a major drop in revenue for many medical centres, private hospitals and dental clinics charging outlier rents. Some may struggle for continued viability.

The new enforcement regime

At the start of 2018, the Federal Government released an updated version of the “Red Book”, a guide to the prohibited benefits regime, which includes a new strategy to enforce the prohibited benefits regime. From February 2018, the Government has been sending out Request for Information letters to landlords and tenants that it thinks might be outliers.

From 1 July 2018, all “new leases” for co-located pathology collection centres will have to be lodged with Medicare for review. New lease is an undefined term, but it seems to include old leases that have been materially amended regarding prohibited benefits-related issues.

Where the parties to these leases do not voluntarily reduce rents to market rates, Medicare states that it will commence civil proceedings.

Now is the time to act

If you are a party to lease with outlier rent, you need to consider your legal, financial and practical options now. If you have not made preparations by 1 July 2018, you will have few options left. Are you happy with your current pathology provider? Lease reviews, amendments and new leases take time, so now is the time to seek advice and to take control of the issue.

This article was written by Geoff Bloom, Partner at HWL Ebsworth Lawyers.

HWL Ebsworth Lawyers and William Buck Chartered Accountants specialise in advising the health industry. They are assisting numerous medical centres and private hospitals to respond to the changes, taking care of the legal and accounting/financial issues in one package. Please make contact if you would like our help.

Please refer to the disclaimer below. The material contained in this publication is also not, nor is intended to be financial advice.