Pathology Sub-leases: Changes ahead

— 8 min read

Pathology sub-leases with outlier rent to be targeted by Medicare armed with enhanced enforcement powers and reinforced by rigorous new disclosure obligations, all set to hurt clinics bottom line.

New enforcement regime

In the 2017-2018 Federal Budget, the Government announced its commitment to strengthening compliance with the prohibited practices provisions of the Health Insurance Act 1973 (Cth)(Act) specifically as it relates to rent for pathology collection centres.

The new compliance initiatives include:

  1. the development of data analytics tools to identify irregularities in rent or referral rates or to identify other indicators of potential prohibited practices;
  2. undertaking targeted compliance activities, including exercising powers to garner additional information relating to potential prohibited practices;
  3. automating and streamlining existing approval process for collection centre lease arrangements; and
  4. extending collection centre approvals from one to two years.

From 1 July 2018, all new sub-lease arrangements with Pathology Providers must be submitted for assessment by the Department of Health through the Health Professional Online Service. This includes submitting renewals or variations of sub-leases entered before 1 July 2018.

Failure to comply can result in:

  1. substantial fines (civil penalties) – individuals $126,000 and Corporations $1.26 million, or
  2. imprisonment (criminal penalties) – with a maximum of 5 years in prison.

Breaches can also be referred to the Medicare Participation Review Committee and individuals and companies can be excluded from the Medicare system.

What does this mean for you?

It is expected that the new enforcement regime will result in a reduction in leasing revenue for medical centres. If you have entered into a sub-lease with a Pathology Provider you must ensure that it complies with the Act. This includes ensuring that the Pathology Provider is not paying outlier rent. This means that rent must not to be “substantially different from the market value” of the rent for the relevant area within medical centre.

What is market value?

The Health Insurance Regulations 1975 (Cth) (Regulations) provide a prescribed method for determining market value, being the rent that a willing tenant would (at the relevant time) have had to have paid a willing, but not anxious, landlord to secure the sublease over the premises.

The Regulations also define the meaning of “substantial difference” as a scenario where “the difference between market value and the payment or consideration is more than 20% of the market value.”

While these regulations have been in place since March 2008,  following the announcement of the new enforcement regime, it will be even more important to exercise caution and due diligence when agreeing to the commercial terms of any sub-lease with a pathology provider.

What am I supposed to do now?

If your sub-lease is not compliant because you are charging outlier rent you will have time to reduce the rent being paid. The Department of Health will initially support medical centres to help resolve any issues, before determining whether any further action is required.

It is important that you obtain specialist advice and take any corrective action as soon as possible before 1 July 2018. A specialist lawyer can assist you to determine whether your sub-lease is compliant by reviewing and, if necessary, negotiating amendments to your existing lease arrangements.

If this all sounds too familiar to you, contact your DPM Consultant who can direct you to DPM’s partner law firm Fletcher Clarendon for more information.

Alternatively or if you are not an existing client of DPM, please book an initial discussion. We’d love to help!

References:
1. You can obtain a copy of The Red Book or “Guidance on Laws Relating to Pathology and Diagnostic Imaging – Prohibited Practices” here
2. Market rent retains its ordinary meaning.
3. Some value could be attributable to the convenience of the location, but essentially, market value assumes an arms-length transaction (see The Red Book, at page 5).
4. The DOH has recently established a hotline where concerns relating to suspected breaches of the prohibited practices provisions can be reported.

Disclaimer: The content of this article was written by Fletcher Clarendon’s legal team. The information contained in it is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.