Medicare takes Court action over “above market” rent

Chief Executive Medicare on behalf of the Commonwealth of Australia v Specialist Diagnostic Services Pty Ltd (Healius Pathology)

Medicare has commenced proceedings against a pathology provider for paying rents significantly above market rate. The case has the potential to clarify how “market rent” will be defined for the purposes of the relevant sections of the Health Insurance Act 1973 (Cth) and as a result, may prompt widespread rental reviews in the sector. It also demonstrates Medicare’s willingness to take Court action on the issue, which has been a longstanding enforcement focus. 

Medicare has had a long standing enforcement focus on the rents paid by pathology providers for leasing collection rooms within medical centres. This reflects a concern that significantly above market rents have the potential to distort the decision making of doctors when referring a patient for pathology services, or when considering the need for such a referral. 

In February 2021, the Chief Executive Medicare on behalf of the Commonwealth of Australia (the Commonwealth) commenced proceedings in the Federal Court of Australia against Specialist Diagnostic Services Pty Ltd (now known as Healius Pathology Pty Ltd) (SDS).[1] 

The Commonwealth are alleging that SDS contravened the Health Insurance Act 1973 (Cth) (Act) by entered into leases and agreeing to pay rent that substantially exceeded the market rate for pathology approved collection centres.  In doing so, SDS is alleged to have provided benefits to a “requestor” of pathology services, being a medical practitioner, which were not “permitted benefits” as provided for in the Act.

The Commonwealth are seeking declarations, pecuniary penalties and costs.

SDS deny that any rent paid by it was substantially more than the market value, and deny the allegations that it contravened the Act.

Facts

SDS carries on the business of rendering pathology services, including under the name “Laverty Pathology”, and is a “provider” of pathology services within the meaning of the Act.

In February 2015, SDS entered into leases for two pathology rooms (2015 Leases) situated within medical centres located in Sydney, NSW (Medical Centres). The leases were for spaces comprising 4.76m² and 8.41m², the rent for which was $150,000 (ex. GST) and $200,000 (ex. GST) per annum, respectively.

In August 2017, SDS entered into further leases for the same pathology rooms (2017 Leases) located within the Medical Centres. Under the new leases, SDS was required to pay rent in the amounts of $152,949.44 (ex. GST) and $203,932.58 (ex. GST) per annum, respectively. 

At the time of entering into the 2015 Leases and the 2017 Leases, the Medical Centres were owned by various holding companies (Landlords), the directors of which were medical practitioners and were therefore “requesters” of pathology services.

The Chief Executive Medicare’s Claim

The Commonwealth allege that:

(a)SDS, in agreeing to pay rent to the Landlords pursuant to the 2015 Leases and the 2017 Leases, provided benefits to the Landlords within the meaning of section 23DZZID(1) of the Act (Benefits); and

(b)none of the Benefits were a “permitted benefit” within the meaning of section 23DZZIF(1) of the Act, because the rent for each lease was substantially more (meaning, greater than 20% more) than the market value of the rent.

The Commonwealth contend that the rent payable by SDS under the 2015 Leases and the 2017 Leases exceed the market rate by between approximately 380% and 425%, detailed as follows:

	Rent Payable by SDS (per annum)	Alleged Market Rate (per annum)	Exceed Market Rate (%)
1st 2015 Lease	$150,000	$28,560	425%
2nd 2015 Lease	$200,000	$39,950	400%
1st 2017 Lease	$152,949.44	$30,000	410%
2nd 2017 Lease	$203,932.58	$42,050	380%

 

SDS do not accept the Commonwealth’s assessment of the market rent.

The Commonwealth’s decision to commence proceedings against SDS are in pursuit of one of the objectives of the Health Insurance Act 1973 (Cth), which is to prevent requesters of pathology services and diagnostic imaging services (such as medical practitioners) from asking for or accepting “un-permitted” benefits in order to induce requesters to request services from those pathology providers.  This is to reduce the risk that requesters’ recommendations to patients as to pathology providers could be influenced by commercial arrangements between requesters and providers, rather than on clinical factors and patients’ best interests.

Key takeaway

These proceedings highlight the need for pathology service providers, as well as hospitals, medical centres and any other businesses involved in leasing pathology approved collection centres, to ensure that the rent payable under those leases are consistent with market rates.  A failure to do so may result in the imposition of penalties of up to $1,332,000 per contravention for a body corporate and up to $133,200 per contravention for an individual.

The case is also a reminder to ensure policies and procedures clearly prohibit benefits passing from Medicare funded service providers to requesting doctors, which could be seen as reasonably likely to induce a doctor to request services from a particular provider. As technology develops and practices evolve, the scope of what constitutes a “benefit” may evolve, and periodic review of business practices is justified.

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