Pathology rent case a blessing in disguise

The conclusion to a long-running court case officially puts a number on what rent a medical practice can reasonably charge a co-located pathology lab.

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Pathology giant Healius copped a whopper of a fine last week for paying inflated rent at two Sydney medical practices, but at least one commentator believes the pathology rent game is far from over.

The pathology services provider, whose claims amount to nearly one third of the total Medicare spend on pathology each year, was found to have agreed to pay rent five times higher than market value.

While it might seem like bad news from a practice perspective – what clinic wants add “making too much money” to its list of problems? – healthcare accountant David Dahm believes that the reverse might be true.

The background

Australia has three major pathology providers: Sonic Healthcare, Healius and Australian Clinical Labs.

It’s a common practice among all three to rent space inside a medical practice and run it as a co-located pathology collection centre.

Generally, it’s a win-win-win – patients get convenience, the clinic gets additional income from rent and the pathology service gets a steady flow of patients.

To avoid overservicing, there are rules in place against the pathology services providing any form of kickback or bribe that could potentially induce doctors to send patients for unnecessary tests.

Under the Health Insurance Regulations 1975, it is illegal for pathology providers to pay a rent that is “substantially different” from – i.e. more than 20% above – market value.

The case

In the Federal Court on Friday, following more than two years of delay, Justice Angus Stewart handed down his decision on Chief Executive Medicare on behalf of Commonwealth of Australia v Healius Pathology Pty Ltd, ordering the pathology company to pay $1.85m in penalties and court costs for the Commonwealth.

Justice Stewart’s finding was that Healius – which was trading as Specialist Diagnostic Services Pty Ltd at the time – entered into rental contracts at two medical practice locations over a six-year period in which it wrongfully agreed to pay an inflated amount of rent.

The case involved four rental agreements at two clinics owned by the same group of dermatologists.

Over two successive leases spanning five years, Healius agreed to pay $150,000 and then $153,000 per year for a 4.76m² pathology collection centre at the Specialist Dermatology Services clinic in Sydney’s Castle Hill.

At the practice’s Kingswood location over the same period, Healius paid $200,000 and then $204,000 per annum for an 8.41m² collection site.

According to independent valuation reports, the market value of the smaller Castle Hill location was $30,000 per annum for the first two-year contract and $35,000 for the following years.

The value of the two contracts for the larger Kingswood space were placed at $75,000 and $82,500 per annum.

Using these valuations, Healius paid almost five times the market value for the Castle Hill site and more than double what the Kingswood space was worth.

Healius refuted the independent valuations but chose not to have a contested hearing.

It now has less than two weeks to pay up.

The good news

Healthcare accountant David Dahm, who told The Medical Republic that he regularly sees pathology rent valuations, said he felt that the independent valuations provided to the court were higher than average.

“If you actually read the judgement and the fine print, a lot of people are going to start to realise that their own pathology rents are probably undervalued anyway,” he said.

Breaking down the independent valuations of rent by area, the smaller Castle Hill collection site works out to about $7400 per square metre per year and the larger Kingswood space works out to $10,000 per square metre per year.

Mr Dahm urged any practices looking at adding a co-located pathology collection centre or re-negotiating rent with their current provider to seek an independent valuation, and to seek professional legal and accounting advice from firms experienced in pathology rent tenders.

“If you’ve got the right structures – and this is the key, you have to have the right structures – to defend the number … it certainly does tell you what’s attainable,” he said.

Where practices were previously afraid to accept offers of high rent lest they be seen as taking kickbacks, Mr Dahm said the court decision now gave a clear indication of value for them to work with.

“This is going to lead to the biggest boom and skyrocketing pathology rents in Australia,” Mr Dahm said.