GPs, Pathology Rents and Please Explain Letters

In light of the Covid-19 pandemic sweeping the nation, many pathology centres like most other businesses in Australia, are attempting to halve their commercial rental payments.  The pathology centres have been hit hard by patients not attending their GP in person, this includes those pathology centres co-located on the premises of a GP clinic whose landlord is the medical centre owner.

These requests threaten to significantly impact and potentially cripple the bottom line for many GP clinics that rely on this rental income to sustain their practices. GP’s bottom lines have been hit because they too have had to make significant changes to their business plans and service offerings due to more allied health professionals having to work from home or via Telehealth.

In a further blow to GPs, the Federal Government has introduced a range of measures to assist commercial tenants who have suffered from a downturn in business as a result of Covid-19. These new measures include placing a temporary hold on evictions as well as a mandatory code of conduct, which includes the ability for a tenant to request a reduction in rent based on their decline in turnover.  

The recent Covid-19 measures, in addition to the 2018 crackdown by the Department of Health on prohibited benefits laws under the Health Insurances Act, have meant some uncertain times for GPs looking forward.

The following provides an outline of what GPs should consider when they receive either a rent reduction request from a co-located pathology centre or a request for further information from the Department of Health.

The Red Book

In March 2018 the Federal Government made significant changes to the already existing laws, prohibiting inappropriate commercial relationships between requesters and providers. The Government, as a result, subsequently released an updated version of the guide to the prohibited practices regime known as the Red Book.

One of the most significant changes affecting GPs and co-located pathology centres was the requirement that all new leases be lodged with the Department for review. This was not restricted to brand new leases but also included leases entered into prior to 1 July 2018 that had been significantly amended.

The catalyst for these changes was an attempt by the Department to instil compliance with the prohibited benefits laws, that whilst having been enacted in 2008, had not been enforced and non-compliance was widespread amongst the profession. For example, prior to the 2018 crackdown, NewsCorp reported that some pathology companies were paying the equivalent in rent as those renting a New York City apartment on Fifth Avenue.

Part IIBA of the Health Insurance Act particularises offences relating to “prohibited benefits” which are focused around benefits from pathology collection centres and diagnostic imaging businesses, referred to as providers, to medical professionals including GPs who are the requesters because they refer their patients to the abovementioned services.

The prohibited offences under the Act include offences that relate to higher than market level rents being paid by providers to the requesters. For example, a GP clinic is unable to charge 20% above the market value rent, calculated on the basis of rent payable on equivalent and similar spaces in the community where a practice is located.

As a result of the 2018 crackdown, the Department has since sent over 400 letters to GP practices asking for further details to ensure compliance, with fines for non-compliance attracting civil penalties for both individuals and corporations of up to $1.26 million. Practices have been continuing to receive these letters in 2020.

Whilst this has forced many GPs to undertake reviews of their commercial tenancy agreements with pathology tenants, other factors have created even greater uncertainty, such as the current Covid-19 pandemic.

Covid-19 Measures

Undoubtedly, the current Covid-19 environment has had a considerable impact on Australia’s health system and placed enormous pressure and demand on GPs to continue operating during this time. This has seen GPs introduce services like telehealth into their practices to enable them to continue to provide an essential service to the Australian public. The implementation of these services is costly and time-consuming. The hit to GP’s pockets hasn’t stopped there.

In a further hit, some GPs have been approached by their tenants, major pathology companies, seeking up to a 50% reduction in commercial rent. Naturally, this is disappointing, as for some practice’s commercial rental from co-location pathology centres can make up a substantial portion of their income and given the required compliance with the prohibited benefits provisions discussed above, it is a double blow.

Some GPs have recently claimed that they feel pressured to accept the proposed reduction in order to comply with both the prohibited benefits provisions and the Australian Government’s new mandatory code in relation to commercial leases.

The mandatory code now in place in relation to commercial leases sees commercial landlords having to reduce the rent of their tenants in proportion with the reduction in a tenants’ business revenue lost as a result of the Covid-19 pandemic. Whilst there are requirements that the commercial tenant must satisfy in order for such a reduction to be applied, such as having a revenue of less than $50 million, the code is heavily skewed in favour of commercial tenants.

A final blow to GPs affected by the uncertainly of their commercial tenancy arrangements is the fact the Federal Government has put an additional moratorium in place, which sees the prevention of any new pathology services from opening to replace any that close as a result of Covid-19 within the next six months, up until September 2020. This places unsurmountable pressure on GPs to accept a reduction in commercial rent or face being without any income due to having no tenant in place.

What to do & how to respond?

It is understandable that many GPs feel highly stressed at the prospect of facing financial ruin due to both the Covid-19 measures that have been implemented in addition to having the responsibility of ensuring continued compliance with prohibited benefits laws.

For those GPs that have received either a ‘please explain letter’ from the Department of Health or a request for a reduced rental from their co-located pathology tenant, it is important to act rather than ignore either form of correspondence and to seek prompt legal and financial advice to determine how to best proceed.

Seeking legal and financial advice can assist you to clarify your concerns as well as assist in navigating through the government’s requirements, red tape and ensuring continued compliance with legislation, which is of paramount importance to the successful continuation of your practice beyond the Covid-19 pandemic.

QUESTIONS?

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