Health Insurance Act 1973 & Approved Collection Centres

June, 2019 – The ageing of the population is putting increased demand on services provided by the health sector. This has resulted in a strengthening in investment demand for medical and health-related property.

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Overview

The ageing of the population is putting increased demand for services provided by the health sector. This has resulted in a strengthening in investment demand for medical and health-related property.

This paper explores the current practice of some Approved Collection Centres (“ACCs”, such as pathology and diagnostic imaging centres), that are co-located with general practitioners, paying rental rates that are considerably higher than market rents in return for increased referrals and the general benefit of being co-located with allied health practitioners that underpin their business.

The Department of Health is toughening its stance on this practice and has issued letters to a number of landlords to justify, or if not able to justify, reduce the rental rates being paid by these tenants to what is considered to be in-line with the fair market rental rate.

This has the potential to result in substantial reductions in the rental rates of some Approved Collection Centres, thus impacting on the centre’s income and value.

Authors

Casey Robinson

Director

View Profile > QLD
Ross Perkins

Managing Director

View Profile > QLD

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Background

There has been a growing trend to co-locate pathology and diagnostic imaging facilities within
general practice clinics.

It is common practice for medical practitioners who own or lease premises to lease or sublet part to a pathologist or diagnostic radiologist (the “provider”) and the medical practitioner then refers patients to the provider. This trading advantage has resulted in lessors being able to extract substantial premiums in rental rates being paid by some lessees.

The lessees are prepared to pay the premium rental rates because of their co-location with allied health practitioners who underpin their business.

However, the Health Insurance Act 1973 states that rental rates paid by providers cannot be substantially different from what is considered to be fair market value. The Health Insurance Act 1973 defines substantially different as no more than a 20% premium (or discount) from the market value – we have referred to this throughout this paper as the ‘permitted rent’. Furthermore, the rent must not be related to the number, kind or value of pathology/diagnostic imaging requests made by the requester.

In March 2008, changes to the law were introduced that prohibited inappropriate commercial
relationships between the requesters and providers of pathology/diagnostic imaging services. However,  it was not until 2018 that these changes to the law were more heavily enforced. This came about as a result of the 2017 Federal Budget including provisions to strengthen compliance relating to ACCs.

Examples of ‘Substantially Different’ Rental Rates

The below table highlights recent examples of rental rates that we assess to be substantially different from the fair market value.

Whilst market rents vary considerably depending on location and the quality of the premises, they generally fall within a gross rental range of $550 to $900 per square metre.

From 1 July 2018, it has been required that all new leases for co-located ACCs to be lodged with the Department of Health for review.

The Department of Health is currently undertaking an audit on rental rates being paid by ACCs who are co-located with general practice clinics. The Department has also advised that it is in the process of issuing “please explain” letters to relevant parties where data suggests non-compliance with the Health Insurance Act 1973, and also its intention to commence legal action if concerned parties do not voluntarily reduce rental rates to be within the permitted rent range.

Impact on Property Value

Changes to rental rates have the potential to cause a substantial reduction in a medical centre’s income, and thus, value, where the lease is directly from the lessor.

The chart below shows a hypothetical scenario of how above-market rental rates can impact on a property’s value.

The example shows that for a 50 square metre tenancy, the tenancy’s contribution to the value of the property increases from $520,000 at a market rent of $650 per square metre, to $3.25 million at a rental rate of $8,000 per square metre.

Market Rent Valuations

Obtaining an independent valuation can assist in ensuring that both the requestor and provider of pathology/diagnostic imagery services (i.e. the owner or lessor and the lessee) understand whether a proposed rental agreement is compliant with the fair market rent regulations and complies with the Prohibited Practiced Provisions outlined in the Health Insurance Act 1973.

The Department of Health has noted that independent valuations are able to be provided as documented evidence when submitting a new lease or sublease, or in the case of a review of the rental arrangement by the Department of Health.

‘A reduction in the income generated by Approved Collection Centres who are currently paying more than 20% higher than the market rent, has the potential to reduce the value of the medical centre within which the tenancy is located’

Casey Robinson
Director - Research