The Australian Department of Health and Aged Care (the Department) has renewed its compliance and enforcement activities in relation to the prohibited practices provisions of the Health Insurance Act 1973 (Cth) (Act), sending a new raft of ‘please explain’ letters seeking information about Approved Collection Centre (ACC) rental arrangements.

What are the Prohibited Practices Provisions? 

Introduced on 1 March 2008, Part IIBA of the Act aims to prohibit arrangements between requesters and providers of pathology or diagnostic imaging services which offer an inducement for requesters to refer patients for pathology or diagnostic imaging services.

The Act authorises a range of commercial arrangements which involve a requester receiving “permitted benefits” from a provider.  The provisions cover a wide array of arrangements not just between individual requesters and providers but other individuals and entities that are “connected” to them.

In the context of ACCs, the amount paid under an ACC rental agreement will be a “permitted benefit” under the Act if it is not “substantially different” from market value. The Act deems “substantially different” as more than 20% above the market value.  The rent must also not be related to the number, kind or value of pathology services requested from the ACC provider.

The Department’s “Red Book”[1],  sets out guidance on the prohibited practices provisions and the Department’s compliance and enforcement policy. Contravention of the Act can attract civil penalties of up to $187,800 for individuals (600 penalty units) and $1.878 million for corporations (6,000 penalty units) as at the time of writing, and for criminal offences, up to 5 years imprisonment.

What is “market value”?

The challenge for parties entering into an ACC rental agreement is to determine what constitutes the market value for the rent.  In the past, the Department has offered only limited general guidance about how parties should determine market value and the metrics it uses to determine whether the rent is “substantially different.”

The only decided case involving a prosecution under the prohibited practices provisions is the matter of Chief Executive Medicare on behalf of Commonwealth of Australia v Healius Pathology Pty Ltd [2023] FCA 981. Proceedings were commenced in 2021 against Healius in relation to two ACCs co-located at dermatology clinics.  The parties reached an agreement under which Healius conceded the rents paid were substantially different from market value, although not to the extent alleged by the Department.  Healius agreed to pay a civil penalty of $1.65 million.  Since the parties had reached an agreement, the Court did not need to decide how market value should be calculated for ACC rents.  As a result, there is still uncertainty how parties should determine market value for ACC rents, including the scope of and relevant participants in the market.

Following the Healius decision the Department issued a media release in September 2023[2] stating that “rent paid per square metre for a medical centre premises may be used as a guide to determine a proportionate rent for space occupied by a pathology collection centre within the medical centre. The department also encourages regular review of lease arrangements and recommends seeking independent valuations of premises to ensure compliance with the Act. “

New Influx of “please explain” letters

Since 2018, we have observed the Department periodically request information from medical practices and ACCs regarding their rental arrangements to assess compliance with the Act.

In the latest raft of letters, the Department specifically identifies the dollar figure it asserts is the average annual rent per square metre for comparable ACCs; and seeks an explanation for why the ACC in question is paying a higher amount.  The precise basis upon which the Department has determined average rent and comparable ACCs is unstated.

We anticipate the question of what constitutes “market value” under the Act will remain a contested issue for some time.

If you have any questions about the prohibited practices provisions or have received a letter from the Department and would like advice about how to respond, please contact our team.

[1] https://www.health.gov.au/resources/publications/the-red-book?language=en

[2] https://www.health.gov.au/news/165-million-penalty-for-prohibited-pathology-lease-arrangements