Federal Court Healius Pathology Decision: A Warning Against Prohibited Benefits in Pathology Leases

by | Sep 19, 2023 | Health Blog

The Federal Court, in Chief Executive Medicare on behalf of Commonwealth of Australia v Healius Pathology Pty Ltd [2023] FCA 981, recently handed down penalties for prohibited benefits given in the context of pathology leases.

The case is a good illustration of the application of the key legislative provisions outlined in the Panetta McGrath factsheet available here 

It serves as an important warning not only for pathology providers, but also landlords (a common example being owners of medical centres) who lease space to pathology providers. Similar considerations also apply to radiology leases.

A case of inflated rents

Under the Health Insurance Act 1973 (“Act”), prohibited benefits can arise in a number of different ways; though the Helius case concerned inflated rental – quite a typical type of prohibited benefit. Relevantly:

  • A lease will not be a permitted benefit (and therefore will be a prohibited benefit) if the rent is substantially different from market value: s 23DZZIF(5)).
  • In this context, “substantially different” means if the difference between the market value and the payment or consideration is more than 20% of the market value: s 23DZZIF(9) and Health Insurance Regulations 1975 (Cth), reg 20CA.

There was some disagreement between the parties about the extent to which the rents exceeded market value. The Applicant produced four expert valuation reports (two for each property) assessing the agreed rentals to be between 100% and 470% greater than the market values – significantly greater than the 20% differential given in the regulation defining “substantially different”.

The Respondent (SDS) admitted that:

  • by agreeing to pay elevated rents under the four leases, they provided a benefit within the meaning of s 23DZZIF, consisting of a payment for the use and occupation of the relevant premises, to requesters of pathology services; and
  • the rents agreed to be paid under the relevant leases were “substantially different” from market value and, accordingly, were not “permitted benefits” and therefore constituted contraventions of s 23DZZIL(1) of the Act.

Rather than have a contested hearing turning on valuation evidence, the parties agreed that ‘when each lease was concluded the amount of the benefit to be paid was substantially different from the market value because the difference between the rental amount and the market value was “significantly more than 20% of the market value”’. In other words, the rents exceeded market value by less than what the Applicant initially alleged, but by more than what the Respondent initially asserted.

Pecuniary penalty, costs and declaration of contravention

In its decision the Court quite aptly explains the public policy reasons behind the legislative regime:

  • Part IIBA of the Act seeks to ‘reduce the risk that the making of pathology requests, funded by the public health system, could be affected by commercial arrangements. This includes the risk that requesters could be induced to request pathology services from particular providers of pathology services and that competition on the basis of quality of services and costs to patients would be reduced’.
  • [C]onsumers, being the patients, are unlikely to possess the necessary knowledge to assess appropriate use of pathology services; they are not generally equipped to identify over servicing or inappropriate ordering of services’.

With the agreement of the parties, the Court made a declaration of the Respondent’s contraventions on the Act and ordered the Respondent to pay a total pecuniary penalty in the amount of $1,650,000 as well as the Applicant’s costs in the amount of $200,000. Amongst the factors the Court considered in assessing the penalties, were that the Respondent is one of the dominant market participants in the pathology industry; and senior management had been involved in the entry into the relevant leases.

If you seek assistance or guidance with pathology collection centre leasing, please contact David McMullen.

David McMullen

David McMullen