Pathology Sub-leases: A year under the new Enforcement Regime

Josh Flett

Josh Flett

Director, Fletcher Clarendon

 In the 2017-2018 Federal Budget, the Government announced its commitment to strengthening compliance for Pathology Approved Collection Centre (ACC) rents under the prohibited practices provisions of the Health Insurance Act 1973 (Cth)(Act). As part of this initiative, the Department of Health (DOH) updated its “Guidance on Laws Relating to Pathology and Diagnostic Imaging - Prohibited Practices”1, also known as “The Red Book”. The Red Book states that the implementation of the new compliance arrangement would include:


  1. the development of data analytics tools to identify irregularities in rent or referral rates or to identify other indicators of potential prohibited practices;
  2. undertaking targeted compliance activities, including exercising powers to garner additional information relating to potential prohibited practices;
  3. automating and streamlining existing approval process for ACC arrangements; and
  4. extending ACC approvals from one to two years.


Since 1 July 2018, all new sub-lease arrangements with Pathology Providers (Pathology Sub-lease) are required to be submitted for assessment by the DOH through the Health Professional Online Service with supporting documents attached electronically. This includes submitting existing Pathology Sub-leases entered before 1 July 2018 such as renewals or where any changes or amendments to the existing Sub-lease have been negotiated. Breaches of the Act or the Health Insurance Regulations 1975 (Cth)(the Regulations) can result in:


  1. substantial fines (civil penalties) – individuals $126,000 and Corporations $1.26 million; or
  2. imprisonment (criminal penalties) – with a maximum of 5 years in prison.

Breaches can also be referred to the Medicare Participation Review Committee which can exclude individuals and companies from the Medicare system.


What does this mean for you?


Many of our medical practitioner clients (i.e. general practitioners, medical specialist, dentists, podiatrists, physiotherapists, and osteopaths) either own or lease medical clinics to operate their medical business (Medical Centres). Many of these Medical Centres are large enough to accommodate an ACC, for pathology providers such as Melbourne Pathology, Dorevitch Pathology, Australian Clinical Labs among many others (Pathology Providers).


Pathology Providers seek out opportunities to co-locate either next to, within or near Medical Centres to attract new customers or service existing ones. As a result, many of our clients have entered into sub-lease arrangements with Pathology Providers. Patients visiting Medical Centres where there is Pathology Sub-lease obtain convenient access to pathology or imaging services, while the medical practitioner receives rent (or some other payment or benefit, e.g. license fee) from the Pathology Provider (Pathology Rent).


All Pathology Sub-leases must comply with the Act. The Act sets out several restrictions in relation to the relationship between Pathology Providers and Medical Centres. One of the main purposes of the Act is to prohibit Pathology Providers from paying inflated rent in return for patient referrals. However, sub-section 23DZZIF(5) of the Act states that the payment for property (i.e. sub-leasing a room for an ACC) is a permitted benefit provided that the Pathology Rent is “not substantially different from the market value” of the rent for the relevant part of the Medical Centre being sub-leased by the Pathology Provider.


What is market value?


Market value may be viewed as whatever price Pathology Providers are willing to pay for the Pathology Sub-lease. Many Medical Centres do this by obtaining offers from multiple Pathology Providers and then simply taking the best offer. In practice, this could mean that any amount offered by a Pathology Provider, if commercially agreed upon, may be treated as constituting market rent, provided the Pathology Rent is not based on any agreement, understanding, or arrangement to refer patients. However, the Regulations provide a prescribed method for determining market value. Sub-section 20CB(1) of the Regulations states that:


“…the market value […] is the amount that a willing purchaser would have had to pay […] to a vendor who was willing, but not anxious, to sell.”


In a leasing context, this means the rent that a willing tenant would (at the relevant time) have had to have paid a willing, but not anxious, landlord to secure the sub-lease over the premises.


The definition of market rent does not have a special meaning2 in the Regulations, but the Regulations do prescribe a method for determining market rent when negotiating commercial terms3 for Pathology Rents. The Regulations require that there be “no substantial difference from market rent”. Relevantly, sub -regulation 20CA(2) of the Regulations state that:


“The amount of the payment or consideration is substantially different from the market value, determined in accordance with regulation 20CB, if the difference between market value and the payment or consideration is more than 20% of the market value.”


In our experience, enforcement of the Act and Regulations in relation to Pathology Rent has not seemed to be a priority of DOH except in response to complaints that have been submitted4. However, since the introduction of the new enforcement regime it has become even more important to exercise caution and due diligence when agreeing to the commercial terms of any Pathology Sub-lease.


What to do next


If your Pathology Sub-lease is not compliant because you are charging “outlier rent” you may have time to regularise the rent being paid. The DOH indicated that it will initially support Medical Centres to help resolve any issues, before determining whether any further action is required.


It is important that you obtain the right advice and take any corrective action as soon as possible. We can assist you to determine whether your Pathology Sub-lease is compliant by reviewing and, if necessary, negotiating amendments to your existing lease arrangements.


Please contact Josh Flett

1. You can obtain a copy of The Red Book here:
2. Market rent retains its ordinary meaning.
3. Some value could be attributable to the convenience of the location, but essentially, market value assumes an arms-length transaction (see: The Red Book, at page 5).
4. The DOH has recently established a hotline where concerns relating to suspected breaches of the prohibited practices provisions can be reported.


The information contained in this article is general and is not intended to serve as advice. Your individual needs have not been considered and you should not act or fail to act on the basis of the information contained in this article. Any views expressed in this article are opinions of the author at the time of writing. The information in this article is believed to be accurate at the time of publication. The information in this article has been approved by Fletcher Clarendon Pty Ltd ABN 25 150 502 284. Fletcher Clarendon recommend you obtain advice concerning specific matters before making a decision.

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