Pathology Rental

    It is of mutual interest for both pathology companies and patients to have pathology collection centres located close to general practices. The pathology companies get increased business. Patients benefit from being able to go straight from the doctor to the collection service in order to have their tests. GPs benefit in that a few (and probably very few) patients will choose to attend a practice that has a "one-stop solution" vs a practice that does not. The general practices also collect rent where the collection centre is co-located within the surgery or in a nearby office owned by the practice. Note that without the pathology company there, the practice would still generate income from this office space by letting it out to someone else. In fact, having another doctor use this room (if within the practice itself) might generate more income and more benefit for the practice than having a pathology company present. The issue becomes, how much rent should the pathology company pay? Should it pay the normal commercial rent for the office space provided?

    Since pathology companies, in this scenario, are being offered a prime location, is it not unreasonable for the practice owners to ask for rent above the otherwise normal rental value. A close location to a general practice will increase the pathology company's income by capturing a slightly larger share of the market. The pathology companies are not forced to accept the higher rental price. They can simply say no and go and set up elsewhere. Another pathology company might accept the higher rental price, but that is what free marketting is all about. The general practice will negotiate the highest rent they can, the pathology company will negotiate the lowest rent that they can. This is a free market economy in action.

    If the rental price is very high, the question becomes, is the pathology company providing an "inducement" on the basis that the general practice will direct all or most of the services to it? Any agreement between a pathology company and a general practice to this effect is illegal in Australia under the ****. What needs to be determined next is how often this breach of law is happening. According to the BCG Report on the Pathology (Approved Collection Centre) Roundtable on Compliance in 2016², no major breaches had occurred. In fact "The Department described its compliance activity as ‘responsive’. It has not received many complaints via the tip-off hotline and had no evidence that rents were substantially above “market value” as they currently interpret the regulations. "

The argument against high rents, given at the Roundtable were:

1. Smaller laboratories, such as independent, public and Catholic Health laboratories, are unable to pay the high rents and are withdrawing or will withdraw from the market
2. Cost-cutting to “afford” high rents is leading to a decrease in training and quality activities; and
3. Competition between pathology providers for co-located ACC leases is driven, in a material way, by ability to pay.

• There is an incentive for large pathology companies to pay higher rent because it excludes the smaller companies, potentially driving them out of business.
• Are larger companies (ie those paying the higher rents) actually saying that they are providing lower quality services?
• Of course ability to pay will determine who chooses to pay the higher rents.

    It should be noted that there is no evidence to say that co-locating a pathology collection centre with a general practice results in the increased ordering of pathology tests. This was demonstrated in a paper written by D Studdert et al. and published in the Medical Journal of Australia in 2010¹.

    It would appear, however, that the government has been convinced that there is a problem. Their solution (to a problem that probably does not exist) is to pass a law to limit rentals to a maximum of 20% above market value. But do they have the right to do this? Surely this is government interfering with free trade? Remember that no pathology company is forced into paying high rent. Under this law, however, general practices will be forced to limit their income. Is this fair trade? Is this a level playing field?

There is a problem with any regulation that uses "market value" in its wording. If market value is defined by what isnegotiated in free trade arrangements then whatever a pathology company and a general practice have negotiated becomes "market value". Twenty percent above this is meaningless.

    A complicating factor is that some large corporations own both the pathology company and the medical practices. In this scenario, it makes little difference what the rental is (if indeed the collection centres pay rental) because the rental monies paid just go back to the same company. It is to their advantage to see limitations on rental agreements because it reduces incomes to practices not owned by them, ie smaller GP owned practices. As many small practices are struggling to remain viable under current circumstancces (eg the Medicare rebate freeze), reducing income further will see some small practices go out of business. This increases the market share for the corporate practices. So the large corporations have a vested interest in seeing limitations imposed on rentals for pathology rooms.

Notes:

1. Studdert D et al., Are rates of pathology test ordering higher in general practices co-located with pathology collection centres?, MJA, Volume 193, Number 2, 19 July 2010

2. BCG Report of Roundtable, Pathology (Approved Collection Centres) Roundtable on Compliance, held on 27 April 2016