By Tom Laundy | Director, Business Advisory

The Australian Government’s recent deal with Pathology Australia effectively ‘controls’ the amount of rent GP practice owners can charge pathology providers for collection centres located in their clinics. The proposed legislation has many GPs concerned about the potential impact the new agreement may have to their bottom line.

As an important source of revenue, how can GP practices who co-share with pathology collection centres look to maintain their profitability following the review of rental arrangements?

In recent times, GPs have found it more challenging than ever to keep their practices financially viable and now with an enforced ruling on the horizon for those with shared lease agreements from January 2017 this only continues to compound the issue.

While we are seeing pathology companies being charged a range of rental rates, a GP practice shouldn’t have to pay a premium commercial rent then be legislated to offset lower rent to a collection centre renting a space in their clinic, particularly if the pathologist is undertaking a large number of collections. It needs to be fair for both parties and we expect this will continue to remain a hotly contested issue for some time, particularly as the Government seeks to clarify the definition of what it believes to be ‘fair market value’ in the amended Health Insurance Act 1973.

The Government’s decision is a result of the axing of $650 million in bulk billing incentives paid to pathology providers from 1 July 2016. Outcry to the decision was followed by a hard-line “Don’t Kill Bulk Bill” campaign and a collection of 600,000 signatures from Pathology Australia to reinstate bulk billing. In an effort to appease the baying crowd, the Government agreed to a peace-making deal to place a cap on pathology rents.

Most pathology companies such as Sonic Health Care are large corporates, the majority of which hold a place on the Australian Stock Exchange. Pathology Australia calls the change to legislation ‘a great win for patients’ however, the longer term outlook has the potential to be just the opposite.

If the ruling goes ahead, GP clinics already battling financial pressures from the Medicare Rebate Scheme freeze (set to stay in place until 30 June 2020), will need to reassess their business model. In the first instance, we might expect to see GPs having to cut back on staffing numbers and wages to reduce costs, however if the impact proves too much, they may be left with little choice but to merge with other practices or worse case, simply just shut up shop. Unfortunately for the wider community this does mean we may see less opportunities for doctors considering owning their own practice and an accelerated trend towards corporatisation or impersonal ‘super clinics’ in the profession.

We could also potentially see pathology collection centres pushed out of medical centres and resettled into other premises near-by. In this case, larger GP practices are expected to suffer bigger financial losses as they usually receive more rental return from pathology centres than smaller GP clinics. However, smaller GP practice owners often rely on the generated income the rent provides to sustain them. This will also take away the convenience factor for patients to be able to fulfil their GP and pathology needs in the one place.

If pathology rents are reduced, we would suggest that GPs review their business financials to work out how to best utilise the relevant space. As practices won’t be incentivised to have an on-site pathology collection centre, they could receive a better rental return from taking on a fully utilised GP or diversified health specialist.

The challenge then will be to source additional doctors to work in the practice and create strategies to attract more patients to the clinic.

One of the biggest casualties in this decision may be the cost to patient care. Doctors may have to look to increase their fees to stay in business, resulting in patients having to pay more to access their GP. Due to the longevity of the Medicare freeze, and in an effort to combat this, the Australian Medical Association recently proposed a recommendation to raise the cost of a standard visit under 20 minutes by $2 to $78. While this proposal hasn’t been actively taken up by GPs around the country who still remain committed to affordable healthcare, it could be the only way to remain in business for some family GPs.

It will be a difficult road ahead for impacted GP practices if the Government pushes through the legislation. Given the proposed timeline, GPs haven’t been given much time to look at how they adjust to potentially losing up to hundreds of thousands of dollars in income.

At William Buck we recommend several approaches GPs should consider to deal with the financial impact of a reduction in pathology rents:

Know the details. Make sure you understand all of the terms and conditions of the final legislation and what scope there is to ‘work’ within the new guidelines e.g. could you initiate a joint venture between pathology providers and GP clinics to share some of the risk?

Assess your options. Consider all of your strategic options if the pathology rent is reduced or removed e.g. can you look to merge with another practice or expedite a new offering after you have properly assessed the impact of the rent reduction. Could there be scope to re-negotiate with your landlord?

Become more attractive. If pathology companies continue to occupy the space in your medical practice at a lower rent, you may need to look at strategies to improve the way you attract and retain doctors and patients to the clinic.

In the current environment, the Government needs to consult properly with all key stakeholders for major healthcare reforms. It should be thinking more strategically and longer term to find better solutions to financial challenges that work for small and large business to ensure both have a place as an invested interest in the nation’s health economy.