New Medicare Laws - Best Practice News Alert 147

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT CURRENT CIRCULATION: DATE: ISSUE NO:

7022 10th July 2007 147

Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.

Writer in charge: Mr David Dahm BA.Acc, CPA, FTIA, Ffin, FAAPM, GLFG.

Inappropriate practice! st

Effective from 1 March 2008, the new inappropriate practice (kickback) legislation called HEALTH INSURANCE AMENDMENT (INAPPROPRIATE AND PROHIBITED PRACTICES AND OTHER MEASURES) BILL 2007, (see attached PDF here) was passed. Excessive rents or incentives paid by diagnostic providers such as excessive rents for pathology collection centres to referrers, such as general practitioners and specialists, are illegal and will result in jail terms and fines. Benign rental arrangements are now under scrutiny and will need to be revised by practices in view of this legislation. Public hospital private practice arrangements are also affected by such arrangements which is the real sleeper and yet another example of unintended consequences of the law. Specifically, special purpose funds set up to finance overseas education and travel or salary sacrifice arrangements for referring doctors will be tested under this legislation.

The bottom line is under this legislation the sustainability of independently family owned private practice, the clinical independence of the healthcare profession and patients have the most to lose.

In this edition we cover: 1. Problem – Do new laws mean there is no longer a level playing field?

• Independently owned family practices will find it hard to compete with corporate owned practices • Does this environment encourage US style managed care?

• Patients before Profits – laws mirror the US laws passed in the 1990’s • If you control and influence the GP gate keeper you control and influence the healthcare system 2. So what’s wrong with the new laws?

3. Immediate impact on private practice 3.1 Not to react to a fear campaign and immediately break your lease and drop your rent.

3.2 Understand that it is unclear what total shared costs mean?

3.3 Avoid dutch auctions 3.4 Third parties and practice managers can get caught

3.5 Are corporates affected? – we think so 4. Where to from here? – how to not fall foul of the rules?

Inappropriate practice!

Introduction Do not be surprised if you receive a call from your pathology tenant you rent your premises to seeking to renegotiate their lease or even to have your employment/contractor terms amended.

We have already received many inquiries from our clients. Independent practices with collection centres and rental agreements will be most affected by this new legislation. At first glance, it appears the corporate practices may remain relatively unscathed. More importantly they are unfairly being provided a legislated commercial advantage over independent family owned practices.

The legislation is either something to be really concerned about or if you look at it closely, it is as threatening as a toothless watch dog in some key areas. Contrary to the corporates belief, they too can easily be caught up in this legislation.

Allegations of overservicing may be due to the governments concern about a blow out in pathology and radiology costs. We are a little concerned that during the drafting of the legislation not enough attention has been made of the government’s own recent initiatives to dramatically increase screening of chronic diseases and the impact of defensive medicine. These may be the real factors behind the cost blowout. This is contrary to an apparent belief that there a lot of doctors rorting the system en’masse. There is little evidence of large scale abuse and we do wonder whether there is a need for such wide reaching rules in the first place. Paul Smith, rd Australian Doctor Chief Political Correspondent in his editorial on 3 May 2007 has echoed our sentiments and has alluded to the fact the innocent are mostly likely to get hurt under the new rules.

One can only speculate the real issue is about aggrieved competitors in the diagnostic provider market who are having a stoush at each other at the expense of the entire medical professions reputation.

If we cannot trust the medical profession I think we have a real problem. The legislation does not solve the governments concerns and will more likely lead to underservicing by the independent providers and overservicing by corporate owned medical centres. Will it extend to co-located specialists and allied health providers based on further fear and innuendo? For patients this means missing out on the benefits and convenience offered by multi-disciplinary co-located independent practices.

If we are serious about overservicing, simply introducing a $2 co-payment or higher to the system should significantly curb concerns. A patient will suddenly become price sensitive and they will start to ask more questions at the front desk. They can police this issue for all of us and we can get rid of this additional red tape. The Federal Governments Safety Net Scheme covers any large out of pocket costs for patients – so its fair.

This edition seeks to deal with the practical issues and the irreversible implications for the industry.

1. Problem – New laws mean there is no longer a level playing field?

Independently owned family practices will find it hard to compete with corporate owned practices The bottom line is corporate practices that own diagnostic services are allowed to own referring providers such as GP’s. These profits can then be used to subsidize and out bid independent practices by offering larger salaries and incentives to lock in doctors. Doctors who sign typically 5 year corporate contracts can have undue influence or financial pressures placed on them if they do not meet the financial objectives of the corporation. There are no safeguards to protect doctors and patients due to strict commercial confidentiality clauses that prevent corporate owned doctors from speaking out. This is how corporate medicine in the US has evolved together with similar legislative support. The current laws fall short of addressing this issue.

Does this environment encourage US style managed care?

Ironically the legislation will have the opposite effect as it does not actually address the overservicing or inappropriate practice issue which is the real reason for this legislation. It potentially provides a free kick and increases the opportunity for corporate medical centres themselves to influence excessive referral behaviour which has not been addressed in the legislation.

The new inappropriate practice legislation can create an irreversible stronghold and control over the Australian private healthcare system. The sustainability of independent private practice, the clinical independence of the healthcare profession and patients have the most to lose.

Patients before Profits – laws mirror the US laws passed in the 1990’s A simple fact is corporate medical practices have no choice but to put profits before patients.

They achieve this success through vertical integration of GP’s, specialists, pharmacy, hospitals and diagnostic services. There are plenty examples of this, just look at the main players on our stock exchange. The rationale is simple, all listed companies are subject to a perpetual takeover.

This means directors and managers can only keep their job by increasing profits. This is their only defence. There will always be a clear opportunity and temptation for corporates to blur the subjective line when it comes to healing the most sick and vulnerable in our society with our taxpayer dollars.

Similar US laws in the 1990’s called the Stark laws were introduced and this assisted in the unprecedented growth of corporate healthcare. It gives further access to our “blue sky” taxpayer funded healthcare system called Medicare. This legislation together with taxpayers money is being used by corporates to fuel an environment of managed care as we have seen in the United States. In the US many unenforceable checks and balances (despite many failed legislative attempts) have lead to unprecedented complaints and serious allegations of not only overservicing but also interference and abuse of patients rights. Practitioners operate in fear of speaking out as they stand to lose their contracts or support from their corporations they work for.

It is hard to bite the hand that feeds you. Water tight commercial confidentiality contracts with large financial penalties prevent doctors from speaking out.

If you control and influence the GP gate keeper you control and influence the healthcare system Australia’s healthcare spending is worth $80 billion a year growing by $10 billion per annum. GP’s are the gatekeeper. Own general practice and you control and influence the gate keeper. The gate keeper controls/influences the specialists and the hospitals they refer to. Each waits for each others taxpayer funded referral.

People will pay a price for certainty and this is where access to the humble referral pad becomes a valuable commodity.

2. So what’s wrong with the new laws?

From a medico-political, legal and patient point of view the issues and implications for the industry can become quite complex. We have attempted to summarise our key concerns below: The concerns we have with the legislation are: 1. There appears to be no broad public consultation process with regards to the legislation; 2. The legislation falls short of addressing the overservicing or inappropriate practice problem it supposedly seeks to solve. Potentially it encourages it; 3. Simple commercial arrangements can be subjected to broad and subjective interpretation. It can immediately imply guilty conduct unless proven otherwise. Doctors can be prosecuted for having normal commercial arrangements in place. The legislation is impractical and unworkable, and any breaches will be difficult to prove – see why below; 4. It penalises independent practice and supports big corporate owned medicine. It sets a new precedent by opening the door for similar legislation to be introduced for co-located providers, such as specialists and allied health, and intra-referring (e.g. between GP’s paid on a percentage of gross fees); 5. It goes against providing and encouraging effective co-located multi-disciplinary care.

Under threat is the convenience a patient receives by not having to travel to multiple locations to receive services, and the facilitation of better communication between providers. A timely lunch room or corridor discussion is worth more than a detailed patient referral letter; 6. It unnecessarily increases the compliance costs of dealing with diagnostic providers as tenants, such as administration, valuation and advisor fees; 7. It unfairly allows corporate owned GP practices to use profits from corporate owned diagnostic providers to subsidise payments to GP’s in the form of lower rents by offering a higher percentage or high sign on fees to doctors. This inturn will cause severe recruitment, retention and succession planning problems for independently owned family practices. In light of the acute doctor shortage, independent GP practices will not be able to compete and eventually go out of or run a marginal business; 8. No part of the legislation stops corporate medical practices from overservicing or inappropriate practice, such as reducing staff support or requesting goodwill payments to be paid back from GP’s for not meeting key performance indicator targets for in-house referrals; 9. The basis of the legislation is based on a hearsay problem in relation to overservicing or inappropriate practice and appears to be about pathology competitors arguing with each other about losing business; 10. The definition of “total shared costs” are not clearly defined and open to interpretation and abuse by diagnostic providers - See below for further explanation; 11. Unnecessary scare mongering will force the rents of existing leases to be reviewed downwards where no reasonable commercial profit can be made. This means practices will not be able to retire practice borrowings and will have to subsidise pathology companies activities which is illogical and uncommercial; 12. The legislation is similar to the Stark Laws introduced in the 1990’s in the US which did not curtail overservicing or inappropriate practice; 13. Similar to the US the legislation is pro corporate owned medicine and the additional profits they make will increase their political lobbying power with Government and reduce the importance of existing medico-political organisations; 14. The legislation naively accepts that corporate owned practices can be trusted for delivering healthcare. By law they have to put tax payer funded profits before patients

otherwise their companies will be taken over and/or their non-performing managers will be sacked. There are no checks and balances regulating the influence that corporates have on clinical activity and the undue influence they have on providers and patients.

3. Immediate impact on private practice st

All practices have until 1 March 2008 to sort out their arrangements. This is a transition period.

As discussed earlier we expect practices that have existing financial arrangements with diagnostic providers will have to review their positions. This includes public hospital arrangements. This legislation affects: 1. Practices who are building or extending their premises and are planning to co-locate and rent out their premises to a diagnostic services; 2. Practices with existing leases with diagnostic providers and; 3. Public hospitals with salary sacrifice and private practice arrangements with their referrers and diagnostic providers. There is no Crown immunity.

We have been receiving reports of some laboratories who are using the legislation to low ball rents. Most are unfamiliar with the detailed working of the legislation and even their representative associations are not quite clear on how it works. We know because we have already tested them.

We note some of the more interesting comments made in the information Memoranda: “…. Some examples of permitted and prohibited benefits are as follows: · if a requester owns a pathology service (or owns shares in a pathology service), then they can share in the legitimate profits of that business (in proportion to their share of ownership). However, it is prohibited for them to receive payments based directly on the number of requests that they make to the business; · requesters and providers may share rented premises provided that they each pay the appropriate rent based on the space used by them. A provider may not, however, station staff or equipment at a requester's premises; · if a requester and a provider share premises and the premises are owned by the requester, then the provider may make payments to the requester to cover the provider's legitimate share of the total costs. The payments can not be greater than the value of the provider's proportionate share of the costs and can not be linked to the requesting of services.

For example, it is intended that determinations will be made in respect of benefits such as gifts, education, hospitality and consumables, and that reasonable limits will be prescribed for such benefits….”

The implications of lower rents and maybe less staff support (we are assuming no other prohibited benefits or arrangements exist other than the selling of data) are: 1. Lower profits and staff support will mean less profits are available to subsise practice overheads, this will put pressure on increasing service fees charged to doctors or patient fees or by reducing your doctors remuneration to compensate for the loss; 2. If the literal interpretation of only charging for the “shared” cost of any arrangement is followed, then there is no profit available to pay for practice building loans in the form of interest and principal repayments;

3. There is an exemption that practices can share in the profits of a diagnostic provider, however this is difficult to achieve for smaller practices; 4. Payments for the purchasing of clinical data may be caught under these arrangements as they maybe treated as a non-permitted activity.

We recommend the following: 3.1 Not to react to a fear campaign and immediately break your lease and drop your rent.

Nobody knows what is an appropriate rent or market value and there is no pre-defined shared cost. It is important to seek advice on the legislation and the impact it will have on your present arrangements if at all.

We quote the explanatory memoranda ….

“It is not, however, intended that the legislation capture or prohibit legitimate commercial transactions”.

23DZZIF(9) ‘….provides where the benefit is provided for consideration that is not substantially different from the market value of the property, good or service..”.

Try and establish what is a commercial and market value rent. Valuers will tell you this is when there is a willing buyer and a willing seller. Advertise your site to the market and request written offers from competing pathology providers. At least two should ensure you are safe.

We are working on projects where the cost of building a practice is up to $7000 sqm so it is important that you do not undersell yourself by signing up to long term leases. Do not be afraid to run a monthly lease if you are uncertain of your position, but do not lock into a long term lease. There are lots of pathology companies that want your business. Do not offer the lessee an option to renew, unless they can cover your future costs! Seek professional help from us if you are not sure. Be wary of using property valuers unless they specialise in the market rates for pathology and radiology leases – ask for their experience in this area in writing. There is a significant difference in office rent values and pathology rent values.

3.2 Understand that it is unclear what “total shared costs” mean A key part of the legislation is all you can charge is for the “total shared cost”.

There is no definition of what an excessive cost is or what costs are. There are costs for the land, fitting out the premises, common areas, negotiating leasing costs both legal, accounting, adviser and valuer fees. Make sure all costs are included. One would also argue the costs of borrowing and financing the area leased should also be included. Some pathology corporates are recommending an independent valuation. The problem is there are very few if any valuers that can value the market value of a pathology lease because the pathology market does pay more for collection centres due to the captured referral base. One could reasonably argue this should be taken into consideration for valuation purposes. The only problem is finding valuers who understand this issue. There is no requirement to secure an independent valuation.

We challenge the definition of costs or market value because it cannot be prescribed at law. It would be impractical to do so and difficult to challenge. We see evidence of this in the Tax Office’s relentless (20 years!) and failed attempts to attack excessive commercial fees for service trusts as ruled by the Federal Courts.

3.3 Avoid dutch auctions To avoid allegations of market rigging ask for all offers to be in writing and avoid a “dutch auction”. Clearly set out the rules that all offers are confidential and must be in writing and that

all potential tenants must make their first and final offer based on service provision and what the practice is offering. We have noted that some laboratories are colluding with their offers.

Accordingly it is important that this does not happen and therefore this should be another condition the practice must impose when it considers offers. For example if a competing bid is $1 out you would not be forgiven for jumping to this conclusion.

3.4 Third parties and practice managers can get caught Note that third parties like accountants, brokers and advisers can also be prosecuted under the legislation due to their business relationship so make sure they understand how it works before you act on any advice. The same applies to your employees, such as practice managers.

3.5 Are corporates affected? – we think so One can only speculate whether a corporates requirement to refer or support in house radiology and pathology is a breach because a corporate can have direct control or direction over a requestor through its providers contracts and access to infrastructure. The question is does the corporate doctor receive a benefit in the form of subsidized service fees or discounted share options and incentives that inherently creates a breach under the act? Why are not upfront “goodwill” payments to doctors considered an inducement under the legislation? A long term 5 year agreement that refers to specified working terms and the necessity to refer services in-house must be a suspect arrangement. Even more so if a doctor could be seen to be in breach of such contracts if they do not comply and then be required to pay back some or all of their goodwill payment.

It is interesting to note Section 23DZZIF permits sharing profits lets say with a corporate is allowed. This could be an opportunity in itself? Who knows.

4. Where to from here? – how to not fall foul of the rules 1. If affected review all your existing diagnostic provider financial arrangement and your own referrer arrangements; 2. Put in writing all negotiations be mindful of the legislation; 3. Do not believe or react to everything you hear. To test this ask for all opinions in writing from anyone who you seek to rely on; 4. Seek competent and independent professional advice. Contact us on 1800 077 222 for an initial free no obligation consult, or email us at pa@healthandlife.com.au.

5. If you are concerned about this legislation, send this email to your local MP or representative organisation supporting these or any other concerns you may have.

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