Less foot traffic from bulk billing and more telehealth equals less on-site pathology volumes. Now, some pathology companies want a rent adjustment.
Nearly 10% of practices have been asked by their on-site pathology tenant to reduce rent going forward, according to an exclusive survey of nearly 500 practice owners last week by HealthEd on behalf of The Medical Republic.
Accountant David Dahm, whose practice centres on healthcare, told TMR that he was seeing this sort of activity pick up and he expected that, as the year gets going, that 10% figure could easily double.
On-site pathology collection is the third-largest revenue contribution for over 5000 practices across the country, after doctor commissions and Practice Incentive Program payments.
Mr Dahm pointed out that, while pathology rent is third in revenue, the profitability of that stream in percentage terms was often high – meaning that any reduction above 5% would have a meaningful impact on practice profitability.
According to Mr Dahm, the reduction requests he was aware of were usually between 5% and 10%.
Likely contributing to the potential problem for practices is Federal Court decision just 18 months ago in Chief Executive Medicare on behalf of Commonwealth of Australia v Healius Pathology Pty Ltd, which ordered that Healius pay $1.85m in penalties for charging rents higher than what the Court deemed market rate.
The case gave some pathology groups a ready-made excuse to have their rents reviewed down, but the relationship between the pathology groups and their landlords is tricky.
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Prior to the case, shares between the major providers had remined reasonably steady.
Now, with foot traffic in GP practices down across the country, protecting or growing your share becomes a much more important game, so asking for a reduction can be risky.
While 34% of the survey respondents said that a reduction in rent would “significantly impact the profitability of their business” only 28% said it wouldn’t.
The remaining 37% weren’t sure if it would or not.
Mr Dahm told TMR that, based on his calculations, a reasonable rule of thumb for market value for on-site pathology would be approximately $30,000 per full time tenant doctor per annum.
But, he said, the safest thing a practice can do is get an independent valuation for pathology rent so, if and when their pathology tenant arcs up about rent, they have a legal basis to substantiate their negotiating position.
Notably, the 2023 Federal Court decision quoted all rents in terms of rental cost per metre per annum.
Although no one likes to talk about it, when you think about how pathology rents should work, the value driver is likely more to do with number of full time doctors on site more than metres rented or the location, Mr Dahm said.
Mr Dahm emphasised to TMR that he is quoting a pathology rent value per full time doctor on site based on market value because it makes it easier for practice managers to understand than basing the calculation on square metres.
TMR and HealthEd will rerun the survey in six weeks and get back to you.
