The government’s pretence of helping GPs, hospitals and patients with its 80% bulk-billing rebate legislation takes the prize, either for most idiotic or most cynical political play on our payroll tax mess.
To read last week’s press release from the NSW government, you’d think that NSW had thought the longest and hardest of all the states on the GP payroll tax dilemma and come up with a truly fair and winning strategy for every stakeholder.
Indeed, most consumer media outlets (who appear to have no idea what is going on unfortunately) bought the release hook, line and sinker and published stories about how patients, GPs and hospitals were all going to be much better off as a result of the legislation.
Nearly the opposite is true.
In fact, to give everyone a sense of just how dumb the new legislation is, one of its immediate effects will be to significantly enhance the profitability and value of a couple of major corporate GP outfits, at least one owned by one of our biggest local private equity firms, and for the favour, these outfits pretty much don’t have to change anything they are doing – which is largely industrialised high-volume low-value GP services.
If you didn’t know better you’d suspect some form of corruption, because these reforms have had exactly the same effect on these large and profitable corporate entities as if a local council had been bribed to change local zoning so a big property developer who bought land on the cheap because it was zoned rural suddenly had a highly valuable property portfolio to develop housing on. There’s a term for this – “grey money”.
Of course, there wasn’t corruption involved here. At least we don’t think there was.
There was, however, rank ignorance and stupidity by the looks of things, with the obligatory opportunistic political expediency to bring in more tax money while being able to point the finger of blame in other directions – in this case payroll tax law, and the federal government.
For any state politicians or policy people reading this and getting in any way offended perhaps what is needed is a short history of how this payroll tax mess happened. And how they have now played a very unfortunate set of circumstances to what looks like very cynical ends, which will very likely end up with a more broken-down GP sector, bigger queues at your hospitals, and certainly, a new direct tax on patients in their state.
The story of the business structures which all of the states are targeting and leveraging now for more money – either directly via audits of medical practices or indirectly through forcing GPs to pass on the new cost of meeting payroll tax to their patients (which is a direct state tax in effect) – began more than 30 years ago with no intention of avoiding state taxes.
Back then, and now, the primary purpose of creating the structures that state governments are so robustly targeting to extract tax, was to avoid the very big issue of medical liability.
Medical liability for a medical centre business owner is a vastly bigger problem than payroll tax will ever be.
Below you are going to be shown one of the most horrific payroll tax bills so far levied in this seemingly unending saga, which comes to $1.2 million.
If you expose yourself to a big medical liability case, by having your doctors connected to your centre as effectively employees or even contractors who look like employees, you can bank on at least $20 million as a starting medical liability case. And while there is insurance you can get for this, the risk is so high that the premiums on that insurance quickly make running a GP medical centre non-viable.
So, way back when the original intention of most of these structures was to create separation between the working doctors in a centre and the legal liability of the centre should one of those doctors do something badly wrong.
It was a perfectly sensible intention and structure.
Back then, bulk bilking was the norm for almost every medical practice because the Medicare rebate was high enough for nearly all practices to make a living.
Then the federal government in its wisdom decided to freeze Medicare rebates for GPs for nearly 10 years, creating a circumstance in which, depending on your practice size and business model, you were no longer able to afford providing the sort of care you had always been providing as a GP on bulk billing alone.
It’s important to remember here just how much the Medicare rebate freeze started to warp the system, because we had a lot of small to mid-sized practices doing low to mid-volume consults with good levels of care, all mainly funded by Medicare.
Alongside the small to mid-sized practices, in the 1990s we saw the rise of the mega high-volume practices, which, being based on volume, were delivering a lot of consults but significantly less overall value to the patients over time, especially complex patients with longitudinal chronic care needs.
Some of these corporates are going to argue this point and claim they delivered the sort of care being delivered in the lower volume practices, but there is plenty of evidence now to say that, historically at least, they didn’t.
Then the high-volume corporate owners made decisions that started to entirely warp the original intention of the typical practice contractor business structure. They decided to industrialise their business model by developing command and control management protocols which directed their GPs to do the most profitable things in the highest possible volume.
Part of the business model of some of these businesses was owning upstream pathology businesses that their downstream high-volume GP businesses could channel tests to. This was where the real profit was being made and the ultimate reason why they needed high volume at lower cost.
Many GPs who worked at some of these groups at the time will tell you horror stories of working there. GPs’ patient management systems were monitored in real time so the owners knew when the GP clocked on, knew every consult they did, and when they clocked off.
It was almost Orwellian.
As a part of their model these groups developed harsh working contracts with forms of targets and non-compete clauses, so they could restrict their doctors from leaving and competing with them in any way.
Needless to say, some of the businesses became huge, massively profitable and highly valuable businesses.
The most famous of these groups was Primary Healthcare. It was sold for a lot of money and went on to become Healius Medical Centres, still supporting an upstream pathology business.
But by the time of this sale the Medicare rebate freeze was in place and was starting to bite. In addition, the group had inherited a big federal court case over unpaid taxes owed on the acquisition of practices and the ongoing services from the doctors they acquired.
Healius lost this case and the judge in the case, as a forewarning of what was to come, actually said that Primary Healthcare did not operate like a shopping a centre but exactly as an employer (or words to that effect).
The model and the value were starting to break down.
The bigger problem for the whole system was that over the years a lot of small to medium-sized practice owners, who had originally set up their structures with the sole intention of avoiding medical liability, and who were starting to feel the pinch of the Medicare rebate freezes too, started looking over the fence at groups like Primary Healthcare, and thinking they should adopt just a few of their “industrial” techniques in order to survive.
Some naively would do things like copy the contracts that these bigger corporates generated for their doctors when one of those doctors started with them. Others went further and started smaller versions of command and control management in their practices to optimise revenues in an increasingly Medicare rebate freeze-stressed business environment.
Some of this was aided by the AMA and the RACGP who came out and claimed that these practices were developing team-based care which was vital for good medicine. The RACGP built the concept into its protocols for practice accreditation.
All through this period, nearly all the accountants and legal advisors of these smaller to medium-sized practices missed entirely the problem they were allowing their clients to build up – structures that ultimately meant that their so-called contractors were in effect becoming employees for the purposes of payroll tax.
As mostly small business owners a lot of practice owners did a lot of DIY through this period looking at other businesses and copying them, all pushed along by the need to survive financially as a result of rapidly declining revenues as the government chose not to increase any Medicare rebates to GPs for such a long period.
And then came the court cases of Optical Superstore and Thomas and Naaz.
The eyes of state revenue offices around the country suddenly bulged at the new revenue opportunity and they started in various ways to start industrialising how they could exploit this potential revenue stream.
The politicians weren’t involved yet, but they inevitably would be because what was starting to happen to the GP sector, given its already dire financial position, was a true crisis, and the various GP lobby organisations started getting involved as best they could to point out to the state politicians what they were actually doing.
Fast forward to this week’s NSW 80% bulk-billing reforms and let’s look at just how big a mess we’ve gotten ourselves into and why state governments failed to understand what has really gone on, and how to really help, if indeed they ever wanted to.
But what did NSW really do with this legislation when you step back from it and blow away the smoke and puffery of their high and mighty stance on the legislation?
First, the main effect of the NSW 80% bulk-billing rebate plan will be to add a direct state tax to a significant cohort of patients in this state during a generational cost-of-living crisis.
Imagine if the NSW government in its next budget announced that they were going to directly tax every patient for every GP visit each year, if the GP they visited did not bulk bill them?
Well, you don’t have to imagine it. That is precisely what the NSW government has done.
Then they’ve thrown a smoke bomb into the whole thing, so the major consumer media don’t see it for what it is, so it won’t blow back at them politically.
The premise that you just have to get your bulk billing up to 80% in the city and 70% in the country and everyone will be sweet is fundamentally flawed and if they don’t know it, they are hugely incompetent.
(By the way, for an example of the incompetence of Revenue NSW, check out the letter sent to Thomas and Naaz – a bill for $1.2 million payroll tax – which the SRO has since admitted was sent “in error”. It’s appalling. Imagine receiving that in the mail.)
Here’s what’s happening.
If you are at or near the 80%, like say the private equity owned ForHealth GP corporate business is, then you tweak your business and systems to hit the number, and you are sweet.
So, all the high-volume lower-value care set-ups which, because of their volume and industrialisation, are still able to make a profit at high levels of bulk billing, have a free kick.
This is not to say that some of these organisations don’t provide services that contribute to the overall mix of care. They do. But this new legislation is now elevating the profitability and value of these set-ups enormously and that is going to drive the balance between them and groups that do higher-value longitudinal care way out of whack (if it isn’t already).
Unfortunately, most mid-sized practices in urban areas and some corporates, aren’t near enough to tweak themselves get to the 80% mark. If they are anything under 70% today then that 10% of lost mixed billing income is pretty much their profit margin.
This makes the legislation meaningless to most GP practices – corporates are only 25% of the mix and not all of them are industrialised at high bulk-billing rates as described above – and most will not take up the offer of moving to the 80% cut off.
What they will do is the only thing they can do to survive. They will increase their private billing component to cover the payment of payroll tax moving forward.
In other words, a direct NSW government tax on patients for going to their GP.
By the way, the get-out-of-jail-free card for ForHealth, which historically invented the command and control GP contractor model in its Primary Healthcare days and which makes you definitely due payroll tax, may have lifted the value of that group somewhere between 5% and 10% when it comes up for sale soon, maybe by $100 million.
Add the value to the group created by up to 40 ongoing urgent care clinic contracts with the federal government and other state government-friendly payroll tax policies (eg the one in South Australia) and we can all congratulate both the state and federal governments for single-handedly rescuing the sale of ForHealth from what was looking like a serious loss on the initial investment by private equity group BGH, to something probably over $500m more than they bought it for.
Another reasonably large corporate, Cornerstone, founded by Henry Bateman, the son of Ed Bateman, who built Primary Healthcare, is also likely to win big out of this decision.
Well done everyone.
ForHealth Andrew Cohen is a very smart cookie, by the way.
His last job was marketing baby milk powder (he did a good job on that) so not a lot of background in the complex world of Medicare and GPs, but within a few years of taking the helm of what was a business pretty much on the rocks, he managed to understand where the money really was for his business – federal and state governments – and get a lot of it out of them.
The guy is a marketing genius at his base.
He’s managed to make federal health minister Mark Butler his biggest cheerleader – every opening of a new UCC tends to be a ForHealth one with Mark Butler cheering everything on in a photo opportunity with ForHealth branding everywhere – and this week he did the same trick and somehow managed to make ForHealth front and centre of the press release from Ryan Park as the leading example of just how great a thing this new deal from NSW was for GPs.
You certainly can’t buy PR like the PR that NSW Health and the federal government has given ForHealth.
That the NSW government is using ForHealth as an example of just how great the new legislation is going to work is a sign of just how naïve the NSW government is.
The legislation will do virtually nothing other than increase the profit and value of ForHealth for an impending sale, potentially to overseas interests. It certainly won’t increase the bulk-billing rate much or offer new bulk-billing consults en masse for patients.
ForHealth is already a bulk-billing business model.
The legislation is great for any GP group which existed in business already near that 80% mark, not for any other GP practice or their patients.
And ForHealth was near enough that mark because its whole history – less so in the last few years for various reasons – has been as an industrialised bulk-billing factory.
Unfortunately, for a lot of GPs, GP practices, and their patients it simply means paying a lot more money — payroll tax money – to top up the treasury coffers of the NSW government.
Resurrecting Primary Healthcare and its old school model (ForHealth) isn’t something I think you’d particularly want to remembered for.
Nor should the NSW government be proud of putting a lot more pressure on that demographic of practices that takes the time and care to deliver more complex care at the GP level, especially for complex chronic care patients, by forcing them to put their prices up on their mixed-billing consults.
One possible effect here would be for a patient to see the price signal as just too high and go down the road to the industrialised bulk-billing corporates.
I guess in that case the NSW government might actually create more bulk billing for its patients after all, but at the cost of gutting that vital high-value core of general practice – more than 70% of it – that is practicing much better care at the community level.
As to the bizarre statement in the NSW health press release that they estimate that a 1% decrease in bulk billing equates to around 3000 additional emergency presentations – could someone please send us all a peer-reviewed properly conducted piece of research that supports such outlandish statements?
We know from insiders that despite UCCs being inundated because they are free (bulk billed) there is no movement at all in the right direction in terms of ED presentations hospitals located close by to these new centres.
Everything this legislation is based on is guesses and politics, and it has missed the mark by a mile if NSW really wanted to help GPs.
But most other states are doing a version of what NSW has done – leverage a very unfortunate evolution of the business structures of one of our most vital small business sectors – general practice – to get more money and try to look like the good guys at the same time.
I’ve ranted (per usual) quite a bit here but let me finish with a real example of what this legislation has done to one very good mid-sized GP practice I know.
The owner of this practice rang me this week highly distressed and in desperation, wondering what to do.
I’m not a professional advisor in any shape or form but I could point him to some and provide him with a rough framework for how he should be thinking about his problem.
His problem was, like so many others in NSW, that he felt he had let his structure drift into the danger zone of command and control and therefore he might not survive an audit on payroll tax.
For this I had some good news and maybe a little bad news.
Every reading of the new rules suggest that after 4 September the state is automatically going to extinguish past payroll tax debt. That’s the good news.
His other problem was that his practices were nowhere near the 80% bulk-billing level so there was no way he could meet that requirement and stay financially viable.
He was genuinely distressed that he felt he would need to put the price up of his consults because of what payroll tax was going to cost him, roll over, and sign up to pay payroll tax from now on.
That cost on a yearly basis for this business was not going to be insignificant – something well over the $100,000 per year mark.
But I guess the cost wasn’t going to be his. It was going to be his patients’ – a direct tax by the state government on his patients if you like.
You might be wondering why I haven’t at least given the state government credit for extinguishing all payroll tax from 4 September going backwards at this point.
At least they did that right, yes?
Well, politically, if they didn’t at least do this they really would be exposing themselves enormously and if you think about how much they are now locking in for ongoing payroll tax revenue they never had before, it’s easy to see why they didn’t mind doing it.
So, I’m not giving them any credit for this initiative.
But even if they did it with good intention to help practices everyone needs to examine this part of their initiative in the light of two things:
- the NSW government is now forcing most of the practices in the state into paying payroll tax going forward, and most of that money is ultimately going to come now directly from patients who are all in a once in a generation cost-of-living crisis;
- Moving to pay payroll tax as a practice has a whole new set of potentially monstrous problems embedded in the decision.
By moving to pay payroll tax you are entering very dangerous new taxation and medical liability ground that might make paying payroll tax seem like child’s play:
- You are pushing your practice one big step further to exposing itself to the federal government, via the ATO, deeming your contractors as employees, just as the state revenue office has done by deciding you owe payroll tax. That might expose you to:
- Having the problem that the ATO goes after your contractors for putting in tax returns as sole traders paying only 25% tax when in fact they are employees who need to pay a whole lot more tax, and back pay it;
- Having to pay your contractors superannuation, leave, long service leave and other employee entitlements, once again going backwards;
- You are doing the same in terms of medical liability claims ie, how long before someone takes a case and runs the line that there was never a true legal separation of them as a contractor and presents as part of the evidence that state governments treat them effectively as employees for payroll tax purposes now, and under “deemed employee rulings” by the ATO, the ATO can as well.
Who is to say what the NSW government really thought it was doing by introducing this payroll tax legislation.
But whether they intended it to be good for the system, patients and GPs or not, it very clearly isn’t.
Stay tuned: there are some interesting strategies that have been put to us about how to deal with all of the above which we will discuss in the coming weeks.