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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Administrative Law - Judicial Review - Exercise of Minister's Powers - Determination of Scale of Fees applicable to approved Nursing Home - Regard to costs necessarily incurred - whether application of policy inconsistent with statutory duty - width of discretion.Administrative Decisions (Judicial Review) Act 1977
Administrative Law - Determination of fees applicable to approved nursing home - Exercise of Minister's discretion - Regard to costs necessarily incurred - Rental - Absence of arm's-length agreement - Goodwill - Whether application by Minister of policy inconsistent with statutory duty - National Health Act 1953 (Cth), ss. 40AA(2), (7), 40AE(2), (3), (4) - Administrative Decisions (Judicial Review) Act 1977 (Cth), s. 5(1)(e). The applicant had been associated with the ownership and management of a nursing home, the premises of which had been approved pursuant to s. 40AA(2) of the National Health Act 1953 since its inception in 1973. In 1980 the applicant purchased the goodwill and assets of the nursing home business from a trust, the beneficial interests in which were in the members of the families of the applicant and two other persons. In June 1980 a trust, of which the children and grandchildren of the applicant were beneficiaries, purchased the land on which the nursing home was located and granted a lease of the land to the applicant. The applicant applied to the permanent head of the Department of Health pursuant to s. 40AD of the National Health Act 1953 for the substitution of a higher scale of fees for patients on the basis that the scale of fees should return to the applicant the standard return of 12 1/2 per cent per annum on his investment and working capital and taking into account the rent which the applicant was required to pay. The permanent head refused the application for a fee increase and in doing so excluded the rental incurred because it did not represent an arm's-length transaction. Upon the request of the applicant, the respondent Minister reviewed the decision of the permanent head and referred the matter to the Nursing Home Fees Review Committee of Inquiry in accordance with s. 40AE(4) of the National Health Act. That committee conducted a hearing and in its report set out three different approaches to the application which might be adopted by the Minister.
The applicant submitted that the Minister should have regard, in accordance with s. 40AA(7) of the National Health Act, in the determination of the appropriate scale of fees to the rental obligation which was a cost of a class necessarily incurred in providing nursing home care and to the payment for goodwill which was reasonably incurred. The Minister had decided that the scale of fees for the nursing home should not be increased to reflect the cost of rent payable to the landlord. The applicant sought an order of review, pursuant to the Administrative Decisions (Judicial Review) Act 1977, in respect of the Minister's decision.
Held: (1) In considering the application for a substituted scale of fees the
rental obligation was one to which it was the duty
of the permanent head and
the Minister to have regard.
Re Hunt: Ex parte Sean Investments Pty. Ltd. [1979] HCA 32; (1979) 53 ALJR 552; Howells v.
Nagrad Nominees Pty. Ltd. (1982) 66 FLR 169, applied.
(2) While not every genuine cost was to be reflected in the nursing home
fees as determined, to have regard to a genuine cost within
s. 40AA(7) of the
National Health Act 1953 must involve considering each cost item contained in
the total financial burden of the proprietor in providing care in the home and
as relevant to the assessment of a fee structure appropriate for current
purposes.
(3) The thrust of the Minister's statement of reasons was that he regarded
the rent as having no place in the fee structure because
it arose in
association with the business. In relying upon the particular recommendation
of the Nursing Home Fees Review Committee
of Inquiry adopted by him, the
Minister chose to put the rental cost on one side because it was a cost of a
new proprietor and therefore
not to be considered in relation to his
determination.
(4) The Minister had adopted a policy according to which regard could not be
had to certain costs including rent and that policy
disabled the Minister from
making individual assessment of the items of such cost in a specific
application made in respect of the
particular nursing home and thus
contravened s. 40AA(7) of the National Health Act 1953.
(5) The decision of the Minister should be reviewed and set aside on the ground contained in s. 5(1)(e) of the Administrative Decisions (Judicial Review) Act 1977, namely, that he had failed to take into account a relevant consideration, by failing to have regard to the rental that the applicant was required to pay in the conduct of the nursing home.
HEARING
Melbourne, 1982, December 6-8; 1983, February 8. 8:2:1983The applicant applied for an order of review under the Administrative Decisions (Judicial Review) Act 1977 in respect of a decision of the respondent under the National Health Act 1953.
D. Graham Q.C. and A. Archibald, for the applicant.
G. Griffith Q.C. and R. McK. Robson, for the respondent.
Cur. adv. vult.Solicitors for the applicant: Marshall Marshall & Dent.
Solicitor for the respondent: B.J. O'Donovan, Commonwealth Crown Solicitor.
T.J. GINNANE
ORDER
(1) The decision of the respondent dated 2 April 1981 to refuse the applicant's request to review the decision of the Permanent Head be set aside and the matter to which that decision relates be referred to the respondent for further consideration.(2) The respondent pay the applicant's costs of the application.
DECISION
This is an application pursuant to s.5 of the Administrative Decisions (Judicial Review) Act 1977 (the ADJR Act) for review of a decision of the Minister for Health (the respondent) affirming the refusal of the Permanent Head of the Department of Health to allow the applicant an increase in the scale of fees applicable to a nursing home known as the Sandown Nursing Home.In 1973 buildings were constructed and the business of a nursing home was commenced at 519A Princes Highway Noble Park in the State of Victoria under the name of "Sandown Private Nursing Home" (Sandown). At all material times the premises of Sandown have been approved pursuant to s.40 AA (2) of the National Health Act 1953 (the Act) as an approved nursing home for the purposes of the Act. The applicant has been associated with the ownership and management of Sandown since its inception. At the beginning of 1980 Sandown was owned and operated by J.H. Emerson Permanent Nominees Sandown Pty. Ltd. (Emerson), as the trustee of a unit trust, the beneficial interests in which were in the members of the families of the applicant and two other persons. In February 1980 the applicant purchased from Emerson the goodwill and assets of the nursing home business, excluding the land on which it was carried on, for the sum of $200,000.00. In June 1980 a company called Mentmore Pty. Ltd., purchased from Emerson the freehold of the land for the sum of $500,000.00. Mentmore Pty. Ltd. was the trustee of what is called the Croft Class Trust. Those beneficially interested in that trust are the children and grandchildren of the applicant. On the day the land was purchased by Mentmore Pty. Ltd. it granted a tenancy thereof on leasehold terms to the applicant. The rent for the first year was $50,057. There was provision in the lease for subsequent adjustments of the rent chiefly by reference to the consumer price index. The term of the lease was three years and two months with an option of six further terms of three years.
On 23 June 1980 the applicant applied to the Permanent Head pursuant to s.40
AD of the Act for a review of conditions of approval
of the home with a view
to substitution for the existing scale of patient's fees of a scale of fees
providing for increases in rates
payable by patients in the home. The
application set out the basis on which the increases were sought, namely, that
the scale of
fees should return to the applicant the standard return of 12
1/2% per annum on his investment of $200,000.00 plus $60,000.00 working
capital and take into account the rent which the applicant was required to pay
under the lease to Mentmore Pty. Ltd. The history
of ownership and management
of the home and the basis on which the transactions between the applicant and
Sandown and Mentmore Pty.
Ltd. were said to have been arrived at is set out in
the application as follows:-
"Dear Sir,charge of the Sandown Private Nursing Home since its inception.
As the Department is aware, I have been the responsible Director in
I enclose for your information copies of the following documents -Equipment.
1. Contract of Sale of the Business.
2. Replacement Valuation of the Trade Fixtures, Fittings, Plant &
4. Contracts of Sale of the freehold.This places a value of $520,000.00 on the freehold.
5. Valuation of the freehold by Messrs. McGee O'Callaghan Gill and Co.
. . . "On 8 July 1980 the Permanent Head, dealing with the matter pursuant to ss.40AD and 40AA(6)(c)(7), advised the applicant that the application for a fee increase was refused. The Permanent Head intimated that he had had regard to costs necessarily incurred in providing nursing care in the home, that he could only adjust fees on the basis of costs necessarily incurred, that the lease was not considered to represent an arms length transaction and consequently no adjustment had been made to the approved fee structure.
On 23 July 1980 the applicant requested the Minister for Health, pursuant to s.40AE(2) of the Act, to review the decision of the Permanent Head. As a result the duty arose in the Minister under s.40AE(3) of the Act either to confirm or vary the decision of the Permanent Head "after such investigation of the matter as he considers necessary". Section 40AE(4) of the Act provides that the Minister shall "as part of his investigation of the matter refer the matter to the appropriate Nursing Homes Fees Review Committee of Inquiry established under Division 3A of Part VIII of (the) Act for examination and report to the Minister". The Minister having so referred the applicant's request, the appropriate committee examined the matter and on 21 January 1981 it presented its report to the Minister.
The Committee conducted a hearing at which the applicant's solicitor made
representations. The applicant, a director of Mentmore
Pty. Ltd. and the
applicant's accountant also attended. The main submission was that the
Permanent Head had failed "to allow" rent
paid as a cost necessarily incurred.
The solicitor submitted:-
"In support of the above assertions, Mr. Bloch submitted that had the
freehold been sold separately to a stranger and the business
sold separately
to another stranger for the same prices as the freehold and the business
respectively were sold to Mr. Croft and
to Mentmore Pty. Ltd., and had the
owner of the freehold leased the nursing home to the owner of the business on
the same terms as
those contained in the lease from Mentmore Pty. Ltd., to Mr.
Croft, the Department would have allowed a fee structure based upon
the rental
under the lease. He further submitted that Mr. Croft should not be penalised
because he arranged for the freehold to be
purchased by a Trust for his
children instead of by a third party and because he purchased the business
himself instead of buying
another hospital."
In later comments he said that although costs necessarily incurred might be
considered in relevant circumstances to be excessive or
unreasonable and
accordingly subject to reduction or non-allowance, what had happened in this
case was that the Permanent Head had
paid no attention at all to the rent
considered as a cost necessarily incurred. The committee took the view that
the rent of $50,057
payable by the applicant to Mentmore Pty. Ltd. although on
the high side, was nevertheless an amount that could have been agreed
upon in
an arms length commercial transaction. It took the view also that that rent
was "technically" a cost necessarily incurred
within the meaning of s.40AA(7)
of the Act. The committee reported that while it regarded the rent payable in
the first year, $50,057
as a "cost necessarily incurred" within the meaning of
s.40 AA(7) it believed, on the wording of that section and the judgment in
Re
Hunt ex parte Sean Investments Pty. Ltd. [1979] HCA 32; (1979) 53 A.L.J.R. 552 that "the
Minister and the Permanent Head had a discretion in determining whether the
fees should be increased to reflect that cost."
The committee presented to the Minister what it called propositions A,B, and
C in which it set out three different lines of approach
which might be adopted
by the Minister in exercising that discretion.
"Proposition AMinister for of 9 September 1980 re Nursing Home is that:
Government policy as expressed in a letter from the Minister to the
'. . . new proprietors are required to acquire the existing fee structure
as part of the package when they acquire a nursing home
or a nursing home
business, and any subsequent fee increases have to be justified by increased
costs. They obviously need to look
at the fees and decide the level of income
generated against the cost of acquisition, operation and external borrowings,
if any.
This means they are required to pay interest commitments and rental
out of the visible profit and thereby be satisfied with a lesser
actual level
of profit.' Based on this policy there is no justification for a fee
increase.
Proposition Bis justified, regard should be had to the profitability of the home after the rental commitment has been met.
The Committee believes that in considering whether an increase in fees
Projected Profit $62 419as disclosed in the balance sheet prior to sale was $46 836. (As mentioned previously, there is no working capital invested in the business). The Committee is of the opinion that the balance of the payment making up the $200 000 was goodwill.
Rent $50 057
-------
$12 362
-------
The total value of the fixed assets at the date of sale of the business
$12 362adequate and at least reasonable; and as such recommends no variation to the approved scale of fees using this approach.
= 26.39%
-------
$46 836
This Committee considers this return on "invested funds" as being
Proposition C"Could you envisage a policy decision being made, an official policy decision being made, whereby no amount would be conceded as a return on goodwill, however we define it, but that some amount, for example $12 1/2%, might be allowed on an amount paid for other assets?".
Re Goodwill - vital effects on profitability calculations
During proceedings the Chairman put the following question to Mr. Bloch,
Departmental Projected Profit $ 62 4198.917%
=
-------proposition B above. However, it is a matter of policy whether the decisions should be based on proposition A, B or C."
Monies Invested including Goodwill $700 000
(Land & Buildings $500 000
"Leasehold" $200 000)
The exclusion of goodwill is fundamental to the calculations under
"COMMITTEE'S RECOMMENDATIONthat the scale of fees for Sandown Nursing Home should remain as:-
If proposition A or B is adopted in principle the Committee recommends
4,3,2 Bed $31.65 $37.65patient per day which is due to expire on 30 June 1981.
1 Bed $34.05 $40.05
This scale of fees includes a loading for lost income of $0.90 per
However, if proposition C were adopted, for reasons detailed by Mr. Bloch, some increases in fees would probably be necessary."
On 2 April 1981 the Minister intimated to the applicant that,concerning the scale of fees for Sandown Private Nursing Home.
"Dear Mr. Croft,
I refer to your appeal under Section 40 AE(2) of the National Health Act
As the matter stood before the Committee and the Minister the applicant's
first submission was that the rental obligation of $50,057
was a cost of a
class and in fact necessarily incurred in providing nursing care in the home
and was thus a cost to which the Minister
should have regard in the
determination of the appropriate scale of fees in accordance with s.40AA(7) of
the Act. The applicant's
second submission was that the $200,000 was a payment
for good will reasonably incurred and which ought to be taken into account
in
the exercise of the Minister's discretion.
Rent Considered as a Cost
So far as the matter of rent was concerned its submission was that although, if regard had been had to the rent obligation it might not have been reflected in the Permanent Head's new determination in whole, or in part, the simple fact was that no regard had been had to it. The argument before this Court was that such regard had been excluded because of the strict application of a policy in the implementation of which there was no place for any such regard. However, the policy by which, according to the letter of 2 April 1981, the Minister was actuated in whole or in part was applied to the problem before him in the light of a report which set out before him fairly and fully the circumstances concerning the applicant's obligation to pay rent. It told the Minister that the payment was a cost necessarily incurred within the meaning of of s.40AA(7), it told him how it became payable, it told him the extent to which the existing fee structure provided a profit after payment of all outgoings, it told him that after providing for the new rental of $50,057 that profit would provide a return to the applicant of 26.39% per annum on $46,836 being that portion of the $200,000 paid by the applicant to Emerson for the business which represented the value of fixed assets included in the purchase. It also reminded him, in effect, that good will may arise as a Government creation, and that under successive Governments, it had been accepted as unreasonable to recognize payment for goodwill merely because a decision has been made by the parties concerned to pay such an amount. It reminded him also of the policy outlined in proposition A above.
From the findings of the Committee it appears that the rental obligation was an obligation of a class necessarily incurred in providing nursing care in the home and that the Committee accepted that the agreed amount was a cost necessarily incurred in so providing that nursing care. Once the business of conducting the home passed from the owner of the freehold to a proprietor of the business who occupied the premises on lease it was inevitable that a rental obligation must arise as a cost necessarily incurred.
It is clear therefore, that in considering the application for a substituted
scale of fees the rental obligation was one to which
it was the duty of the
Permanent Head and the Minister to "have regard". The following passages in
the judgment of Mason J. in In
Re Hunt (supra) indicate the significance of
that expression. After indicating that rent is an item of cost in providing
accommodation
and care in a nursing home and normally, except where it is paid
voluntarily in whole or in part a cost necessarily incurred, his
Honour said
at p.554:-
"When sub-s. (7) directs the Permanent Head to "have regard to" the costs,
it requires him to take those costs into account and
to give weight to them as
a fundamental element in making his determination. . . . In many cases it is
to be expected that the scale
of fees will be fixed by ascertaining the costs
necessarily incurred and adding to them a profit factor. In the very nature of
things,
the costs necessarily incurred by the proprietor in providing nursing
home care in the nursing home are a fundamental matter for
consideration.
However, the sub-section does not direct the Permanent Head to fix the
scale of fees exclusively by reference to costs necessarily
incurred and
profit. The sub-section is so generally expressed that it is not possible to
say that he is confined to these two considerations.
The Permanent Head is
entitled to have regard to other considerations which show or tend to show
that a scale of fees arrived at
by reference to costs necessarily incurred,
with or without a profit factor, is excessive or unreasonable. It may be that
the rent
paid by the proprietor of a nursing home, though a cost necessarily
incurred, exceeds the prevailing rental which is paid for comparable
premises
and that the determination of a scale of fees by reference to that rent would
result in a scale of fees which is unreasonably
high. The Permanent Head would
be entitled to take this factor into account in making his determination."
It was said by Fox and Franki JJ. in their joint judgment in Dr. Gwyn Howells
and Michael MacKellar v. Nagrad Nominees Pty. Ltd.
(1983) 43 A.L.R. 283 (the
Nagrad Case):
"As was pointed out by Mason J. in Sean Investments (supra, at p.504) to
"have regard to" in the context of s.40AA(7) means to
have regard to as a
"fundamental" element. We do not wish to attempt to find a synonym for what,
with respect, is such an apt term,
but it is obvious that costs necessarilly
incurred in accordance with sub-section (7) are to be given due weight, as
matters of basic
importance. The discretionary power vested in the Delegate
must be exercised separately in relation to each nursing home. It is the
purpose of the legislation that the position of each nursing home business be
considered on its merits, and s.40AA(7) requires that
due weight be given to
each cost to which it relates. The consideration must at least be sufficiently
open-minded to permit of a
particular cost being taken into account in greater
or less degree."
In the same case I said:-
"Once the classes of costs necessarily incurred in providing health care
in the home are identified then in determining the scale
of fees under
sub-section (6) the Permanent Head must have regard to all of them. This is a
mandatory obligation. He must treat them
as fundamental elements (see Ex parte
Sean Investments Pty. Limited (supra)) in the making of the determination.
As fundamental elements, suitable allowance must be made in respect
thereof. It is in determining what that suitable allowance
is that questions
of the reasonableness of the amount of any alleged item of cost may arise. It
is at this stage that all relevant
considerations are to be applied, such as,
the appropriate level of such costs from a business point of view, from the
point of those
who have to pay the fee and the appropriate fee from the point
of view of the viability of the establishment and the purposes of
the Act.
When the duty to determine the fee imposed by sub-section (6) is read subject
to the duty imposed by sub-section (7) then
it is in my opinion, permissible
and proper to adopt the language of Viscount Simon in Palser v. Grinling
(1948) A.C. 291 at p. 534 where he said "the direction that regard is to be
had to the value to the tenant (of services and furniture) i.e. that
such
value must not be overlooked must be suitably allowed for . . .". His Lordship
used these words with respect to a very different
problem from the present,
but in view of the context of s.40AA(7) of the Act, they do seem appropriate
to describe what Parliament
intended to convey in the statutory direction in
that section."
It would seem therefore that consideration of an item of cost such as rent as
a fundamental element in the relevant cost structure
is an essential function
to be performed in determining a scale of fees. Indeed it appears to me that
in the absence of some particular
feature of such a cost affecting its
reasonableness or propriety, or of some circumstance such as, that it is
already suitably provided
for in some other discretionary allowance made in
the fee structure, perhaps by way of profit, suitable allowance will be made
for
it in the fee determined.
In this case the rental obligation arose, not from the operation of ordinary commercial negotiations between persons at arms length but as a re-arrangement of the legal relationships of parties already in close business association. It may be too much to say that the whole re-arrangement was designed to increase the costs necessarily incurred in conducting the home and thus place an additional burden on patients and the taxpayer, but it is clear that the re-arrangement had benefits for the persons previously beneficially interested in the returns from the home, and, if the fees of the home were increased as a result of the re-arrangement it would benefit some if not all of the parties already beneficially interested (at the expense of the patients and the taxpayers of Australia). And this would occur while the service rendered to the patients at Sandown would remain precisely at its former level. It was no doubt with considerations of this kind in mind that on 8 July 1980 the Permanent Head rejected the applicant's submission stating, "It should be noted that this Department can only adjust fees on the basis of costs necessarily incurred in providing nursing home care. The lease arrangement submitted is not considered to represent an "arms length transaction" and consequently no adjustment has been made to the approved fee structure." This statement points up a problem. The mere fact that an arrangement is not negotiated at arms length does not mean that its terms are not binding, nor that it necessarily lacks bona fides, nor that the obligations undertaken are not fair and reasonable. And if one of those obligations be rent, and found to be a reasonable rent, then that would be a cost of a class necessarily incurred in providing nursing care in the nursing home, and in fact, so incurred. The Permanent Head would be bound by s.40AA(7) to have regard to it. What allowance, if any, should be made for it would depend on all the relevant circumstances after proper scrutiny of the reasonableness and propriety of the arrangement in question.
But it would not be sound to ignore that obligation by failing to consider whether any allowance at all should be made in respect of it. Yet that appears to have been what the Permanent Head did.
It would seem that to have regard to a genuine cost within the meaning of
s.40AA(7) must involve considering that cost items in
the total financial
burden of the proprietor in providing care in the home and as relevant to the
assessment of a fee structure appropriate
for current circumstances. Of course
as indicated elsewhere in these reasons, this does not mean that every genuine
cost is to be
reflected in the fees as determined. In this case, if the facts
were as presented by the Committee, to have regard to the rental
in the manner
discussed above might have involved an approach along lines such as, namely:-
an assessment of the genuineness and reasonableness of the rental
obligation icurred by the applicant in the light of all aspects
of the
business and family relationships of the parties involved, the recognition
that the existing fee structure contained a substantial
element of profit,
that the previous proprietor paid no rent but did provide the premises, that
the profit might be regarded as representing
in part, at least, a return on
capital, that the new fee structure did not call for an allowance for return
on capital but did call
for an examination of the profit component and for
recognition that rent was now involved.
But however the problem be approached, the real task would be, not to adjust
new costs to an old fee structure however convenient
that may be, but to
determine a current level of fees in the light of current costs.
The Minister did not make his decision on the same ground as did the Permanent Head. If one looks at the Minister's letter of 2 April 1981 he made the decision by reference to a particular policy. In this context a policy can only mean a rule applicable to all situations of a specified kind. It is implied in the terms of the stated policy that the relevant rule was one to be applied to all cases where there was a new proprietor of a nursing home in respect of which there was at the time of acquisition an established fee structure. And it appears that the rule was that no change would be made in that structure by reason of rental obligations or certain other specified items of cost that might be incurred by the new proprietor. And the rule was applicable in respect of those costs albeit necessarily incurred in providing nursing care in the relevant nursing home and constituting reasonable additional costs of providing nursing care in the home. The Minister said that he had had regard to the costs necessarily incurred in providing nursing care. Presumably, this was not intended to indicate more than that the Minister was aware that the rental obligation was such a cost. It does not indicate that he had given thought as to whether any allowance ought to be made in the fee structure on account of that cost as a matter to be considered in the light of the total cost constituent involved in providing nursing care in that particular home. The policy as expressed made any such consideration irrelevant.
In the statement of reasons delivered by the Minister pursuant to s.13 of
the ADJR Act the Minister stated that in making his decision
the Minister had
regard to the following items:-
(I) the established policy that new proprietors are expected to pay interest
and rent outside of the visible profit obtainable from
the fees at the time of
acquisition;
(II) the merits of this case;
(III) the consideration that should a nursing home proprietor receive an
unchallenged increase in the fees to service a more expensive
financial
structure it could be expected that many nursing home proprietors would take
advantage of this precedent to refinance their
operations, resulting in
increased fees and increased government subsidies.
That the Minister had regard to the policy expressed in paragraph (I) above is clear. It is a question how the statement that he had had regard to the merits of this case is to be understood. Does it indicate that although it would be incompatible with the implementation of the policy as stated to consider the new rental cost in relation to the total costs involved in conducting the particular home to decide whether some and what allowance should be made in the level of fees with respect thereto, the Minister did that? Does it indicate that the Minister directed his mind to whether any and what allowance should be made in the fee structure because of the new rent, as for instance, would be done in the case of an increase in rental suffered in the ordinary way by a proprietor of a home? Or is it to be understood as indicating that he looked at the merits to decide whether or not he should apply the policy according to its terms in this particular case, with the result that if he decided that he should, then, giving the kind of consideration as last mentioned, to the rent, just would not have to be undertaken. To answer these questions it is necessary to consider the statements of the Minister as a whole. In the end it appears to me that the Minister has said that he is acquainted with the whole of the material submitted to him and after considering it all he has decided to apply the established policy that subject to peculiar or extenuating circumstances in particular cases a purchaser of an existing nursing home should take over the approved fee structure existing at the change of ownership. Amplifying this it is said by the Minister that under this policy a cost such as rent associated with acquiring the home should be met from the existing fee and that subsequent fee increases have to be justified by increased costs.
I think that such a statement has to be understood as an intimation to the applicant to the effect, namely, although it may be that his cost burdens in conducting the home including his rent were such as would justify the Permanent Head in determining a higher level of fees if they had come about otherwise than as part of an arrangement under which the applicant purchased the home, as to whether they would or not the Minister had not decided and did not enquire, he refused an increase on the ground that part of the applicant's costs, namely rent, which might possibly have justified the increase in fees, constituted a cost associated with the purchase. In such case it is apparent that in the exercise of determining the level of fees pursuant to s.40AA(6) of the Act there has been no consideration as to whether the applicant's actual costs, necessarily incurred, of running the home would justify an increase above the existing fees. The rental component of those costs is just excluded from consideration because they arose in association with the purchase of the home.
In my opinion the Minister did not intend to be understood as saying that he had considered the merits of making an allowance in the level of fees for the rent in the sense that he considered the cost of the rent as a component of the total costs of running the home with a view to making an allowance therefore if that rent was a cost reasonably and properly incurred. The thrust of his letter and his stated reasons is to the contrary. He regarded the rent as having no place in the fee structure because it arose in association with the purchase of the business. It is to be noted that the Minister's reasons state that "The Minister had regard to the rental cost as a cost necessarily incurred. However, in exercising his discretion in this matter to have regard to "other considerations" the Minister decided to accept the Committee's Proposition A." That proposition is put forward in the Committee's report as an alternative to proposition B.
Under proposition A the matter is disposed of by the simple application of policy which excludes any consideration of the rental as an item which wholly or in part might be included in the fee structure. On the other hand, proposition B provides reasoned argument relevant to a decision should the Minister enter upon consideration of the rental as a cost in respect of some or all of which an allowance might be included in the level of the fee structure of the home. Proposition B contains, in my opinion, one way of implementing the statutory injunction to have regard to costs necessarily incurred in providing nursing care in the nursing home. Proposition A does not. Accordingly, when the Minister chose Proposition A in preference to proposition B he inevitably chose to have regard to the rental cost, not as a cost to be considered in relation to the actual costs of running the home, and relevant to the determination of the appropriate current fee structure, but as a cost to be put on one side because it was a cost of a new proprietor and therefore not to be considered as relevant in relation to that determination. It may be observed that from the figures before the Minister it would appear that the existing scale of fees provided a profit which was adequate, from the standpoint of arithmetic, to meet the amount of the applicant's rent. But it does not follow that had the Minister had regard to the rent as a fundamental element of cost, and looked at it in the light of the total financial structure of the home, he would not have decided, by a process of appropriate reasoning, that the rent or some allowance in respect of it should be included in the fee as determined by him.
To have regard to a cost in the nature of a cost necessarily incurred in
providing nursing care in the nursing home in the sense
enjoined in s.40AA(7)
of the Act it is necessary in the first place to realise that it is to be
treated as a fundamental element
to be given due weight as a matter of basic
importance. Compare the observations in In re Hunt (supra). To apply a policy
under which
such a cost is excluded from consideration is of course to exclude
it from being given any weight at all. It is to be observed also
that to
perpetuate the existing fee structure in the new circumstances is to introduce
a degree of artificiality where there ought
to be reality. When new
circumstances arise they call for a decision with reference to them and not
the continuance of a fee structure
which may or may not be appropriate in the
new circumstances. As was said by Fox and Franki JJ. in the Nagrad Case
(supra):-
"What it requires is that the scale of fees be determined by reference to
the business as conducted by the proprietor for the
time being. To talk of the
cost of a nursing home is but an elliptical way of referring to the costs
incurred by the proprietor of
the nursing home business. A change of ownership
will in all probability become known to the Department in the due course of
administration,
but there is also a specific requirement that an outgoing
proprietor notify the Permanent Head within one month after ceasing to
be
proprietor (s.43(1)). The nursing home cannot be treated as an abstract
entity, a continuum, persisting regardless of changes
made, including changes
related to the situation in which the new proprietor acquires it and carries
it on. This does not mean that
the Delegate is the slave of all that has
happened, or of all that he is told is likely to happen. It is expected of him
that he
use his experience and good sense, his own judgment."
Thus in looking at a cost in the nature of a cost necessarily incurred in its
setting as part of the financial structure of any home,
and considering to
what extent it should be allowed, the Permanent Head is not helpless. In using
his judgment the Permanent Head
or the delegate will have regard to the
circumstances in which costs have arisen. If he were not satisfied that they
are the result
of bona fide commercial arms length bargaining or if he were
satisfied that they were the result of a legal arrangement between the
parties
deliberately designed to increase costs at the expense of future patients and
the taxpayer, or that the system had been otherwise
exploited, such
circumstances would surely constitute, in the words of Mason J., those "other
considerations which show or tend to
show that a scale of fees arrived at by
reference to costs necessarily incurred . . . is excessive or unreasonable."
But to adopt
a policy pursuant to which no regard is paid to such fees is to
fail to observe the requirements of the statute. Proposition B provides
a
method of approach suitable to a consideration of the question whether in the
particular circumstances of the Sandown home an allowance
should be made in
respect of the new rent. It is suggested that there was a discretionary profit
component in the existing fee which
might be treated as adequate provision for
the rental obligations of the new proprietor. It should be noted however that
in the hearing
before this Court, various questions of fact arose as to the
actual existence of this profit and as to whether there is in the existing
fee
structure a component such as an allowance for return on capital. When the new
cost is looked at in relation to the total financial
structure of the business
of providing nursing care in the home all these matters would be relevant. By
their consideration the worthy
objective of the policy would be achieved in
those cases where it ought to be achieved, and thereby it would be achieved in
conformity
with the Act. To have regard to the merits of the case in this
latter way is to perform the requirement of the statute. To have regard
to
them in the former manner results in the application of a policy according to
which regard cannot be had to certain costs including
rent. The policy,
formulated in the way it is, disables the Minister from making individual
assessment of the items of such cost
in a specific application made in respect
of the particular nursing home.
The contents of item III referred to above of the Minister's stated reasons appear to me to go directly to support the validity of the policy formulated in item I. It is no doubt proper to take into account, when looking at a cost arising on a change of structure of ownership and occupancy of a nursing home and which is said to be a cost necessarily incurred, the danger that such changes may be deliberately contrived to increase costs without improving the service to patients. Such a matter is clearly a proper one to be looked at when deciding whether or not an allowance in respect of such cost should be included in the fee structure. The difficulty is that if the policy is applied no such cost is ever so looked at. Regard is not paid to it. That this contravenes the requirements of s.40AA(7) of the Act is apparent when it is remembered that a fee restructure involving added costs may be well justified and might if looked at by the Permanent Head be taken into account and made the subject of some allowance in the fee.
Item III therefore in my opinion adds nothing. So far as it takes effect as an independent ground it operates to the same effect as the policy formulated in item I. It is to be observed that receipt by a proprietor of an unchallenged increase in fees is not an issue in the case. What is in issue is whether the new structure is to be looked at in an enquiry as to whether or not some increase in the fee structure is appropriate.
It was emphasised by Dr. Griffith for the respondent that it is not
essential for the Minister to set out in his stated reasons
every
consideration which has influenced him in coming to his decision. He submitted
that the Minister was to be understood as having
all the matters referred to
in the report of the Committee in his mind and indeed also the evidence before
the Committee. He relied
upon the observations of Deane J. in Sean Investments
Pty. Ltd. v. MacKellar (1981) 38 A.L.R. 363 particularly at pp.369 and 370
where he said:-
"It is apparent that the Act contemplates that the primary inquiry on any
review by the Minister of a decision by the Permanent
Head on a request to
alter the conditions relating to the fees applicable to a nursing home shall
be conducted by the appropriate
Committee of Inquiry. Such a Committee
possesses coercive powers to obtain oral evidence and access to material which
are not possessed
by the Minister. It is entitled to make recommendations to
the Minister in respect of the matters which must be referred to it for
inquiry and report. Indeed, in the ordinary case, one would expect that a
Committee would make such recommendations. The Minister
is, for his part,
plainly entitled to pay regard to the Committee's report and any
recommendations which it may contain: otherwise,
there would be little point
in having the preliminary inquiry by the Committee. A question arises,
however, as to the extent to which
the Minister may rely upon the Committee's
report in reviewing the decision of the Permanent Head. In particular, is the
Minister
entitled, if he thinks it appropriate, simply to adopt the
Committee's report and recommendations or is he obliged to review and
assess
for himself the evidentiary material and information upon which it is based?
The power conferred upon the Minister by s.40AE(3) of the Act must be
exercised personally by the Minister in the sense that it
cannot be exercised
for him by a responsible officer of his Department. The reason for this is
that the decision of the Minister,
under that sub-section, is by way of review
of a decision of the Permanent Head of the Department and, even though the
Permanent
Head may commonly, as he did in the present matter, act through a
delegate, it could scarcely have been the legislative intent that
that review
should be susceptible of being delegated either to the Permanent Head himself
or to an officer in his Department under
his authority. It may well be that it
was this consideration which led the Parliament to provide for an inquiry by
an independent
committee whose report would be available to guide the
Minister. The statutory requirement that there be a report from the Committee
before decision by the Minister, the inquisitorial powers conferred upon the
Committee, the nature of the decision, the realities
of the functioning of
responsible government and the limitations of human capacity combine to make
unavoidable the conclusion that,
having received the Committee's report, the
Minister is entitled to decide to adopt it and any recommendations which it
may contain
without having examined and assessed for himself all the material
which was before the Committee. Alternatively, he may decide to
reject the
report in whole or in part or to rely only on certain conclusions expressed in
it."
However, in the instant case the situation is that the Minister has plainly indicated how he used the report of the Committee. He has adopted one of the three different courses presented to him by the Committee. And the course he adopted relieved him from considering matters, such as those discussed by the Committee in Proposition B, which would have been relevant to considerations of whether any allowance should be made in the fee structure in respect of the rental costs regarded as a not unreasonable or excessive fundamental element in the cost structure of the home. It also relieved him of consideration of matters such as the relevance of the circumstances that the re-arrangement of legal interests was not an arms length transaction. The Minister had the knowledge which could have been applied to the problem before him if, in the relevant sense, he had had regard to the rental as a cost of providing nursing care in the Sandown nursing home, but he did not apply that knowledge to the real problem.
Dr. Griffith further submitted that it is clear that the Minister is
entitled to adopt a general policy in regard to the scale of
fees and deal
with a review of fees for a nursing home in the light of that policy. He
pointed to the observations to this effect
of Murphy J. in In Re Hunt 53
A.L.J.R. 556-7 cited by Deane J. in Sean Investments Pty. Ltd. v. MacKellar
(supra) at p. 368. But again, the application of the general policy
as
formulated by the Committee and in the Minister's letter of 2 April 1980 and
his statement of reasons in this case excluded consideration
of the new rental
cost as relevant to the financial scenario of the particular nursing home in
question. Any policy that does that
contravenes s.40AA(7) of the Act. It
invokes a circumstance which has nothing to do with the genuine cost of
providing the care.
A policy, for instance, that rentals above a certain
relationship to capital value would not except in special circumstances be
reflected
in a fee structure might stand in a different category. It is to be
noted that the observations of Murphy J. last referred to proceed
as follows,
"but his determination or review must be in order to arrive at an appropriate
scale of fees for the particular nursing
home." The application of the policy
involved a determination for a purpose far removed from that. His Honour
continued:-
"If the costs necessarily incurred are excessive for any reason whether
inside or outside the control of the proprietor, it may
be that the scale of
fees the Minister determines is such that if those costs continue, the home
can be conducted only at little
profit or at a loss. If that result follows it
is because the Minister is not engaged in determining a scale of fees
according to
a cost plus system; he is carrying out a statutory duty to
determine what, in his opinion, is an appropriate scale of fees in relation
to
the approved nursing home."
But because of the course adopted by the Minister he never formed an opinion
as to an appropriate scale of fees in relation to the
Sandown nursing home. He
said the existing scale, appropriate or inappropriate, had to be maintained.
Dr. Griffith said that the
policy considerations which found favour with the
Minister could not be said to have been extraneous to the problem before him.
He
relied on the observations of Dixon J., as he then was, in Browning v.
Water Conservation and Irrigation Commission (N.S.W.) [1947] HCA 21; (1947) 74 C.L.R. 492 at
p. 505 and Swan Hill Corporation v. Bradbury [1937] HCA 15; (1937 56 C.L.R. 746 at p.757
which were approved in The Queen v. The Australian Broadcasting Tribunal and
Others [1979] HCA 62; (1980) 144 C.L.R. 45 at p. 49. His Honour was there dealing with a
provision placing an embargo upon an individual's private rights "unless he
obtains
the sanction of a public authority". He said at 56 C.L.R. 757-8:-
"When a provision of this kind is made, it is incumbent upon the public
authority in whom the discretion is vested not only to
enter upon the
consideration of applications for its exercise but to decide them bona fide
and not with a view of achieving ends
or objects outside the purpose for which
the discretion is conferred. The duty may be enforced by mandamus. But courts
of law have
no source whence they may ascertain what is the purpose of the
discretion except the terms and subject matter of the statutory instrument.
They must, therefore, concede to the authority a discretion unlimited by
anything but the scope and object of the instrument conferring
it. This means
that only a negative definition of the grounds governing the discretion may be
given."
The problem arising out of s.40AA of the Act is of a different nature from that considered in these cases. In this case the question is, what is meant by a positive command to have regard to certain costs in determining a level of fees to be paid by or in respect of patients in a nursing home run on a private enterprise basis as part of a scheme for providing essential nursing care to needy people. The statutory command in s.40AA(7) is to be understood by reference to the scope and object of the instrument in which it is given. It is apparent that the general intention of the Act is that there shall be as many nursing homes conducted on a private enterprise basis, as are thought desirable for providing nursing care for qualified patients needing it.
It is manifest that the success of the scheme, depends upon there being available to the proprietors of nursing homes financial returns which will constitute reasonable income taking into account all genuine items of cost. The provisions in s.40AA(7) serve the objective that the essential interest of the old and largely helpless inmates of nursing homes that care is honestly provided and is reasonably adequate. Hence the command in s.40AA(7) requires attention in every case to be the reasonableness and propriety of necessary costs said to be involved in providing nursing care in the particular home concerned. That the level of fees be adequate to encourage honesty and service at an acceptable level is obvious. In these circumstances it is important that costs expecially those which are said to be necessarily incurred, should be considered on their merits as possibly reasonably incurred and proper to be taken into account in relation to the proper and reasonable financial circumstances of the home. To exclude such consideration of such costs on the ground that they have been incurred in association with the purchase of the home offends this requirement. Attempts by nursing home proprietors including purchasers to exploit the system by increasing costs by contrived legal arrangements or otherwise may be dealt with appropriately by applying the tests of reasonableness, fairness and propriety.
It follows that it is my opinion that the decision of the Minister should be
reviewed on the ground set forth in s.5(1)(e) of the
ADJR Act, in that the
Minister failed to take into account a relevant consideration, namely by
failing to have regard, in the sense
in which that expression is used in
s.40AA(7) of the Act to the circumstances that in the conduct of the Sandown
nursing home the
applicant was required to pay a rent at the rate of $50,057
during the relevant year of operation.
Goodwill
Whether an allowance for goodwill should be made in a fee structure of a
nursing home was discussed in the Nagrad Case. I would
refer to what is said
therein I am satisfied in the joint reasons for judgment of Fox and Franki JJ.
and in my own reasons for judgment.
I am not satisfied that it has been shown
that in relation to goodwill the application of the policy discussed above
constituted
the taking into account of an irrelevant consideration or that
there was a failure to take any relevant consideration into account.
Section
40AA(7) of the Act has no application to payments for goodwill. As the
committee reported to the Minister "In a situation
of Government controlled
supply and guaranteed government and insurance benefits, where demand
virtually exceeds supply a value of
goodwill may arise in effect as a
government creation". As I said in the Nagrad Case,
"It would render of little effect the condition of approval of premises as
a nursing home, that the fees charged should not exceed
the maximum determined
by the Permanent Head, if the proprietor might conduct the home under the
certificate of approval containing
that provision and then sell the home on
condition of a so called goodwill payment recoverable by the purchaser from
future patients."
Conclusion
In the result I am satisfied that the ground for review specified in s.5(1)(e) has been established. Accordingly the decision of the Minister the subject of this application should be set aside and the matter remitted to the Minister for reconsideration.
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