Re La Magna Enterprises Pty Limited v the Secretary of the Department of Community Services and Health [1993] FCA 30; (1993) 40 FCR 235 (1993) 30 ALD 375 (Extract) (12 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: LA MAGNA ENTERPRISES PTY LIMITED
And: THE SECRETARY OF THE DEPARTMENT OF COMMUNITY SERVICES and HEALTH
No. G792 of 1992
FED No. 32
Number of pages - 18
Administrative Law
[1993] FCA 30; (1993) 40 FCR 235
(1993) 30 ALD 375 (extract)

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Administrative Law - National health - Determination of scale of fees - construction of Part V of the National Health Act 1953 and of Principles formulated by the Minister under s. 40AA - whether ultra vires - whether overriding discretion.

National Health Act 1953

Administrative Decisions (Judicial Review) Act 1977

Federal Administrative Procedure Act 5 USC

Alexandra Private Geriatric Hospital Proprietary Limited v The Commonwealth [1987] HCA 6; (1987) 162 CLR 271

Octet Nominees Pty Ltd v Minister for Community Services (1987) 15 FCR 199

Re Hunt; Ex parte Sean Investments Pty Ltd [1979] HCA 32; (1979) 53 ALJR 552

Neviskia Pty Ltd v Minister for Community Services (1987) 17 FCR 407

Minister for Immigration Local Government and Ethnic Affairs v Taveli (1990) 90 ALR 177

BTR PLC v Westinghouse Brake and Signal Co. (1992) 34 FCR 246

HEARING

SYDNEY, 21 December 1992
12:2:1993

Counsel and solicitors for the Applicant: Mr J.B. Simpkins instructed

by McBride Harle and Martin

Counsel and solicitors for the Respondent: Mr S.J. Gageler instructed

by the Australian
Government Solicitor

ORDER

THE COURT ORDERS THAT:

1. The application be dismissed.
2. The applicant pay the costs of the respondent.

DECISION

GUMMOW J. By contract dated 11 June 1991 and completed 14 July 1991, the applicant purchased what it now operates as the "Villa Magna Nursing Home" ("the Home") in Burwood, a suburb of Sydney. The Home previously was styled the "Kathleen House Nursing Home".

2. Since 1 October 1985, the Burwood premises have been an approved nursing home within the meaning sub-s. 40AA (2) of the National Health Act 1953 ("the Act"). The Home is a "Class 1 nursing home" within the meaning of the definition in s. 39 of the Act. Section 47A of the Act provides for the payment to proprietors of approved nursing homes of a Commonwealth benefit in respect of each approved nursing home patient in the home for each day on which the patient there receives nursing home care.

3. Sub-section 40AA (6) sets out in paras. (a) - (d) various conditions to which the approval of premises as an approved nursing home is subject. Paragraph (a) imposes the condition that the number of beds available in the approved nursing home for qualified nursing home patients not exceed the number of beds determined from time to time by the Minister. In the present case, that number is 34. Paragraph (c) deals with the fees which may be charged in respect of the nursing home care. Sub-paragraph (c) (i) of s. 40AA, so far as material, states:

"The fees charged in respect of the nursing home care of a
qualified nursing home patient . . . in the nursing home
will not exceed such fees as are from time to time
applicable in respect of the nursing home care of the
patient in accordance with a scale of fees determined, in
accordance with any principles in force under subsection
(7), by the Secretary . . ."

Sub-sections 4OAA (7) and (7B) are important for this case. They state:

"40AA (7) The Minister may, by written instrument, formulate
principles for the determination of:
(a) scales of fees for the purpose of
subparagraph (6) (c) (i) in the
application of that subparagraph to a
nursing home that does not contain exempt
beds; and
(b) any matter required by this Act to be
determined in accordance with principles
formulated under this subsection.
(7B) In formulating principles under subsection (7),
the Minister shall have regard to:
(a) the need to ensure that nursing homes are
efficiently and economically operated;
(b) the need to ensure that the cost to
nursing home patients of nursing home care
is not excessive or unreasonable; and
(c) any other matters the Minister considers
to be relevant."

4. Provision also is made in the Act for the substitution of a new scale of fees for the purposes of sub-para. 40AA (6) (c) (i). The present litigation was instituted on 27 October 1992 and the hearing was expedited and heard in Vacation. The applicant seeks an order of review under the Administrative Decisions (Judicial Review) Act 1977 ("the ADJR Act") of a decision made 23 July 1992, being the determination of a new scale of fees for the Home.

5. The new scale took effect on 1 September 1992. The decision was made in exercise of the power reposed in the Secretary (a term defined in s. 4 of the Act) by sub-s. 40AD (1B). This states, so far as presently material:

"40AD (1B) The Secretary may, at any time, in respect of a
nursing home . . . on application in writing made
under this subsection by the proprietor of the nursing
home or otherwise, alter the conditions applicable to
the nursing home by substituting for a scale of fees
determined in relation to the nursing home for the
purposes of subparagraph 40AA (6) (c) (i) such other
scale of fees as is determined by the Secretary."

The applicant seeks an order setting aside the determination and certain ancillary relief.

6. Section 61, under sanction of a penalty, obliges the proprietor of an approved nursing home to keep certain records; in particular, the records must be such as will enable verification of claims for Commonwealth benefits, and compliance with the conditions spelled out in sub-s. 40AA (6). Sub-sections 61 (1), (1A) so provide. Two of these conditions, those in paras. (ca) and (cb) of sub-s. (6) require the keeping with the records of the nursing home of certain documents relating to the operation of the nursing home. Section 42 provides for the inspection of the records of approved nursing homes by persons authorised to act under that section.

7. I have referred to the empowering by sub-s. 40AA (7) of the Minister by written instrument to formulate certain principles. Exhibit 3 is a document of 117 pages. It comprises an instrument executed on 27 June 1989 by the Minister, whereby the principles previously formulated pursuant to the sub-section were revoked and fresh principles formulated. Exhibits 1, 2 and 4 comprise the principles as in force throughout 1986-7, and as at 1 July 1987, and 1 July 1988.

8. The applicant's premises are a "Participating Home Type 1" for the purposes of the principles in Exhibit 3 ("the Principles").

9. One of the conditions contained in sub-s. 40AA (6), that in para. (ce), is that the proprietor of the nursing home will at such times and in respect of such periods as are determined by the Secretary and in a form approved by the Secretary submit to the Secretary, in a manner approved by the Secretary, such information relating to the employment of nursing staff and personal care staff in connection with the nursing home. On 7 January 1992, the applicant wrote to the Department stating that pursuant to the purchase agreement with the previous proprietor it was agreed that the relevant form (known as the "NH20") for the 1990/1991 financial year would be prepared by the previous proprietor and submitted to the Department.

10. The relevant form, completed by the previous proprietor, was received by the Department on 25 February 1992. The result was the determination by the Secretary, under principle 32 (26) (m) of an "actual expenditure adjustment". The calculations are not in dispute. The actual expenditure of the former proprietor for the 1990-1991 year was set against the estimates used to determine the fees for that period. This showed an overpayment by the Commonwealth to the former proprietor of $50,404. The result was the imposition upon the applicant of what is hereafter described as the "first loading" in the determination of 23 July 1992, the subject of the present application for an order of review.

11. The "second loading" was imposed as a consequence of the "validation" (or, in plainer terms, an audit) of the 1986-1987 expenditure for the Home. It was determined, the respondent contends, in accordance with principle 32 and in exercise of the powers in the Act to determine the actual expenditure of an approved nursing home for a period and to compare it with the amount which has been represented to the Commonwealth to be the expenditure for that period by the proprietor. In the present case, the validation inquiry showed that a number of items of expenditure had been overstated by the then proprietor. The result of the overstatement of the expenditure had been to increase the income of the then proprietor of the Home for each of the 5 years commencing with the year 1986-1987 and ending with the year 1990-1991. Again, significant sums of money were involved.

12. The determination of 23 July 1992 of the new scale of fees took into account these two negative loadings.

13. A relevant factor in the determination of fees for an approved nursing home is the protection of the revenue against inflation of the level of fees and the legislation attempts to strike a balance between the interests of the patients, the proprietor and the Commonwealth; see Alexandra Private Geriatric Hospital Proprietary Limited v The Commonwealth [1987] HCA 6; (1987) 162 CLR 271 at 283; Octet Nominees Pty Ltd v Minister for Community Services (1987) 15 FCR 199 at 209-10.

14. The applicant puts its case in various ways, but its essential complaint is that by the adverse application to it in the new scale of fees of the two negative loadings there have been visited upon it the results of the shortcomings or failures of the previous proprietor in his dealings with the Commonwealth. For its part, the respondent maintains that he acted in accordance with the Act and the Principles. Counsel pointed to the importance of those provisions as safeguarding public expenditure and emphasised that it was open, in any contractual dealing for the purchase of such premises as those with which this case is concerned, for the purchaser to insert an appropriate protective provision for recoupment from the vendor.

15. Prior to the making of the determination in question the applicant made representations to the Minister by fax dated 5 May 1992 protesting that any restriction in the applicant's nursing home income would severely deteriorate its current position of "delicate viability" and that there would be little alternative than to close the Home. The Minister replied by letter dated 8 July 1992, which included the following:

"Where a nursing home changes ownership, the
validation and annual reconciliation process
may, in certain circumstances, result in the
Department recovering from the new proprietor
some over-advanced benefit that was paid to the
previous proprietor. Each nursing home business
has a responsibility under the Act to acquit its
expenditure. Irrespective of ownership, the
Commonwealth has a clear statutory authority and
responsibility to recover taxpayers' money.
When the Department is given sufficient notice
that a sale is to take place, it will attempt to
complete a full validation of the home's
expenditure prior to the sale, so that the
amount of any adjustment can be known and taken
into account in the final sale price. However,
where such notice is insufficient or where the
contract makes insufficient or no provision for
adjustment, the recovery process must still be
effected.
I am advised that, prior to your purchase of
Kathleen House, the then proprietor forwarded to
the Department an authorisation to provide any
information regarding the affairs of the nursing
home to you. In discussions held in late June
with an officer of the Department, I understand
that you were advised of the existence of a
current negative loading and the need, in the
contract of sale, to take account of other
possible liabilities against the home.
I note that you took the precaution of
negotiating a contract of sale which made
allowance for the possibility of recovery action
by the Department. It is unfortunate if the
contract did not protect you from full liability
for previous overpayments.
Whilst the circumstances surrounding the
purchase of Villa Magna are regrettable, the
Department cannot be held responsible for the
outcome of such negotiations."

16. In argument, counsel for the respondent pointed to principle 32 (17). This states:

"32 (17) Where, after a person has acquired the business or
undertaking carried on at a nursing home, the
Secretary is determining a scale of fees in relation
to the nursing home, the Secretary shall take into
account:
(a) any loadings reflected in the scale of fees
applying before acquisition; and
(b) any loadings that would have been reflected in
the scale of fees applying before acquisition if
a scale of fees had been determined on the day
before the day of acquisition and that scale of
fees had taken into account all costs incurred
or saved and all income from fees foregone or
gained due to costs being incurred or saved
before the day of acquisition."

Counsel submitted that the effect of this provision was, put broadly, to render applicable to the applicant the negative loadings otherwise applicable to the previous proprietor.

17. Principle 4 provides as follows:

"4 The Secretary shall determine a scale of fees in relation to
a nursing home (other than a nursing home for disabled
people) by taking into account -
(a) for an unclassified patient, the standard fee;
(b) for a classified patient, the standard fee for
patients in that classification;
(c) any differences in fee for wards which offer different
standards of accommodation in the nursing home,
determined by the Secretary in accordance with
principle 31;
(d) any loadings, in relation to the nursing home,
determined by the Secretary in accordance with
principle 32; and
(e) other cost reimbursed expenditure determined pursuant
to Part 5."
(emphasis supplied)

18. I accept the submission for the respondent that the terms of principle 4 are such that the Secretary is obliged to take into account the five matters identified in paras. (a) - (e) and to give weight to each of them as a fundamental element in the making of the determination; cf Re Hunt; Ex parte Sean Investments Pty Ltd [1979] HCA 32; (1979) 53 ALJR. 552 at 554. Principle 32, in turn, deals with the determination by the Secretary of loadings, any such determination then being an integer to be taken into account under principle 4. In various paragraphs of principle 32 the phrase "shall take into account" is used as spelling out the task of the Secretary in making the determination. Paragraph (17) is one example.

19. Counsel for the applicant submitted that the Principles nevertheless operated so as to give to the Secretary what he described as a "residual discretion" to disregard the matters which by principle 32 (17) the Secretary was obliged to take into account. Counsel further submitted that in applying principle 4 itself, the Secretary might take into account any of the matters listed in paras. (a) - (e), including that dealing with loadings (para. (d)), so as to disregard it; this was said to be subject only to the requirements in principle 2 (5) for fair and consistent administration of Part V of the Act, in which s. 40AA appears.

20. In formulating the Principles themselves, the Minister is obliged by sub-s. 40AA (7B) "to have regard to" the need for efficient and economical operation of nursing homes, the need to ensure that the cost to nursing home patients of nursing home care is not excessive or unreasonable, and to "any other matters the Minister considers to be relevant".

21. In considering s. 40AA in an earlier form where the phrase "shall have regard to" was used, Mason J. in Sean Investments supra at 554 said of the legislation as it then stood that it was not possible to say that the Permanent Head was confined to two listed considerations. The phrase now found in para. (c) of sub-s. (7B) "any other matters the Minister considers to be relevant" is perhaps a legislative recognition of the point made by his Honour when dealing with the legislation in its earlier form. However that may be, the presence of the expression "shall have regard to" in sub-s. (7B) of s.40AA is of no assistance to support the submission for the applicant as to the construction of principle 32 (17).

22. It would be an odd construction of principle 4 to hold that the force of the words "by taking into account" as used therein is such that the Secretary might, for example, take into account (but so as to disregard) the existence of any loadings which the Secretary had determined under principle 32. Rather, principle 4, in a sense, contains an index of elements or integers which are to be taken into account in determining a scale of fees, each of those elements being the subject of elaborate provision later in the Principles. On a plain reading of principle 4, the Secretary is given a task to determine a scale of fees and it is stated that he shall perform it by taking various matters into account. There is no "overriding discretion"; cf Octet Nominees supra at 212.

23. I accept the respondent's submission that the same is true of principle 32 (17). This applies when the task of the Secretary is to determine any loadings in the particular circumstance that the determination is taking place after a person has acquired the business or undertaking carried on at a nursing home. The Secretary shall take into account the two matters identified in paras. (a) and (b), each being a certain species of "loading" and a "loading" being arrived at after the application of complicated provisions.

24. Further, the Principles are so drawn as to distinguish between a requirement that the Secretary "shall take into account" certain matters and the provision that the Secretary "may take into account" certain matters. A difficulty for the applicant is that principle 32 (17) is not in the latter category. The Principles which do fall in the latter category are found in principles 9 (2), 15 (1) (b), 17 (1) (c) and 33 (1). Other provisions conferring discretions upon the Secretary are found in principles 9 (4), 10 (2) and 22.

25. I reject the submission that the Principles conferred upon the Secretary a discretion to disregard the loadings identified in principle 32 (17), when determining the scale of fees by taking into account the matters listed in principle 4.

26. It was next submitted, in relation to the reconciliation adjustments based upon the 1990-1991 period, that principle 32 (17) is invalid as having been promulgated for an improper purpose.

27. In considering that submission, it is necessary to have regard to Neviskia Pty Ltd v Minister for Community Services (1987) 17 FCR 407. The legislation was not then in precisely the same form, but consideration was given to sub-s. 40AA (7B). It was held that it was open to the Minister to formulate principles which require the taking into account of negative loadings calculated in accordance with previous savings, and applying those negative loadings to a new proprietor which bears the necessary degree of relationship to an earlier proprietor. On the facts of that case, the "necessary degree of relationship" existed by reason of an association through certain trusts. Here, the necessary degree of relationship is readily to be found in the direct contractual connection between the applicant and the former proprietor.

28. Counsel for the applicant submitted that principle 32 (17) was to be characterised as concerned with the recovery of fees rather than the determination of fees. I accept the respondent's submission that this assumes a false dichotomy. Whether or not the principle is concerned with the recovery of fees, clearly it is directed to the determination of fees in relation to the applicant, within the meaning of sub-s. 40AA (7). I reject the submission that the principle is ultra vires as being beyond the power of formulation of principles given the Minister by that sub-section.

29. The next submission concerned the construction of para. (b) of principle 32 (17). The applicant contended that upon its proper construction, this provision did not permit the carriage of the result of the validation of the 1986-1987 financial year through to the current year.

30. In particular, it was said that the reference in para. (b) to "all costs incurred or saved . . . before the day of acquisition" is to be read subject to an implied limitation, namely to costs incurred or saved during the financial year or part thereof immediately before the date of acquisition.

31. Elsewhere in principle 32, in paras. (29) and (30), reference is made to the determination of a scale of fees by the Secretary taking into account as a loading certain amounts identified by reference to "the previous financial year". However, as counsel for the respondent pointed out, para. (17) is conspicuously not so limited. This suggests that it would not be right to imply into para. (17) the phrase contended for by the applicant. I reject this submission.

32. As I have indicated, the second investigation which gave rise to a negative loading concerned expenditure for the Home for the 1986-1987 year. The respondent contends that, to that end, various paragraphs of principle 32 were applicable. Counsel pointed first to para. (3) of principle 32. In substance, this provides that in determining a scale of fees in relation to a Participating Home Type 1, as is involved here, the Secretary shall take into account as a loading any income from fees gained by the proprietor due to a cost having been saved, that is to say not incurred, during the 1986-1987 financial year, where that saving of cost was not taken into account in the scale of fees in force in relation to the nursing home on 30 June 1987.

33. Paragraph (3) is in the following terms:

"32 (3) In determining a scale of fees in relation to a
Participating Home Type 1 or 2, the Secretary shall
take into account as a loading any income from fees
which has been foregone or gained by a nursing home
proprietor due to a cost being incurred or saved
during the financial year commencing on 1 July 1986 or
an earlier financial year where the cost has not been
taken into account in the scale of fees in force in
relation to the nursing home under subparagraph 40AA
(6) (c) (i) of the Act on 30 June 1987 but would have
been so taken into account in accordance with the
Nursing Homes Fees Determination Principles if a scale
of fees had been determined on that day and that scale
of fees had taken into account all income foregone or
gained due to costs being incurred or saved before
that day."

34. The first point taken by counsel for the applicant is that para. (3) apparently was not relied upon by the delegate.

35. A statement pursuant to s. 13 of the ADJR Act was issued on 21 October 1992. Detailed reference there is made to para. (17) of principle 32. However, para. (3) of principle 32 is not identified among the "evidence or other material" on which the findings were based". Paragraph (26) (k) of principle 32 is identified, but it is accepted by both counsel that it has nothing to do with the matter. Plainly, that reference was made in error.

36. Emphasis was placed in Minster for Immigration Local Government and Ethnic Affairs v Taveli (1990) 94 ALR 177 at 193, 201-2 upon the importance of s. 13 statements as a means of alerting the party in receipt thereof to the availability or otherwise of a ground of review. In the present case, no prejudice has been shown to have been sustained by the applicant. Any error has been immaterial. The case was fully prepared and most skilfully argued by counsel for the applicant, all issues which might assist his client being properly ventilated before the Court.

37. Further, it is necessary to bear in mind the terms of s. 13. These are narrower, for example, than the comparable provisions in the United States legislation dealing with administrative review. A s. 13 statement is to set out in writing "the findings on material questions of fact, referring to the evidence or other material on which those findings were based, and the giving of reasons for the decision". On the other hand, 557 (c) of the Federal Administrative Procedure Act 5 U.S.C. requires the federal decision-maker (defined as an "agency") is to adopt in any formal adjudication or formal rulemaking a complete statement of its findings with respect to all materials of fact and its conclusions concerning all legal issues presented. As part of the record, there must be included a statement of:

"(A) findings and conclusions, and the reasons or basis therefor,
on all material issues of fact, law, or discretion presented
on the record; and
(B) the appropriate rule, order, sanction, relief or denial
thereof."

The position in the present litigation may be compared with what was said as to immaterial legal errors, in relation to an appeal to this Court from the Administrative Appeals Tribunal, in BTR PLC v Westinghouse Brake and Signal Co. (1992) 34 FCR 246 at 253-4.

38. I turn now to the substantive points taken as to the applicability of para. (3) of principle 32. The applicant contends that the provision is "transitional" in the sense that it applies only to the next fresh determination of fees after 30 June 1987. Further, it is submitted that it does not apply because it is a necessary requirement of any cost saved that it has not been taken into account in the scale of fees in force as at 30 June 1987; here reliance is placed upon the words "where the cost has not been taken into account in the scale of fees in force in relation to the nursing home under subparagraph 40AA (6) (c) (i) of the Act on 30 June 1987".

39. As will be recalled, the Principles were promulgated with effect from 1 July 1989. In that setting, it would be an odd construction to treat para. (3) as merely a transitional provision to apply only to the first determination made after 1 July 1987. I accept the submission for the respondent that the only relevant time limitation is that the cost have been incurred or saved during the financial year commencing on 1 July 1986 or an earlier financial year.

40. The applicant further submits that para. (3) is inapplicable because some of the costs in question were taken into account, albeit in a different amount, in the scale of fees in force on 30 June 1987; it follows, it is submitted that the result is that the condition for the operation of the paragraph is not fulfilled. However, the respondent submits that the reference is not to a "cost" in a generic sense, but to the amount which is actually incurred or saved, so that it is not correct that because costs at some level have been taken into account in the determination on 30 June 1987 there may be no redetermination of the level of those costs in the light of actual figures which have since come to light.

41. I accept the submission for the respondent that para. (3) of principle 32 is best understood in the light of the changes which came into effect on 1 July 1987 whereby, in place of a reimbursement mechanism involving principles concerned with payment for expenditure incurred in each particular approved nursing home, depending upon historical levels of expenditure, there was established a standardised expenditure reimbursement involving standardised fixed costs. Section 40AG (5) provided what counsel described as a "phasing in formula" for Class 1 nursing homes which had been approved under the Act before 1 July 1987. The Home is one such Class 1 nursing home. This provided for the calculation of the standard fee in accordance with a complex formula which requires application of the "assessed annual infrastructure cost", an expression defined in s. 39 by reference to principles formulated under sub-s. 40AA (7). Elaborate provision then is made in Part 6 of the Principles (principles 23 - 30) for the assessed annual infrastructure cost. It follows that in the "phasing in" formula in sub-s. 40AG (8), those costs assumed a particular significance and thus were important for inclusion in later years.

42. The structure of the Act and of the other Principles in my view supports the submission that the "cost" which is spoken of in para. (3) of principle 32 is, as the respondent puts it, cost in the sense of quantum not in some generic sense. I accept that submission.

43. The application should be dismissed with costs.