CATCHWORDS Administrative Law - setting of fees for nursing home - order of a Full Court setting aside decision of delegate, and remitting the matter to the delegate - whether delegate reconsidered the matter in accordance with the judgment of the Full Court. Administrative Appeals (Judicial Review) Act 1977 National Health Act 1953 s.40AA ALEXANDRA PRIVATE GERIATRIC HOSPITAL PTY LTD (trading as Alexandra Private Nursing Home) and the HONOURABLE DONALD JAMES GRIMES (in his capacity as Commonwealth Minister for Community Services) and Ors. VG 362 of 1986 Sweeney J. 20 August, 1987 Melbourne EDENAL COURT OF FEO AUSTRALIA , PRINCIPAL HEGISTAY IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. VG 362 of 1986 GENERAL DIVISION BETWEEN: ALEXANDRA PRIVATE GERIATRIC HOSPITAL PTY LTD (trading as Alexandra Private Nursing Home ) Applicant AND HONOURABLE DONALD JAMES GRIMES (who is sued in his capacity as Commonwealth Minister for Community Services), ALAN DOUGLAS ROSE (who is sued in his capacity as the Permanent Head of the Commonwealth Department of Community Services) and PETER DAVID TRATT (who 1s sued in his capacity as the Delegate of the Permanent Head of the Commonwealth Department of Community Services) Respondents THE COURT: Sweeney J. PLACE : Melbourne DATE : 20 August, 1987 MINUTES OF ORDER The Court orders that the application be dismissed, with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. VG 362 of 1986 ~~ ~~ w~ GENERAL DIVISION BETWEEN: ALEXANDRA PRIVATE GERIATRIC HOSPITAL PTY LTD (trading as Alexandra Private Nursing Home ) Applicant AND : HONOURABLE DONALD JAMES GRIMES (who is sued in his capacity as Commonwealth Minister for Community Services), ALAN DOUGLAS ROSE (who is sued in his capacity as the Permanent Head of the Commonwealth Department of Community Services) and PETER DAVID TRATT (who is sued in his capacity as the Delegate of the Permanent Head of the Commonwealth Department of Community Services) Respondents THE COURT: Sweeney J. PLACE : Melbourne DATE : 20 August, 1987 REASONS FOR JUDGMENT This is an application under the Administrative Appeals (Judicial Review) Act 1977 to review the decision dated 18 September 1986 of the thirdnamed respondent, Peter David Tratt, ("the delegate") acting in his capacity as the delegate of the secondnamed respondent. This decision was made following an order of a Full Court of this Court, on 12 July 1985 in proceedings VG239 of 1984 (7 FCR 341), setting aside a decision of the delegate dated 13 March 1984 determining, in accordance with the provisions of the National Health Act 1953 ("the Act"), the approved scale of fees for the Alexandra Nursing Home ("the home") to be effective as from 15th March, 1984, and remitting the matter to the delegate, to be reconsidered in accordance with the judgment of the Court. On reconsidering the matter, the delegate, in his decision of 18 September 1986, determined, inter alia, that the allowance for return on the value of the applicant's investment in its nursing home be $27,280.00 this being the same return as was allowed by him in his earlier decision dated 13th March, 1984, In its application the applicant asserted that - "1. The thirdnamed Respondent in making his said decision dated 18th September, 1986 either failed or neglected to consider properly or at all the decision of the said Full Court ... as ordered by it on the 12th July, 1985. 2. The thirdnamed Respondent in making the said decision dated 18th September, 1986 in so far as he determined the allowance for return on the value of the Applicant's investment in its nursing home at $27,280.00 iterated his original decision dated 13th March, 1984 which had been reviewed in the said proceedings VG No. 239 of 1984 and set aside by the said Full Court ... in its Order made on the 12th July, 1985". The "41, The applicant seeks - An Order quashing that part of the decision of the thirdnamed Respondent dated 18th September, 1986 which determined the allowance for return on the value of the Applicant's investment in its Nursing Home at $27,280.00. An Order that the thirdnamed Respondent by reason of the exceptional circumstances of the case and in view of the previous Court proceedings between the parties determine the allowance for return on the Applicant's investment in its Nursing Home at $78,500.00. Costs to be taxed on a Solicitor client basis. Such other order or orders as the Court considers appropriate". background leading up to the present application is, briefly, as follows - 1. As from 1 January 1973 the Commonwealth assumed powers to approve nursing homes and to control the numbers of approved homes, the admission of patients to those homes, and the fees which they could charge. The first fixation of nursing home fees, effective from lst January, 1973, was based on the fees charged by the nursing home affected as at 30 June 1972. The fees allowed were such as to provide to the operators of the nursing home the same gross return as had applied in the previous period ending six months earlier. Subsequent adjustments were made annually or following special application to provide for increases in wages and other costs in accordance with rises and anticipated rises in the Consumer Price Index. The element of profit arising from the fees charged in 1972 was not taken directly into account in assessing subsequent increases in fees, and, subject to the costs being fully and accurately adjusted, the profit factor in subsequent years remained the same in money terms but declined in real value as a result of inflation. In relation to the Home the profit factor in 1972 amounted to $23,177. As a result of the judgments of the High Court in R.V. Hunt; Ex parte Sean Investments Pty Ltd (1979) 53 ALJR 552 and of this Court in Nagrad Nominees Pty. Ltd. v. Howells (1981) 54 FLR 170, the delegate in determining fees was required to take into account not only costs necessarily incurred but also profit. This course was followed by the delegate even after the amendment of the Act in 1983, by which, as set out below, the Minister was empowered to formulate principles for the determination of scales of fees. Between 1973 and 1983 there were several applications made in respect of the home, and some adjustments made to the scale of fees including an adjustment in December 1983 following extensions to the building and expenditure on fittings and furnishings. The adjustment represented a return on the additional capital invested calculated at the rate of 10% on the new building works, and 12.5% on new fittings and equipment. This had the 7. effect of increasing the allowance for profit from $23,177 to $27,280. By letter dated 20 October 1983 a further claim was made in respect of the home, seeking a review and adjustment to overcome "the totally inadequate return to the Proprietor". No variation was granted and in a reply dated 25 October 1983 the delegate stated - "The excess of permanent fee income over approved expenditure currently included in the fee structure provides for a reasonable return on the historical investment in Alexandra Nursing Home and no further adjustment is considered necessary at this stage". A further application for a review of staff hours was lodged and by determination dated 13 March 1984 the total hours allowed were unchanged, but more hours were allowed to registered and enrolled nurses, and fewer to nursing assistants. This determination, which was effective as from 15 March 1984, also included in the tabulation the item -—- "Excess of Permanent Fee Income over Approved Expenditure $27,280". An order to review this decision was sought in this cour t in proceeding No. VG 46 of 1984 and in due coursewas dismissed. It is in respect of that The matter was then taken on appeal, in proceedings No. VG 239 of 1984, to a Full Court which allowed the appeal, and ordered, inter alia - "The judgment of the Honourable Mr. Justice Woodward of 7 August 1984 be set aside. The decision of the delegate of the Permanent Head of the Department of Public Health dated 13 March 1984 be set aside and the matter remitted to the delegate to be re-considered in accordance with the decision of this Court", application is brought. In March 1984 the relevant provisions of the Act follows: "40AA (6) The approval of premises as an approved nursing home is, except in the case of a Government nursing home, subject to the following conditions: (c) a condition that - (i) 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 such scale of fees as is determined, subject to any principles that have been formulated under sub-section (7) and that are in force, by the Permanent Head in relation to the nursing home; (7) The Minister may, by writing under his hand, formulate principles in accordance with which scales of fees are to be determined for the purposes of sub-paragraph (1) of paragraph (c) of sub-section (6) in relation to nursing homes generally or in relation to nursing reconsideration that the present read as homes included in specified classes of nursing homes. (7A) Without limiting the generality of sub-section (7) principles formulated under that sub-section may - (a) specify matters of a kind that are, in the case of each nursing home or of each nursing home included in a class of nursing homes, to be taken into account in determining a scale of fees for the purposes of sub-paragraph (i) of paragraph (c) of sub-section (6); (b) specify matters of a kind that are, in the case of each nursing home or of each nursing home included in a class of nursing homes, to be disregarded in determining a scale of fees for the purposes of sub-paragraph (i) of paragraph (c) of sub-section 6; and (c) specify criteria for assessing, in relation to matters of a kind that are required, in accordance with principles of a kind referred to in paragraph (a) of this sub-section, to be taken into account in determining a scale of fees, the amounts that are to be so taken into account in relation to matters of that kind. (7B) In formulating principles under sub-section (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". In March 1984 no principles had been formulated by the Minister. The proceedings in vG239 of 1984 are reported as Alexandra Private Geriatric Hospital Pty. Ltd. v. Blewett & Anor FCR 341, where Smithers J. said, (at p.345): "there was nothing in the Act specifically guiding the delegate in his approach to his task. He did not even have the assistance of a provision such as the earlier s.40AA(7) which had at least told him that he must have regard to those costs necessarily incurred in providing nursing care in the nursing home". His Honour went on to say (at p.346) - "The situation 1s stated succinctly by the learned trial Judge as follows: 'I believe the delegate left the current values of the appellant's lands and buildings out of account in exercising his discretion. He was fully aware of this consideration but regarded himself as bound by a departmental policy to base his calculation on historic costs. There is nothing to suggest that he disagreed with this policy.' To my mind the evidence amply supports this finding. It raises the critical issue in this case. Clearly, the delegate in determining a scale of fees for the appellant is entitled to look at the question whether any and what amount for profit should be allowed. But in doing so it is his duty to take into account all relevant considerations affecting the finances of the home with respect to the period during which the determination will apply. It is profit for that period which is in contemplation. It is apparent that just as it is the amount of costs which will be incurred in the conduct of the home in the contemplated period which are relevant to the task, so the contribution made by the appellant by way of capital in the form of land and buildings during that period is a relevant consideration. It is a most important factor in any such exercise. It is the combination of that capital contribution plus the day to day services rendered to patients in the home which are the justification for charges to the patients. Of course in one sense the capital contribution in 1984 is the same as it was in 1972. Subject to the recent additions, it is the same land and buildings that are contributed. (1985) But profit is by its mature commercial, and when one comes to consider profit, commercial considerations are inevitably involved. Commercially the capital contribution is much more than it was in 1972. And just as 1t was reasonable for a 1973 profit to have regard to the 1972 valuation so it is reasonable for 1984 profit to have regard to the 1984 valuation. The shrinkage in the value of money rendered it inevitable that real profit in 1984 of the home considered as a private enterprise project must be related to the 1984 value of the assets used in the project. The rule that for the purposes of an assessment of an allowable profit the capital contribution of the appellant should be taken into account at the 1972 cost value of the land and buildings meant that with respect to the period for which the determination was to be made no regard was paid to the true value of the capital contributed to the project during that period. To my mind the exclusion from consideration of the current value of the appellant's contribution to capital for the relevant period necessarily invalidated the exercise of the discretion of the delegate. And it did so whether it was done by way of implementation of Ministerial policy or otherwise.". Sheppard J. in considering the wording of s.40AA(6)(c)(i), said (at p.356): "Does it follow from the words in question that the delegate must necessarily allow anything for profit? This question cannot be answered without a consideration of the policy underlying the Act. That policy is that approved nursing home care is to be provided, at least in part, by privately owned nursing homes. The premise is that each of these homes will be carried on, not by a government agency, but by a person carrying on business on his own account. The object underlying business activity is profit making. One cannot make profits unless the return which is received covers costs and leaves a surplus for the proprietor; c.f. the judgment of Smithers J. ain the Nagrad case at pp. 293-294, especially the passage therefrom earlier cited. His Honour took the view that profit was a proper item for consideration, not because of anything contained in the former s.40AA(7), but because of the provisions of s.40AA(6)(c). That provision has not undergone relevant amendment, no principles having been formulated pursuant to the new s.40AA(7) at the relevant time. I am thus of opinion that, notwithstanding the generality of the language in sub-sec (6) of the Act, the delegate was obliged, as a matter of law, to take into account costs and to provide for a profit margin when he came to consider what fees should be approved". His Honour went on to conclude that the profit figure which had been allowed, based on historical costs, was so unreasonable that no reasonable person could have so exercised the power, and on the further ground that the delegate had implemented a policy without taking into account the individual circumstances of the case. The third member of the Court, Jenkinson J., dealt primarily with the inequality arising between freehold owner operators of nursing home premises and those operating under leasehold. He concluded that the exercise of the power of determining the scale of fees of the appellant in conformity with the policy of the department to take into account historic costs only "was s0 unreasonable that no reasonable person could have so exercised the power". In the course of reconsidering the matter, the delegate referred to each of the Full Court judgments and concluded: "the decision of the Federal Court requires that I, as the delegate, have regard to the current value of the nursing home when re-making the determination". In doing so, he applied the view of the ratio decidendi of that case for which the applicant has contended. It is not to the point that another Full Court in N.C.A. (Brisbane) Pty. Ltd. v. Simpson (1987) 70 A.L.R. 10 has since expressed doubt as to whether it is possible to find a ratio decidendi in the earlier case, and if so, as to what it may be. The delegate in his fresh determination stated that the evidence revealed that the current value of the nursing home (as at approximately March 1984) ranged between $710,000 and $760,000. The delegate went on to state - "From my examination of the relevant files, the allowance for return on investment included in the approved scale of fees in the original determination dated 13 March 1984 was $27,280 as calculated below: Land and buildings $152,684 @ 10% $15,268.40 Other Investment $96,090. @ 12.5% $12,011.25 rounded $27,280 per anum I have studied the decision of the Federal Court and the evidence produced by the applicant regarding the value of the nursing home. I have also examined the evidence regarding the rates of return which have been claimed to be appropriate to the nursing home assets. I have considered the question of the allowance to be made as a return to the nursing home and have decided to allow the following: Land and buildings $152,684 x 10% - $15,268.40 Other Investment $96,090 x 12.5% - $12,011.25 rounded up $27,280 per annum I have had regard to, and given due weight to the current value of the Alexandra Nursing Home. If this was the only factor which I was to consider then a higher return and therefore a higher scale of fees may have been warranted. However, as part of my consideration of the allowance for return to be given in respect of Alexandra Nursing Home I have also considered the following:" The delegate then stated that a person contemplating an investment in a business venture would take into account a balance of three factors, namely (a) risk (b) annual return and capital gain, and {c) alternative investment opportunities. In regard to the risk factor the delegate considered that "the risks involved in the nursing home industry compared to most other private enterprise ventures are minimised if not eliminated by the controls and safeguards provided under the National Health Act ... therefore, in my opinion, there is virtually no risk element associated with investment in the nursing home industry" He therefore decided that an overall return of about 10% on investment was commensurate with that minimal risk. In relation to annual return and capital gain the delegate said "In my experience investors in nursing homes have achieved high levels of capital gains over the years since the introduction of growth control in 1972" and concluded that the applicant "has achieved a potential capital gain on sale of the business of approximately $702,000". He also considered that there would be a substantial capital gain in the land and buildings, and then stated - "Having considered all the above facts, I have concluded that, given the very high potential capital gain that could and should be realised upon sale of the Alexandra Nursing Home, it would not be appropriate for me to determine a return on investment on current valuation as an annual return at a rate of 10% on both business and freehold at 1984 valuation would be of the order of $145,000. This, to my mind, would be excessive and would certainly cause unwarranted financial hardship to patients as it would entail a $6.00 per bed per day increase in the fees.". In dealing with the question of alternative investment opportunities the delegate referred to possible returns on the original cost of land and buildings invested in Treasury Bonds and in shares. The delegate said - "I consider that Treasury Bonds to be very low risk as is the nursing home business. However, unlike Treasury Bonds which have a par redemption value and therefore no capital gains, Sr Goode's decision to invest in Alexandra Nursing Home has created a capital gain in the order of $702,000 in 'key money' or 'ingoing'". He then dealt with the question of possible returns and concluded - "Having regard to all of these factors I consider that the appropriate rate of return should be 10% on land and buildings and 12.5% on other assets and that these rates should be applied to the historic cost of the assets and not the current market value.". on shares The Court was not invited by the applicant, and is not entitled, to substitute its own decision for that of the delegate, for, as Mason, J. (as he then was) observed in the Peko Wallsend case (1986) 66 A.L.R. 299 at 309:- "The limited role of a court reviewing the exercise of an administrative discretion must constantly be born in mind. It is not the function of the court to substitute its own decision for that of the administrator by exercising a discretion which the legislature' has vested in the administrator. Its role is to set limits on the exercise of that discretion, and a decision made within those boundaries cannot be impugned (Wednesbury Corporation at 228)". The specific grounds upon which the applicant challenged the decision of the delegate were: 1. That the decision of the delegate was not authorised by the enactment, in pursuance of which it was purported to be made, as construed and/or to be applied as decided by the Full Court. That the making of the said decision by the delegate was an improper exercise of the power conferred by the enactment, in pursuance of which it was purported to be made, as construed and/or to be applied as decided by the Full Court. That the decision by the delegage involved an error of law in that it does not apply properly, or at all the enactment, pursuant to which it was purported to be made, as construed and/or applied by the Full Court. In my opinion, the applicant has failed to establish any of these grounds. It is true that the amount which he fixed resulted from the calculation of a return upon the historic cost of the assets employed in the home, and, 1f£ no more had appeared, this would have amounted to a clear failure to obey the direction of the Full Court, because the delegate would have paid no regard to the current value of those assets. The delegate, as has been seen, made a finding as to that current value and recognised that if it had been the only factor to be considered "a higher return and therefore a higher scale of fees may have been warranted". He also weighed the other factors which he described as risk, annual return and capital gain, and alternative investment opportunities. A consideration of all those factors, including the current value of the assets, led the delegate to make his decision. In my opinion the course which he followed does not show that he disobeyed the direction of the Full Court. The application is dismissed, with costs. I certify that this and the preceding fifteen (15) pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice Sweeney Dated: 20 August, .1987 a a a wee eeoee eee eneonee ee oe Associate Counsel for the applicant: Solicitors for the applicant: Counsel for the respondents: Solicitors for the respondents: Dates of hearing: 4, 5 June, VG 362 of 1986 Mr. R. Gillard McNab & McNab Mr. M.E.J. Black Q.C. Mr. R. McK. Robson Australian Government Solicitor