Private hospitals: will they be there for you – or not?

The system is broken. Hospitals are closing, patients turned away. It doesn’t have to be this way.

Australians are fast losing faith in public hospitals. After witnessing decades of decline, scandals, under-funding, overcrowding and ambulance ramping, it’s hardly surprising.

Those with the means to do so are looking for alternatives, and finding them – or believing they are finding them – in the private system. But, if public hospitals won’t be there for them, private hospitals might not be either. Both are in serious trouble.

The best single measure of the stress on the nation’s public hospitals is the time people needing admission to a ward are kept in emergency departments because there are no beds available for them. This chart shows the figure at the 90^th percentile: that is, the time by which 90% have been admitted and 10% are still waiting.

As a result, the long-term decline in insurance fund membership has dramatically reversed. The low point was in 2018, when 64,700 more people dropped coverage than took it up. But in 2024, the increase reached 309,000 – almost double the 20-year average.

Glitches in the system

GLITCH: Australia still claims to have a universal healthcare system, one which treats you on the basis of need, not on your ability to pay. But unless you can pay – and pay quite heavily – this fallback option is closed to you, forcing you back into the inadequate and increasingly chaotic public system. A top hospital-only policy with Medibank Private for a family will cost almost $6,000 a year, even with a $750 excess on every claim made.

GLITCH: Private hospitals do not provide the same services as the public system. The private system concentrates strongly on elective surgery, which is more profitable than medical services. If you’re an emergency case – particularly if you’re a road trauma patient – you will almost certainly be treated in a public hospital.

As this chart shows, the split is striking.

GLITCH: The funding system allows private hospitals to boost profits by cherry-picking patients. It’s a very long-standing problem and it’s been getting much worse lately.

GLITCH: Doctors, not patients, are the customers in private hospitals. Doctors who are unhappy with a private hospital are likely to move to somewhere else and take their patients with them. Doctors bill their patients, not the hospital. There is therefore no effective countervailing pricing power: they can charge whatever they think their market can stand. Some doctors, particularly surgeons and anaesthetists, earn several million dollars a year.

GLITCH: Health insurance companies can protect their profits, as can doctors. Hospitals have far fewer options, leading to many distortions that are not in the interests of patients or the nation.

GLITCH: Many hospitals are losing money and closing. Some new hospitals are opening, but have a different, more restricted and more profitable patient mix and are likely to have fewer beds.

The big squeeze

Private hospital operating costs have been rising significantly faster than revenue. For the six years to 2022-23, average costs have risen by 3.2% a year but revenue by only 1.8%.

The gap between per-patient costs and revenue was a healthy 8.7% in 2017-18 but only 1.5% five years later. These industry-wide averages conceal a wide range, from patients who make good money for the hospital, to those who break even, and to those who lose money for the hospital. Managers have a clear and increasing incentive to cherry-pick.

Meanwhile, insurance companies are covering a progressively lower proportion of actual hospital revenue and costs.

By 2023-24, industry-wide operating profits before tax had shrunk from 16.7% before the pandemic to 2.8% in 2023-24. The long-term trend is unmistakable.

The pandemic hit private hospital revenues badly. Governments restricted activity in private hospitals and in some cases commandeered wards and operating theatres. And during lockdowns, far fewer patients sought treatment.

As pandemic restrictions strangled world trade, supply pipelines for hospital equipment and resources dried up and costs soared. The war in Ukraine added to the problems. And those costs remained high.

As we’ve seen, private health insurers provide less than half of private hospital funding. Data from the Australian Institute of Health and Welfare show that the federal government provided 37% of recurrent costs of public hospitals in 2022-23 and almost the same – 36% -- for private hospitals.

The AIHW figures ascribe the premium rebate, which in that year cost $3.3 billion, to the Commonwealth and not to the insurers. The government also contributed through the Department of Veterans Affairs ($648 million) and through Medicare and the PBS ($3.7 billion).

Individual patients paid out-of-pocket costs amounting to 11% of total private hospital revenue.

The insurers, in contrast to the hospitals, are doing very nicely.

Medibank Private's luxurious new headquarters

The top five (measured by revenue) account for 79% of the total health insurance market. Their gross margins (the difference between premium revenue and claims) are extraordinarily high, ranging from 12.1% to 19.1%: the industry average is 17.4%. For Medicare, the corresponding figure is less than 4%.

Out of that come lavish management fees. These include very high remuneration for senior executives. The boss of Medibank was paid $4.5 million in 2023-24 and the head of the much smaller NIB got $3.7 million (though he did better in the previous year, with $4.3 million).

The annual reports of most large Australian companies reveal what they pay their top executives. That is not the case with BUPA and HCF, which together control 39% of the national market. BUPA is not a listed company but a wholly-owned subsidiary of a top British insurer. HCF is listed but employs an unusual format in its reports, which keeps individual remuneration secret.

On the basis of fund size and performance, it is unlikely that BUPA’s boss, Nicholas Stone, earns less than $5 million or that the HCF CEO, Sheena Jack, gets less than $4 million.

Distortions

Private hospitals dominate in the key elective surgery category, defined as any procedure which can be scheduled. In practice, this means anything that can be delayed for 24 hours or more.

Private hospitals in Tasmania and the territories refuse to provide their data to national agencies, so figures exist only for the five larger jurisdictions.

Access to elective surgery is centrally important. Procedures range from the minor (cataracts, wart removals) to the critical (coronary artery bypass grafts, heart valve replacements, cancer treatment). Unless you are one of the relatively small number of public hospital patients who are operated on in private hospitals with the state government paying, you will have to pay. If you have to rely on the public system, you may have to wait for many months or even years. Too many people needing treatment, but who can’t afford to pay for it, will never get their operations.

The current situation represents a major failing of this country’s public system. Because of this, Australia is significantly more unfair than it should or could be.

Ten years ago, the gap between public and private was much less. Over the past decade, the number of people receiving elective surgery in public hospitals has been steady, despite ever-increasing demand. Private hospital treatment has continued to rise.

Here’s another view of the same thing. In 2013-14, private hospitals treated 696,000 more elective surgery patients than the public system. With the pandemic, that figure shot up to over 900,000 and has remained elevated.

Public hospitals, under-funded for far too long, can no longer cope.

Private hospitals leave emergency surgery to the public system. Elective earns much more money with much less financial risk.

In both public and private systems, there has been a race to improve efficiency, treating more patients with the same inputs of staff and resources. Public hospitals discharge people much more quickly than was once the case; but that trend can’t go on forever, and it ended in around 2016. Since then, public per-patient costs have soared as hospitals become less and less efficient.

In the private system, the drive for lower costs is driven by the funding squeeze. Patients who can be treated and discharged in a single day are preferred to those who must be in hospital for several days. This chart shows the trend in private hospitals: a decade ago, there were 2.1 same-day patients for every overnight patient. By 2024, that ratio had risen to 2.6.

Less profitable patients are being sacrificed in the quest for income. Expectant mothers are less profitable, and private birthing services have closed down in around 30 locations around the country. The most recent are in Hobart and Darwin, both run by the troubled Healthscope network.

“These closures are the latest in a long list of private hospitals that have closed or downgraded their services in critical areas such as maternity care, mental health and reconstructive surgery,” said the Australian Medical Association in a release.

“AMA President Dr Danielle McMullen said Healthscope’s announcement that it would close maternity wards in hospitals in Hobart and Darwin later this year should ring alarm bells for the long-term viability of the private health system.

“’The importance of maternity services simply cannot be overstated, and those who purchase private health insurance deserve to do so with the confidence they will get the care they need,’ Dr McMullen said.”

Mental health treatment is suffering a similar fate. Public facilities are unable to cope with rising demand, and – as this chart shows – numbers have been flat for almost a decade. Much of that slack had been taken up by the private system until the recent downturn began. Since 2022-23, when these data end, the trend has accelerated.

Here’s what they’re actually doing. Of the top ten categories, eight are elective surgery. Both the others (for sleep apnoea and vaginal delivery) are relatively cheap services. The others are much more expensive, earning more money for the doctors and the hospitals.

What can be done?

It’s almost all about money: how much, who pays and – most critically – the way that money is distributed.

As a nation, we spend plenty on private hospitals. In 2022-23 it amounted to $21.5 billion and the annual growth rate – even after being adjusted for inflation – was 3.9% over the past decade. It ought to be enough. And it would be – if we spent it more intelligently.

There is ample evidence of a massive imbalance between insurers and hospitals. The hospitals are short of money and the insurers are rolling in it.

INDEXATION: The hospitals suggest that payouts from insurers to hospital operators should be indexed, to take account of overall rising costs. That would help hospital bottom lines, but it would still allow them to cherry-pick patients, getting rid of the less profitable services and boosting the money-making ones. Good for business, less good for customers.

ACTIVITY-BASED FUNDING: The method the federal government uses to fund public hospitals would be more effective and fairer. But it’s more complicated than it looks.

The government sets the payment for each service according to its average real-world cost. To do this, the huge variety of services are broken down into a list of categories, called diagnosis related groups. The table at the end of the last section shows ten of these.

Each DRG is assigned a weighting figure. A knee replacement (minor complexity) has a weighting of 3.6, and a caesarean delivery is 1.9. Sleep apnoea is only 0.2.

Those cost-weights refer to a single dollar figure, called the National Efficient Price. For public hospitals, a cost-weight of 1 gets $7,258. Therefore, that knee replacement would be worth $26,129, a caesarean $13,744 and sleep apnoea treatment $1,557.

A similar method could be used for private hospitals too – but it would take a lot of work and would be far less effective than it might look.

In public hospitals, this system can account for all costs because the government employs the doctors. In private hospitals, doctors bill their patients and would therefore fall outside any pricing mechanism. There would still be no effective countervailing force to limit their extraordinary pricing power.

Only two-thirds of private hospitals report data to the government’s Independent Health and Aged Care Pricing Authority. The authority is under-resourced for the work it already does, and adding another huge layer would require more funding and a lot more expert employees.

DIRECT FUNDING: Labor went to the 2004 election with a policy of paying private hospitals directly to supply services to a range of public patients. That was the election famously lost by Mark Latham, and the policy has not been seen since.

That’s a pity. If such a scheme was introduced on a large scale, it would give the hospitals an alternative funding source, making them less reliant on the inefficient and unreliable private insurers. Critically, the government would sign contracts with the hospital operators for all elements of treatment costs, including payments to surgeons, anaesthetists and other private-practice doctors. At last, they would face significant countervailing power.

Funding could use the same activity-based funding model, currently used in the public system.

This would be opposed by doctors, their lobby groups, and health insurers, for obvious reasons. And it would cost a lot of money.

On the other hand, the federal government already finances private hospital services to the tune of almost $8 billion, with $9.7 billion coming from the insurers. And some state governments already buy some private services for public patients.

Money from government would replace money from the private insurers. And – given the added efficiency inherent in government funding – extra public funding of $9 billion a year would make the government the overwhelmingly dominant funder of private hospital services. To put that into context, that’s 28% of the money the federal government spends on public hospitals, 9% of its total health budget and 1.2% of its overall budget.

The premium rebate, currently costing almost $8 billion a year, would be removed from insurers and the money used to pay hospitals directly. The insurers would retain a role in the new system, but not the central one, covering those non-core services that the publicly-funded scheme did not.

Because private insurance payouts would be so much less, premiums would fall dramatically, despite the government subsidy no longer being available. In order to remain competitive in the new environment, insurers would have a strong incentive to sign contracts with hospitals for an entire service package which would include doctors’ fees.

But the money would have to come from somewhere. Taxation would have to increase.

If new tax revenue was drawn from the capital, rather than the labour, share of the economy, the social wage would increase materially and inequality would be reduced. The obvious candidate is the 50% discount on capital gain tax for individuals and trusts, introduced in 1999 by Howard and Costello.

The Treasury estimates that this will cost the budget $14.3 billion in 2025-26 and $16.5 billion by 2027-28. Halving the discount rate from 50% to 25% would pay for almost all the cost of this hospital reform proposal.

The present tax discount policy discriminates massively against 90% of taxpayers and favours only the top 10%. The richer you are, the more this measure gives you. The richest 10% gets around 82% of the benefit.

This is important, socially and economically. Australia has an inequality problem..

Since 1975, the share of national income going to the richest 10% of the population increased from 25% to 33%; the bottom half went the other way, from 20% to 17%.

The introduction of Medicare by the Hawke-Keating Labor government in 1984 made a major contribution to the social wage: people no longer had to spend on private health services – or to miss out on care they could not afford. Medicare allowed the government and the union movement to end the wage-price spiral and end a long period of damaging inflation and industrial conflict. Medicare is now firmly embedded in Australian society.

But it is not enough. As we have seen, private hospitals are an indispensable element of the health system. Reforming them and making them fit for purpose would represent an advance almost as great as Medicare 41 years ago.

It can be done. All that’s missing is political will.