Are Private Hospitals in Australia Facing a Financial Crisis and Risk of Closure?

Economists and policy experts have raised concerns about the lack of transparency in private healthcare costs as the Department of Health prepares to release findings from its review of the sector’s financial viability.

The review, which started in May, followed contract disputes between private hospitals and health insurers that could lead to higher out-of-pocket patient costs. Hospitals have also voiced concerns about the rising expenses of delivering care.

Some warn that private hospitals may be at risk of closing—but is this an exaggeration?

What’s the debate around private hospitals?

Private hospitals partially blame health insurers, whose memberships and profits have been growing, for not directing enough funds to hospitals.

Private Healthcare Australia, representing insurers, argues it is responsibly returning money to policyholders and insists hospitals shouldn't have to "raid health funds to solve their problems."

The ongoing dispute between private hospitals and health insurers has led the Federal Health Department to request financial data from hospitals and other stakeholders to evaluate the sector’s performance, pressures, and profitability.

The department’s report, which was due earlier, is now delayed. A department spokesperson told Guardian Australia on Monday that it is "still being finalised."

Health Minister Mark Butler expressed concern over reports about the sustainability of some private hospitals, particularly those in regional areas, where they serve a crucial role in local communities. He emphasized the importance of the health department’s efforts to understand the situation better.

What do we know about hospital and insurer finances?

Charles Maskell-Knight, a former senior health department official, is sceptical that the department will get a complete picture of how private hospitals manage—and possibly misuse—their funds.

The Australian Bureau of Statistics previously released an annual report on private hospitals that included financial data. However, this report was discontinued after the 2016-17 edition, leaving a gap in up-to-date financial insights.

“There is no independent data source on the financial position of the private hospital sector,” said Charles Maskell-Knight.

"Call me cynical, but if I were running a profitable private hospital like St Vincent Hospital, why would I provide data to a review based on the idea that private hospitals are struggling? If the review recommends measures to improve the financial position of private hospitals, I would benefit—so why would I share data suggesting such measures aren't necessary?"

Maskell-Knight also pointed out that private health insurers have “done very well from the pandemic.” He explained that while insurers are returning money to members, they are doing so because they raised premiums unnecessarily rather than drawing on their reserves.

Many insurers' reserves have continued to grow, with some holding more than a year's premium revenue.

Maskell-Knight believes the government should stop subsidising private health insurance premiums and instead focus on subsidizing private hospitals based on the type and amount of care they provide, similar to the activity-based funding model used for public hospitals.

Are private hospitals on the brink of collapse?

The private hospital sector has warned that hospitals could face closure without additional support from insurers. This comes as health insurers reported their net profit after tax more than doubled to $2.2 billion in the year ending June 2023.

While the private hospital sector claims that 71 hospitals have closed since 2019, Charles Maskell-Knight notes that the net loss is closer to a dozen, as new hospitals have also opened during this period.

Dr Rachel David, CEO of Private Healthcare Australia, addressed the ongoing standoff between Healthscope, Australia’s second-largest hospital provider, and the insurers, stating, “I want to reassure the 12 million Australians with hospital cover that health funds will not let hospitals in genuine areas of need close.”

Should the government intervene?

According to Charles Maskell-Knight, the activity-based funding model has already improved efficiency in the public healthcare sector and could offer similar benefits to private hospitals. He emphasized, however, that the government should avoid intervening in contract disputes between insurers and hospitals.

"Insurers and hospitals are consenting adults and should be left to negotiate mutually agreed contracts," he said. "The promise of private health insurance is quicker access to hospital treatment, and if an insurer can't deliver on that promise, they will face issues."

Peter Breadon, the health and aged care program director at the Grattan Institute, suggested that transparency could resolve the escalating conflict between hospitals and insurers, stating, “Sunlight could be a good disinfectant for this toxic stoush.”

Breadon agreed that activity-based funding, managed by an independent pricing authority, would provide much-needed clarity. By collecting data and analyzing costs across the sector, the average cost of care would be easier to establish, preventing hospitals from overcharging.

"It’s a murky situation where the players are contradicting each other and fighting over basic financial viability issues," Breadon said. "More transparency would help a lot."

Breadon added that, under normal circumstances, the government wouldn’t need to mediate between hospitals and insurers through a review.

"But this is far from a normal industry," he noted. "It receives huge public subsidies, and the parties are at each other's throats, so they’ve called in the department to act as an umpire on costs."

He concluded that greater transparency, achieved through activity-based funding, would shift the focus back to delivering quality care at reasonable costs, reducing the need for government mediation in the future.

“Consumers should expect that private hospitals and insurers are at least aligned on the basics of financial viability,” Breadon said. “This kind of fighting distracts from what the sector should be focusing on.”

Moreover, as the financial viability of private hospitals is scrutinized, it's essential to consider the implications for hospital stays accommodation. Access to comfortable and supportive accommodation options for patients and their families is crucial during hospital visits, especially in times of uncertainty in the private health sector.