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There’s only one way to save private hospitals.


Neither party wants to talk about it, but the crisis facing private hospitals – which provide one bed in every three in this country – is a time-bomb waiting to explode under the next government.

Private hospitals are shackled to one dominant income stream – private health insurance. But that arrangement is no longer fit for purpose. If the hospitals are to survive into the long term, that nexus must be broken.

Private health insurance, as the Grattan Institute's Stephen Duckett has pointed out, is in a “death spiral”. Young people are leaving and only the old are still joining. That’s a problem because young people don’t tend to get sick and old people do. The over-70s cost a lot more than the under-30s.

The reason the young are ditching health insurance is no secret and no surprise. They can’t afford it. Over the past 20 years, premiums have soared – and wages haven’t.

Health insurers, though, remain highly profitable. The industry-wide gross margin last year was 14.6%. The behemoths did even better – BUPA’s was 16%, Medibank Private’s was 16.4% and NIB’s was 16.8%.

For the medium term at least, the insurers will be able to maintain their profits by increasing premiums. And those increases are significantly underwritten by the taxpayer through the federal government’s premium rebate scheme – though the federal contribution to funding private hospitals (which includes the rebate) has flatlined for the past decade.

The rebate costs the federal government $6 billion a year. This stopped growing in 2014 and has been falling in inflation-adjusted terms ever since. Only half actually ends up with private hospitals, with the rest going to GPs, specialist consultations, public hospitals and so on.

The heavy lifting is still done by the non-government sector – that is, by individuals paying directly or through their health insurance. Over the decade, the cost to individuals rose by 44% in inflation-adjusted terms despite (for a while) decreasing during the pandemic lockdowns.

The states have become a much more important source of private hospital funding, up 188% over the decade – admittedly from a low base. This reflects the need for state governments to find room for patients who can’t be treated in overcrowded and under-resourced public hospitals.

Insurers control both their revenue and their costs, so will survive. Hospitals control neither and are therefore in peril.

Revenue is dependent on the capacity, or the willingness, of insurers to pay benefits and of policy-holders to pay premiums. As premium revenues fall, so too must benefits.

Hospital costs are determined by factors largely outside the control of operators. Salaries for employed staff (nurses, administrative staff, support workers) are determined by the industrial relations system. The costs of buildings and equipment are set by the supplier. Then there are the doctors.

Doctors, not patients, are the customers of private hospitals. Doctors are not employed by the hospitals: it’s the other way around. Surgeons, anaesthetists and physicians take their custom – and their patients – to the hospital they most like. If they’re unhappy with the one they’re in, they take their business elsewhere. And unlike the public system, private hospital operators have no control at all over what doctors charge their patients.

Nor, in any practical terms, do the patients. Doctors are able to charge whatever the market can bear. And people needing care, and who can’t get it in the overcrowded public system, are prepared to pay quite a lot – if they can afford it. That’s why senior surgeons and anaesthetists can, and often do, earn several million dollars a year. It’s such an embarrassment to the profession that even the Royal Australasian College of Surgeons says it’s not a good look.

But under the current system, nobody has any control – not the hospitals, not the government and certainly not the patients. And it puts strong upward pressure on doctor fees throughout the system – in public hospitals and in general practice.

To maintain viability, hospital operators have increasingly had to cherry-pick patients. Those with conditions that make money for the hospital continue to be treated; those who do not bring enough in are referred to the public system.


As private hospital operators are squeezed harder and harder between costs and revenue, share prices fall and they become vulnerable to opportunistic takeover by the big North American private equity funds. The nation’s second-larges for-profit operator, Healthscope – and its 43 hospitals – was taken over by the Canadian giant Brookfield in 2019. Now Ramsay Health, whose 72 hospitals make it Australia’s biggest operator, is being targeted by KKR, the original “barbarian at the gates” whose assets of $662 billion make it the world’s largest private equity company.

KKR HQ, New York
Private equity companies are a re-branding of the leveraged buyout outfits that got a very bad name in the 1980s. Think Alan Bond, Christopher Skase, John Spalvins, Michael Milkin, Young Warwick Fairfax.

The private equity outfits targeting Australian private hospitals know that the real money  in not in services to patients but in the real estate. By splitting the hospital firms up into separate property operational companies, the patient-servicing elements are separated and become tenants. We can expect these to later be sold separately for a considerable profit. The benefit to Australia is less obvious.


The current system isn’t working, so another must be found. It’s a common theme across the whole of the health system that individuals cannot afford to fund their own care. That was why Medicare and the PBS were established and why Whitlam used federal funding to make public hospitals free. The idea is that if the whole society benefits from adequate and equitable healthcare, it’s reasonable for the whole society to pay for it.

Direct federal funding of private hospital services became Labor policy when Julia Gillard was shadow health minister for the election Mark Latham threw away in 2004. The policy fell away and has never been seen since. But if it was necessary 18 years ago, it’s even more pressing now.

Under such a model, government money would go directly to the hospital operator, rather than to insurance companies. This would allow contracts to be signed with the hospitals that would put them – for the first time – in charge of their own businesses. Doctors would be contracted, in turn, by the hospitals which would have a level of pricing power that individual patients simply do not.

In bypassing insurers, immediate efficiencies of at least 15% would be gained. That money would be far better used in treating patients rather than profiting insurance companies.

Hospital operators would welcome such a scheme but the Australian Medical Association – the most powerful trade union in the country – would fight hard to prevent it. Surgeons and anaesthetists would try to punish hospitals that signed up by taking their business elsewhere, so the scheme would have to be big enough to dominate, giving the doctors less opportunity to call the tune. If the hospital down the road was doing the same thing, there would be no point in moving.

The role of insurers would also need to change, to a parallel model of contracting with hospitals rather than doctors. That may require legislation.

It would not be easy, quick or cheap. But the cost to the country of continued neglect would be far greater.


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