How to end the private hospital blame game
by Peter Breadon
The federal Department of Health will soon finish a “health check” of private hospital finances. Warnings of an emerging crisis sparked the review, with private hospital closures, claims that more hospitals are on the brink of collapse, and high-profile disputes between private hospital companies and health insurers.
About 70 private hospitals have closed since 2019, but almost as many have opened, reportedly leaving only a reduction of four. Private hospitals claim their costs are rising faster than the funding they get from insurers. Insurers have argued that too many beds, the wrong mix of care, or inefficiency are really to blame.
There are many reasons private hospitals might be under pressure, and those will differ from case to case. Private hospital occupancy is low, and some companies have probably built more beds than the market needs. Some companies have big debts, which interest rate rises have made more costly. And shorter stays, more home-based care, and workforce shortages are squeezing profit margins for some companies.
But whatever the truth, when a special review is needed to stop an industry tearing itself apart, it points to a deeper problem.
The Federal Government and patients spend about $20 billion a year on private hospitals, but the truth about the cost of that care is murky. As a result, the insurers and private hospitals can both claim they are being ripped off, and patients and taxpayers don’t know whom to believe.
One solution the Department of Health is reportedly considering is “activity-based funding” for private hospital care. That’s how funding for public hospitals is set today. Essentially, the cost of care for an average hospital is calculated. Then hospitals are paid that “nationally efficient price”, with adjustments for the type of patients they treat, and the type of care they provide.
That means costly hospitals have a financial shortfall, and cheaper hospitals get a surplus. It gives hospitals an incentive to reduce costs, especially hospitals that are unusually expensive. Since it was adopted nationally in 2012, activity-based funding has worked, driving down public hospital costs dramatically.
The Grattan Institute has proposed activity-based funding for private hospitals. It would short-circuit the rancorous conflict in the sector, and, as it has in public hospitals, it could help reduce costs.
Today, private hospitals can increase their revenue by gold-plating care and sending the bill to insurers and patients. For example, after adjusting for patient complexity, people stay a lot longer in private hospitals than they do in public hospitals. While that increases costs, it doesn’t always help patients recover, and it puts them at risk of infection and injury. Activity-based funding would encourage hospitals with unusually long stays to send patients home sooner, which could lead to lower insurance premiums.
But unlike for public hospitals, the national efficient price would be a floor, not a ceiling. Insurers would have to pay it as a minimum, ensuring the average private hospital remains financially viable. But private hospitals would be free to argue for a higher price. They would have to persuade insurers that they have higher costs for a good reason, such as providing higher-quality care.
Like any method of funding care, activity-based funding has drawbacks that need to be managed. It doesn’t work well for small rural hospitals with higher costs, which would need to be funded differently. And, like the funding approach for private hospitals today, it doesn’t reward quality of care, or keeping people out of hospital.
Many other policies are needed to make sure private hospitals patients get good care, while taxpayers get a good deal for their billions in direct and indirect funding. But a fair minimum price, set by an independent umpire, could put a stop to all the shouting. Then the sector and the government could focus on improving quality and value, instead of debating cost.