Saving private health must start at the hospital

by Stephen Duckett

Published at the Australian Financial Review, Tuesday 26 November

If you have a baby in a private hospital, you stay about a day longer than if you had the baby in a public hospital. The same is true for a hip replacement. In fact, the same is true for any procedure requiring an overnight stay.

If this was simply the private hospital ‘value proposition’ and was simply a matter of private choice and private cost, it would not be a matter of public policy and taxpayer interest. But subsidies to private health insurance cost taxpayers $6 billion dollars a year, and a further $3 billion of annual subsidies are provided for medical costs in hospitals.

So taxpayers have an interest in ensuring private hospitals are less wasteful and more efficient.

Private health insurance in Australia is facing a death spiral. Rather than respond to the youth exodus from private cover by calling for more government handouts, the industry needs to face up to its weaknesses and improve its product. If private hospitals improved their efficiency, that would drive down the costs of private care and that, in turn, would drive down private health insurance premiums.

The relatively relaxed approach by private hospitals to how long their patients stay needs to be challenged. There should be sharper incentives on private hospitals to force them to lift their game.

A new Grattan Institute report, Saving Private Health, recommends extending the same system that has been used to pay for public hospitals for years to private hospitals. This system – known as activity-based funding – involves an independent arbiter setting a fair price for each diagnosis-procedure combination. It has driven big improvements in public hospital efficiency and will do the same for private hospitals.

We recommend that the fair price set by the independent arbiter be used by private hospitals to issue a single bill to patients for all the care covered by the price. Gone will be the deluge of separate bills from the surgeon, the anaesthetist, the radiologist, and the candlestick maker. There should be no separate bills for prostheses either.

Our report shows that private patients had to pay more than $750 million in out-of-pocket costs to specialists in 2018-19 for in-hospital medical care. Giving patients a pamphlet explaining how they might negotiate the costs of their treatment won’t reduce that amount materially. Nor will another helpful industry or government website. Both strategies deflect responsibility for reining in outrageous billing from those who can do something about it – the government, hospitals or doctors themselves – to patients who have no power.

Private hospitals should do the negotiating with the specialists that they accredited to their facility about what the specialist proposes to charge patients. The hospital should let patients know up front – that is, when the patient arranges an admission date – the full amount the patient will have to pay. This should mean the end of the surprise bills that so annoy patients and contribute to people’s dissatisfaction with private health insurance.

Because private hospitals would be paid a fair price by private health insurers for each admission, with the price including medical costs, the hospital would have a financial incentive to get doctors to be reasonable in their bills.

The Grattan report also identifies that there is a lot of unnecessary admissions to private hospitals, for example unnecessary knee arthroscopies and unnecessary hysterectomies. This unnecessary care, which has no apparent benefit for the patient, costs the private health system and taxpayers. It also drives up the costs of premiums for everyone with insurance, because private insurers are forced by government regulation to pay for these operations, whether they are necessary or not. It’s got to stop.

Similarly, there has been massive growth in the number of rehabilitation admissions to private hospitals, significantly faster than growth in the number of procedures, or in the number of rehabilitation admissions to public hospitals. We recommend that private insurers should be able to seek approval not to pay for unnecessary care.

Inefficiency and low-value care – or indeed no-value care – adds $2 billion to the cost of private care every year. Eliminating that waste could lead to reductions in private health insurance premiums of 7-to-10 per cent.

It’s time to shake-up private health, to help the industry face its future.