Australian Private Hospitals Urge for Reform Amid Declining Profitability, But Experts Question Data’s Accuracy

Department of Research, Strategic Studies and International Relations01-11-2024

Australia’s private hospitals are sounding the alarm on their financial stability, citing a recent federal review that they argue underscores an urgent need for structural reforms in the relationship between healthcare funders and providers. However, questions about the credibility of the voluntary financial data collected for the review have sparked debate among experts.

The Department of Health initiated the “Private Hospital Sector Financial Health Check” in June to assess the sector’s financial sustainability. This move followed ongoing contract disputes between private hospitals and health insurers that raised concerns about potential cost increases for patients. Rising operational expenses further compounded the sector’s challenges.

On Friday, the department released a summary of its findings based on financial data from 243 out of 647 private hospitals, covering 58% of private hospital discharges and 63% of revenue for 2022–23. However, the full report remains confidential, in line with the conditions under which hospitals provided their data.

Key findings showed a concerning trend: from the 2018-19 to 2022-23 period, the average EBITDA (earnings before interest, tax, depreciation, and amortization) margins for private hospitals fell from 8.7% to 4.4%. Despite this, the department estimated that the sector’s average EBITDA margin could range between 7% and 8% for the 2022-23 period, based on publicly available data.

Yet, some experts argue the review’s data may be skewed. Charles Maskell-Knight, a former senior health official, raised concerns over a potential selection bias, suggesting that more profitable hospitals may have opted out of the voluntary submission process, potentially lowering the perceived profitability of the sector. This absence of complete data, he argued, complicates an accurate assessment of whether the industry faces a genuine crisis.

The review highlighted maternity and mental health services as areas of particular concern, noting that these services are increasingly challenging to sustain. Australian Medical Association (AMA) President Dr. Danielle McMullen expressed similar concerns, noting that hospitals across the country have been forced to close or reduce services in critical areas, including obstetrics and mental health, due to financial constraints.

Additional analysis of national cost data collections indicated that private hospital expenses have been rising at a compound annual growth rate of 4.1%, while revenue growth lagged at 2.9% from 2018-19 to 2021-22. Australian Private Hospitals Association CEO Brett Heffernan remarked on the stark disparity, stating, “This does not add up to a profitable sector, let alone one able to keep its surgery doors open.”

Compounding the issue, Heffernan pointed out, is the increasing profitability of health insurers. In 2022-23, health insurers reportedly doubled their profits from the previous year, reaching $2.2 billion. This profit surge followed a 3% increase in premiums, creating further pressure on private hospitals, he explained.

Responding to the review’s findings, Health Minister Mark Butler announced the creation of a Private Health CEO Forum. This initiative will bring together leaders from private hospitals, health insurers, and other key stakeholders to discuss both short- and long-term solutions to bolster the sector’s sustainability. Butler underscored the essential role of private hospitals within Australia’s healthcare ecosystem but emphasized that the government is unlikely to introduce taxpayer-funded support, highlighting instead the need for market-driven solutions.

Heffernan cautioned that if more private hospitals shut down, the burden would fall on the already strained public healthcare system, which is grappling with extensive waitlists. He emphasized the need for decisive action rather than prolonged discussions, stating, “We are long past the need for answers, not more discussion.”

The AMA has welcomed the government’s efforts and reiterated its call for a comprehensive reform body, suggesting an independent Private Health System Authority to ensure the viability of private healthcare and address ongoing issues effectively.

In conclusion, while the financial health review has spotlighted significant challenges within Australia’s private healthcare sector, discrepancies in the voluntary data have led some to question the urgency of the crisis. As the Private Health CEO Forum begins its discussions, the hope is for innovative, sustainable solutions that can stabilize and strengthen the sector for the long term.