A battle between private hospitals and private health insurers is playing out in public.

At its heart is how much health insurers pay hospitals for their services, and whether that’s enough for private hospitals to remain viable.

Concerns over the viability of the private health system have caught the attention of the federal government, which has launched a review into private hospitals that has yet to be made public.

But are private hospitals really in trouble? And if so, is more public funding the answer?

Private hospitals vs private health insurers

Many private hospital operators have reported significant pressures since the start of the COVID pandemic, including staff shortages.

Inflationary pressures have increased the costs of supplies and equipment, pushing up the costs of providing hospital care.

Now, private hospitals have publicised their difficult contract negotiations with private health insurers in an attempt to gain support and help their case.

Healthscope, which runs 38 for-profit private hospitals in Australia, has been threatening to end agreements with private health insurers.

St Vincent’s, which operates ten not-for-profit private hospitals, announced it would end its contract with nib (one of Australia’s largest for-profit health insurers) but then reached an agreement.

UnitingCare Queensland, which operates four private hospitals, announced it would end its contract with the Australian Health Service Alliance, which represents more than 20 small and medium non-profit private health insurers. Since then, the two parties have also kissed and made up.

Why should we care?

There are three reasons why viability of the private health sector affects us all, regardless of whether we have private health insurance or use private hospitals.

1. Taxpayers subsidise the private health system

Australian taxpayers subsidised private health insurance premiums by A$6.3 billion (in premium rebates) in 2021–22. Much of this makes its way to private hospitals. Medicare also subsidised fees for medical services delivered for private patients in private and public hospitals to the tune of $3.81 billion in 2023–24.

But when the going gets tough, the private health sector (both hospitals and health insurers) turns to the government for more handouts.

So we should be concerned about the value we currently get from our public investment into the private health system, and if more public investment is warranted.

2. Public hospitals may be affected if private hospitals close

Calls for greater government support for private health have long argued that a larger private hospital sector would help reduce pressures on the public system.

Indeed, this was the justification for a series of incentives introduced from the late 1990s to support private health insurance in Australia.

However, the extent of this is hotly debated. Recent evidence shows higher private health insurance coverage leads to only very small falls in waiting times in public hospitals.

While it is possible the closure of a few private hospitals might lead some patients to seek care in public hospitals, this shift might not be that large and will not increase waiting times too much.

3. Fewer private beds, but is that a bad thing?

If unviable private hospitals close or merge, we’d expect to see fewer private hospital beds overall.

Fewer private hospital beds is not necessarily bad news. Mergers of small private day hospitals, in particular, might make them more efficient and lead to lower costs, which in turn lowers health insurance premiums.

We might also need fewer private beds. This is due to policies that try to shift health care out of hospitals into the community or the use of hospital-in-the-home schemes (where patients receive hospital-type care at home with the support of visiting health staff and/or telehealth). The private health insurers are supporting both.

If a few small private hospitals close, this reflects the market adjusting to less demand for hospital care. Some of the closures have been for maternity wards but with falling birth rates, this also seems like an appropriate market adjustment.

What do we know?

Any objective data about what is happening in the private hospital sector is scarce. This is mainly because the Australian Bureau of Statistics has stopped a compulsory survey of all private hospitals. The latest data we have is from 2016–17.

Health insurers are the largest payer of private hospitals and hence wield a considerable amount of negotiating power. In 2016–17, almost 80% of private hospitals’ income came from private health insurers. Health insurers have also increasingly become “active” purchasers of health care – not just passively paying insurance claims, but wanting to strike a good deal with private hospitals for their members to keep premiums (and costs) down, and profits high.

Reports of hospitals closing ignore hospitals that are opening at the same time. But since 2016–17 there are no publicly reported data on the total number of private hospitals in Australia or changes over time.

The latest figures we have show about half of all hospitals in Australia are private, and of these 62% are for-profit with the rest run by not-for-profit organisations (such as St Vincent’s).

The main for-profit providers are Ramsay Health Care and Healthscope. Both have operations overseas and were in trouble before the COVID pandemic.

Fast-forward to 2024 and the recent issues with contract negotiations suggests the financial situation of for-profit private hospitals might not have improved. So this could reflect a long-term issue with the sustainability of the private hospital sector.

What are the options?

The private health system already receives large public subsidies. So the crux of the current debate is whether the government should intervene again to prop up the private sector. Here are some options:

• do nothing and let this stoush play out Closure and mergers of private hospitals might be good if smaller hospitals and wards are no longer needed and patients have other alternatives

• introduce more regulation Negotiations between small groups of private hospitals and very large dominant private health insurers may not be efficient. If the insurers have significant market power they can force small groups of private hospitals into submission. Some private hospital groups may be negotiating with many different health insurers at the same time, which can be costly. Regulation of exactly how these negotiations happen could make the process more efficient and create a more level playing field

• change how private hospitals are paid Public hospitals are essentially paid the same national price for each procedure they provide. This provides incentives for efficiency as the price is fixed and so if their costs are below the price, they can make a surplus. Private hospitals could also be funded this way, which could remove much of the costs of contract negotiations with private hospitals. Instead, private hospitals would be free to focus on other issues such as the number and quality of procedures, and providing high-value health care.

What next?

Revisiting the regulation of prices and contract negotiations between private hospitals and private health insurers could potentially help the private hospital sector to be more efficient.

Private health insurers are rightly trying to encourage such efficiencies but the tools they have to do this through contract negotiations are quite blunt.

As we wait for the results of the review into the private hospital sector, value for money for taxpayers is paramount. We are all subsidising the private hospital sector.

Anthony Scott, Professor of Health Economics and Director, Centre for Health Economics, Monash Business School, Monash University and Terence C. Cheng, Associate Professor, Centre for Health Economics, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.