Department of Health opens dialogue on Code of Conduct for hospital-insurer contracts

The Department of Health is considering proposals for a mandatory Code of Conduct governing contracting between private health insurers and private hospitals, following discussions with Brian Kelleher, Assistant Secretary of Health Systems Strategy Division.

The move comes amid escalating concerns that private hospitals are operating in a market where negotiating power is heavily skewed toward health insurers. This is leaving providers exposed to contracting tactics that disadvantage hospitals and undermine clinician choice.

The previous voluntary framework failed to address these issues. Introduced in 2001, the Voluntary Code was signed by more than 40 registered health funds and approximately 160 hospitals, but ultimately did not deliver meaningful protections.

The Australian Competition and Consumer Commission (ACCC) explained the shortcomings at the time, stating, “With no effective sanctions for breaches of the code it is a ‘toothless tiger’. Mandating with punitive measures for breach is the only viable option to ensure that contract negotiations are conducted in accordance with the Code of Conduct”.

The Australian Private Hospitals Association (APHA), Day Hospitals Australia (DHA), Australian Medical Association (AMA), Catholic Health Australia (CHA) and the Medical Technology Association of Australia (MTAA) have all pushed for a formalised and enforceable code of conduct, arguing that stronger rules are required to restore transparency, consistency and fairness to insurer-hospital negotiations.

Alison Penfold, Nationals Member for Lyne, has backed the push, saying “I urge the Minister, for the sake of Australians, to seriously consider the need for a mandatory code of conduct in contracting between private health insurers and private hospitals.”

Dr Sophie Scamps, Independent Member for Mackellar, also supported the principle of reform, saying “There must be clearer rules set so that opaque contracting disputes do not keep destabilising hospitals, eroding services and limiting patient choice.”

The AMA has raised concerns that doctors are being pressured into restrictive and confidential agreements with health insurers that interfere with clinical decision-making. It warns that these arrangements are affecting treatment choices, rehabilitation pathways, hospital selection and length of stay, creating a system where insurers increasingly influence the care and services available to patients.

The consequences are already being felt across the private hospital sector. Current contracting arrangements have contributed to a structural lack of financial viability for private hospitals, with around 20 hospital closures and the cancellation of 80 services, particularly maternity and mental health units.

The APHA has flagged concerns about insurers issuing “take it or leave it” offers during contract negotiations, warning that such approaches place hospitals under unsustainable financial pressure. On the other hand, CHA has reported that some of its hospitals have waited on late payments of $4 million from insurers due to pre-verification audits, despite the fact those claims could legitimately be audited after payment.

Concerns have also been raised about contracting practices that influence clinical decisions and quality of patient care.

One example involves bundling arrangements and referral penalties. Under some agreements, rehabilitation services are capped, often at just five days, despite patients requiring longer care due to individual circumstances. Hospitals that provide necessary additional services can then face financial penalties from insurers.

In another area of concern, insurers are seeking control over treatment and service expansion. Before a hospital can expand its clinical services to local patients, insurer approval is required. If approval is not granted, insurers will only provide minimum payments for services delivered. Advocates argue insurers should not be deciding what treatments patients can access when those treatments have been determined as clinically necessary by doctors. Their role is to fund the care members require, not restrict services to reduce financial exposure at the expense of patient needs.

A mandatory Code of Conduct, including an arbitration model and greater contracting transparency, is essential to level out the playing field between hospitals and insurers. For DHA, fair contracting would ensure that private health insurers pay hospitals a fixed price for the same procedure, regardless of the hospital size and negotiating power.

Recent reforms in the dairy and sugar sectors point to arbitration mechanisms that encouraged parties to negotiate in good faith and adopt fair contracting practices to avoid unfavourable arbitration outcomes that could set market-wide precedents.

The broader policy objective of the Code of Conduct for hospital-insurer contracts must also be accompanied by restoring the link between health insurer premiums paid by consumers and services funded to pre-Covid levels of 90 cents in the dollar.

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