Is there a policy reform black hole in the private health sector?

MedTech & Diagnostics News: Australia’s private hospitals are facing a crisis of sustainability. Despite accounting for a significant portion of hospital beds and providing essential acute care and surgical services, a staggering 70% of private hospitals are are bleeding money or barely staying afloat.

According to recent data, private hospitals constitute 36% of all hospital beds in Australia and are responsible for 40% of acute care services and 60% of surgeries.

The Australian Private Hospitals Association (APHA) has voiced grave concerns about the current state of affairs.

“The cost of food, power, medical supplies, and medical technology have increased by an estimated 10% to 15% in the last year,” said APHA CEO, Michael Roff. “At the same time, health insurance companies are only offering hospitals increased payments in the order of 2% – 3%.”

Recent trends in the insurance sector add complexity to the issue. Prior to the COVID-19 pandemic, insurers were grappling with dwindling participation rates and escalating costs. However, the pandemic has brought about unexpected growth, with private health insurers witnessing 13 consecutive quarters of membership expansion. This surge in membership has translated into record profits for many for-profit insurance companies.

Yet, while insurers thrive, private hospitals languish. The gap between revenue and costs for private hospitals narrowed to a mere 0.8% in 2021-22, indicating financial strain. If the situation has deteriorated since then, as many fear, it signals an impending crisis for these institutions.

Faced with mounting losses, private hospital operators find themselves at a crossroads. They must choose between hiking up out-of-pocket costs for patients, further slashing costs which could compromise the quality of care, or worst-case scenario, shutting down altogether.

Critics argue that a significant portion of the blame lies with the private health insurance industry itself. While Medicare, the public insurer, boasts administrative costs of 3.4%, private insurers have seen their administrative expenses skyrocket in recent years, reaching 21.75% in 2021-22. Top executives of private health insurers are earning over $1 million a year each, and CEOs well over $3 million. For example, Medibank’s top four executives were paid $17.45 million package in total in 2022 with much of their pay is linked to company profit and share price.

“Increasing CEO pay is not actually linked to an increase in the value of CEOs’ work,” found a report from the US-based Economic Policy Institute. “Instead, it is more likely to reflect CEOs’ close ties with the corporate board members who set their pay.”

The Commonwealth Government’s involvement in promoting private health insurance adds complexity to the issue. Concerns have been raised about the potential conflict of interest stemming from the Department of Health and Aged Care’s dual role as policymaker and regulator.

Calls for reform are growing louder. The Australian Medical Association (AMA) has proposed the establishment of an independent Private Health System Authority in its pre-budget submission to oversee the private healthcare sector. The Medical Technology Association of Australia (MTAA) has thrown its weight behind the proposition along with other stakeholders including the APHA.

This authority would ensure that the interests of patients, hospitals, insurers, and other stakeholders are balanced effectively. It would come with a price tag of approximately ~$30.5 million annually in government funding, alongside an additional cost of $10.6 million for its establishment.

“Private health policy has been on the ‘set and forget’ mode for some time now, meaning the system is falling behind changing customer needs and demographics,” AMA President Professor Steve Robson said.

As discussions surrounding the future of private healthcare intensify, a crucial recommendation has emerged to address a glaring gap in policy. Currently, there is no directive regarding the proportion of premiums that should be returned by private health insurers as health services. To enhance the value proposition of private health insurance, the AMA proposes the implementation of a mandated minimum return amount of 90% to benefit consumers. Such a standardised return would surpass the current industry average, providing greater transparency and value to policyholders.

“There is currently a policy reform black hole in the private health sector, leading to a system that doesn’t properly balance the needs of hospitals, medical device manufacturers, doctors, insurers, and most important of all – patients,” Professor Robson emphasised.

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