Private health funding model stifles innovation, fuelling two-tier divide

At the Australian Private Hospitals Association (APHA) National Congress, senior healthcare executives warned that the current funding model is actively blocking health technology innovation, eroding the value proposition of private health insurance, and pushing Australia toward a two-tiered healthcare landscape where paradoxically patients gain faster access to advanced technology in the public system than in private hospitals.

Kevin Falzon, Executive General Manager of the Royal Australasian College of Surgeons (RACS), defended surgeons’ insistence on medical device choice, arguing that differences between technologies can have profound consequences for patients.

“Device choice becomes really important not just for what happens on the operating table, but what happens to that patient five to 10 years down the track,” Falzon said. “A surgeon is often operating in more than one hospital with different products on the shelf at each of those hospitals. The surgeon wants consistency and reproducibility, so the same procedure with the same instrument, independent of where that operating room is located.”

But Cameron Fuller, Chief Financial Officer at Nexus, argued that from the hospitals’ perspective, accommodating extensive surgeon preferences is “very difficult”.

“The variability in private hospitals is a killer in cost,” Fuller said. “Whether it’s fluctuations in volumes or employers switching and changing workflows, any variability is the antithesis of efficiency.”

He pointed to internal reviews showing surgeons using orthopaedic prostheses with dramatically different price points despite producing comparable patient outcomes.

“We can see in the data that there is a wide variation in cost and not necessarily the same variation in clinical outcomes from the patient perspective,” he added.

Attention then turned to the Prescribed List (PL) reforms, which industry leaders argued have missed the point.

“The reform process hasn’t really delivered much else apart from cuts to benefit levels,” said Ian Burgess, CEO of MTAA. Those reductions have totalled roughly $300 million over the past two years, with cumulative savings exceeding $3 billion since the PL reforms were initiated.

“That’s significant cuts in funding to the medtech industry, and direct savings to private health insurers,” he added.

Panellists warned the consequences are becoming increasingly serious. Even after the Therapeutic Goods Administration (TGA) approves a new medical device, patients can still wait five to six years before reimbursement pathways allow private hospitals to adopt it.

Burgess pointed specifically to orthopaedic devices, where the current “two-year rule” and requirements for extensive follow-up data across 250 patients can significantly delay funding approval from insurers.

“Those delays in recognising and reimbursing innovation reduce Australia’s attractiveness as a destination to launch new technologies,” Burgess warned. “That applies to both global companies and Australian companies. Increasingly, Australian innovators are looking to launch overseas and bypass Australia’s private health system entirely.”

No issue exposed the contradictions in the system more starkly than robotic surgery. Panellists agreed robotic-assisted procedures are rapidly becoming central to surgical practice globally, yet Australia’s funding architecture remains structurally incapable of supporting widespread adoption.

“There isn’t a funding mechanism that actually funds hospitals and incentivises hospitals,” Burgess said.

Falzon warned the long-term implications could become existential for Australian surgery.

“If we don’t find solutions, we will get left behind,” he said. “Big medtech companies like Medtronic and J&J have innovated in the laparoscopic space for decades. Most of that investment is now being redirected into robotic and AI technology for surgery, so the technology is not going to progress non-robotically. If we don’t make these moves now, we will have a very different surgical landscape in 10 years’ time.”

Fuller argued robotic-assisted surgery delivers limited efficiency gains for hospital operators, even if it significantly benefits surgeons. Suppliers may provide robotic platforms with minimal upfront capital cost, but recover margins through expensive consumables that hospitals must then negotiate with health insurers to have reimbursed.

Yet, when insurers refuse to fund robotic surgery, the costs do not disappear. They simply shift elsewhere.

“What it meant, though, is that we started seeing larger out-of-pocket costs from the surgeon going to the patient,” said David Du Plessis, Founding Director of Aller Consulting. In other words, the technology remained available, but the financial burden moved directly onto patients.

Perhaps the panel’s most politically charged argument was that ongoing restrictions on medical technology could ultimately undermine the value proposition of private health insurance itself, at a time when insurers are already confronting growing consumer dissatisfaction over rising premiums and escalating out-of-pocket costs.

“I would be horrified to think that I wasn’t getting the best possible device or treatment because of some funding mechanism,” moderator Rachel Hart said.

As the session drew to a close, discussion shifted to value-based care. This is the sector’s long-promised but still elusive objective. Even there, consensus proved difficult. Panellists debated whether meaningful structural reform would require moving away from fee-for-service models altogether, alongside greater transparency around individual clinicians and hospital site outcomes to allow meaningful benchmarking across the system.

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