Dr Rachel David: Let’s get real about what’s ailing private hospitals


By Private Healthcare Australia CEO Dr Rachel David

If recent media reports are to be believed, the financial woes of some private hospitals could be solved if health funds were to pay them more. If only it were that simple.

There is no doubt some hospitals are doing it tough as a consequence of the pandemic and its second order economic impacts. Inflation, mostly driven by increasing labour costs is putting the squeeze on margins.

Data from the Australian Institute of Health and Welfare shows there has been a decline in private hospital admissions, but this is off the base of a period of significant expansion of private hospital capacity. Since 2018, private hospitals have added 3,400 beds, while the public sector has only added 1,200. There has been a slight uptick in the number of closures, but this has been offset by new beds opening up.

To get to the root cause of why some private hospitals are struggling, we must be clear on why building new hospitals and adding beds is a bad idea in the current economic climate.

There are several major trends impacting the private hospital sector and they aren’t confined to Australia.

The first is a chronic shortage of health workers, particularly in regional areas. Private hospitals rely on medical specialists to refer patients to them. If there are not enough specialists in a region, there’s not enough demand for private hospital services.  

There are multiple drivers for this workforce shortage, and no quick fix. Many health workers burnt out during the pandemic and moved into other jobs, and the pipeline of skilled migrants we’ve relied on to bolster our health workforce dried up during COVID-19. Migration is slowly recovering but there’s fierce global competition for skilled workers.

Further, a 2023 survey by the Medical Board of Australia found one in five trainee doctors were thinking of leaving their jobs, others opting for part time or taking up side-hustles – a trend that’s likely to stay. 

These workforce trends are contributing to private hospital closures. In February, Dr Neale Fong, the CEO of Bethesda, a psychiatric hospital closing in Perth, highlighted this problem on ABC radio. The 75-bed hospital, built during the pandemic, has never had more than 27 patients at one time.

“To get into a hospital, you need to come under the care of a private specialist, in this case a psychiatrist… If they’re not willing to actually do the inpatient work, which is now unfortunately a national trend around Australia, where psychiatrists are more than happy just to stay in their outpatient rooms and do consultations rather than do the heavier lifting of inpatient care, then [patients can’t be admitted],” he said.

Even if health funds were paying private hospitals more for psychiatric services, those hospitals would likely be unsustainable. The workforce and referrals they need would simply not be there.

Constraints on workforce supply, general inflation and the rapid release of money into the economy during the pandemic have driven an increase in out-of-pocket costs. Heath funds are unable to chase this without putting premiums up, and it is dampening demand for inpatient care.

The other major headwind for private hospitals is a global shift towards out-of-hospital care, shorter stays and new “hospital in the home,” services aided by wearable technology and new pharmaceuticals. New, evidence-based care models for mental health, addictions and rehabilitation emphasise in-home care over inpatient treatment.

This is great news for patients. Shorter hospital stays with better outcomes lead to a reduced burden of treatment. On a global scale, Australia has been slow to embrace this trend but consumers – and many doctors – are now demanding for more convenient healthcare. Australians don’t want to sit in waiting rooms to receive cancer treatment or kidney dialysis if it can be done safely in their own home.

This is disrupting private hospitals’ traditional business model. But critically, out-of-hospital care is helping more patients get better treatment.

Health funds are walking a tightrope between keeping premiums as low as possible to support members facing cost of living pressures, while providing adequate funding for hospitals and frontline health workers to deliver quality care. 

There is no evidence health funds are ‘tightening the screws on payouts’ to private hospitals as has been reported. In fact, the opposite is true, and payments are at an all-time high.

Inflation is driving up the cost of everything health funds pay for as well. Over the past twelve months, health inflation rose 5.1%, with medical and hospital services (+6.5%) being the main contributor. The latest APRA report shows benefits paid by health funds in 2023 totalled $23.6 billion, an increase of 10.2% over the previous year.

Consumers ultimately pay for increasing health care costs through their premiums. This year’s premium of 3.03% is well below inflation. The Government and regulators decide the premium increase, based on actuarial input and forecasts from health funds. Health funds do not hold the pen on this process.

Health funds are acutely aware that some private hospitals, like many sectors across the community, are struggling. It’s in the interests of health funds and their members to find a solution. 45% of Australians have hospital cover, they want to be confident they can access high quality private hospital care where and when they need it. But there are many factors outside the control of health funds. Healthcare is changing and it’s a global phenomenon. The solutions are likely to be far more complex than short term funding increases.