In recent years, a growing standoff between private hospitals and health insurers has come to the forefront of Australia’s healthcare sector. At its heart is a disagreement over how much health insurers should pay hospitals for their services, a conflict that threatens the viability of private healthcare facilities across the country. This brewing crisis has caught the attention of the federal government, prompting a review into the future of private hospitals—a report that has yet to be made public.
But what is fueling this dispute, and are private hospitals really at risk of collapsing? If so, is more public funding the solution, or are there deeper structural problems at play? As this battle unfolds in the public eye, it is important to understand the broader context and implications, both for those who rely on private hospitals and for taxpayers who indirectly fund the private health sector.
The Pressures Facing Private Hospitals
Private hospitals have been facing growing financial pressures, exacerbated by several factors that have intensified since the start of the COVID-19 pandemic. Among the most significant are:
- Staff shortages: The pandemic caused a wave of healthcare workers to leave the profession, putting immense strain on hospital staff and pushing many facilities to operate with fewer resources.
- Inflation: Inflationary pressures have significantly increased the cost of medical supplies, equipment, and general operations. These rising costs are making it harder for hospitals to break even, let alone turn a profit.
- Difficult negotiations with insurers: Private hospitals are increasingly vocal about their struggles in contract negotiations with health insurers, who are looking to limit payouts while hospitals seek to cover their rising costs.
Healthscope, one of the largest for-profit hospital operators in Australia, with 38 hospitals nationwide, has publicly threatened to end its agreements with private health insurers. Similarly, St Vincent’s, a not-for-profit operator running ten private hospitals, recently made headlines for nearly terminating its contract with nib, one of Australia’s major health insurers, only to later reach a resolution.
Meanwhile, UnitingCare Queensland, which runs four hospitals, announced its intention to end its contract with the Australian Health Service Alliance before eventually renegotiating terms. These public disputes indicate the growing tension between private hospitals and insurers, both of which are competing for larger shares of a limited financial pool.
Why Private Hospital Viability Affects Us All
The viability of the private health sector isn’t just a concern for those who use private hospitals or have private health insurance. It affects all Australians, and for three key reasons:
- Subsidies: Taxpayers heavily subsidize the private health system. In 2021–22, the federal government provided A$6.3 billion in premium rebates for private health insurance, much of which flows to private hospitals. Medicare also subsidized A$3.81 billion in medical services delivered to private patients in both private and public hospitals in 2023–24.
- Pressure on the public system: Advocates of the private health sector have long argued that a robust private hospital system helps ease the burden on public hospitals by providing alternative care options. If private hospitals were to close or shrink, the strain on public healthcare facilities could increase.
- Calls for more government support: When private hospitals face financial difficulties, they often look to the government for additional subsidies. This raises questions about whether the current level of public investment in the private health sector is delivering good value for taxpayers—and whether further government intervention is justified.
Government Support and Its Limits
Historically, government support for the private health sector has been framed as a way to reduce pressure on the public hospital system. From the late 1990s, a series of incentives was introduced to encourage Australians to take out private health insurance. The logic was that a larger private hospital sector would reduce waiting times and ease capacity issues in public hospitals.
However, this premise is increasingly being questioned. Recent studies suggest that even with higher private health insurance coverage, reductions in public hospital waiting times have been minimal. While it’s true that the closure of some private hospitals could drive a portion of patients to seek care in public hospitals, the overall impact might not be as significant as previously thought.
In fact, fewer private hospital beds could even be beneficial in some cases. Mergers of smaller day hospitals, for instance, might lead to more efficient operations, lower costs, and ultimately, reduced health insurance premiums. This shift towards efficiency is already supported by private health insurers, who are promoting models such as hospital-in-the-home schemes, where patients receive hospital-level care at home, reducing the demand for hospital beds.
- Market Adjustments: Is Less Always Worse?
A reduction in the number of private hospitals doesn’t necessarily spell disaster. If the market adjusts by closing or merging smaller hospitals, especially those that are no longer viable due to falling demand, the overall system could become more efficient. For example, maternity wards in private hospitals have been closing in some areas, but this coincides with falling birth rates in Australia—a reflection of the market responding to demographic changes. - There is little recent data to gauge the extent of closures or the precise number of private hospitals currently operating. The Australian Bureau of Statistics (ABS) stopped its compulsory survey of private hospitals after 2016–17, leaving a significant gap in objective data. The last available figures show that nearly half of all hospitals in Australia were private, with 62% of these being for-profit institutions.
- The Power Dynamic Between Hospitals and Insurers
One of the core issues in this ongoing battle is the power imbalance between private hospitals and health insurers. In 2016–17, nearly 80% of private hospitals’ income came from health insurers, who now wield substantial negotiating power. Health insurers have moved beyond simply paying claims—they are now active purchasers of healthcare, seeking to strike favorable deals to keep premiums low while maintaining profitability.
This shift has led to an increasingly tough negotiating environment for hospitals, especially smaller ones that may be dealing with multiple insurers simultaneously. The process is costly and time-consuming, and many hospitals feel they are being forced into unfavorable terms that further threaten their financial sustainability.
On the other hand, hospitals that are closing often fail to get public attention for those that are opening. New facilities are springing up even as others shutter, meaning the market is in constant flux. This dynamic is often overlooked in the narrative of a sector in crisis.
What Should the Government Do?
As the federal government considers its next steps in reviewing the private hospital sector, there are several possible options on the table:
- Do nothing and let the market adjust: Allowing the closure and merger of private hospitals might not be a bad outcome if it reflects declining demand and increased efficiency. Smaller hospitals that are no longer needed could close without significantly affecting overall access to care, especially if alternative care models, such as hospital-in-the-home, are expanded.
- Introduce more regulation: The power imbalance between a few large insurers and smaller private hospital groups could be addressed through regulatory changes. This could streamline negotiations, making them more efficient and equitable for both parties. Regulation could also ensure that private hospitals aren’t disproportionately squeezed by dominant insurers.
- Change how private hospitals are paid: Currently, public hospitals in Australia are paid a fixed price for each procedure they perform, an arrangement that incentivizes efficiency. Private hospitals could be funded in a similar way, which would reduce the need for costly contract negotiations and allow hospitals to focus on providing high-value care.
The ongoing battle between private hospitals and health insurers raises fundamental questions about the sustainability of Australia’s private health sector. While private hospitals have voiced concerns about their viability, it is unclear whether more public funding is the answer or whether structural changes, such as mergers or increased regulation, are needed.
As the federal government’s review into the sector looms, one thing is certain: taxpayers are heavily invested in the private health system, and ensuring value for money should be a top priority. Whether the solution lies in further subsidies, regulatory reform, or market adjustments, the future of Australia’s private hospitals remains a critical issue that will affect the entire healthcare landscape.
