Australians are stuck paying more for care under a private hospital system that’s struggling to cope with rising costs and changes in the types of procedures patients want, experts warn.

Health Minister Mark Butler is preparing a review into the sector examining how to stem a tide of private hospital closures in recent years, with advocates saying the sector is at a breaking point.

Hospital operators are pointing the finger at insurers, which they argue are posting huge profits as the system struggles, while the major health funds claim hospitals are being run inefficiently.

Consumers, meanwhile, are being hit with soaring health insurance premiums post-pandemic and a reduction in the availability of care as operators shutter key services like maternity wards.

Professor Francesco Paolucci at the University of Newcastle says the situation has become so bad it threatens to affect the broader public health system too, underscoring a need for reform.

“These issues have been going on for a long time. It’s structural and it’s not the private sector only, it’s really about the design of our healthcare system overall,” Paolucci told The New Daily.

“Prices in health care are going up.”

Private hospitals at ‘breaking point’

The federal government is undertaking an urgent review into private hospitals as dozens of closures since Covid-19 spark fears that the system is about to buckle under financial stress.

Katharine Bassett, director of health policy at Catholic Health Australia – a group of health providers that are responsible for 63 private hospitals – says the sector is at a “breaking point”.

“Over the past five years we’ve seen over 70 private hospital services close,” Bassett said.

“It has a huge impact on communities and puts the burden onto the public hospital system.”

CHA has taken aim at major health insurers over the state of the sector, arguing big brands like Medibank, Bupa and nib are posting billions in profits at the expense of healthcare outcomes.

Analysis they published last week found the industry reported after-tax profits of $2.2 billion in the 2022-23 financial year, a doubling on the prior year as consumers paid higher health premiums.

The group is arguing that just 83 per cent of revenue from premiums is being returned to patients, short of a 90 per cent standard set by the industry in partnership with regulators.

“We want that funding to flow from insurers into hospitals,” Bassett said.

“And we want insurers to be giving more back.”

Representatives for the insurance industry have sought to counter claims they are squeezing the private hospital sector, instead arguing that many private hospitals are being run inefficiently.

University of Technology Sydney associate professor Nathan Kettlewell said there’s a “natural tension” between health funds and hospital operators and that both groups make relevant points.

He explained there has been an increase in what are called “gap payment rates”.

That’s the difference between what a patient pays and what hospitals get back from insurers.

“There’s an increase in the number of policies that are being sold that have exclusions and so don’t cover all the procedures that have occurred in private hospitals,” Kettlewell told TND.

“That means patients going into the private system are paying an increasing amount out of pocket or the hospital has to adjust its costs.”

But that can also mean some claims which are inefficient in the context of the broader healthcare system are discouraged by insurers, Kettlewell explained.

“We do know private hospitals are still doing some surgeries that could be considered low-value care,” he said.

Hospital squeeze

Either way, what is clear is that consumers are increasingly being expected to pay more for a healthcare system that is increasingly struggling to keep up with demand after the pandemic.

The government approved an increase in health premiums on April 1 of about 3 per cent, but consumer group Choice says many insurers have raised prices several times that figure.

And regardless of disagreements between hospitals and insurers about whether there’s price gouging, both sides of the debate agree the cost of providing health care is rising.

Paolucci explained that the problems facing private hospitals are really a whole healthcare system issue that also encompasses public hospitals and that the two can’t be separated.

One big problem is the medical workforce, which he said isn’t keeping up with rising demand, resulting in labour shortages that make it more expensive to run a hospital and administer care.

“When you have scarce resources prices tend to go up, naturally,” Paolucci said.

“Our fundamental system does not allow natural growth of [healthcare] professionals .. supply is not responsive enough.”

Kettlewell agreed that workforce concerns are a key issue causing cost pressure for private and public hospitals, suggesting it could even get worse as Australia’s demographics change.

“We’ve got an increasing demand for healthcare services because we’ve got an ageing population,” Kettlewell said.

“As you live the more things go wrong with your body, so you’ve got these dual problems.”

But he also said that private hospitals in particular are under increased strain because of changes in demand for surgeries since the pandemic.

“There’s been continuous years of very low growth in the number of private hospital admissions. People aren’t using the system as much.

“And there’s been changes in the mix of services … over the past five years there has been a decline in the number of long admissions. They’re doing more day surgeries.

“Those things are definitely impacting the bottom lines of private hospitals.”

Structural dilemmas

Although insurers and hospitals want the government to step in and back reforms that shift the balance of power – and revenue streams – in the industry, experts said wider change is needed.

To improve workforce issues, Paolucci said lowering barriers (such as costs) for Australians and migrants to become qualified nurses and doctors is crucial.

Kettlewell said innovations like team-based health care could make existing workers more efficient as demand increases.

Paolucci also said the federal government must look at health insurance models used in European nations like the Netherlands and Germany, where patients have more cost certainty.

In Australia patients pay insurance premiums each year, but cannot know how much they will be out of pocket if they actually use that cover for a surgery until after it has been completed.

A consumer “guarantee” of costs would lower complexity for consumers while also providing hospitals more certainty about their funding, helping to alleviate issues with insurance funds.

“That could mean having products that cover the pool amount of an individual cost for an intervention with complete disclosure of excess amounts,” Paolucci said.

“That will bring certainty in the relationship between insurers or providers.”

Kettlewell said consumers face considerable uncertainty when buying insurance in Australia.

“You don’t know who your health insurer has negotiated contracts with or what prices they’ve negotiated for different types of services,” he said.

“It’s a mystery what your bill is going to look like.”

But delivering better certainty has to be done carefully, he said, to ensure hospitals still have an incentive to prevent unnecessary costs.

“If insurers are compelled to pay out a full amount to a doctor you don’t really need to cost minimise,” Kettlewell said.