Private hospitals are in trouble. Here’s what this means for public hospitals – and taxpayer dollars

Written by Anthony Scott, Professor of Health Economics and Director, Centre for Health Economics, Monash Business School, Monash University

Every other week there seems to be more bad news for private hospitals. The sale of Healthscope, hospital and maternity ward closures, and fights with private health insurers about funding, suggest they are in financial trouble.

Profitability is declining, especially since the COVID pandemic.

But are private hospitals’ financial struggles putting more pressure on public hospitals? And should governments direct more taxpayer funding to private health care?

How do private hospitals operate in Australia?

Australia has a mixed public and private hospital system. In 2022–23, the latest year for which figures are available, total funding for private hospitals from all sources was $21.5 billion, nearly a quarter of the $85.6 billion spent on public hospitals.

Private hospitals comprise around half (633 in September) of all hospitals in Australia. Three quarters of those admitted to private hospitals stayed less than 24 hours.

Around 70% of all elective surgeries (such as hip and knee replacements and cataract operations) are conducted in private hospitals, and they take 40% of all hospital admissions.

Private non-GP specialists decide who goes to a private hospital, usually after you have seen them in their private rooms.

A composite of a health worker looking stressed

When it comes to public hospitals, everyone seems to be waiting – waiting for emergency care, waiting for elective surgery, waiting to get onto a ward. Private hospitals are also struggling. In this five-part series, experts explain what’s going wrong, how patients are impacted, and the potential solutions. What does ‘going private’ mean for patients? Using the private system generally involves paying additional out-of-pocket costs – and these fees are often not known in advance. For planned care, going private can shorten waiting times, and treatment is usually provided directly by a fully qualified specialist. In contrast, public hospitals typically operate as training hospitals, where care is delivered by teams that include registrars: qualified doctors who are training to become specialists under specialist supervision. It’s often assumed that paying more translates to a higher quality of care, but Australia has no objective data on the performance of non-GP specialists. GPs may offer guidance based on experience, but they also lack objective information about specialist fees and quality. As a result, both the likely costs and the quality of care are often uncertain at the time patients are deciding between public and private treatment. While Australians appreciate having a private system alongside public care, it does create uncomfortable questions about fairness. Private health insurance allows people to jump the queue, while many on lower incomes, who often have greater health needs, find it difficult to access specialist care. Are private hospital pressures affecting the public system? Public hospitals are also struggling. The median wait time for elective surgery in public hospitals has been on a steady upward trend since 2016, apart from spikes during COVID. Ambulances are spending far more hours ramped outside public hospitals than five years ago across every state and territory. Public hospitals frequently run deficits, spending more than they receive in funding. But these pressures aren’t necessarily because patients have shifted away from private hospitals into public hospitals. This does not seem to be the cause of increased pressure on public hospitals. Since 2019, the number of patients in private hospitals has actually grown faster (4.2% per year) than in public hospitals (2.8% per year). Even as the volume of activity is increasing in private hospitals, profits are still falling. The current situation seems to be caused by rising costs in private hospitals, not by people switching to public hospitals. Should funding increase for private health care? Private hospitals, private health insurers and Coalition governments have long argued that taxpayers’ money invested into private health care takes the pressure off the public sector. While the government ruled out a bailout for Healthscope earlier this year, private health insurance rebates from the government already prop up private hospitals. These rebates are already projected to reach A$7.6 billion in 2025. And some insurers have called for even more taxpayer funding to increase these rebates. The simple logic is appealing and understandable to voters: going private will avoid a public hospital admission for you as an individual and keep the waiting list down. But this ignores another simple logic. Investing more in private hospitals rather than public hospitals will increase public hospital waiting lists because there is a fixed number of doctors at any one time. Our previous research suggests that more money invested in private health care rather than public hospitals will mean non-GP specialists spend more time in private hospitals and less time in public hospitals. With total working hours of all non-GP specialists falling over time, more private care means less public care. And despite what many assume, having more people insured privately doesn’t take much pressure off the public system either. Rather than increasing taxpayer subsidies to private health care, increasing funding for the public hospital system, including for doctors to spend more time in the public system, is a more direct and effective way to reduce public hospital waiting times. Read more: Does private health insurance cut public hospital waiting lists? We found it barely makes a dent So how can private hospitals reduce their costs? Many private hospitals are small day-hospitals and may not be operating at full capacity. This is inefficient. Mergers of private hospitals might help reduce costs through economies of scale and scope. The takeover of Healthscope hospitals by other hospital groups may go some way towards reducing costs, if the fixed costs of administration and billing can be spread across more hospitals. However, the ownership of private hospitals by private equity firms, such as Healthscope hospitals, can increase financial risks for the sector as they use specific financing mechanisms, such as selling property and leasing it back, to extract short-term profits. The prices of medical equipment and devices are centrally negotiated and may be too high, according to private health insurers, because the federal government doesn’t negotiate hard enough with medical devices sector. More effective regulation of the contracts struck between private hospitals and private health insurers is another policy option to provide more clear incentives to reduce costs, while also ensuring more certainty on future funding for private hospitals. After years of taxpayer-funded expansion, private hospitals may have hit their limit. To survive and be profitable once again, something has got to give that does not rely on government handouts. Read more from the Hospitals in Crisis series here.

Authors: Anthony Scott, Professor of Health Economics and Director, Centre for Health Economics, Monash Business School, Monash University

Private hospitals are in trouble. Here’s what this means for public hospitals – and taxpayer dollars

How do private hospitals operate in Australia?

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