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SUBMISSION

Solutions to the

growth of private patients

in public hospitals

Healthscope Limited

ACN 144 840 639

22 September 2017

Solutions to the Growth of Private Patients in Public Hospitals page 2

Healthscope Limited

ACN 144 840 639

Level 1, 312 St Kilda Road

Melbourne, Victoria, 3004

Australia

Phone: 03 9926 7500

www.healthscope.com.au

Submission to the Government

Solutions to the growth of

private patients in public hospitals

Healthscope Limited is a publicly listed company,

trading on the Australian Securities Exchange under

the ticker HSO. Healthscope is a leading private

healthcare provider in Australia with 45 hospitals.

Healthscope also operates pathology operations in

New Zealand, Malaysia, Singapore and Vietnam.

http://www.healthscope.com.au/


Table of Contents

1 Executive summary 4

2 Healthscope: Exceptional patient care 7

3 Vital role of private hospitals in the community 11

4 Private patients in public hospitals: A growing industry, driven by states and

territories 12

5 Key issues 14

6 Our findings: Four key drivers fuelling the phenomenon 18

7 Analysis of the Government’s proposed options 27

8 Our Recommendations: Reinforce two core ‘fair and equitable’ objectives in

the new National Health Reform Agreement. Execution requires a

comprehensive approach including an introduction of a cap 31

9 An efficient model of care: Public-Private Partnerships (PPP) 37

10 Appendix 39


1 Executive summary

Healthscope welcomes the Commonwealth Government’s consultation process

reviewing options to curb the growth of private patients into public hospitals.

To inform our view, we commissioned an independent analysis by Ernst and

Young (EY) to look into the drivers which have fuelled the phenomenon.

Our key findings are:

1. The overall funding formula is flawed with public hospitals receiving

disproportionally higher funding for private patients, adding unnecessary

costs to the health system. The analysis found that public hospitals receive

44% higher funding for a private patient ($7,085) compared to a public patient

($4,927). Subsidies and the lack of depth of discount applied by the

state/territories incentivise public hospitals to recruit private patients

2. State and territory Governments have developed a vicious appetite to chase

private patients, inadvertently subsidising the growth of, and further

increasing the demand to build expensive acute care beds

3. Public hospitals have developed questionable processes on ‘private patient

election’

4. Patients are subsidised by the Commonwealth Government’s private health

insurance (PHI) rebate to buy policies covering only public hospitals

In addition to adding pressure on PHI premiums, the inequity of funding drives

the growth of private patients which has resulted in:

Australia ranking below average for “equity of care”

Patients without PHI waiting over twice as long for the same treatment in

public hospitals

Public hospitals breaching Medicare principles of treating patients

according to clinical needs


Additional demand created for state and territory Governments to

establish new and expensive acute care beds

Patients who elect to be treated as a private patient in a public hospital

are not receiving the full value of private healthcare, decreasing the

customer value proposition of PHI

Longer term challenges to the sustainability of our health system

Healthscope urges all Governments and public hospitals to agree to two core ‘fair

and equitable’ objectives, which should be enshrined in the next National Health

Reform Agreement commencing in 2020:

1. All Australians should have access to free public healthcare and be treated

according to their clinical needs, based on longstanding Medicare principles.

Elective surgery waiting time should be equal for patients with or without PHI.

From a fairness point of view, priority should be given to non-insured patients

on the basis that they do not have an alternate option, whereas those who

are privately insured do

2. Funding for patients should be equitable at public hospitals, regardless of a

patient’s PHI status, and incentives which are driving public hospitals to

favour private patients should be eliminated

Our analysis shows the five options presented by the Government will fall short to

meet these two core objectives. Healthscope recommends a comprehensive

approach in addressing the growth of private patients in public hospitals. Specific

measures should focus on the four areas based in our key findings:

1. Remove unfair incentives by fixing the revenue formula and equalise funding

per hospitalisation between public and private patients

2. State and territory Governments should be held accountable for differential

waiting times between public and private patients. There should be increased

transparency on waiting lists, waiting times and bed planning processes.

Penalties should be introduced if Medicare principles are breached


3. Protect patients while they are most vulnerable by tightening procedures for

‘private patient election’ at public hospitals

4. Set minimum standards for PHI products and remove the PHI rebate for junk

and public hospital only policies

Transparency of data from public hospitals is required so the Independent

Hospital Pricing Authority (IHPA), National Health Funding Body, State Treasury

and Health Departments can monitor and adjust funding. A new, independent

body should be granted the power to enforce compliance of Medicare principles.

Rather than immediately removing existing funding, we recommend a transition

process where a cap is introduced based on the current number of private

patients by states and territories’ baselines. Any additional activity above this

cap would not attract any more Commonwealth or states/territories funding.

The cap should be fixed until public hospitals satisfy the two core objectives. As

managers of the public hospital system, the states and territories would be

responsible for distributing different caps to local hospital networks based on the

private hospital options in the community. For example, a higher cap could be

given to rural and regional areas given the relative lack of private providers.

In addition, the increase in private patients in public hospital continues to push up

the demand to build more ‘state-funded’ acute care beds. However, questions

have been raised whether this capital investment would ultimately deliver benefits

to public or private patients, from infrastructure and operational efficiency

perspectives. The EY analysis shows the cost of construction per bed being 57%

higher in public hospitals relative to private hospitals. In addition, it is estimated

that cumulative rental cost of providing services to private patients in public

hospitals across Australia was about $2.9 billion over the past 10 years.

Finally, Healthscope recommends the Commonwealth Health Council ministers

to consider the benefits of public-private partnerships (PPP) and actively

encourage their respective Health, Planning and Infrastructure Departments,

Local Health Networks, to adopt collaborative models when designing plans to

increase or redevelop public hospitals to meet the future demand.


2 Healthscope: Exceptional patient care

Healthscope was established in 1985 and first listed on the Australian Securities

Exchange in 1994, operating three hospitals. Today, Healthscope operates 45

private hospitals across every state and territory in Australia and 63 pathology

laboratories across New Zealand, Singapore, Malaysia and Vietnam. The

company employs over 18,000 people in Australia and has over 17,500

accredited medical practitioners working at our hospitals. Accredited medical

practitioners operate independently and are not generally employed by or

remunerated by Healthscope.

Healthscope’s aim is to provide a healthcare offering synonymous with quality

clinical outcomes and an excellent patient experience. We are committed to

delivering industry leading quality of care for patients and exceptional services for

doctors through our acute care, mental health and rehabilitation facilities and

international pathology laboratories.

Patient-centred care and quality clinical outcomes are core principles of

Healthscope’s operations, and will ultimately underpin our ability to continue to

improve, invest and grow the services we provide our patients. Care that sets

Healthscope apart to sustainably differentiate us from the industry is our ultimate

goal.

In 2016/17, a periodic review of the accreditation of Healthscope’s corporate

office was undertaken. This involved assessment by an independent surveyor of

100 of the most important governance, consumer participation and infection

prevention standards. In the December 2016 survey, Healthscope achieved 51%

“Met with Merit” ratings, exceeding the national average of 2% for corporate

accreditation.

Our strong accreditation record validates the quality of our existing systems and

processes but there is always room for improvement. With the introduction of the

2nd edition of the National Safety & Quality Health Service standards planned for

1 January 2019, we continue to look at ways to better serve our patients and

raise the standard of clinical quality and service across the industry.


Healthscope is committed to transparency in reporting key indicators to highlight

quality clinical outcomes and safety.

Clinical quality can be defined and measured in many ways but at Healthscope, it

is a comprehensive assessment of the many aspects of a patient’s experience.

We help patients make informed decisions by publishing indicators that reflect

clinical quality and safety which we believe will contribute to the patient

experience at our hospitals.

Healthscope is proud to be the first private hospital operator to publish our clinical

performance and health outcome results with MyHealthscope since 2011. We

also continue to look at ways to build on this leadership position by highlighting

our commitment to patient safety and quality clinical outcomes.

The key features of MyHealthscope include:

• Publication of Healthscope’s national rates of quality indicators, as well as

individual hospital rates

• Each indicator is presented with a trend over time (i.e. several years)

• For every indicator, a national benchmark, average or target rate is displayed,

so patients can compare Healthscope’s performance to this rate

• Patients and consumer representatives have been consulted about the

indicator choice and how the website is presented

• Information is provided about how the indicators are collected – a reference

page lists the source information and definitions, if further details are required

• Resources are provided on the web-pages for patients/families e.g. how to

wash your hands

• Healthscope enhances and adds new indicators, where appropriate, to

MyHealthscope on an annual basis

MyHealthscope has received broad commendation across the healthcare

industry, both nationally and internationally, and from public and private

healthcare leaders. No other private Australian healthcare group provides the

same level of detail and volume of quality information to the general public.


As an example, an unplanned return to theatre is a broad indicator of quality. A

way of monitoring the success of surgery is to check whether any patients require

an unexpected second operation during the same admission. A high rate always

requires investigation as it may indicate a wide array of possible problems in

surgical practice and care, such as post-surgical infection, post-surgical bleeding,

poor post recovery care plan, or problem with pre-admission assessment of high

risk patients. Every unplanned readmission case is investigated to improve

patient outcomes and increase quality of care. Healthscope publishes this

indicator for every hospital on MyHealthscope.

Healthscope is committed to continuously improving on providing quality clinical

care to patients, minimising risks, and fostering an environment of excellence in

care. Clinical governance refers to accountability for standards and performance

in relation to clinical care and requires all individuals within the organisation to

have accountability for the delivery of safe and high quality care to individual

patients, management and the community.

Sustainability of excellence in clinical governance requires:

• A focus on the consumer experience throughout the continuum of care

• Strong leadership and appropriate allocation of resources

• Clarity of responsibility for managing safety and quality

• Effective use of data to monitor, report on and improve performance

• Systems for identifying and managing risk


• Processes to support continuous improvement

• Compliance with legislative and relevant standards, including accreditation

Our Safety and Quality Plan Clinical Governance Framework is comprehensive

and drives our quality and safety priorities.

Table 1: Healthscope Safety and Quality Plan Clinical Governance Framework


3 Vital role of private hospitals in the community

The undeniable burden for the healthcare system is that Australians are living

longer with increased lifespans and older age also being associated with

increased ill health. Given the elderly have a higher incidence of disease and

illness, it is unsurprising that this group are more likely to use hospital care.

As a comparison, between 2011–12 and 2015–16, the number of hospitalisations

for people aged 65 to 74 increased by 26%, an average increase of 5.9% each

year. This was faster than the population growth for this age group during that

period (about 4.3% each year). For people aged 85 and over, the number of

hospitalisations rose by 22% overall, an average increase of 5.1% each year,

compared with the population growth for this age group of about 3.9% each year

over the same period.

These statistics highlight the need for long term solutions which efficiently deliver

quality healthcare outcomes to Australians.

Private hospitals play an important role in the Australian healthcare system by

significantly reducing the burden on the public health system and delivering

healthcare outcomes which are more efficient. The 2009 Productivity

Commission Report: Performance of Public and Private Hospital Systems,

showed private hospitals services were 30% more efficient than their public

counterparts. This is despite the fact that the cost and complexity of private

hospital care has risen. The differences in estimated efficiency between private

and public hospitals were most noticeable between smaller for-profit private and

public hospitals.

With an ageing population and healthcare expenditure expected to exceed $200

billion by 2020, it is clear to see that the private hospital sector will play a key role

in the delivery of healthcare to Australians.


4 Private patients in public hospitals: A growing industry,

driven by states and territories

In recent years, there has been a rapid rise of private patients in public hospitals.

In the last 12 months, additional information has been made available to support

the claim that public hospitals are overtly chasing private patients. These actions

have potentially damaging consequences for an already stretched public health

system.

Public hospitals have become the fastest growing private hospital provider group

in Australia. The number of private patients in public hospitals has been growing

disproportionally, and now accounts for 14.4% of all separations (872,000

separations in 2015-16) in public hospitals. Since 2008, private patients in public

hospitals has almost doubled (93%) and significantly outpaced the 24% increase

of public patients in public hospitals. In contrast, private patients in private

hospitals increased by 40% over the same period.

Private patients in public hospitals now accounts for $6.2 billion expenditure per

annum in the Australian health system.

Table 2: Estimated attribution of total funding sources of private patient in public hospitals for 2016/17. Source: Private Patient in Public Hospitals Funding Analysis, EY, July 2017

At a time when health costs are being heavily scrutinised, private patients in the

public system adds to the cost burden and waste in the system. The inefficient

use of resources allocated to healthcare is further compounding the affordability

problem. According to the Government’s discussion paper, average benefits

paid for private patients in public hospitals per family with insurance has


increased from 42% about $310 to $440 from 2012-13 to 2015-16 at the

consumer level. If the number of private patients in the public sector had grown at

the same rate as private patients in private hospitals over the period since 2010-

11, premiums in 2015-16 would have been approximately 2.5 per cent lower.

States and territories are both funders and managers of public hospitals. The

diagram below shows the significant differences which exist in proportions and

growth rate of private patients in public hospitals over recent years. NSW and

Tasmania recorded the highest proportion of patients funded by PHI in public

hospitals, but Queensland experienced the highest growth rate of 27.2% since

2008-09. The diagram also shows a significant inflection point between 2011/12

and 2012/13, and coincides with the introduction of activity based funding

nationally.

Diagram 1: The growth of private patients in public hospitals across all states and territories. Data from Australian Institute of Health and Welfare.

The marked differences between states and territories in the quantum and the

speed of growth indicates that state and territory funding policies have more of an

impact on public hospitals’ behaviour than Commonwealth funding.

For the purpose of this submission, we are using local health networks, local

hospital networks and public hospitals interchangeably.


5 Key issues

Healthscope recognises that the primary objective of the consultation is to reduce

pressure on PHI premiums and ultimately benefit patient affordability. However, it

is important to outline other key issues and related impact from the growth of

private patients in public hospitals.

Australia ranking below average in “equity of care”

Researchers at the reputed Commonwealth Fund recently compared health care

system performance in Australia, Canada, France, Germany, the Netherlands,

New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the

United States looking into five domains: care process, access, administrative

efficiency, equity, and health care outcomes. Data sources included its own

international surveys of patients and physicians and selected measures from the

OECD, WHO, and the European Observatory on Health Systems and Policies.

They calculated performance scores for each domain, as well as an overall score

for each country.

Despite being the second-ranked country in terms of overall performance,

Australia was below average and ranked seventh out of eleven for equity of care.

Equity compares performance for higher and lower-income individuals within

each country. The study confirmed that while our public-private health care

system is well recognised, there is significant room for improvement in provision

of equity of health care. In our system, we should draw comparison of access of

care for those with or without insurance.

Table 3: Mirror, Mirror 2017: International Comparison Reflects Flaws and Opportunities for Better U.S. Health Care, The Commonwealth Fund 2017.


Patients without PHI waiting over twice as long for the same treatment in

public hospitals

The Australian Institute of Health and Welfare (AIHW) Admitted Patient Care

2015-16 report published in May 2017 confirmed that patients with PHI were

effectively allowed to use their policies to ‘queue jump’ in front of public patients

when they attend public hospitals. Patients without PHI wait on average 42 days

for elective surgery, which was more than double those with PHI (20 days).

Table 4: Average waiting time for elective surgery, according to private health insurance, in Australia. Source:

The Australian Institute of Health and Welfare (AIHW) Admitted Patient Care 2015-16 report.

Public hospitals breaching Medicare principles of treating patients

according to clinical needs

In the National Health Reform Agreement and Heads of Agreement on Public

Hospital Funding agreed between the Commonwealth, states and territories

governments on 1 April 2016, all parties re-committed to the long standing

Medicare principles which set out:

eligible persons are to be given the choice to receive, free of charge as

public patients, health and emergency services of a kind or kinds that are

currently, or were historically provided by hospitals

access to such services by public patients free of charge is to be on the

basis of clinical need and within a clinically appropriate period

arrangements are to be in place to ensure equitable access to such

services for all eligible persons, regardless of their geographic location


The disparity in the public hospital waiting list based on PHI status goes against

the spirit of Medicare where patients care should be governed and delivered by

clinical needs.

Those who have PHI can choose between private and public hospitals, whereas

those without PHI are likely to only have access to the free public hospital

system. If patients with PHI are allowed to continue to queue jump, inequity will

widen.

Additional demand created for state and territory Governments to establish

new and expensive acute care beds

As demonstrated by the continuing rise of elective surgery waiting lists in parallel

with private patient activity increases, public patients are not reaping the full

benefits of state and territory Government investments in public hospital capacity.

Since 2009-10, the states and territories have outspent the private sector on

building hospital beds. In addition, the analysis undertaken by EY (Capital

analysis report is attached in the Appendix B) found that capital costs in the

public sector were approximately 57% higher than the private sector ($1.7 million

vs $1.1 million per bed in 2015-16 dollars) in NSW/VIC.

Over the last 10 years, EY has estimated that the cumulative notional ‘rental’ cost

to state and territory governments’ of providing services to private patients in

public hospitals was around $2.9 billion. This effectively reflects the theoretical

cost to ‘rent’ the hospital beds that are required to treat private patients

(excluding any profit margin for the entity providing the beds).

From a state Government’s perspective, the increase in capital cost represents

funding that could have been allocated to other activities – such as reducing

public hospital waiting lists or helping to retire debt. However, this capital spend

could have a longer lasting impact as it may induce public hospitals to chase

higher revenue to recover the debt incurred or balance potentially higher

operational costs.


Patients who elect to be treated as a private patient in a public hospital are

not receiving the full value of private healthcare, decreasing the customer

value proposition of PHI

A survey by private health insurer HCF of 35,000 members over three years

identified that of those who chose to be treated as a private patient in a public

hospital, nearly 60% did not receive their choice of doctor and only 20% were in a

single room – the two key factors which would drive an individual’s decision to be

treated as a private patient. Furthermore, around 14% of patients faced

unexpected costs ranging from $200 to $1,000. HCF suggested that the push by

public hospitals to treat patients as privately insured was revenue rather than

service enhancement.

Longer term challenges to the sustainability of our health system

Should the perceived decline in the relative value of PHI not reverse, participation

rates of private healthcare will continue to decline and transfer demand of

services and financial pressure back to the states and territories, potentially

resulting in longer waiting lists and increased waiting time.


6 Our findings: Four key drivers fuelling the phenomenon

To better understand the issues, Healthscope commissioned EY to conduct an

independent analysis so they can provide insights into the drivers contributing

towards the growth of private patients. We have attached the reports to the

Appendix A and B. In collating the evidence, we have identified four key drivers

which widen the disparity for patients without PHI in public hospitals:

1. The funding formula is flawed with public hospitals receiving

disproportionally higher funding for private patients, adding

unnecessary costs to the health system

Funding of public and private patients at public hospitals is complex and poorly

understood. No single Government or agency has complete control or oversight

of the entire formula.

The table below outlines the funding sources and the contribution against each

funding source. Private patient attracts two extra funding sources, being private

health insurance and Medicare benefits, compared to a public patient.

The EY analysis revealed that, in the overall funding formula, private patients in

public hospitals receive disproportionally higher funding compared to public

patients in public hospitals.

Table 5: Estimated attribution of funding sources per separation by patient insurance status in public hospitals

for 2016/17. Source: Private Patient in Public Hospitals Funding Analysis, EY, July 2017


At $7,085 per hospitalisation (or separation) for a private patient in a public

hospital compared with $4,927 per hospitalisation for public patients without PHI,

there is clearly a strong incentive (44% higher funding) for public hospitals to

prioritise the treatment of private patients.

The table also highlights the following:

A private patient has the ability to draw on Commonwealth funding from

Medicare ($596) and Private Health Insurance ($1,806) with these

additional funding streams adding $2,402 per hospitalisation compared

with a public patient

This Commonwealth funding for private patients treated in public

hospitals, as determined by the IHPA discounts funding using a Private

Patient Accommodation Adjustment and Private Patient Service

Adjustment

The states and territories funding contribution was 10% higher ($3,214 v

$2,918) for private patients compared to a public patient per

hospitalisation, effectively subsidising the practice

The data confirmed public hospitals receive significantly extra funding which

favours recruitment of a private patient.

In addition, EY provided a specific analysis into combined Commonwealth and

state and territories funding contribution only, which reflects the efforts taken to

neutralise the additional revenue generated by PHI and Medicare. According to

Table 5, a public patient attracts a total of $4,907 combined government funding

against a private patient of $4,683. The funding difference of $224 for public

hospitals is significantly less than the $2,402 that can be generated from PHI and

Medicare through private patient election. On diagram 2 below, EY provided a

further breakdown of governments funding by states and territories, without the

PHI and Medicare revenue. The graph shows:

Most states and territories provide reduced funding to private patients,

except for Queensland and Western Australia


Queensland provided $6,175 for a private in public hospitalisations

against a $5,647 for a public hospitalisation (9.3% higher)

Western Australia provided $5,817 for a private in public hospitalisation

against $5,319 for a public (9.3% higher)

For the states that have applied a reduction, ACT applied the largest

discount at 26.7%, similar to the size of the Commonwealth discount. All

other states and territories’ discounts are significantly less, 13% (Victoria)

to 4.6% (NSW/NT).

Diagram 2: Estimated attribution of funding sources per separation by patient insurance status, by states and territories governments, in public hospitals for 2016/17, without PHI and Medicare. Source: Private Patient in Public Hospitals Funding Analysis, EY, July 2017

Our view is that the extra subsidies and the lack of depth of discount applied by

the state Governments incentivise public hospitals to recruit private patients.

The data also reaffirms that state and territory funding policies have had more of

an impact on public hospitals’ behaviour than the Commonwealth under the


current arrangements. The driver of this phenomenon was initially outlined in an

analysis contained in the Private patients in public hospital service utilisation

report commissioned by the IHPA. It found state and territory funding frameworks

and service level agreements with Local Hospital Networks contained evidence

of private patient revenue targets in NSW, VIC, QLD, WA and TAS which may

create incentives for public hospitals to increase the number of private patients.

NSW, QLD, WA and TAS have implemented state-specific versions of the

National Activity Based Funding (ABF) Model. They have localised or

modified either the design of the funding model or the application of the

model to the budget build up process and development of SLAs between

State Governments and LHNs. The SLAs do not fully include the IHPA

determined reductions to the funding provided to LHNs for private patients

thereby creating an incentive for LHNs to target private patients.

SA applies the acute admitted model, including private patient

adjustments as determined by the IHPA. However, there may be residual

incentives or unintended outcomes for private patients receiving subacute

or non-admitted care.

The ACT applies a full implementation of the IHPA National ABF Model.

Therefore, on the assumption that IHPA National Private Patient

Adjustments are fit for purpose to achieve price neutrality, the ACT

implementation of ABF would also achieve public–private neutrality within

the ACT.

2. State and territory Governments have developed a vicious appetite to

chase private patients, inadvertently subsidising the growth and further

increasing demand to build expensive, acute care beds

State and territory governments are responsible for funding and managing its

public hospital system.

Although principles and parameters are agreed between the Commonwealth and

state and territory Governments through the National Health Reform Agreement,

the Commonwealth Government does not have the power to determine the


yearly health budgets of states and territories. In fact, every state and territory

Government has separate budget process, target and expectation. There are

currently no restrictions for these governments to set high revenue targets which

rely on funding outside of the National Health Reform Agreement. To meet these

targets, the states and territories, in turn, transfer the responsibilities to local

hospital networks and public hospitals by creating management targets and

incentives to chase additional revenue sources, primarily through increased

private patient activities.

On the other hand, as managers of the system they are supposed to abide by a

key and longstanding principle that ensures all Australians are to be treated

according to their clinical needs at public hospitals.

In terms of performance, patients have experienced significantly increased

waiting time for procedures over the past 15 years. The average waiting time is

now 37 days. As highlighted earlier, patients without PHI wait over twice as long

for a procedure at a public hospital. The growth effectively undermines the intent

of health legislation which supports the Medicare principles and the balance of

public and private health systems.

Diagram 3: Average waiting time for elective surgery in Australia. Source: AMA Report Card

Ultimately, the states and territories need to be held responsible to manage

waiting lists and differential waiting times. They have an obligation to enforce


local hospital networks and public hospitals so privately insured patients cannot

queue jump.

Despite private patients in public hospitals being a $6.2 billion industry, there has

been a lack of monitoring of this responsibility. This is further complicated by

public hospitals not having contracts with private health funds, therefore being

absolved of the same reporting standards compared to non-government

hospitals. Combining opaque service level agreements with unclear compliance

requirements, public hospitals have been allowed to develop unfavourable

management practices without scrutiny over the past 10 years.

Currently, no single body has the power to monitor and adjust public hospital

funding formulas against their Medicare obligations. In other words, there is an

absence of regulatory control within the current National Health Reform

Agreement to balance service and funding objectives.

With the above observations, it could be argued that state treasury budgetary

requirements effectively over-ride the clinical needs of patients without PHI.

Unless a robust compliance mechanism is introduced, state and territory

governments can continue to demand revenue objectives to serve its own needs

ahead of the public patients.

Furthermore, this growth of private patients treated in public hospitals has

created additional demand for the state governments to establish new

beds. Since 2009-10, the states and territories have outspent the private sector

on building hospital beds.

The significance of the increase in private patients in public hospitals from a

capital perspective is compounded by the differential in the cost of constructing

hospital beds between the public and private sectors. EY analysis found that

capital costs in the public sector were approximately 57% higher than the private

sector ($1.7 million vs $1.1 million per bed in 2015-16 dollars).

The private hospital sector’s efficiency in managing demand means it act as a

safety valve in the healthcare system with a capacity to take on additional work. It

also has access to capital and is willing to invest, at no cost to public funding, to

service patient needs and demand growth.


As demonstrated by the increasing elective surgery waiting time, whilst private

patient activity has increased, public patients are not reaping the full benefits of

the investments in public hospital capacity. Furthermore, from a state

Government’s perspective this cost effectively represents funds that could have

been allocated to other activities – such as providing services to public patients

or helping to retire debt.

From a funding efficiency perspective, EY was able to compare the funding of a

private patient admitted in a private hospital compared to a public hospital. The

figures below show funding in private hospital is markedly more efficient

compared to public hospital. At $4,159, there is a stark 70% funding difference

compared to $7,085.

Table 6: Estimated attribution of funding sources per separation by patient insurance status in public hospitals for 2016/17. Source: Private Patient in Public Hospitals Funding Analysis, EY, July 2017

The opportunities for cost savings by the state and territories in capital

investment and ongoing operations are significant.

3. Public hospitals have developed questionable processes on ‘private

patient election’

It is a fundamental principle of Medicare that all eligible persons have the right to

receive public hospital services free of charge. The National Health Reform

Agreement underpins the right of privately insured patients to elect to be treated


as a public or private patient in a public hospital, and it sets out the funding

principles that apply for each situation. The current framework is supposed to

provide protection for patients around the election process and to ensure

neutrality of funding for public and private patients.

Clause 9 of the National Health Reform Agreement requires the states and

territories to adhere to the Business Rules in Schedule G which sets out

procedural requirements for public hospitals in relation to patient election.

However, the Agreement does not specify how compliance with the Business

Rules will be monitored and enforced. There are no penalty provisions within the

Agreement for failure to comply with the Business Rules.

With no penalties, local hospital networks and public hospitals are employing

techniques to increase the number of private patients, including the employment

of officers with the distinct role of increasing private patient uptake. The following

tables are excerpts from the EY report which show a range of job advertisement,

open appeals and enticements.


4. Patients are subsidised by the Commonwealth Government’s PHI rebate

to buy public hospitals only policies

The PHI rebate is currently income tested and offers targeted support for

consumers. However, the rebate does not distinguish between the levels of

hospital cover between products - whether private hospital cover is included or

the policy is a public hospital only junk policy. The absence of this delineation

means that the consumers see the Government endorsing both products

including junk policies.


7 Analysis of the Government’s proposed options

Healthscope acknowledges the Government’s efforts of raising the issue of

private patients in public hospitals and presenting options to reduce pressure on

PHI premiums at the Commonwealth Health Ministers’ meetings. The five

options are:

1. Limit PHI benefits to the medical costs of private treatment in public

hospital with no benefits paid to the hospital

2. Prevent public hospitals from waiving any excess payable under the

patient’s policy

3. Remove the requirement for health insurers to pay benefits for treatment

in public hospitals for emergency admissions (i.e. through a public

emergency department)

4. Remove the requirement on health insurers to pay benefits for an episode

where there is no meaningful choice of doctor or doctor involvement

5. Making changes to the National Health Reform Agreement National

Efficient Price (NEP) determination and funding model

Healthscope recognises that public hospitals funding can be complex. With

multiple stakeholders, changes can be extremely sensitive and difficult to

achieve, especially without an informed transition period. While some of these

measures can be implemented by changes to the Commonwealth Government’s

Private Health Insurance Act 2007, the states and territories Governments should

have ‘buy-in’ with the changes as managers of public hospitals.

The five options proposed at the Commonwealth Health Minister’s meeting were

analysed against Healthscope’s two core ‘fair and equitable’ objectives:

1. All Australians should have access to free public healthcare and be

treated according to their clinical needs, based on longstanding

Medicare principles. Elective surgery waiting time should be equal

for patients with or without PHI. From a fairness point of view,

priority should be given to non-insured patients on the basis that


they do not have an alternate option, whereas those who are

privately insured do

2. Funding for patients should be equitable at public hospitals,

regardless of a patient’s PHI status, and incentives which are driving

public hospitals to favour private patients should be eliminated

With this in mind, Healthscope believes the five options proposed by the

Government are unlikely to be sufficient to address Healthscope’s two core

objectives.

Our analysis uses Table 5 as a starting point. Implementing individual options will

not reduce the funding incentives for a private patient to be in line with a public

patient. For example, if only the PHI benefits component is removed ($7,085 -

$1,806 = $5,279 compared to $4,927), funding for a private patient in public

hospital will still be higher than a public patient.


for 2016/17. Source: Private Patient in Public Hospitals Funding Analysis, EY, July 2017

In addition, none of these measures address the equity issue. The five options

did not state or make public hospitals more accountable so patients without PHI

are guaranteed to be treated according to clinical needs.

Our analysis of the five options are summarised in the Table 7 below:

Option 1 - Limit PHI benefits to the medical costs of private treatment in public

hospital with no benefits paid to the hospital will result in reduction of 83.5% of

the PHI component of the current funding ($1,806), which equates to a reduction


of about $1,508 per hospitalisation. While this may reduce premium pressure,

the funding differential for public and private patient still exists ($5,576 for private

versus $4,927 for public)

Option 2 - Prevent public hospitals from waiving any excess payable under the

patient’s policy will not change the funding per hospitalisation received by the

public hospital ($7,085 for private compared to $4.927 for public). The objective

of this policy appears to be to deter patients to elect using their PHI. However,

this option would not discourage hospitals from aggressively seeking out private

patients and seeking to induce them to elect through the provision of other

incentives. While we agree with the principles of this measure, it would be

difficult to implement and monitor compliance.

Option 3 - Remove the requirement for health insurers to pay benefits for

treatment in public hospitals for emergency admissions (i.e. through a public

emergency department) would reduce funding per separation for these patients

by $1,806, to $5,279 per hospitalisation. While this is closer to current funding

for public patients, private patients would still attract higher funding compared to

the public.

From a policy perspective, the advantage of this measure is the ability to protect

patients so staff at public hospitals would be disincentivised to approach patients

while they are most vulnerable at the emergency department. The environment

of the emergency department is not an appropriate setting for a patient to be

approached to make a financial decision. The patient deserves the assurance of

knowing that Medicare entitles treat on the basis of clinical needs irrespective of

their financial status.

Option 4 - Remove the requirement on health insurers to pay benefits for an

episode where there is no meaningful choice of doctor or doctor involvement.

The inherent difficulty in this option lies in the ability to design a clear and simple

definition that could be applied in all circumstances and in a manner meaningful

to consumers. Although it would be possible for the Federal Government to rule

some services as ineligible, this might be seen as discriminatory against

consumers particularly those with chronic conditions requiring medical rather

than surgical treatment and those in regional areas without access to a private


hospital. Similar to option 3, even if the funding for these patients are completely

removed, private patients would still attract higher funding compared to the public

($5,279 per hospitalisation for private compared to $4,927 for public).

Option 5 - Making changes to the National Health Reform Agreement National

Efficient Price (NEP) determination and funding model would only work if IHPA

has extended power to control funding provided from the states to local hospital

networks. Under the current rules, IHPA only has the ability to directly determine

the Commonwealth Government portion of the public hospital funding. IHPA

creates a discount for some funding items which are identifiable and measurable.

However, IHPA cannot directly determine or enforce how much the states and

territory governments can provide to local hospital networks and public hospitals.

Without changing the rule, the maximum IHPA could theoretically reduce is the

Commonwealth Government funding component ($1,469), under the direction of

the Minister. The overall funding of a private patient at public hospital would still

be higher than the public patient. ($5,616 for private versus $4,927 for public)


according to the five options, with analysis of implementation difficulty and equity of waiting time.


8 Our Recommendations: Reinforce two core ‘fair and

equitable’ objectives in the new National Health Reform

Agreement. Execution requires a comprehensive

approach including an introduction of a cap

Healthscope urges all Governments and public hospitals to agree to two core ‘fair

and equitable’ objectives, which should be enshrined in the next National Health

Reform Agreement commencing in 2020:

1. All Australians should have access to free public healthcare and be treated

according to their clinical needs, based on longstanding Medicare principles.

Elective surgery waiting time should be equal for patients with or without PHI.

From a fairness point of view, priority should be given to non-insured patients

on the basis that they do not have an alternate option, whereas those who

are privately insured do

2. Funding for patients should be equitable at public hospitals, regardless of a

patient’s PHI status, and incentives which are driving public hospitals to

favour private patients should be eliminated

Our analysis shows the five options presented by the Government will fall short to

meet these two core objectives. Healthscope recommends a comprehensive

approach in addressing the growth of private patients in public hospitals. Specific

measures should focus on the four areas based in our key findings:

1. Remove unfair incentives by fixing the revenue formula and equalise funding

per hospitalisation between public and private patients

2. State and territory Governments should be held accountable for differential

waiting times between public and private patients. There should be increased

transparency on waiting lists, waiting times and bed planning processes.

Penalties should be introduced if Medicare principles are breached

3. Protect patients while they are most vulnerable by tightening procedures for

‘private patient election’ at public hospitals


4. Set minimum standards for PHI products and remove the PHI rebate for junk

and public hospital only policies

Transparency of data from public hospitals is required so the Independent

Hospital Pricing Authority (IHPA), National Health Funding Body, State Treasury

and Health Departments can monitor and adjust funding. A new, independent

body should be granted the power to enforce compliance of Medicare principles.

Rather than immediately removing existing funding, we recommend a transition

process where a cap is introduced based on the current number of private

patients by states and territories’ baselines. Any additional activity above this

cap would not attract any more Commonwealth or states/territories funding.

The cap should be fixed until public hospitals satisfy the two core objectives. As

managers of the public hospital system, the states and territories would be

responsible for distributing different caps to local hospital networks based on the

private hospital options in the community. For example, a higher cap could be

given to rural and regional areas given the relative lack of private providers.

1. Remove unfair incentives by fixing the revenue formula and equalise

funding per hospitalisation between public and private patients

Independent data revealed that, under the current funding model, a private

patient attracts 44% higher funding compared to a public patient. There are

multiple permutations of measures for the Government to adopt in order to

equalise payments for public and private patients.

The Commonwealth or state or territory Governments could equalise funding by

reducing their contributions, unilaterally or jointly, for private patients. In addition,

Medicare funding could be reduced or removed for episodes where there is no

doctor choice, referral or involvement.

However, if the state and territories do not reduce their contributions to private

patients’ funding in public hospitals and access to Medicare remains unchanged,

our analysis shows that both the Commonwealth Government and PHI would


have to jointly reduce their contributions in order to achieve equity of funding

across both cohorts.

For example, if the Commonwealth Government removes its funding component,

it would reduce incentive from $7,085 to $5,616. But this is still higher than the

funding for a public patient of $4,927.

Within the PHI, there is a range of measures the Government could consider to

align with government policy objectives, some of these are options presented by

the Government and discussed above.

Exclude PHI patients use of insurance in public hospitals

Limit PHI benefits to the medical costs only with no benefits paid to the

hospital

Remove the requirement for insurers to pay PHI benefits for treatment in

public hospitals for emergency admissions

Remove the requirement on insurers to pay PHI benefits for episodes

where there is no doctor choice/referral/involvement

Remove the requirement for insurers to pay PHI benefits to public

hospitals for private patients

Healthscope supports these measures as long as the overall effect satisfies the

two core objectives in regard to equity of funding and patients being served

according to clinical needs.

Other changes which would reduce incentives and align funding mechanism of

private patients in public hospitals is to change the basis of the PHI minimum

benefit from a per diem to an activity based payment.

From an implementation point of view, the biggest barrier for change is

transparency of data. Information emerged over the past six months on waiting

time and funding is only the start. It is important to further delineate information

by mandating local hospital networks and public hospitals to publish quality,

performance and financial data about private patients.


The effectiveness of the funding formula depends on whether it can identify and

take account of all other income generated from a private patient including MBS,

prostheses and the insurers. Without these vital statistics, it would be difficult for

funders to calculate and distribute funding equitably.

A body should be tasked to enact, monitor and adjust the funding based on the

information collected. The IHPA and the National Health Funding Body are in the

best positions to be granted with extra powers to execute the change.

2. The states and territories governments should be held accountable to

differential waiting time between public and private patients. There

should be increased transparency on waiting lists, waiting times and

bed planning process

While the current National Health Reform Agreement has some principles and

payment rules regarding private patients in public hospitals, it does not address

the overall funding formula, incentives and differential waiting time.

Given the states and territories are responsible for both funding and management

of public hospitals, the ‘fair and equitable’ objectives have to be addressed and

enforced at the same time. Central agencies and respective state health

departments should be banned from any additional revenue and management

targets outside of the National Health Reform Agreement which has driven the

current vicious cycle. In addition, any policy change must be translated to affect

Local Hospital Networks/public hospitals to ensure reform measures are

executed effectively.

In addition, Healthscope proposes the Government to strengthen the National

Health Reform Agreement by:

Increase the Commonwealth Government’s controls of implementations

and localisations of the activity based funding framework, including private

patient adjustments, for states and territories

A new, independent body should be granted the power to enforce

compliance of Medicare principles


AIHW to publish a breakdown of waiting time of procedures by states and

territories, and individual public hospitals

Public hospitals to provide greater transparency and report elective

surgery waiting time of patients with or without PHI

Increase frequency of monitoring so patients are treated according to their

clinical needs

Explicitly ban state or territory imposed management quotas and targets

for Own Sourced Revenue on public hospitals. In the transition period, all

private patient targets between State Governments and LHNs should be

publically available.

Increase controls over state and territory Governments’ service level

agreements with local hospital networks and public hospitals

Impose penalties for non-compliance

As the increase in private patients in public hospital continues to drive the

demand to build more acute care beds, relevant planning authorities need to re-

examine the public benefits and are encouraged to explore more efficient options

to deliver important public hospital services before more beds are built.

3. Protect patients while they are most vulnerable by tightening

procedures for ‘private patient election’ at public hospitals

Public hospitals have been allowed to develop these practices because of unfair

financial incentives favouring recruitment of private patients ahead of public

patients. This is compounded by a general lack of penalties for non-compliance

under the National Health Reform Agreement. Until the two ‘fair and equitable’

objectives are fully implemented, Healthscope believes the following measures

should be immediately applied:

As an extension to removing the requirement for insurers to pay PHI

benefits for treatment in public hospitals for emergency admissions,

governments could further protect vulnerable patients by not allowing


hospitals to convert patients admitted through Accident & Emergency

(A&E)

Restrict hospital’s ability to offer inducements or unduly pressure

consumers to declare PHI status

Strengthen process on informed patient financial consent

Extend the power of the Private Health Insurance Ombudsman so

patients can report any issues directly

Enforce compliance through Departments of Health and Treasuries

Impose penalties on public hospitals which are in breach of the rules

Mandate public hospitals to submit patient election form on admission

4. Set minimum standard on PHI products so the Government will remove

PHI rebate on junk or public hospital only policies

The growth of exclusionary and junk products is negatively impacting the quality

of cover. The extent of the decline has significant implications and further adds

pressure onto the public hospital system. Healthscope believes this is an

important issue which has been masked by the headline figure of PHI

participation rates, commonly used as an industry benchmark indicator.

Healthscope believes that the Government should only provide support to PHI

policies which adds value and ensures sustainability to the health system.

We advocate for any hospital policies that offer no private hospital cover to be

banned or reclassified as non-PHI products and that these should not be

endorsed by the insurance industry or supported by the Government. These

products should not attract PHI rebates and should be clearly published at

privatehealth.gov.au and health insurers’ website so they are transparent to all

consumers.


9 An efficient model of care: Public-Private Partnerships

(PPP)

To achieve a sustainable public-private healthcare system, longer term reforms

must be addressed through the National Health Reform Agreement.

The private healthcare sector serves an important purpose to take pressure off

the public hospital system.

Analysis undertaken by EY (Capital analysis report is attached in the Appendix B)

found that capital costs in the public sector were approximately 57% higher than

the private sector ($1.7 million vs $1.1 million per bed in 2015-16 dollars) in

NSW/VIC.

Over the last 10 years, EY also has estimated that the cumulative notional ‘rental’

cost to state and territory governments’ of providing services to private patients in

public hospitals was around $2.9 billion. This effectively reflects the theoretical

cost to ‘rent’ the hospital beds that are required to treat private patients.

From a state Government’s perspective, the increase in capital cost represents

funding that could have been allocated to other activities – such as reducing

public hospital waiting lists or helping to retire debt. However, this capital spend

could have a longer lasting impact as it may induce public hospitals to chase

higher revenue to recover the debt incurred or balance potentially higher

operational costs.

Given cost efficiencies shown, innovative models should also be further

developed and propagated in the broader healthcare system to leverage existing

available capacity, including public-private partnerships such as the Northern

Beaches Hospital, a joint initiative between Healthscope and the NSW

Government.

The Northern Beaches Hospital project is a new 450-bed public-private hospital

currently being built in the northern beaches of Sydney. The Northern Beaches

Hospital will be built faster and at a reduced cost to the taxpayer. The project

addresses the demand and cost impact of future service delivery and transfers

the long-term cost of asset maintenance to the private sector.


A Public Sector Comparator (PSC) was undertaken for this project by the NSW

Government. This provides a risk adjusted cost of the project if it were to be

designed, built and operated by the State of NSW. According to this analysis,

Healthscope’s proposal yielded a benefit to the state of $1.5 billion over the life of

the asset, with the total cost being 39% lower than the Public Sector Comparator.

Healthscope recommends the Commonwealth Health Council ministers consider

the benefits of public-private partnerships (PPP) and actively encourage their

respective Health, Planning and Infrastructure Departments, as well as Local

Health Networks, to adopt collaborative models when designing plans to increase

or redevelop public hospitals to meet the future demand.


10 Appendix

A. Private Patient in Public Hospitals Funding Analysis, EY, 2017

B. Private Patient in Public Hospitals Capital Analysis, EY, 2017

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