Private hospitals seeking more government subsidies

Jun 20, 2024
The Hon Mark Butler MP speaking at an event in Melbourne, 2022 Contributor: Credit: ManWithaCamera Melbourne / Alamy Stock Photo

Instead of churning more taxpayer money through Private Health Insurance funds to private hospitals, the Commonwealth Government should establish a Hospital Benefits Fund (HBF), similar to the Medical Benefits Fund (MBF), with benefits going directly to patients for payments to a hospital of their choice.

Many “private” hospitals are pleading for more government subsidies. In response the Minister for Health, Mark Butler has established an internal Health Department Committee to review the problems of private hospitals. The Minister is sensible not to appoint a review that is stacked by health providers with their own barrows to push. That has been the undoing of most health inquiries in the past.

Ramsey Health’s  share price has fallen 17% in the last month. The AMA tells us that ‘the review is overdue… we are seeing extraordinary cost and viability pressures on private hospitals around the country’. Catholic Health has also described the problem: “In the past five years, 71 private hospital services have closed down as a result of workforce shortages and funding from insurers failing to keep pace with soaring costs of providing care. Without immediate action, these closures will continue and more private patients will be pushed into public hospitals which are already operating over capacity, impacting patient access to timely care and increasing costs for taxpayers”.

But some private hospitals are ‘evolving, not collapsing’ according to Members Health, the voice of the not-for-profit health insurers.

In inheriting the Whitlam/Hawke legacy of Medicare the ALP has invariably chosen to muddle through rather than look at some basic problems that have arisen after over 40 years of Medicare. Before Mark Butler considers another ‘band aid’ solution, he should address a fundamental problem: how to get PHI out of the government funding loop. Why should the Australian Government fund private hospitals by churning its money through inefficient and expensive PHI? Funding should follow the individual and not be delivered via PHI.

Ross Gittins has called PHI a scam.  Warren Buffett has described  PHI as a tapeworm in health systems, eating away from within.

  • PHI threatens our universal health system through seriously weakening the ability of Medicare as a single funder to control costs. We have seen the enormous damage that PHI has wrought in the US. We are steadily going down the same dangerous path. On present trends, we will have a divided healthcare system. One system will be for the wealthy with a safety for the indigent.
  • PHI not only weakens Medicare, but in itself it does not have the market power to match the power of health providers who hold all the cards. Dr Rachel David the chief Executive of Private Healthcare Australia has told us that ‘private health funds have no control over input costs, which include medical device benefits, hospital accommodation costs, allied health costs e.g. dental, medical specialist gap costs among others’.
  • It favours the wealthy, who can jump the public hospital queue by going to private hospitals.
  • It penalises country people who have limited access to private hospitals.
  • It has administrative costs three times higher than Medicare.
  • For decades the premiums payable to PHI have increased at about three times the CPI.
  • PHI has made it extremely difficult for public hospitals to retain specialists who are attracted to remuneration which is often at least three times higher in private practice in private hospitals.  No wonder the two highest paid occupations in Australia are surgeons and anaesthetists.
  • PHI has not taken the pressure off public hospitals.
  • Guardian Australia found that in BUPA’s aged care homes one third were found to be a ‘serious risk to residents’. BUPA has 73 aged care homes. BUPA is also the largest PHI insurer.

If people want private health insurance, that is their right. But why should taxpayers subsidise the PHI industry to corrupt and undermine a universal system that is available to all?

The vested interests in PHI never argue their case in public. They rely on private lobbying of ministers and officials.

I have argued for many years that the Australian Government should avoid funding private hospital through PHI funds. It should fund it through a Hospital Benefit Scheme.

Several years ago, a secretariat in the Department of Prime Minister and Cabinet issued discussion papers on federalism. A draft discussion paper had several options which  interested me. Unfortunately, P M & C have removed the discussion paper from its website.

Option 2 suggested that ‘The commonwealth establish a HOSPITAL BENEFIT. Under this option ‘the PHI rebate would be discontinued and funding directed to the new hospital benefit’. To support this option the discussion paper said:

The Commonwealth would establish a hospital benefit for all hospital treatments and procedures, regardless of whether they are performed in a public or private setting or whether individuals elect to be treated as private or public patients. Similar to the operation of the MBS, funding would follow individuals. The Commonwealth would fund a proportion of the cost of each procedure, with the price determined by an independent body.

The States and Territories would be asked to cover the difference between the Commonwealth benefit and the cost of the service for public patients to ensure they continue to receive free treatment in a public hospital in line with the Medicare principles and international agreements. This would be the public hospital equivalent of bulk-billing in general practice. People choosing to be treated as private patients could take out private health insurance to cover the difference, or choose to pay the gap themselves.

The States and Territories would remain system managers of public hospitals and would be free to make decisions about the delivery of public hospital services and would have the flexibility to commission services from the private sector. They would continue to be responsible for the regulation and delivery of public hospital services. The Commonwealth would have no role in setting operational targets for public hospitals.

The Commonwealth hospital benefit would replace current Commonwealth funding for public hospitals through transfers to the States and Territories and for private in-hospital procedures through the MBS. The private health insurance rebate would be discontinued and funding redirected to the new hospital benefit. Funding for other services would remain the same. It is essential that we have a single funder for both the public and private health sectors as is the case for veterans. It works well. A Commonwealth hospital benefit would increase consumer choice for patients and competition for hospital services, where there are sufficient markets and alternative viable providers of hospital services. Increased competition should drive down costs and improve efficiency, and could lead to reduced waiting times for hospital services. As it would reward activity, rather than outcomes, the risk of over-servicing would need to be addressed in implementation.

This option does not address the fragmentation between primary and specialist care and hospital services, and does not provide an incentive for prevention and early intervention. Additional reforms to support connections between different elements of the health system may need to be considered.

This option could reduce incentives for cost shifting between the Commonwealth and the States and Territories by aligning funding between public and private settings. The Commonwealth’s funding of hospital services would remain the same, but would be more transparently and directly linked to the cost of procedures.

This option is likely to improve the durability of hospital funding. Alternate mechanisms (for example block funding) would be required to address thin or non-existent markets (for example in regional or remote areas).The impact on the private health insurance market would also need to be considered, including the impact on consumers through changes to premiums.

This option improves the accountability and fairness of funding of hospital services. It would be consistent with other Commonwealth benefit payments to individuals.”

I couldn’t have put the case better myself!

I have been concerned for many years about the expensive and destructive nature of the $12 b. per annum Commonwealth Government subsidy to the private health insurance industry. This $1 b. consists of direct rebate subsidies; money foregone by the Commonwealth through tax exemption from the Medicare Levy Surcharge and other costs through the PHI rebate being exempt from tax in the hands of individuals. There is also the exemption from GST of medical and health services. These Tax Expenditures, as the Treasury describes them, ‘do not attract the same attention in the media as do other expenditures’.

The key feature of option 2 is that ‘The PHI rebate would be discontinued and funding redirected to the new hospital benefit.’

This option makes good sense to me. It would in practice be following the system that we have established for veterans whereby they can use their veterans’ hospital benefit for treatment in either a public or private hospital.

A Hospital Benefit Scheme would also have the advantage of providing the opportunity for better coordination of care between public and private hospitals.

It would also make much more sense for the Commonwealth Government to directly pay a private hospital benefit rather than churning money through wasteful and high cost private health insurance.

Getting the detail right would of course be very important. The main obstacle to this proposal for a Commonwealth Hospital Benefit would be the power of the vested interests – PHI and the private hospital lobby .

The private hospital lobby would do itself and the community a service by pressing for a Hospital Benefit Scheme in the same way as the MBS allows patients to choose their own provider.

It must surely be only a matter of when and how this $12 b per annum feather bedding of PHI by the Commonwealth Government is brought to a decent end and where private and public hospitals can work together cooperatively.


John Menadue was an early pioneer of Medibank/Medicare with Gough Whitlam, Moss Cass, John Deeble and Dick Scotton. He chaired the NSW Health Council which reported to the NSW Minister for Health in March 2000 on changes to health services in NSW. He also chaired the SA Generational Health Review which reported to the SA Minister for Human Services in May 2003.

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