Private hospitals play a crucial role in delivering first rate health care to Australians. As such, they are key stakeholders in the private health insurance system.150
Notably:
• private hospitals treat 41 per cent of all patients in Australia. In 2013-14, this amounted to 4.0 million patients; and
• 67 per cent of elective surgery in 2013-14 was performed in private hospitals.
There are various safeguards in place, which tend to diffuse the scope for market power to be abused along the supply chain. These include:
• Second Tier arrangements, which provides a safety net where a contracted price is not negotiated between private health insurers and private hospitals; and
• joint purchasing arrangements through AHSA, ARHG and HAMBS, which alter the competitive position of insurers in negotiating with suppliers.
150 See Private Hospitals and the Australian Health System available at [email protected]. This document provides further information on the role of private hospitals in the Australian health care system.
Approximately 70 per cent of total hospital treatment benefit payments in 2013-14 were paid to hospitals for hospital services such as accommodation and nursing, and the remaining 30 per cent were for medical services and prosthesis.
Most hospitals and insurers have negotiated agreements (known as Hospital Purchaser Provider Agreements (HPPAs)). These agreements detail the prices that the insurer pays for the treatment of their members.
The HPPA may include terms that share risk between the insurer and the hospital. For example, hospital admissions are often billed on an episodic basis meaning the hospital is paid an agreed price based on the type of case regardless of how many days the patient remains in hospital. In this way, the financial risk of the patient requiring an extended length of stay is passed from the insurer to the hospital.
Consequently, the hospital has a clear incentive to reduce the length of the admission and to enhance hospital efficiency.
The HPPA can also remove or limit the additional charges that a fund member can face. For example, the insurer and the hospital can agree that the patient is not to be charged a private room fee or for discharge medication supply as the hospital agrees to provide these at no additional cost to the patient.
If the patient is treated at a hospital that does not have an agreement with their insurer, then the insurer is required to pay at least the Second Tier benefit if the hospital is appropriately registered. Lower minimum default benefits are payable if the hospital is not registered for Second Tier benefits. The patient then may be required to pay the difference between the benefit paid by the insurer and the hospital charge.
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Second Tier pricing arrangements were originally introduced to provide a level of protection for the fragmented private hospital market when negotiating pricing arrangements with a more consolidated private health insurance industry. To this end, the Private Health Insurance (Benefit Requirements) Rules 2011 require that, in the absence of a specific agreement with the hospital, private health insurers are required to pay out a minimum of 85 per cen of the average benefit for an equivalent hospital treatment episode under negotiated contracts held by the insurer with comparable hospitals in the relevant jurisdiction.151
To some extent, the market determines the competitive tensions along the supply chain and generates counterbalances to equalise market forces. For
instance, in recent years, there has been a broad trend of consolidation within private hospitals providing greater market strength (achieving economies of scale and scope as well as increased bargaining power), with some hospital groups now effectively ‘too big’ not to do business with.
Outside of the larger hospital groups, however, the private hospital sector remains fragmented. Smaller private hospitals are not able to rely solely on Second Tier rates, but nor can they sustainably attract co-
151 Any facility that wishes to be considered for inclusion as a Second Tier approved facility, or any facility that wishes to remain specified as an approved facility after its eligibility expires, may apply to the Second Tier Advisory Committee for approval that it satisfies the second tier eligibility criteria set out in the Private Health Insurance (Benefit Requirements) Rules 2011. The Committee considers each application against the eligibility criteria and compiles a complete list of Committee-approved facilities eligible for second tier benefits. The Committee may remove facilities from the list if those facilities no longer satisfy the relevant criteria. Currently, for all insurers, price negotiations with suppliers are hotly contested, which signals strong competitive pressure for all parties along the supply chain.
payments from patients. They are likely to be price takers in contract negotiations.
Private hospitals differ greatly in size. In 2013-14, there were 612 private hospitals in Australia, of which 286 were acute or psychiatric hospitals and 326 were freestanding day hospitals. Of these, there are large organisations operating many hospitals (namely Ramsey Health Care Limited and Healthscope Limited in the for-profit sector and Catholic hospitals in the not-for-profit sector), as well as smaller bodies running single or only a few facilities.152
Data from the ABS on private hospitals by size (excluding free standing day hospitals) shows that a significant proportion of private acute and psychiatric hospitals are relatively small, with 37 per cent having fewer than 50 beds, and less than 10 per cent having more than 200 beds (Table 32).
The distribution of private hospitals across metropolitan and regional areas is also quite uneven, which can have important impacts on the strength of the competitive tension between private health insurers and private hospitals in different geographic areas. For instance, approximately 77 per cent of all available private acute and psychiatric hospital beds in 2013-14 were located in capital cities, even though only 67 per cent of Australia’s population lived in these areas (Table 33).
The differences in market power characteristics across different hospital associations, different insurer groups and state and territory delineations have raised some concerns, on both sides of the market, of the efficiency
152 Productivity Commission 2009, Public and Private Hospitals, Productivity Commission, Canberra, page 46.
32. Number of private hospitals by size, 2013-14 (a)
JURISDICTION 0-50 beds 51-100 beds 101-200 beds Over 200 beds Total
New South Wales 34 36 15 6 91
Victoria 30 20 24 5 79
Queensland 18 13 17 8 56
South Australia 14 8 np np 28
Western Australia np 4 np np 22
Tas, NT & ACT (b) np 3 np np 10
Australia 107 84 68 22 286
Source: ABS (Private Hospitals, Cat. no. 4390.0).
(a) Acute and psychiatric hospitals (excludes freestanding day hospitals).
(b) Data for Tasmania, the Northern Territory and the ACT are aggregated to protect the confidentiality of the small number of hospitals in each of these jurisdictions
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and competitiveness of pricing negotiations along the supply chain.153 For example, where larger hospital
groups are considered by insurers as able to rely on Second Tier rates, insurers suggest that this limits and biases the amount of negotiating power brought to the table as it provides a regulated rather than market-set floor to prices.154