Private health funding cure likely to kill the patient

THE Federal Health Department's first cut at a Private National Efficient Price (PNEP) for hospital services reneges on the original intent of a floor price with annual indexation. Instead, it seeks to impose an average cost, which will still see insurers low-ball hospitals below this indicative figure.

"The Department must get back on track to develop a floor price with annual indexation as promised," APHA CEO Brett Heffernan said. "What has been served up in this first draft fails to address the point of the exercise – the viability and investability of private hospitals.

"Instead, the proposal drives a 'race to the bottom' based on cheapest costs and trades-off the innovation, quality and safety, and choice and access for which private hospitals are renowned. It would undermine any reason to opt for private healthcare and have dire implications for public hospitals.

"This was supposed to be a cure for the viability and investability crisis impacting private hospitals. It fails to even address them. At no stage in the draft paper is there any call on private health insurance companies to dip into their skyrocketing profits and exorbitant management fees to meet rising healthcare costs."

With over 70% of hospitals denied a voice in the PNEP process, the APHA has canvassed the full gamut of its membership, encompassing 275 for-profit and not-for-profit small, medium and large hospital groups; small, medium and large independent hospitals; specialist psychiatric hospitals and rehabilitation hospitals; and day surgeries.

"There is universal agreement the PNEP, as presented, is not fit-for-purpose," Mr Heffernan stressed. "At tomorrow's meeting in Sydney, the Department's CEO Forum must come back to first principles and address a raft of issues before a PNEP can begin to have any possibility of working.

"Stepping away from the floor price is just one defect in a series of false assumptions, errors and omissions that pose more problems than solutions. This far-reaching, largely secretive and underdone proposal has major ramifications for healthcare delivery for all Australians. Yet, it comes late and riddled with gaping holes."

The APHA's submission on the draft highlights numerous faults in the PNEP, including:

• Cost vs Price: the Department has fundamentally got this wrong. Erroneously, the draft uses the terms 'cost' and 'price' interchangeably. This is a basic error undermining margins for for-profit and not-for-profit operators alike, making investment impossible.
• It seeks to redistribute funds from the existing pool, not increase the size of the funding pool. It makes no reference to the role private health insurers need to play in meeting the real-world costs of healthcare delivery.
• It will only 'inform' contracting between hospitals and insurers. Negotiations will run their usual course with the PNEP as an 'indicative' measure of costs. This enables the insurers to negotiate below any indicative cost, with the perverse outcome of accelerating hospital closures and forcing greater consolidation by squeezing out independent hospitals.
• Despite recognising the absolute need for capital expenditure and investment in quality and innovation as vital components of private hospital care, nowhere in the draft is this, in any way, accounted for. This must be addressed and the funding stream clearly articulated.
• On quality and safety, the draft, at no point, cites how the PNEP incentivises excellence in clinical outcomes, nor the adoption of ground-breaking care, new treatments or procedures. Quality care would not be costed, which undermines patients getting the best in healthcare.
• The use of Diagnosis Related Groups (DRGs) as a costing tool is flawed. They were never intended for this purpose and would reinforce problems. For example, in cataract surgery the use of a simple lens, versus a complex lens, versus a complex lens with eye stent all come under the same DRG, yet represent vastly different costs. Similarly, a total hip replacement with a fractured femur has the same DRG as an elective hip replacement. These are very different procedures, and the rehabilitation time is more than double for the more complex surgery. The Department seems oblivious to these realities.
• The draft, as presented, places all the burden for costs of care, investment, quality, safety and innovation on private hospitals, but without a corresponding responsibility from health insurers to acknowledge these cost needs, let alone adequately fund them.
• Floor price and annual indexation: the Department of Health has reneged on this undertaking. It has morphed into a simplistic 'average cost', which fails to account for regionality, specialties or casemix, but still allows insurers to abuse their market power in hospital contracting.

"Without the funding share from insurers growing, the existing viability and investability issues only worsen," Mr Heffernan added. "The draft fails to provide for future investment which, in most cases, would not be possible.

"The result would be an homogenous healthcare offering that dwindles in quality over time and falls below the expectations of private patients and those paying ever-rising private health insurance premiums.

"That the Health Department expects to have Phase 1 ready by 1 July 2026 is deeply concerning given the scant and defective detail provided to date. That the draft makes no call on private health insurers as the major funders of private healthcare, is conspicuous and disturbing.

"The original floor price with annual indexation was the basis by which private hospitals could see a purpose to this process. Without it, the viability of private hospitals continues its downward spiral, with patients and the whole national hospital system even worse off.

"If implemented as proposed, the erosion of innovation, quality, safety, choice and access would see most people hard-pressed to find a reason to maintain private health insurance coverage at any price."

-ENDS-

The APHA's submission on the Federal Health Department's draft Pricing Framework for Australian Private Hospitals Services is available at: APHA response to draft Private National Efficient Price.

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