Australian private hospitals under ‘serious threat’ amid margin erosion, with more closures on the horizon

Private hospitals have suffered significant erosion in earnings and margins to the point where a large segment of the sector is under “serious threat”. With WA taxpayers set to foot the bill to re-open a crucial mental health clinic in Cockburn, the private hospital industry’s peak body warns the spate of recent closures could grow. Australian Private Hospitals Association chief executive Michael Roff said operators need to be making a margin of at least 5 per cent to “keep your head above water”. “There has been a significant erosion in earnings since 2019 to the point now where a lot of hospitals aren’t making sufficient margins to fund their business-as-usual capital expenditure,” he said. “There’s a significant portion of the sector who have margins below that 5 per cent level and . . . across the sector the average margin has continued to decrease.” Hospital operators say they are facing an existential threat because higher costs for medical equipment, supplies, maintenance are surpassing the payments they receive from private health funds. Bethesda Health Care revealed last month it was “suspending services” at its $60 million mental health clinic in Cockburn, less than a year after it opened. It claimed the 75-bed clinic was not “financially viable” and was struggling to source psychiatric staff. The Cockburn clinic has since been thrown a lifeline by the State Government, with the South Metropolitan Health Service set to run services. The government has struck a three-year lease. Bethesda boss Neale Fong also warned after the Cockburn bail-out that more private hospital closures were likely without government intervention. Dr Fong, a former WA Health Department boss, reportedly warned these closures would put more pressure on public hospital and lead them to State-owned services to crisis point. At least two Sydney private hospitals have said they will close in recent weeks. Ramsay Health Care chief executive Craig McNally in February said 16 private hospitals across Australia had closed in the past 12 months. St John of God Health Care group chief executive Bryan Pyne said like other providers across Australia, the Catholic healthcare group was operating with a slower-than-anticipated return of patients following COVID. Mr Pyne said St John of Gold also faced rising operating costs with consumables, wages, insurances, utilities and interest rates. “We have taken a long-term outlook to our response to these factors to ensure this important organisation, which began in WA 125 years ago, remains sustainable in today’s environment,” he said. St John of God early last year announced an internal review aimed at addressing the financial impacts of COVID and other factors impacting the current healthcare environment. It has cut nearly 180 positions. While the St John of God is just cutting costs and putting some expansion plans on hold, Mr Roff warned of more hospital closures across Australia “unless something changes”. “The conundrum here is that you have private hospitals struggling to survive and at the same time you have the health insurance industry that’s enjoying record profitability,” he said. Dr Fong also took aim at the private health insurers, saying they were not providing the necessary reimbursement for the viability of private hospitals around Australia. “Private health funds have not increased what they pay to stay in line with inflation,” he said. “This is despite private health funds increasing premiums for their members and collectively sitting of billions of dollars in annual profit.” The private health insurance industry made a collective profit of more than $2 billion last financial year, up from $1b the previous year. With private health insurance premiums set to increase 3.03 per cent in April — the most in five years — Mr Roff urged insurers to share more of their revenue. “They certainly have the capacity to come to the party and assist private hospitals meeting these unavoidable cost increases without the need for any further premium increases,” the Australian Private Hospitals Association chief said. But Private Healthcare Australia chief executive Rachel David said health funds were walking a tightrope between keeping premiums as low as possible amid rising cost-of-living pressures, while providing adequate funding for hospitals and frontline health workers. She said health fund payments to private hospitals were at an all-time high, pointing to Australian Prudential Regulation Authority data showing payments grew 10.7 per cent to $16.6b last year, from $15b the prior year. Dr David said factors like workforce shortages and increasing out-of-pocket costs dampening demand for inpatient care were impacting the private hospital sector, but were outside the control of health funds. “Even if health funds were paying private hospitals more for psychiatric services, some hospitals would likely be unsustainable. The referrals they need would simply not be there,” she said. “Bethesda for example, a 75-bed hospital built during the pandemic, never had more than 27 patients at one time.” Dr Fong said there were no immediate concerns around Bethesda’s long-term future as long as health funds increased their reimbursement to align with the growing costs of providing the services. “But if health funds don’t provide the adequate reimbursement, some private hospitals will either reduce their scope of services or locations,” he said. “A reduction in accessibility to private hospital services does not benefit private health fund members. “It reduces timely access and forces many people back into the government systems.” Mr Pyne said St John of God’s recent review had enabled long-term commitments to expand its facilities, including stage two of the redevelopment of its Subiaco hospital and announcing the approval of planning for a new private hospital in Midland. But Mr Pyne conceded those projects may need to be put on pause if the operating environment changes “so that we can review and assess the broader health care needs across all of St John of God Health Care”. “We must ensure we operate in a financially responsible way and we will continue to explore ways to align our services and improve efficiencies, including looking at alternative operating models across some services, while continuing to maintain our high standards of patient and caregiver safety,” he said.