4.1 Broad Statement on Structure of the Industry
Australia’s hospital system comprises a mix of public and privately owned hospitals. Private hospitals provide a large proportion of Australia’s hospital services which would otherwise need to be met within the publicly funded Medicare system. State health systems are dependent on an appropriate private/public mix to ensure adequate provision of services. Victoria has one of the largest private hospital sectors in Australia, accounting for 29% of all occupied bed days, and 28% of all separations (ABS,1993/94).
The private sector has two components: not-for-profit (NFP) hospitals and for-profit (FP) hospitals. Charitable, religious and community controlled hospitals make up the NFP segment. Apart from the bush nursing hospitals, these have traditionally been the larger, more sophisticated facilities. However, the more recent trend is for the FP sector to rationalise and become larger (ie. consolidate into major chains) and/or develop as niche players.
Traditionally, public and private hospitals have been distinguished on the basis of the level of medical care and the relative complexity of services provided, with only a small degree of substitutability between the services offered by each. Historically, the private hospital sector was largely a cottage industry. However, this has also changed in recent years, given that the (now numerous) larger private hospitals have undertaken significant investment in equipment, facilities etc. in order to provide more complex services including cardiac, orthopaedic, plastic and neurological procedures.
It is arguable that the changing nature of the private sector has, in part, resulted from the declining length of stay patient profile. Targeting the more complex procedures is likely to be associated with increased patient length of stay and greater utilisation of beds and other hospital services. The availability of a wider range of services also provides greater incentives for private insurance holders to elect to be treated in private hospitals.
A further trend in recent years has been the growth in number of freestanding outpatient facilities, or "day procedure centres". These centres place significant competitive pressures on private hospitals because of their advantages in comparison to in-patient facilities (in particular, the reduced capital investment requirements).
A special (and unique) element of the Victorian private hospital sector is that of the bush nursing hospitals. Bush nursing hospitals are generally private, not-for-profit hospitals. They provide a variety of health services (including medical/surgical, obstetrics and dialysis,) throughout Victoria, particularly in outer metropolitan, rural or remote areas. Unlike some of the larger metropolitan private hospitals, their smaller size and limited customer base, generally precludes substantial capital investment in equipment and/or refurbishment of buildings. This, combined with the reluctance of many practitioners to work in remote rural areas, means bush nursing hospitals are unable to offer the range and complexity of services offered in larger, and more sophisticated, metropolitan hospitals. Previous reports considering this sector, such as the 1993 Report of the Taskforce of the Minister for Health, into the Victorian Bush Nursing Agencies have concluded that competitive pressures are likely to compel a change in their focus and operation, towards smaller multi-purpose centres, if they are to remain commercially viable.
4.2 National and State Legislative Framework for the Health Care System
The private health industry is affected by regulation applying directly to private hospitals, to the health insurance industry and the medical and nursing professions. Both state and federal governments are involved in regulating the industry.
In terms of federal regulation, the Health Insurance Act 1973 and the National Health Act 1953 are relevant to the health care industry as a whole. The former Act regulates hospital activity with respect to payment of Medicare benefits and the provision for the Commonwealth and States to enter into agreements for the provision of public hospital services without charge to all residents. The latter provides for the registration of health benefit organisations and registration requirements for each fund.
The principal legislation governing hospitals in Victoria is the Health Services Act 1988 (Vic). It contains provisions relevant to both the public and private sectors, including day procedure centres and seeks to ensure:
More specifically, the Health Services Act 1988 requires that health service establishments (including both private hospitals and day procedure centres) be registered and that departmental approval be obtained for any variation in registration of the establishment in relation to, for example, the number of beds which may be used for the provision of specified health services, as well as the kinds of health services that may be provided.
The Health Services Act 1988 also provides that it is an offence for a proprietor of a health service establishment to provide more beds (or accommodation for more persons) than the number of beds for which the establishment is registered. In addition, it is illegal for a proprietor of a day procedure centre or private hospital to provide health services for which the centre or hospital is not registered or to provide more beds for any kind of service than the number for which the centre or hospital is registered.
Therefore, the total number of beds, and the number of beds allocated to the provision of a particular kind of health service, are restricted by the registration requirements specified in the Health Services Act 1988. In addition, the Health Services (Private Hospitals and Day Procedure Centres) Regulations 1991 prescribe the types of services that may be provided by private hospitals and day procedure centres. For example, day procedure centres are limited to the provision of medical, surgical and endoscopy services. Private hospitals, on the other hand, may provide medical, surgical, obstetrics, emergency medicine, coronary care, intensive care, radiation oncology, organ transplantation, in vitro fertilization, psychiatric, and specialist rehabilitation services. The 1991 regulations effectively impose a greater level of control over private hospitals than previous regulations, as they prescribe a much broader list of health services for which private hospitals must seek approval, before performing.
4.3 Financing of Private Hospitals
Privately owned hospitals are largely funded by private health fund revenue, compensation payments, Department of Veterans’ Affairs payments and patient co-payments. This includes the cost of private hospital accommodation and theatre fees. However, medical and pharmaceutical services in private hospitals remain substantially publicly funded. Medicare provides a rebate of 75% of the schedule fee for medical services provided to private hospital and day procedure centre inpatients, with health funds covering the remaining 25% of the schedule fee. Patients in Private hospitals also have access to the Commonwealth Pharmaceutical Benefits Scheme, which provides a wide range of drugs at subsidised prices.
The Victorian Government’s Bush Nursing Program provides some public funding for patients receiving obstetrics, dialysis, medical/surgical and emergency assessment and stabilisation/ambulance transfer in selected bush nursing hospitals. The Program was largely established to provide acute health services to public patients in area not well serviced locally by public hospitals. Generally, bush nursing hospitals, like other private hospitals, are reliant on payment by private third party payers such as health funds and individual co-payments.
Federal Government Funding
Apart from Commonwealth funding of medical and pharmaceutical services, private hospitals currently receive no direct financial support from the federal government. This is in contrast to the early 1980’s where private hospitals received significant financial support from the federal government. With the introduction of Medicare in 1984, the federal government pursued a policy of directing its financial support to the public hospital system, while progressively removing financial support from private hospitals and health insurance funds.
Previously, the federal government provided a private hospital bed day subsidy averaging $30, while health insurance funds were supported through the payment of an annual federal government contribution of $100 million to the health funds reinsurance pool. In addition, the federal government increased the share of medical costs paid by health funds from 15% to 25% for inpatient services, and regulated that health funds meet prosthesis costs as part of their basic hospital tables. The Australian Private Hospitals Association (APHA, 19--) has estimated that the above changes effectively transferred $500 million of costs in 1990 from the federal government to the private sector. This represents an increase cost burden of approximately 26%, based on the $2,388 million total benefits paid by the health funds in 1991-92.
Continued Federal government support for the community rating principle has, in effect, contributed to an increase in private health insurance premiums. The principle does not allow health funds to adjust premiums to reflect assessed health risk. Therefore, the ability of funds to tailor packages to the needs of low risk members is reduced, and high risk members are effectively subsidised. With an aging population, this problem will only increase as long as the principle is maintained.
Developments in Private Health Insurance
Private health insurance membership has declined rapidly following Medicare’s introduction and the choice of a free alternative public hospital system. Declining health insurance membership has reduced the size of the funding base for private hospitals.
In addition to the various federal government cut-backs to the private sector, private health funds have faced financial pressure from increasing administration costs and the effects of the recent recession on the investment incomes of the funds, as well as on private health insurance membership. While private health insurance premiums have increased, this is likely to reflect the growth of 100% hospital cover and the significant reduction of patient co-payments in many cases.
The Prices Surveillance Authority cited a number of reasons for the increases in health insurance premiums (PSA, 1993). The higher payout value per claim, due to the rising costs in the hospital sector, and the increase in the number of claims per contributor due to a general increase across the community in the use of hospitals services (combined with a shift in the contributor base towards a higher health risk), are two of the more significant factors.
Due to these various financial pressures and the growth of 100% hospital cover, private health insurance premiums have increased substantially over recent years. This has contributed to the decline in private health insurance membership, which was precipitated by the introduction of the Medicare system in 1984.
In 1995, the first of a series of federal staged changes to the legislative framework for health insurance funds took effect. The reforms are intended to encourage health funds to enter into contracts with hospitals to cover the full cost of patient services, so removing one of the major difficulties currently cited by health fund members, namely, substantial out-of-pocket payments.
Victorian and South Australian health insurance funds have used such contracts to cover hospital costs for several years. The federal government reforms are also directed at obtaining coverage for the first time of medical "gap payments" where doctors charge at higher levels than the schedule fee. Recent press coverage (The Australian, --/--/1996) suggest that progress in providing 100% total coverage of hospital and medical costs may be slow.
4.4 Allocation of Resources Within the Public and Private Sectors - Some Current Issues
The existence of the private hospital sector provides a valuable safety net for the public hospital system. In comparison to other states, Victoria has a large number of private acute and psychiatric hospitals operating alongside the public hospital system. The patient load currently carried by the private hospital sector could not be transferred to the public sector, without a substantial addition to capital cost. Consequently, the promotion of private hospital services and day procedure centres is likely to be continued, and is seen by many to be critical, given the continuing budget restraints placed on the public system across Australia.
Factors which potentially impact on the balance between public and private hospitals include: the level of private health insurance membership, funding levels (and payment systems such as casemix) of public hospitals, and the range and mix of services provided across the two systems.
The introduction of casemix funding for Victorian public hospitals in 1993 did not impinge directly on private hospitals. Nevertheless, casemix funding appears to have had an indirect effect on the demand for private hospital services, particularly in light of decreasing patient average length of stay in public hospitals, which increases the throughput of these hospitals and reduces waiting lists. A shorter waiting period means public hospitals become a more attractive prospect, relative to private hospitals. Statistics (referred to in the next section) indicate the rate of growth in private hospital separations in Victoria, has slowed in the last few years. The decline in waiting lists for access to public hospitals would go some way towards explaining this phenomenon.
Trends in private hospital service provision
In terms of the mix of health care services provided, the private hospital sector appears to have followed divergent paths. A number of private hospitals are increasingly offering care via the provision of day surgery services. Day surgery services generally involve lower average costs per admission, due to the nature of procedures undertaken (less complex procedures), lower capital requirements (less sophisticated equipment/technology is required) and length of stay (no overnight care).
The other trend in the private hospital sector is for the larger private hospitals to offer a greater range and complexity of health care services, in an effort to attract a greater share of the health care market. This expansion in health services provided reflects strong investment by the larger private hospitals in an effort to upgrade their facilities, including the latest in expensive high technology equipment, so as to provide (for example) emergency services and intensive care units with 24 hour medical staffing. Many of these private hospitals now have the capacity to provide a wide range of medical and surgical services which, just a few years ago, were only available within the public hospital sector at the large teaching hospitals. Private hospitals with more sophisticated equipment and a more extensive service range, are more attractive not only to patients, but also to medical practitioners. This is likely to partially explain the notable decline in recent years in the number of privately insured patients receiving treatment in public hospitals (see Independent Assessment of Casemix Payment in Victoria, Health Solutions Pty Ltd, December 1994).
Competition between private vs. public hospitals
The efforts undertaken by the private hospital sector in recent times, with improved facilities and a greater range of services being offered, suggest/indicate that the private sector has sought to reposition itself in the health care market relative to the public sector. For example, the recent trend for larger private hospitals to establish specialist units suggests that private hospitals are attempting to provide a viable alternative to the free access, public sector. Given that hospitals are dependent upon securing the services of the medical profession for survival, providing upgraded and sophisticated facilities is a necessary component of this. (Note that where adequacy of facilities is not an issue, other factors such as patient insurance, access to finance, doctor patronage and hospital location takes on greater significance in determining competitive advantages. For instance, private hospitals providing the same (competing) services can be expected to compete more or less effectively depending on their location, i.e. proximity to the patient catchment area being served and to the doctors utilising that service.
On the other hand, day procedure centres are developing their own niche in the health care market by providing more sophisticated services than might a general practitioner, but less complex than a hospital. With their lower capital requirements and overheads, these facilities have significant competitive advantages. It is expected that further growth in this sector in the future, might place significant competitive pressures on private hospitals (for the less complicated procedures).