Major Australian healthcare provider can’t pay bills with time running out

A big “For Sale” sign has gone up outside dozens of Australia’s private hospitals, but the real concern is why. Healthscope, operator of the hospitals, is on the verge of collapse, the group unable to pay landlords and lenders what they are owed.

For those scratching their heads over what is at stake, here’s a refresher.

Healthscope nurses and midwives walking off the job in November to demand a 15 per cent pay rise.

Healthscope has 38 private hospitals – including Sydney’s Northern Beaches Hospital, Holmesglen Private Hospital and The Melbourne Clinic – which house 5000 beds and employ 17,000 staff across the country.

State and federal health ministers will be among those watching closely to ensure that Healthscope’s precarious financial position does not translate into health failures – especially given the tragedy at Northern Beaches recently.

We are a long way from the days when Healthscope owner, Brookfield Asset Management, confidently predicted that Healthscope might never change ownership if the $4.4 billion cash takeover succeeded.

“We’ve been owner operators for over 100 years,” Brookfield’s head of private equity Len Chersky said in February 2019 when its takeover bid was in the ascendancy.

“We’re a long-term patient investor and when you look at it on a 10-year basis, the tailwinds are undeniable,” Chersky said at the time about the long-term opportunity Australia’s ageing population provided to a business such as Healthscope.

As a global financial giant with more than $1 trillion of assets under management, Brookfield had, and still has, the financial heft to back Chersky’s confident prediction.

So what has hurt Healthscope so badly that even a trillion-dollar financial giant is threatening to walk away from a group which operates such an essential part of Australia’s health infrastructure?

The most dramatic event was not foreseeable. A year after Chersky’s chat, COVID-19 hit and Australia’s private hospitals were effectively shut down.

But it was when Australia’s for-profit health sector emerged from the pandemic that it became clear that more foreseeable problems had accelerated – especially for operators such as Healthscope.

Private health insurers such as Medibank and NIB have kept customers happier – and costs lower – by allowing a lot more at-home treatment for services that previously required a lengthy hospital visit.

That means lucrative multi-day admissions to private hospitals have dropped over the past five years while costs have soared for private hospital operators in the wake of the pandemic.

On Monday, hundreds of nurses and midwives at the public hospital operation that Healthscope runs at Northern Beaches Hospital went on strike with demands that include a one-off 15 per cent pay rise and mandated nurse-to-patient ratios.

Any pay rise would almost certainly set the bar higher for Healthscope’s private operations next door.

Private health insurers, which private hospitals rely on for most of their income, have also been reluctant to financially support a sector which has a cost base that – they think – is no longer fit for purpose.

Lucrative multi-day admissions to private hospitals have dropped over the past five years while costs have soared for private hospital operators in the wake of the pandemic.Credit: Luis Enrique Ascui

From the viewpoint of Healthscope and its current owners, the private health insurers are squeezing the life out of private hospital operators which provide the core service that operators such as Medibank are selling to their customers.

It was clear how acute the problems were becoming last year when Healthscope and Brookfield took the desperate step of publicly brawling with the private health insurers.

In November, it threatened to block millions of PHI customers from funds such as BUPA unless customers paid hefty out-of-pocket fees.

But Healthscope has also had to face up to the fact that the levels of rent it pays, and the hefty $1.6 billion debt owed to lenders, are way above what the business can afford to pay. Cuts are needed to both expense items if the business is going to claw its way back to viability.

What happens next is not clear.

Healthscope’s “for sale” sign was not a voluntary move. Lenders forced Brookfield to take this step in return for them agreeing to keep it out of administration last month by delaying part of their loan payments.

It may not be enough to save Brookfield’s investment. Reports in the Australian Financial Review reveal just what a disaster this has been.

Some debt holders did not agree to the standstill on debt payments. At least one has sold its loan for less than half of the outstanding loan amount.

If lenders are expecting such a massive loss, it means Brookfield has almost certainly torched the multi-billion dollar investment it made in Healthscope.

What Brookfield hasn’t lost just yet is its reputation.

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