Patients now pawns in private health care war

Revelations that hundreds of private hospitals are on the verge of going broke or being shut down have come as a shock to the public. But not to the healthcare industry.

Ambulances pictured outside St Vincent's Hospital in Sydney’s Darlinghurst. Picture: Damian Shaw

Revelations that the viability of a sizeable proportion of the private hospital sector is on such shaky ground, that hundreds of hospitals are on the verge of going broke or being shut down, have come as a shock to the public.

Within the healthcare industry, it’s no surprise.

The bare facts of the matter are as follows: the pandemic smashed not only the public sector but also private hospital groups, with plummeting demand now amplified by high rates of inflation, wage increases and workforce constraints pushing the costs of running hospitals to all-time highs.

Insurers argue they cannot meet the cost challenges hospitals face under contracts that set out rates of remuneration without slugging consumers with higher premiums – even though health funds are banking record profits.

The paradox is that even as the pandemic and the parlous and overloaded state of public hospitals pushed millions more Australians to take out private health cover, halting the pre-pandemic “death spiral” trajectory of the health insurance industry, substantially higher levels of private cover have not been matched by buoyant levels of demand.

Across the private sector, wards sit empty, especially in maternity and mental health departments, and patient demand remains depressed well after pandemic conditions eased. Patients are baulking at out-of-pocket costs – in maternity as many as 40 per cent of people who initially see a private obstetrician end up giving birth in a public hospital.

Workforce constraints are crippling the entire system. At the same time, trends in innovation such as out-of-hospital care and shorter stays after surgery are also disrupting the business model of full-service private hospitals.

Insurers are among the biggest innovators; as funders they’re also setting up their own services. It’s a trend of what’s known as vertical integration that has been in existence in pockets of the market for years, but it is now expanding more rapidly and pushing into unprecedented new zones, such as general practice.

Market forces can drive efficiencies and modernisation, but potential unintended consequences and risks to the system as a whole loom large. With a federal government rapid review of the private hospital sector under way, the stakes are so high that behind-the-scenes tussles over contract negotiations are beginning to spill into the public arena.

St Vincent’s Health Australia took the unprecedented step of announcing publicly last week that it intended to walk away from its contract with NIB within 45 days unless the insurance giant offered it a fair deal. That would have placed NIB’s 1.3 million members in the position of having to rely on second-tier default benefits if they wanted to obtain surgery or care at any of St Vincent’s 10 private hospitals, which could leave patients with a bill for thousands of dollars even though they have private coverage. NIB is now back at the bargaining table.

Hundreds of similar negotiations are playing out across the country but never hit the headlines. “When you’ve got the providers going broke and shutting ser­vices, and the funders making super profits, something is clearly out of balance in the system,” outgoing Australian Private Hospitals Association chief executive Michael Roff says. “I think the government’s attention has been captured now, and they are now looking very closely at the whole situation.”

Allegations of insurers squeezing hospitals to the bone while building their own empires on the back of super profits and aided by billions in taxpayer incentive payment funds have been slung. But these tussles between hospital groups and health funds are much more than a matter of market power imbalance. It is clear to all players in the private health sector that the immense strain on health systems as a whole, already great, are soon to be hit in inexorable rising intensity by the tide of chronic disease in an ageing population that will exponentially ramp up in coming years.

Coupled with the limited capacity of consumers to shoulder the rising costs of healthcare, and the urgent need for efficiencies and system reform, these factors are all coalescing to pose an enormous challenge. It’s galvanising insurers to pursue more efficient models of care that they own as well as fund, as well as providing consumers with the access and value they demand.

“The language of innovation is just being discovered by healthcare. It’s been in other industries for two decades,” St Vincent’s Health chief executive Chris Blake says. “The danger is if market forces are left to run, the risk is that the system bifurcates. And people who can afford healthcare get good healthcare, and no one else does.”

St Vincent’s Health CEO Chris Blake.

Private hospitals are broadly in alliance on this point with doctors, who lobby fiercely against insurers funding and simultaneously owning healthcare service arms.

Hardline critics such as Australian Society of Ophthalmologists president Peter Sumich says vertically integrated healthcare tilts Australia in the direction of US-style managed care in an incremental creeping fashion.

Managed care is a US term that refers broadly to insurers having various levels of control over a member’s healthcare, purportedly to reduce costs and increase the quality of care, and can include incentives for doctors and patients to choose certain care over other care, selective contracting with healthcare providers and controls on inpatient admissions and length of stay.

“Health funds are no longer happy just being fund holders, they want to grow larger and be more profitable,” Sumich says.

“To do this they have to integrate themselves into the health provider space, and vertically integrate to include hospitals and medical professionals. This gives them more control over costs and clinical pathways of treatment. It also allows them more access to profits. They would claim that it will provide downward pressure on policy fees and costs of health. These were the same arguments we heard in the 1990s when America switched to managed care.

“As time has shown, these US companies end up keeping most of the profit but continue to cut costs and reduce the health product available to the health consumer.

“These are historical facts now, not conjecture. In the last 30 years in the US we have seen spiralling costs of health insurance, thus none of the purported benefits ever came to pass. Now in the US they also exert control over clinical treatment protocols, patient choices, medical provider freedoms, length of treatment, and they tend to lock specialist hospitals behind paywalls, depending on what health fund they contract with, called hospital networks.

“If a patient has the wrong health fund they do not get access to a certain hospital or doctor.

“It is time for an independent private health regulator to oversee the system and ensure that our health system remains true to its principles, and in no way resembles the US managed care system.”

Private Healthcare Australia chief executive Rachel David fundamentally rejects that any insurers are pursuing managed care models.

“In Australia all of those things are illegal,” David says. “You can’t employ private doctors. You can’t restrict cover to certain hospitals. No participants in the system who know the system really believe you could introduce managed care into Australia right now.”

Still, Australian health funds’ push into service delivery or ownership of services has accelerated since the advent of the Covid-19 pandemic, particularly focused on out-of-hospital care in areas such as home rehabilitation, chemotherapy and heart health.

The Australian Medical Association said in a recent report the trend had been “largely driven by insurers on their own terms, in part due to a lack of legislative and policy design”. It pointed out risks to equity given most insurers will only provide select out-of-hospital schemes for their own policyholders, as well as risks to patient choice and clinical autonomy.

And now there are new frontiers: insurer Bupa has just made a large play into ownership of general practice, joining Medibank which has increased its investment in Myhealth Medical Group.

“Insurers should not be able to solely contract with the services they own to the exclusion of other providers,” Ramsay Health chief executive Carmel Monaghan says.

“This is happening today and leads to clinical interference by payers, a lack of consumer choice and a disintegration of care for patients. And insurers should never have been allowed to own general practice – this is not good for consumers. It will lead to a two-tiered healthcare system where the treatment of private insured patients seeking general practice could cannibalise available practitioners for non-insured patients.”

Medibank chief executive David Koczkar rejects the criticisms and says it’s vital for health funds to offer efficient, cost-effective models of care and to invest in preventive care, both as a response to consumer expectations and to ensure the entire health system remains sustainable into the future.

Medibank chief executive David Koczkar. Picture: NCA NewsWire/Nicki Connolly

“We are not just a private health insurer. We are a health company investing in supporting both the public and the private system,” Koczkar says. “Our customers want us to be more involved in their health. They want us to be involved in their health when they’re generally well, and they want us to support them seeking treatment to have more choice and control in their health.

“We are all about increasing choice and maintaining clinical autonomy between doctors and patients. Ultimately, I think health transition extends to primary care, virtual care, home care and even into prevention and personalisation. So this is very much the health transition we need as a country.”

For young people in particular, the value proposition of private health insurance is often under serious question given the high cost of premiums. It’s vital for insurers to keep young people in the system, and some of the vertically integrated offerings are aimed at exactly this. As well, keeping younger people well saves massive costs for insurers and the system as a whole down the line.

Medibank member Bekki Fisher used the insurer’s preventive healthcare app, Live Better, to transform her life during the past two years. The app rewards users for high step counts, good sleep hygiene, and relaxation or meditation and other preventive health activities such as vaccinations, blood pressure checks, skin checks and dental check-ups.

Medibank member Bekki Fisher lost 30kg over two years using the insurer’s Live Better preventive healthcare app. Picture: Lyndon Mechielsen

“I tracked every single stretch, sleep, snack and step,” Fisher says. “Every time I wanted to give up, a reminder on my phone to track my movement kept me going.” She lost around 30kg and was given five pairs of Adidas sneakers and some activewear.

Another outfit making a big play into service provision and healthcare data science is Honeysuckle Health, jointly owned by NIB and US health services company Cigna Healthcare.

Honeysuckle was given the green light by the Australian Competition & Consumer Commission as the nation’s first authorised buying group for healthcare payers, and offers health contracting services, data services and health programs for private health insurers, general insurers and travel insurance companies.

It’s moving heavily into the clinical at-home care market, which in Australia is lagging well behind other countries and which Private Healthcare Australia has estimated has the capacity to deliver $1.3bn in cost savings to the national economy.

“I think every health insurer of any scale around the world is going through kind of a similar challenge or transformation, every health insurer is trying to change its business model,” Honeysuckle Health chief executive Rhod McKensey says. “And every insurer is trying to change its value proposition from being a passive payer of claims to a much more active participant in its members’ health. And so we absolutely see ourselves as helping to facilitate that.

“Healthcare in Australia is fragmented. And there’s a variety of reasons for that. But one of the key reasons is that the multi-payer system leads to that level of fragmentation, the fee for service model creates that fragmentation. And ultimately only the GP is remunerated for co-ordinating an individual patient’s care. And that remuneration is inadequate.

“And so in Australia there is definitely a need for care to be better co-ordinated.”

The AMA’s vociferous opposition to vertically integrated models of care is founded on concern that the overriding principle of what is best for the patient is subsumed by a primary desire by the insurer to achieve cost efficiencies.

“It’s not about what is best for doctors but what’s the best for patients,” AMA president Steve Robson says. “The doctor-patient relationship is supposed to be like priest and penitent, there should no barriers to getting the fullest possible picture so that you understand every aspect of the patient. And in that relationship the best decision is always made, and it’s not a protocol decision or a decision that an insurer intrudes into.

“Vertical integration fundamentally overturns this principal of a sacrosanct relationship based on clinical independence that is thousands of years old.”

Honeysuckle Health chief executive McKensey and Medibank’s Koczkar dispute that characterisation.

“There is no place in Australia for US-style managed care,” says Koczkar. “We are all about increasing choice and maintaining clinical autonomy between doctors and patients. We’re not interested in any way bypassing clinical autonomy between the patient.”

But Australian Orthopaedic Association president Michael Johnson insists that not only do vertically integrated models of care throw up risks of conflicts of interest, but also they may well trigger potentially far-reaching structural problems for private hospitals.

“If a doctor is involved in some kind of contract with the insurer, there is a potential for a clash between the doctor’s commitment to the patient and their ethical behaviour and the requirements to fulfil their contractual arrangements,” Johnson says.

“Those contracts will have performance and quality targets for the doctors who sign those contracts. Those targets will invariably be related to length of stay. And none of these contracts is open or transparent.

“You’ve then got a situation where for the doctors on these contracts, they are being incentivised to treat people with the least complex problems, and disincentivised to treat the elderly, frail and people with complex problems, and those people will then rely upon the full-service hospitals, whether they’re public or private hospitals.

“And so the case mix of the full-service hospitals then becomes increasingly complex. They end up treating the most complex set of patients, with the least complex patients being treated in other facilities. Now, I don’t have a problem with that, of putting more complex patients into full-service hospitals, as long as the full-service hospitals are adequately funded to treat the change in case mix.”

Wherever the debate lands over vertical integration and insurers’ role in service delivery and preventive care, the issue is at the heart of the current power struggle between funds and private hospitals groups as the latter fights to secure stable financial bases.

The clear risk is that if the market is left to run with cashed-up insurers positioning themselves as the controllers of innovative, efficient markets, the funding of full-service hospitals that are left with having to support a complex patient mix heavily affected by chronic disease will become more difficult than ever.

The dilemma is sparking increasingly urgent calls not only for government regulation but also for system reform to ensure the policy aims of Australia’s healthcare system and tax policy , are maintained.

“You can’t have reform by regulating one sector. You have reform by changing the system,” St Vincent’s Health chief executive Blake says. “And so governments are doing amazing things right now to get the facts on the table, but innovation requires the players in the system to do something different by definition, as opposed to double down.

“Regulation is important, but I think policy design, more broadly, is even more important, and the interplay between the different elements – state, federal, private, public, aged care, primary care and acute care. It’s going to be up to government partnering with organisations who can think differently to craft transitions in a carefully designed way for the trends that are coming, not for the interests of one particular group.

“And we’ve got to do enough to make sure that there’s not market failures where we’re redesigning.

“Reform is possible in Australia at the system level, we’ve done it in economics with the Accord. Health is an infrastructure that requires thinking at that scale.”