It's time for a hospital buying group

One of the most rewarding and challenging, moments in my career was that of setting up the Honeysuckle Health Buying Group. Not only was it a fascinating process to work through Competition Law, and the approval process with the ACCC, but it afforded me the opportunity to work closely with, and understand the views of hospital, doctors, other health bodies and associations.

Should Australia have a Private Hospital Buying Group

The subsequent appeal, once we received approval from the ACCC, to the Australian Competition Tribunal (ACT) brought a whole new rigour to my understanding of the complexity of procedural law and the importance of stakeholder engagement. It was a stark reminder of that endearing lesson - "don't count your chickens before they hatch."

The drivers and reason for use of buying group by Private Health Insurance make abundance sense. As of March 2024, the registry of Private Health Insurers lists 30 organisations (some with multiple brands). While this may seem like a reasonable balance given the size of the market the clear issue is how market share allocation works. The top five health insurers (Medibank, Bupa, HCF, HBF and nib) account for 82% of the market, leaving only 18% market share for the remaining 25 insurers to fight over.

Naturally, with less than 20% of the market across so many insurers it would be almost impossible for these organisations to afford the costly overhead of employing dedicated contract negotiators with the analytic capabilities needed to support them. Even if they could afford this overhead it is unlikely they would achieve competitive rates with hospital groups like Ramsay, Healthscope and SJOG. Ultimately, without buying groups like the AHSA, the small health insurers would not be able to viably compete with the five largest insurers on product pricing.

In essence; a buying group allows the insurers to have highly skilled negotiators act on their behalf, the ability to invest in proper analytics and commercial modelling for complex contract negotiations. But most importantly, enough market share to make it a reasonably balanced negotiation with large hospital groups.

Why then does no such buying group exist for hospitals in Australia?

All of the same drivers exists, more so given the viability challenges now facing many small hospital operators. At present some of the barriers to long term viability for hospital operators are:

1. Small hospitals are not able to afford dedicated professional contract negotiators to face off against Private Health Insurers in Australia.

2. The providers do not have the capacity to conduct complex commercial modelling on contract changes, nor do they have the market size to benchmark pricing and understand relative value.

3. They do not hold enough market share to be able to enter into a fair and balanced negotiation with health insurers. Put simply, a termination between a small hospital or hospital group and a big insurer just isn't going to hurt the insurer enough to enforce a better deal with the hospital.

4. They could benefit from strong secondary opportunities in procurement which their larger hospital group competitor's access.

So why then, with all the similar drivers for both sides of the industry, do we see insurers so powerfully activate towards and use buying groups, and hospital not?

It could be due to the history of competition between hospital providers, or the relative broad range of operators (from doctor owned, NFP, community owned and privately invested companies). Whatever the reasons, perhaps now is the time for hospitals to reconsider how they approach.

With the right approach a buying group representing small hospital operators, day hospitals and small to medium sized groups could restore equity to the marketplace. With the right type of authorisation from the ACCC, these small operators could, through a buying group, present a material negotiation opponent to health insurers. One with sufficient risk to an insurer that they cannot simply ignore; ensuing fair and reasonable terms or conditions like they currently do.

This approach would not be without its challenges and as with any good strategy, the devil is in the detail. That said, given the current state of affairs, waiting for the Government to rescue the market is not a strategy at all. So why not learn from the health insurers and adopt what has been, to date, an effective strategy for decades?