Politics before Patients

When we consider all the reports released by the Department of Health or the Health Minister’s office over the past decade, it is hard to find any other report that has been as anticipated by the hospital sector as the Private Hospital Sector Financial Health 

Check.

Private Hospital Sector Financial Health Check - Summary

It is doubly hard to find any other reports as disappointing or underwhelming at a time when the sector needed to see some clear leadership from the Minister for Health and the Department of Health. That said, with an election year looming and Labor falling behind in the polls, it is no surprise that “Politics before Patients” will be the mandate and true focus of our political elite. The Prime Minister has already started the opening salvos of policy agenda this week, and it is clear there is a high chance we will have an election in April/May next year. If we do see any rate relief from the Reserve Bank, my guess is this will be the trigger for Labor, allowing them to highlight that their cost of living policies are now starting to work, thereby removing some of the sting from the opposition's soft target of interest rates and mortgage stress.

All this means that any meaningful policy position is likely to come only as election promises (for what little they are worth), while our trusty Department of Health gets ready for caretaker mode—effectively hamstringing them in achieving anything substantial until after we have a new government.

While all of this is interesting, it is cold comfort for a private hospital sector under extreme pressure, looking to the Government for at least a glimmer of hope. Hope that was categorically quashed with a report that ultimately said nothing of relevance.

So what, if anything, can we take away from the Financial Health Check? Well, for those deeply involved in the sector, not much. Overnight separation growth is low, day procedure growth is higher but not amazing. Most of the new day procedure work is being done in overnight hospitals rather than the day hospital sector.

The EBITDA margins analysis likewise held no surprises. Some hospitals remain extremely profitable and viable, while a growing number of hospital providers are now losing the fight on margin pressure and are now lagging. If the Department had more courage in this release, I am sure we would also have seen some simple home truths. The vast majority of hospitals under pressure are not held by major groups like Healthscope (sorry, Brookfield...), and regional hospitals are under far more pressure than major metropolitan hospitals.

EBITDA Margins - Private Hospitals

Let’s also not forget there is some selection bias in this. Hospitals under significant pressure were far more likely to supply data to the review than hospitals still maintaining reasonable performance. The financial performance data provided covered only 58% of admissions and 63% of revenue for the sector. This is a significant portion, but a reasonable question anyone might ask is: if the rhetoric on viability and reality are close, then why not more? The likely answer is that viability is a huge issue for some; in essence, we have a rich-poor gap between our provider types. Chances are, the providers really under pressure, really hurting, aren't the ones able to fund a multi-million dollar ad campaign.

Once again, with some more intestinal fortitude, the release of who contributed to the review would shed more light on where the true viability concerns sit in the market. Likewise, showing the breakup of funding disparity between health funds based on size would have showcased some interesting patterns, revealing which funders may be driving viability risk in the sector.

Ultimately, the media release was far more informative than the health check summary. Statements like the following give a strong indication of what, if anything, will be done to support private hospitals:

"While parts of the sector have remained strong, there has been a reduction in profitability over time as costs have risen faster than revenue."

And the following quote from Minister Butler

" There will be no silver bullet from Canberra or funding solution from taxpayers to deal with what are essentially private pressures in this system." - Minister Butler

So what does this mean for private hospitals, especially those dealing with near-horizon viability concerns? Essentially, it means you are on your own, and that the Department and Federal Minister for Health view this as a commercial issue that commercial entities need to sort out.

In the short term, that means getting better at negotiations and leveraging any and all tools you can to maximise your outcomes. Improving training for your negotiators, accessing good benchmarking tools, and developing robust negotiation strategies are all critical for providers if they hope to endure in the short term.

Over the medium term, the only reasonable solution I see is for small and independent providers to form a buying group to improve their ability to consistently drive reasonable outcomes in revenue negotiations and price containment for procurement.

If you are interested in either option, reach out for a discussion.