Why big hospital terminations are bad news for small providers

The termination of agreements between St. Vincent's Health and nib health funds marks the fourth significant split between a major hospital group and a large insurer (or insurer buying group) in the past four years.

Smaller hospital operators, while keenly observing and generally supporting hospitals in securing better deals with health insurers, may not realise that the success of larger entities like Ramsay, Healthscope, and St. Vincent's could come at their expense...

Do terminations result in worse outcomes for small hospital operators in the long run?

Terminations over the past four years

In May 2022, Ramsay issued a termination notice to Bupa Health Insurance, leading to a highly public and contentious three-month battle that concluded with a resolution in August. Observers could see Ramsay's dual objectives: to secure a significant rate increase needed to stabilise its declining share price and mitigate post-COVID healthcare inflation, and to send a strong message to all insurers. The message was clear: Ramsay was ready to challenge any insurer, regardless of how big, and would emerge victorious. This stance reverberated throughout the private health insurance industry, setting the tone for future negotiations.

Just a few months later, private health insurance consumers faced more turmoil when Healthscope issued a termination notice to HCF in December 2022. Another intense public dispute ensued, albeit less polished, until an agreement was reached in February 2023. Despite HCF's initial advantage in the public relations battle with their message, "Your Health Is Not For Profit," the swift and unexpected settlement indicated that Healthscope achieved its goals from the termination.

This was Healthscope's second major termination strategy, following a relatively successful negotiation with the Australian Health Services Alliance (AHSA), a buying group for 26 small health funds, in May 2020. During this termination Healthscope targeted and ended its agreements with six of the largest funds in the AHSA to force a better outcome.

Not to be outdone, the Sydney Adventist Hospital Group issued a termination notice to the AHSA in December 2021, reaching an agreement by March 2022. This demonstrated that even smaller operators, with significant presence in high-value locations like North Sydney, could leverage public termination processes to their advantage.

So why is this Bad News for Small Providers?

Unfortunately, health insurers in Australia operate under price regulation and political influence, which often prevents them from securing rate increases that match inflation. This makes it difficult for them to adequately compensate hospital groups. After covering their management expenses and achieving their targeted profit or surplus (typically low, between 2%-5%), insurers only have about 85 to 89 cents of every dollar of premium revenue to allocate to hospital benefits.

Termination events are generally effective for large hospital groups if they can significantly impact an insurer’s ability to attract and retain customers. The strategy behind a termination is to inflict enough financial pain through reduced sales and increased customer attrition (members switching to competitors) that the insurer agrees to a higher rate increase to avoid these commercial impacts.

This strategy, however, poses a significant problem for smaller hospital operators. If the total benefits payable are viewed as a single pie, the larger the slices secured by major groups like Ramsay, St. Vincent's, and Healthscope the less is left over for everyone else to share. This is particularly concerning because when these large groups negotiate higher percentage increases through termination events, those increases apply to a much higher base rate than what smaller hospitals receive for the same treatments.

Insurers respond by trying to contain costs in areas where they can more easily negotiate lower pricing. While large groups may target and secure increases between 6%-10% in todays environment, insurers often push small providers to accept deals in the 2%-3% range to balance their budgets. This dynamic creates significant viability challenges for small hospital groups, independent hospitals, and day hospitals.

Over the past decade, insurers have driven down prices for these smaller providers to razor-thin margins, while larger groups have continued to extract higher increases. Consequently, when inflation drives up costs, smaller providers are unable to absorb these increases, leading to hospital closures in Australia.

While large hospital groups also face challenges and require significant increases to remain viable, managing their concerns is far more preferable than dealing with the viability issues faced by independent day hospitals in Australia.

One thing is clear: all providers must now invest in robust health fund negotiation strategies to survive in the current climate. Without specialist support, training, and tools, few small hospital operators can compete successfully against health funds equipped with professional full-time negotiators and teams of analysts and data scientists.