A government discussion paper has floated a National Efficient Price for private hospital care. Could this end the war between insurers and private hospitals?
It’s been talked about for years, now we have the first concrete evidence that the government is considered a National Efficient Price for private hospital care.
The federal government has circulated a draft proposal of the Pricing Framework for Australian Private Hospital Services to senior insurer and hospital executives. It was leaked over the weekend and has been seen in full by Oncology Republic.
It outlines a new, “nationally consistent, transparent, and evidence-based approach to funding private hospital services, anchored by a Private National Efficient Price (PNEP) informed by Activity Based Funding (ABF) principles.”
The proposal explained how the current system is complex, inconsistent and isn’t aligned with what the patients, providers and funders need.
Not only are there multiple payers (private health insurers, state and territory governments, accident compensation schemes and Department of Veterans’ Affairs), each of these payers has different ways of purchasing care.
Private hospitals manage dozens of bespoke contracts, which are complicated and admin intensive. There isn’t a consistent benchmark for cost efficiency or service appropriateness, making pricing negotiations between hospitals and health insurers protracted.
At the same time, there’s a heavy reliance on cross-subsidisation where services with high margins like hip and knee replacements subsidise those with lower margins like breast disorders and dementia.
“Broader pressures – workforce shortages, inflation, outdated funding models, and inconsistent data collection – are compounding the challenge, threatening the sector’s long-term viability,” said the government’s draft proposal.
The solution, according to the proposal, is an activity-based funding model similar to how healthcare is priced in public hospitals. Payment for healthcare services would be linked to the quality and complexity of the care provided.
Each clinical activity would be grouped with those with similar resource requirements, and then costs would be determined for delivering each type of care. It would then apply a benchmark unit price, which would apply price weights to each classification.
The proposal highlighted direct impacts, including making contract negotiations easier and simplifying arrangements for public patients in private hospitals.
It would mean all payers in the private hospital system would have a single, consistent model and could replace the second-tier default benefit regime.
Indirectly, it could also play a role in informing the annual health insurance premium round process and make risk equalisation of higher-risk individuals fairer.
“Providers, funders, and policymakers alike recognise the need for a more consistent, transparent, and evidence-based approach to pricing,” said the proposal.
“While all parties support flexibility and local negotiation, the absence of a commonly accepted national pricing reference point undermines the sector’s ability to function efficiently, strategically invest, or innovate care delivery.”
OR reached out to many of the largest private hospital groups and health insurance companies to get a sense check of the proposal.
Most refused to comment, however Catholic Health Australia’s director of health policy Dr Katharine Bassett was in favour.
“It is clear that private hospitals are struggling to remain viable and we urgently need funding reform,” she said.
“The current system where dozens of individual insurers and hospitals separately negotiate the cost of care — and value it differently — is a hugely inefficient waste of time and money that could be better spent serving patients.
“As insurers’ bargaining power continues to grow, the resulting agreements are often unsustainable, placing immense financial pressure on the day-to-day operations of not-for-profit private hospitals.
“Catholic Health Australia’s proposed National Private Price offers a proven solution.
“Already used effectively in the public system, it would establish a robust, evidence-based, and transparent benchmark for the cost of delivering care. This would simplify negotiations, reduce administrative burden, and ensure funding from insurers accurately reflects the true cost of care.
“If implemented alongside incentives for insurers to give back more to patients, it would also ensure more funding flows from insurers to patients for the delivery of care,” she said.
Medibank also responded, saying:
“We support reform initiativesthat will help keep healthcare more affordable for patients and drive health system innovation and productivity.
“The government has sought responses to its paper that lays out a number of different options for pricing models and we’ll be providing our submission by Monday’s deadline,” they said.
Industry groups – the Australian Private Hospitals Association and Private Healthcare Australia – want to understand the opinions of their members before they comment publicly.
Dr Rachel David, CEO of PHA told OR:
“We have an open mind about this. We are currently putting considerable effort into consulting our health fund members about it so we can inform the discussion.”
Peter Breadon, health program director at the Grattan Institute told OR that insurers particularly should think longer term.
“Insurers shouldn’t just think about the dynamics today, but also how they might change over time, and how this reform will ensure a fair and efficient price for all parties under future market conditions which may not favour insurers.
“Adopting a national efficient price for private hospital care is a good reform that can help end the toxic blame game between insurers and private hospitals that has been creating a lot of uncertainty about the future of the sector and for patients who rely on care from the private system.
“This will create transparency about what the viable cost of care really is, and there’s good evidence that this way of funding care over time can help reduce cost in the system as well.
“So it could both stabilise the system today, while helping to improve productivity over the longer term,” he said.
A government spokesperson told OR:
“All Australians deserve access to affordable treatments and the devices they need to stay healthy and live full and productive lives.
“Millions of Australian families hand over their hard-earned cash every month for their private health insurance premiums. Insurers and hospitals need to work together and take responsibility for driving change in this sector.
“The government also has a responsibility to consider options that could improve the affordability and value of private health insurance. The government will carefully examine the findings and recommendations of options available.
“The paper is provided only to inform discussions,” said the spokesperson.
The paper will be part of discussions between the department, hospital and insurance executives on 10 December at the Private Health CEO’s forum.
