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As fees for private healthcare surge and cause many to cancel their plans, insurers blame inefficiencies in the private hospital system. By Mike Seccombe.
Is private healthcare facing an exodus?
To an increasing extent, Australians in private healthcare are downgrading their insurance cover, private hospitals are failing and millions of Australians are delaying or skipping the care they need because they can’t meet rising out-of-pocket costs.
Over the past five years the number of Australians with the highest level of private health cover has fallen by 360,000, or almost one third, as people downgrade to plans that cover less. Sixty-eight per cent of hospital policies now contain exclusions.
Figures from a “report card” released by the Australian Medical Association (AMA) last month suggest the reason. Since 2008, private health insurance premiums have increased by more than 100 per cent, double the general rate of inflation. Over the same period, average wages have gone up about 60 per cent and indexation of government payments under the Medicare Benefits Scheme have increased by less than 20 per cent.
Australians are “paying more but are covered for less”, says AMA president Danielle McMullen.
In trying to determine who or what to blame for the increasing unaffordability of private healthcare, a circular pattern of finger-pointing quickly emerges.
The insurers blame general medical inflation – which has gone up more than 90 per cent since 2008, and accelerated in the years following the pandemic – and inefficiencies in the private hospital sector.
The hospitals blame the insurers and also inflation, due to increased wages for nursing staff and cost increases in everything from medical devices to food for patients. They also cite fee-gouging by medical specialists – a Grattan Institute report last year showed a 73 per cent increase in specialist fees in real terms since 2010.
Independent health economists point to overinvestment by some hospital operators, who failed to anticipate changes in the way care is delivered, such that people now spend less time as inpatients, meaning more empty beds. Everyone blames government for below-inflation increases in benefits.
The report from the doctors’ union, though, laid the blame largely on private health insurers for profiteering. Its data showed that since 2019 the benefits paid for in-hospital medical treatment had gone up just over 18 per cent, while insurers’ profits grew by nearly 50 per cent.
Just prior to the pandemic, 88 per cent of the premiums paid for health insurance were returned in benefits to insured patients. Six years later, in 2024/25, that had fallen to just over 84 per cent – lower than even the dysfunctional system in the United States, which mandates a return of 86 per cent. The AMA has called on the government to mandate that insurers return at least
90 per cent.
The report also called the insurers out for so-called phoenixing, an “increasingly common” practice whereby they withdrew existing policies and replaced them with nearly identical policies at higher prices.
This tactic, it said, “bypasses the regulated premium-increase approval process, allowing insurers to raise costs without ministerial oversight and leaving consumers, especially those seeking top-tier hospital cover, paying more”.
The AMA also called on the federal government to establish a new private health system authority. “There are too many bodies involved in the regulation of private health – a single, independent authority would provide a unified and coherent approach,” it said.
It’s not only patients (“consumers”, in the language of the report), who are struggling. Private hospitals also are suffering.
Just before Covid, in 2017/18, private insurers and private hospitals both recorded healthy, roughly equal, levels of profit: about $1.8 billion and $1.6 billion, respectively. In the years since, however, the operating profit of the hospitals has trended sharply downwards. The AMA report included data showing that in 2023/24 private hospitals made a $34 million operating loss, while private health insurers banked more than $2.2 billion.
That is a big problem, McMullen tells The Saturday Paper, given private hospitals account for 41 per cent of all admissions in Australia and about two thirds of elective surgeries. “To be frank, our public system couldn’t cope if our private sector fell over.”
It is tottering. In the past five years, according to the Australian Private Hospitals Association (APHA), 82 have closed. Others have opened, so in net terms, there are only eight fewer – down to 633 in 2025 – but the new ones tend to be smaller and offer a narrower range of services. APHA notes the “trend has been for day surgeries, usually doctor owned, to open, so there has been a significant shift in the make-up of the sector”.
Even the larger hospitals that remain are cutting services. Catholic Health Australia (CHA) reported last May, for example, that 18 maternity units across the country had closed since 2018, “13 of them in just the past three years”.
Katharine Bassett, director of health policy with Catholic Health, points to another recent example. Last August, one of only two private hospitals in Hobart stopped offering maternity services.
“Calvary, as the only other private provider in that area, assumed this unprofitable service to ensure ongoing community care. Catholic hospitals frequently do this, as not-for-profit, mission-driven organisations, regardless of the financial impact,” she says.
Which is a good result in the case of Hobart but also illustrates the bigger problem: private hospitals simply can’t make money on certain services. Some will cross-subsidise loss-makers such as maternity, mental health and regional services with lucrative day procedures, such as hip and knee replacements, but these operators are inclined to do so by keeping patients in beds longer than might be necessary, to recoup costs.
The essence of the problem, says Bassett, is that “everyone is paid a different price for the same services”.
“There are teams of contracting staff in both insurers and hospitals whose entire job is to argue every day over how much indexation will be applied to a contract, rather than how we can deliver new models of care and innovations for patients,” says Bassett.
“Everyone’s in a rowboat that’s slowly sinking, and instead of dealing with the leak, we’re all busy hitting each other with the oars.
“Why don’t we just have a single price [that reflects] how much it costs to deliver that service?”
CHA – Australia’s largest non-government, non-profit provider – has been pushing this idea for years and it is gaining traction. Just this week CHA announced that the Australian Health Service Alliance, representing non-profit insurers, was supportive of a National Efficient Price.
“Australia’s not-for-profit private healthcare sector has backed the government’s proposal for a new funding mechanism that puts private hospitals on a sustainable footing, removes complexity, and focuses on delivering quality care to patients,” began the media release.
It’s an optimistic take on the government position. A spokesperson for Health Minister Mark Butler said the proposals “are not Government policy” but one of a range of options “being considered” by the CEO Forum, a body established a year ago that comprises the heads of for-profit and non-profit private health businesses, including insurers and hospital operators.
Nonetheless, the big for-profit insurers have gone to the bother of providing modelling to government that foreshadows dire consequences from such a change.
Ben Harris, director of policy and research with Private Healthcare Australia, the peak body representing private health insurers, emphasises another factor driving healthcare costs up: private hospitals have too many beds with too few people in them.
He cites a Grattan report that found occupancy rates were only about 64 per cent.
Of every $7 health insurers pay out, roughly five goes to the hospitals, one is spent on medical devices and technology and one goes to the doctors. So the hospital money is actually the big money.
“A problem for the hospitals – and this is a good problem for consumers – is that surgery is generally less interventionist than it used to be,” says Harris. “So instead of going to the hospital for a couple of weeks, you can now go in for many surgeries for a few days.
“Hospitals are making less revenue from the same number of patients,” says Harris.
“Even a knee reconstruction used to be seven days in hospital. Now it’s five days, with much better results. In Europe, the average is now down to two days, with often better results than in Australia.
“We have too many hospital beds in a range of urban areas across Australia, and plenty of areas – particularly regional – where we don’t have enough services.”
Harris says there was “overinvestment” in private hospitals 15 or 20 years ago.
“The hospitals are struggling because their costs are going up, and their fixed costs are becoming a higher percentage,” he says.
Peter Breadon, health program director at the Grattan Institute and one of the authors of the report referenced by Harris, says the “burst of quite competitive building-out [of new facilities]” saw some hospital operators “massively loaded up on debt”.
The most obvious example was Healthscope, which operates several dozen hospitals across Australia. It was bought by the giant Canada-based private equity asset manager Brookfield in mid 2019 and went into receivership last year.
The overinvestment, the shift to shorter hospital stays and the post-pandemic burst of inflation combined to make a “perfect storm”, says Breadon.
Ultimately, he says, there has to be a shake-out of the private hospital sector. “In some cases, they might have to go public, or be repurposed, or closed down.”
On the idea of replacing the current inefficient and opaque system of contracts between hospitals and insurers, Breadon notes that the relationship between hospitals and insurers is “one of the most toxic dynamics” in the health system.
The big private operators are, to put it mildly, reluctant. The modelling they commissioned suggested some 560,000 people could drop out of the system and that the cost of hospital care could rise by $800 million to $1.2 billion annually.
Breadon argues that real-world experience shows otherwise. Activity-based funding has an established track record in the public hospital system, starting in Victoria in the ’90s and nationwide from 2011. The public hospitals take the average cost of a service, after some adjustments for outliers for a given type of care, to determine the price governments will pay.
Applying a similar approach to the private sector “would create transparency for all sides. It would ensure the funding is enough to cover the costs of the system, and you get the stability that we want, but it would also drive efficiency over time,” says Breadon.
The big insurers reject the idea, he says, “because they think it takes away their bargaining power”, and some of the big hospital operators enjoy better deals than smaller ones.
Despite its dire modelling, the APHA’s stance seems less a rejection of a benchmark price than of a price that is too low.
“PHA supports a Private National Efficient Price, as long as it is set at an efficient rate,” says Harris. “Our concern is that setting an average price is not the same as an efficient price and will just lock in what we currently do. We want something which drives change and better healthcare.”
He suggests the real opposition comes from some of the big private hospital operators. The circle of finger-pointing continues, but the push for change appears to be growing.
This article was first published in the print edition of The Saturday Paper on January 17, 2026 as "‘Toxic dynamics’".
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