Private Patients in Public Hospitals

Private Patients in Public Hospitals

In both the National Health Reform Agreement and the Australian Health Care Agreements, the Commonwealth and States agreed that people can choose to be a private patient in a public hospital and that the public hospitals can charge for these private patients at a fee set by each State.

This paper examines the situation of privately insured patients in public hospitals (hereafter referred to as private patients, noting that this specifically excludes other non-public patients such as the self-insured, compensable, DVA, etc.). The paper examines the trends over the last ten years and the factors causing the considerable growth in private patients.

From 2005-06 to 2010-2011 public patients in public hospitals increased by 16%, whilst over the same period private patients in public hospitals increased by 50%, an average increase of 8.5% p.a. By 2010-11, 10.0% of all patients in public hospitals were private patients, compared to 7.8% in 2005-2006.

$864 million in accommodation fees was paid by private health funds to public hospitals in calendar year 2012, a 17.6% increase on the prior year. On top of this accommodation fee, private patients brought in an estimated $123 million in prostheses payments and $384 million in medical fees which in the case of salaried medical staff are retained by the public hospital. In total there was therefore an estimated $1.37 billion of additional revenue in 2012 from private patients.

The paper concludes that the public hospital drive to increase the number of private patients is a direct result of the capped Commonwealth and State funding arrangements that have been in place for the last decade. The Commonwealth provides block funding which is capped and the States also with limited budgets provide the public hospitals with capped expenditure budgets. Recognising that additional uncapped revenue can be obtained from private patients the State governments then encourage the public hospitals to maximise the number of private patients they can attract each year.

As a result of this encouragement from their State governments the public hospitals proactively market to their captive audiences of vulnerable people after they have fallen ill and been admitted to the hospital. Driven by State determined budget constraints on the number of public patients, public hospitals in some States also encourage their surgeons to admit their private patients to the public hospital giving them priority of access over public patients.

The public hospital practice of encouraging patients to elect to use their private health insurance is strongly supported by doctors as they also benefit from this practice. Once a public hospital convinces a patient to go private the treating doctor can then bill the patient directly. These funds ($384M in 2012) are then either fully or partially donated to the hospital and held in a special account for the purchase of equipment, attendance at conferences or retained by the doctor.

The estimated $123 million in prostheses charges to private health funds is highly profitable for the public hospitals as these are at private or near private hospital rates as mandated by the Commonwealth but the purchase price is at public rates. The resulting 2012 profit to public hospitals is estimated to be $55 million.

The incentive for public hospitals to persuade patients to elect to be private does not stop at obtaining additional revenue from the private health funds. It also unlocks money direct from the Commonwealth bypassing the States. Once a patient elects to be private, 75% of all scheduled medical fees can be billed to the Commonwealth, and this includes surgeons, anaesthetists, diagnostic radiology and pathology. The component of medical fees from the Commonwealth is estimated to be $256M, two thirds of the total medical revenue received.

With all these additional revenue streams it is not surprising that the recruitment of private patients by public hospitals is wide spread and growing. The use of facilities and staff paid by tax payers to raise money in direct competition with privately funded facilities is of considerable concern to private hospitals and private radiology practices.

States set the fees payable by private patients to maximize this additional revenue from the provision of services to private patients in public hospitals. However as a privately insured person is fully entitled as any Australian to free service in a public hospital, the person is unlikely to accept being admitted as a private patient if their private health fund will not pay their full costs. This puts a constraint on the fees set by the States and often requires the public hospitals to waive any out of pocket costs these patients might incur.

If the doctor is a specialist who works full-time at the hospital, there is usually no out-of- pocket medical charge. The doctor’s fee is covered by the private health fund and Medicare. However, if the doctor is a Visiting Medical Officer there may be an out-of- pocket expense that will have to be paid by the patient to the doctor. In these cases the public hospital sometimes guarantees to the patient that there will be no out-of-pocket payment to either the hospital or the doctor. To ensure there is no medical out-of- pocket payment public hospital sometimes direct their VMO’s not to charge above the fees set by the private health funds.

The recruitment of private patients is possible as there is a legislative loop hole which allows public hospitals to proactively persuade patients to use their insurance after they have arrived at the hospital despite the patient having entered the hospital with no intention to use their private health insurance.

The National Health Reform Agreement requires that public hospital staff don’t direct patients to elect to be private, but makes no statement limiting the extent of pressure that can be put on privately insured patients. As a result public hospitals now employ marketing people who direct the admission staff and visit the patients in hospital to convince them to use their private health insurance.

This is analogous to state schools recruiting fee paying students from private schools and charging them for attendance. The difference is that with health the person takes out health insurance in advance and it is the insurance company that pays.Whilst with most insurances there is an incentive not to do this as the person would then have an increase in their insurance rating having made a claim, health insurance legislation in Australia doesn’t permit such action.

Information obtained directly from patients at some public hospitals reveal cases where patients have been asked to be a private patient and very strongly encouraged to do so. In some cases the patients have not realised they were signing an election to be treated as a private patient and in others they were pursued subsequent to discharge despite providing written advice that they did not want to use their private health insurance.

The practice of public hospitals converting public patients to private patients after they have already been admitted was recently confirmed by the Victorian Health Minister David Davis who denied that private patients were taking beds that could be used by the 55,000 people on Victoria’s waiting list, saying that hospitals asked about patients’ insurance status only after they had been admitted, making it impossible to give priority to those able to pay. However if this is the case in Victoria, it is certainly not the case in NSW where public hospitals are known to put pressure on their doctors (Visiting Medical Officers in particular) to admit private patients promising them immediate access to the hospital in preference to public patients.

The shift from Commonwealth Block funding to Activity Based Funding in July 2014 will change State government incentives to recruit private patients as not only will the Commonwealth contribution for public and private patients be dependent on the patient’s Diagnosis Related Group (DRG), but the amount that the Commonwealth pays for private patients relative to what it pays for public patients will vary with each DRG. Dependent on the DRG the payment to the States for private patients will be discounted to between 37% and 93% of the amount paid for public patients.

The Commonwealth initiative is directed at ensuring both private and public patients receive the same total revenue from all non-State government revenue sources, namely: the Commonwealth’s Activity Based Funding, MBS payments, and private health fund payments. If the States adopted this approach for their own public hospital funding it would mean that apart from unintended variations at the DRG level brought about by the fact that health fund accommodation payments remain per diem, public patients would then be given the same priority as private patients.

It is expected however that the States will wish to continue to encourage the conversion of public patients to private patients post July 2014 to supplement State government expenditure to the maximum extent possible. The other reason the States are expected to continue this behaviour is that surgeons receive a higher income from private patients and the States believe that this is important in order to recruit and retain highly experienced surgeons in their public hospitals.

The Commonwealth discount for private patients will reduce the State’s incentive to encourage private patients but the extent to which this will change behaviour is as yet unknown as this discount only applies to 45% of the National Efficient Price.

Key to public hospital behaviour will be the extent to which the States pass on the Activity Based Funding (ABF) arrangements introduced by the Commonwealth to their hospitals. If the States all move to ABF funding arrangement for their public hospitals, passing on the Commonwealth DRG level private patient discount then it is expected that public hospitals will respond by being more selective in their private patient recruitment practices, focusing on those DRGs which bring in the most lucrative returns.

Link to full report