Albanese Government Proposes Major Overhaul of Private Hospitals With Benchmark Pricing Model
The Albanese government has proposed an overhaul of the private hospital system, introducing a benchmark pricing model for procedures that would replace the existing funding system, which has led to disputes between health insurers and hospitals.
According to a discussion paper from the Department of Health, circulated to health fund and hospital group executives for comment ahead of an industry meeting next month, the Labor Party plans to introduce a Private National Efficient Price by July 2028. The shift would mark the biggest shake-up in decades for the private hospital system, which handles 70 percent of planned surgeries in Australia.
However, major hospital operators and insurers have expressed concerns about the idea, and consensus appears unlikely meaning it may never become government policy.
The benchmark price would be set through activity-based funding, the document says - a formula used in the public hospital system that is based on patient numbers and treatment costs. It would replace the current funding model, under which insurers negotiate individual funding agreements with hospitals.
These agreements were a major source of conflict last year, as hospitals struggled with rising costs and pressured insurers to pay them more. "Without a clear national price benchmark, contract negotiations are often confrontational, payers struggle to assess value, and smaller or regional hospitals face increasing financial pressure", the paper states.
"Broader pressures workforce shortages, inflation, outdated funding models and inconsistent data collection intensify these challenges and threaten the sector's long-term sustainability". The proposed overhaul comes as health funds have submitted premium-increase proposals to Health Minister Mark Butler.
Annual price rises for 15 million Australians take effect on April 1 and are expected to be approved early next year. Experts predict premium increases of around 4 percent next year - potentially exceeding health inflation for the first time in years due to rising hospital wage costs as new nursing enterprise agreements take effect. Last year, Butler approved an increase of 3.7 percent, about half of what some insurers had requested.
"If health inflation stays around 4 percent this calendar year, we expect insurers and the government will agree on premium increases in a similar range for 2026", said Chris Whitelaw, General Manager of health insurance comparison site Money.com.au.
"The private health sector is likely to recalibrate after several years of suppressed pricing". Health insurers fund the private hospital system, which has been financially strained since the pandemic.
Healthscope, the second-largest operator, has debts of $1.6 billion and is up for sale. ASX-listed Ramsay Health Care is the largest and one of the more profitable operators.
The paper argues that a benchmark price would reduce administrative burden for hospitals by replacing the current default-benefit system a government-mandated minimum level of coverage that insurers must provide. It would also address systemic cross-subsidisation among insurers, where cheaper procedures offset more expensive and complex surgeries.
The direct impact on patients is unclear but expected to be minimal, as insurers would still cover most procedure costs. However, the policy carries implications for publicly listed funds Medibank Private, NIB and Ramsay. People familiar with the discussion paper, who are not authorized to speak publicly, said there is significant skepticism among both insurers and hospitals.
The paper does not include cost modelling or mention a minimum price something the hospital lobby has been seeking.
Under the framework, the government would set an appropriate profit margin for the sector, though Ramsay and Healthscope could argue for a higher weighted average cost of capital to justify their investments. Catholic hospital operators are reportedly more open to the idea.
The paper says the proposed funding model would encourage more patients to undergo day-surgery rather than long, often unnecessary, hospital admissions.
Insurers, however, will argue that it does not address what they see as an oversupply of hospital beds and could push premiums even higher at a time when cost-of-living pressures are expected to drive people out of the system because they can no longer afford coverage.
The paper notes that the current funding model is imbalanced, with high-margin services like spinal fusions subsidizing significant losses in areas such as caesarean deliveries and dementia care contributing to the closure of psychiatric units and maternity wards. It suggests measures to protect small rural hospitals with higher costs, which would receive different funding.
The Grattan Institute proposed activity-based funding for private hospitals last year. It argued that such a system as in the public sector could reduce conflict within the industry and help lower costs.
It said that hospitals would have an incentive to avoid lengthy or unnecessary admissions, which could reduce insurance premiums.
On December 10, hospital and insurer executives will meet with the Department of Health as part of ongoing talks about the sustainability of private hospitals.
The Australian Private Hospitals Association (APHA) and Private Healthcare Australia, the main insurer lobby group, are currently reviewing the discussion paper with their members and will submit formal responses by the end of the year.
