Managing Director & Partner
Sydney
Australia’s private hospitals have been under serious pressure with stagnant patient volumes and rising costs, leaving profits at 15-year lows. Despite these challenges, the sector has reasons to be confident about its longer-term prospects, especially for larger, well-located facilities. This article explores reasons to be positive about the longer-term outlook and suggests how hospitals can best navigate the current challenges.
As we explored in our recent paper, Delayed Recovery: Why Times Are Tough for Australia’s Private Hospitals and What They Can Do About It, these conditions have been driven by a combination of sluggish revenue growth and escalating costs.
Revenue growth slowed to 5% p.a. from FY19 to FY23, primarily due to patient volume growth slowing to less than 2% p.a. during the same period, constrained by minimal growth in GP and private specialist consultations and by workforce supply challenges in the hospitals themselves. Limited price increases and case mix shifts also contributed.
At the same time, hospital operators have faced significantly higher costs. Firstly, workforce shortages drove an increase in staff expenses of 6% p.a. from FY19, as operators relied more heavily on agency and casual staff. And nursing salaries surged significantly after the COVID-19 pandemic; in Victoria, public nurses and midwives will receive an historic 28% increase over 3 years. Secondly, workforce productivity has fallen. Private hospital FTEs in Australia have increased 11% overall since 2019, while private separations have increased by only 7% (according to the National Health workforce dataset and PHDB). Finally, purchased goods and services have increased in cost by 8% p.a. since FY19, largely due to global supply chain disruptions and inflation, and now account for 20% of total hospital expenses.
The public sector is unlikely to be able to meet growing demand. For many years, Australian private hospital capacity and activity grew by more than the public sector. In 2012, under the National Health Reform Agreement, Commonwealth funding for 50% of all growth costs led to a capacity and throughput boom across the public sector, drawing growth away from the private sector. The funding model was adjusted down to 45% in 2017, with a cap of 6.5%, which saw the public hospital system growth rate fall back significantly but continue to stay ahead of the private sector, following a decline in private health insurance membership due to increased public hospital capacity. Since the pandemic, public sector admissions growth has been constrained by both labour supply issues and falling productivity.
Looking forward, it seems unlikely that the public system will be able to revert to the growth rates of the 2010s. While productivity improvements may drive some volume growth, significant challenges remain. Construction delays, exacerbated by acute labour shortages are likely to peak in late 2026. According to Infrastructure Partnerships Australia, meeting hospital infrastructure demand would require a 2.5-fold increase in workforce capacity. Additionally, rising construction costs, coupled with salary commitments and debt reduction pressures, are likely to further constrain capacity growth. The public sector’s inability to meet demand is already showing, with a growing number of elective surgeries being outsourced to the private sector. In FY23, 175,000 patients were contracted to private facilities – 75,000 more than in FY19, according to the Private Hospital Data Bureau.
Success in health care continues to depend on the ability to attract both patients and clinicians. These conditions for success are only growing in importance as global talent shortages become more acute and consumers increasingly make their own choices about how to access health care. In these circumstances, larger centres of excellence and facilities in strong precincts will be best placed to thrive.
Larger centres and strong precincts offer clear benefits to patients and staff. Patients gain convenient access to multiple health professionals and receive high-quality care in a single location. The presence of multidisciplinary teams, advanced technology, and cutting-edge treatment options further enhances outcomes. Staff benefit from increased productivity and the ease of moving across public, private, and research facilities. And the strong reputation of health care precincts attracts referrals and creates a dynamic work environment.
Recent closures of private facilities have been concentrated among smaller, independent and specialised hospitals, largely in rural and regional areas. Our analysis identified 28 hospital closures since the start of 2023, of which 20 were either small day hospitals or in regional locations.
Our previous paper argued that hospital operators need to adapt their business models to respond to the lower growth environment by developing new clinician value propositions and new digitally enabled patient journeys that will capture a higher share of emerging growth. With clinician supply critical to growth and many younger clinicians constrained in their ability to take risks to build a private practice, new clinician engagement models need to be explored. Similarly, as more health care value is created outside hospitals, growth will come from providing digitally integrated private patient journeys across multiple facilities operating under the same brand of a local flagship hospital.
While these ideas are not new (most operators are focused on them already), additional opportunities exist for operators to take even more innovative approaches to set hospitals up for greater long-term success, such as engaging doctors directly in improvement programs, and building strong and thriving health care precincts.
Engage Doctors to Help Drive Productivity and Growth
While hospital operators are focusing on operational discipline, productivity generally remains worse than it was pre-pandemic. Operators can achieve greater outcomes by involving doctors deeply in the design and implementation of improvement programs, rather than trying to work around them. In hospitals, unlike most other businesses, the decisions that drive costs are made at the front-line – often by doctors – which means cost control needs to engage them.
Involving doctors in improvement programs is almost counter-cultural for most Australian private hospitals who deal with doctors as customers. While it would require paying for their time, it would also recognise the deep interest that both doctors and hospitals have in operational productivity, quality and patient outcomes. From improving operating room utilisation, reducing ALOS or making procurement savings, a deeply collaborative process that involves doctors in a meaningful way could lead to much better outcomes.
Optimise Hospital Portfolios by considering Precinct Strength and Potential
Given current conditions, hospital operators are taking a sharp look at their portfolios and working out what to change to maintain profitability and deliver their missions. However, internal reviews can be limited to activity within the hospital walls. Taking an approach that considers the strength of the entire health care precinct in which the hospital is located, and how to enhance it, is much more effective. Operators have an opportunity to assess the potential for growth from facilities in strong or potentially strong precincts and scrutinise standalone facilities in weak locations.
Options to strengthen local health care precincts include:
While signs are encouraging, providers are still navigating an incredibly challenging operating period. There are no easy answers, but it’s clear that what has worked in the past will not be enough. Hospitals that pursue new ways to drive productivity and develop strong health care precincts will survive the short term and thrive in the future.