• The fundamentals that drive demand growth remain strong. Australia has a growing and ageing population, with the number of Australians over the age of 65 expected to nearly double by 2042 to 6.7 million people. Australia also has high levels of chronic diseases, with nearly 1 in 2 Australians reporting at least one chronic disease. The number of people with private health insurance also continues to increase and 1 million more Australians have private health insurance compared to pre-pandemic levels. 

• Demand pipeline is starting to flow as the impact of Covid wears off. We are starting to see positive signs in the demand pipeline that supports private hospital growth. GP consultation volumes grew 1% in the first half of 2024, compared to the same period in 2023, reversing a 3% decline in the second half of 2023 compared to the second half of 2022. Specialist visits have increased from pandemic lows, with growth in the last half of 2023 and the first half of 2024. Anecdotally, this growth appears to be driven by increasing doctor availability as leave balances continue to decline following the pandemic and higher interest rates and cost of living challenges drive a willingness to work longer hours.

• Private hospital admissions are starting to show sustained growth. Admissions volumes grew by 4% in FY24, following a 5% increase the previous year. Admissions grew in each quarter of FY24 for the first time since the pandemic, signalling a return to more consistent and reliable growth.  

• 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.

• The trend to day surgery is not seriously harming large multi-day hospitals. There has been a clear mix shift towards day surgery in Australia (according to APRA, since FY19, same-day admissions have increased 2.6% p.a., while multi-day admissions have increased 0.1% p.a.) impacting private hospital capacity utilisation and revenue. However, unlike the trend in many other markets, this mix shift has not led to significant growth of Ambulatory Surgery Centres (ASCs) that has significantly undermined the financial viability of many private and not for profit hospitals. In Australia, day-only surgeries are more likely to happen within overnight facilities than day-only facilities. Day surgeries in day-only facilities have grown at 1.9% since FY19, while day surgeries in multi-day facilities have grown at 2.9%. This outcome partly reflects doctor preferences to maintain access to multi-day surgery facilities for more acute patients. Differential private health insurance rebates for ASCs versus multi-day hospitals have also limited investor interest in the ASC model.

Large Centres of Excellence and Hospitals Located in Strong Health Care Precincts Will Benefit Most from the Recovery; Smaller and Regional Facilities Most at Risk

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. ¹ 1 BCG and North West Health Care REIT analysis. Note: Government sources report different numbers of hospital closures due to varying interpretations of “closure.” Some private facilities have been taken over by public or other private operators, leading to discrepancies Notes: 1 BCG and North West Health Care REIT analysis. Note: Government sources report different numbers of hospital closures due to varying interpretations of “closure.” Some private facilities have been taken over by public or other private operators, leading to discrepancies These facilities have struggled to attract and retain staff and secure patient referrals, leaving them more exposed to the current challenges in the private health sector.

Getting Ready to Benefit from the Eventual Recovery

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:

• Building stronger connections and amenity within a precinct:  Collaborate with like-minded property owners and health care operators to develop a precinct identity and improvement plan. Work with local and state governments to improve connectivity between sites, improved public transport access and improved local amenity. Establish partnerships with adjacent businesses, such as research facilities, to align clinical specialties and physical connections, and foster collaboration among clinicians, researchers and corporate partners. 
• Investing directly in the precinct: Identify services that would benefit from proximity to the physical hospital building, but can operate nearby. Services that can be unbundled include ambulatory surgical centres, diagnostic services, professional rooms and other facilities. ‘Unbundling’ can make access to services easier for patients and clinicians, but still offer the benefits of proximity. It drives a stronger precinct by making it attractive to other health care providers. 
• Strengthening the employee appeal of the precinct: Given the importance of access to talent, precincts must be a more attractive work location. In expensive locations, surplus land could be used to commission housing for essential workers. Access to nearby childcare and educational facilities can also improve access for staff. 

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.