Does contracting public care to private hospitals save money?

There is no publicly available, solid evidence to show that such outsourcing generates savings for governments. But it could. Alexander Tihonov/Shutterstock

In the lead-up to the budget on May 13, the Tony Abbott government is looking for ways to make the health dollar go further. In 2011-12 the federal government spent A$14.4 billion on public and private hospitals, and state and territory governments spent A$20.2 billion. It’s no surprise, then, that both levels of government are keen to find ways of keeping a lid on hospital costs.

If health minister Peter Dutton’s recent speech to the Australian Private Hospitals Association is any indication, contracting out some public hospital services to the private sector is one option governments might consider when trying to reduce expenditure on public hospitals.

In the speech, Dutton drew attention to Queensland’s state-wide contracting program, Surgery Connect. Under this program, the state government arranges for patients who have been waiting too long for elective surgery in one public hospital to be treated in any public or private hospital in the state at the government’s expense. In the original version of the scheme, patients were mostly sent to private hospitals.

Contracting between public and private hospitals also occurs in many other parts of Australia. Victoria, for example, allocated up to A$165 million to contract out elective surgery over the period 2013-14 to 2016-17 as part of its Competitive Elective Surgery Initiative to reduce the proportion of patients who have to wait longer than clinically necessary to access hospital care.

In other states and territories, contracts between public and private hospitals are negotiated between individual hospitals.

According to the health minister, Surgery Connect leverages off the private sector and helps reduce costs. But there is no publicly available, solid evidence to show that such outsourcing generates savings for governments.

Some private hospitals already treat the overflow of patients from public hospitals. Flickr/painter dude, CC BY-ND

In fact, some of the hospital executives we interviewed for a research paper on hospital contracting said it is sometimes more expensive to contract out the care of public patients to private hospitals.

These executives, from public, private and not-for-profit hospitals, explained this is often because contracting is done in an ad hoc way, with hospitals given very short timeframes to do the additional work. And it’s also done without clear or consistent state, regional or local-level approaches to determining prices for contracted services.

Most of the 24 hospital executives we interviewed brought up the first problem – the ad hoc nature of contracting. Private hospital executives, for example, explained that they are sometimes asked to treat large numbers of public elective surgery patients in the final weeks of the financial year, or in the lead up to a state election.

With such short notice, they say it can be impossible for them to do the work – surgeons are not available, or operating theatres are already fully booked. This ad hoc approach causes enormous frustration among private hospital executives, and makes them less willing to work with the public sector in the future.

Sometimes private hospitals make the decision to do the public contract work at short notice, but they charge a premium. To treat the extra patients they have to pay staff overtime to work longer hours, or to do extra shifts on the weekend. Sometimes surgeons also charge higher fees when private hospitals ask them to do extra theatre sessions.

Paying private hospitals a premium to treat public patients raises serious questions about value for money and the underlying rationale for contracting with the private sector, which is to use the resources of public and private hospitals as efficiently as possible.

Some private hospitals already treat the overflow of patients from public hospitals. EPSTOCK/Shutterstock

Despite the problems, most hospital executives could see merit in outsourcing public hospital care, but only if it was better organised.

Some interviewees suggested small-scale reforms that could be easily implemented, such as establishing contracting arrangements that run over longer periods, and setting up brokers who can help find hospitals (public or private) that are able to do the elective surgery work when it’s needed.

These reforms would take away the rationale for private hospitals charging a premium when treating public patients.

They also suggested some larger-scale reforms:

  • establishing contestable funding pools where public and private hospitals compete for a certain volume of public elective surgery work

  • building more co-located public and private hospitals where co-operation is built into the operating model of both hospitals

  • implementing new health-care financing models where public and private health-care providers compete on a more equal footing for all patients.

The challenge for policymakers in this area is to leverage off what is already happening in practice – quite extensively in some parts of the country – and find ways of making contracting work better.

No doubt any reforms considered will be hotly contested because they raise contentious issues, such as the use of taxpayer’s money to fund private hospitals, the legitimacy of allowing public hospitals to admit (and charge) private patients, and the role of private insurance in the context of Medicare.

Some people have philosophical objections to public sector hospital contracting because it means the government is using taxpayer dollars to fund private hospitals to deliver care that would otherwise have been delivered in the public system.

Many people forget, however, that the reverse happens too: public hospitals actively encourage people with private insurance to use it when admitted to a public hospital, even though they are entitled to receive care free-of-charge if they have a Medicare card.

Competition for patients between public and private hospitals is only possible because Medicare and private funds are insuring people for the same hospital services. In some countries – Canada, for example – it is unlawful for private funds to insure people for services that are funded under government schemes.

Resolving these contentious issues in our health system will be take time. Fortunately our research shows that in the meantime, many hospital providers are open to considering innovative ways of working around them and making the most of our public and private hospital systems.

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