The nation’s biggest private health fund, Medibank Private, has secured a landmark win in its battle to lower costs in hospitals after inking a new agreement with the country’s second-biggest private hospital operator Healthscope.
Medibank boss George Savvides branded the two-year deal a “tipping point” in the bruising public spat over the introduction of new “quality and affordability” criteria into the fund’s contracts with hospitals.
Getting Healthscope on board has taken the share of hospital beds covered by Medibank’s new contracts from below 50 per cent to more than 70 per cent.
Mr Savvides said the new contracts “make a big difference in how we manage our costs”.
“I can only say this is one of the high points of my near-14 years at Medibank,” he said.
“It will flow into lower premium increases on a year-to-year basis.”
Medibank’s success pushing responsibility for what it calls “hospital acquired complications” back onto hospitals is a key lever to reduce its costs and boost profits for its shareholders.
About $3.5 billion of the $5 billion Medibank pays in claims each year goes to hospitals.
Federal Health Minister Sussan Ley has launched a flurry of reviews into the healthcare sector to try to cut waste and check a growing burden on the public purse. Medibank’s success in slashing costs for the private health sector is critical to cap soaring premiums, which have been rising much faster than inflation, near 7 per cent a year in recent times.
“At the end of the day, it is a symbiotic relationship [between hospitals and insurers],” Healthscope chief executive Robert Cooke said.
“There is a realisation that the cost of private health insurance is becoming prohibitive.”
Healthscope is by far the biggest private hospital operator to agree to Medibank’s new “quality and affordability” criteria.
The deal follows a long, acrimonious and highly public fight between Medibank and the Calvary hospital group.
Medibank had refused to pay Calvary for unplanned patient readmissions within 28 days of a procedure or any of a list of 165 events the insurer labelled “highly preventable”, such as taking a fall while in care.
Every two to three years health funds and hospitals gear up for hard-fought contract negotiations, usually behind closed doors.
But Medibank’s determination to cease being a mere payer of bills, and to arrest the spiralling cost of healthcare and health insurance, pushed the insurer into the damaging public spat that is widely believed to have hurt Medibank’s brand in the eyes of consumers.
Mr Cooke said Healthscope had already shown leadership in quality and accountability by publishing clinical data and having a list of “never events”.
Never events means Healthscope does not get paid in the event of a serious mistake, such as if a surgical instrument is left inside a patient.
“We were aligned on the basic starting point. We had pretty narrow discussions around some of the quality points and then around commercial arrangements, as per usual,” he said.
The new two-year contract kicks off in March and will be about $400 million a year.
Mr Savvides said Medibank had used its market leadership position to inject “a new level of accountability” into the health system.
“Complications and unnecessary reworkings within 28 days of a procedure should be avoided. In Medibank’s world of 4 million customers we don’t have anyone that wants to receive a hospital-acquired complication: falls, pressure sores, accidents that happen in hospital situations,” he said.
Medibank pays out more than $3 billion to private hospitals every year. In 2014-15, the insurer brought in $5.9 billion of premium revenue and paid out $5.1 billion in claims.
But its claims growth was just 4.3 per cent, compared with broader growth in hospital claims that is running about 7 per cent.
The strong performance on costs sent Medibank shares surging on the day of its August earnings result. The stock is up 15.9 per cent to $2.33 since the full-year result.
Huge rises in the cost of healthcare has resulted in ballooning health insurance premiums, prompting downgrade of cover by price-conscious customers.
Mr Savvides said he believes the deal with Healthscope is a big step in breaking that cycle.
Medibank codes its data engines to interpret coded claims numbers. Whenever a claim with any of the 28-day readmission codes comes through, the machines recognise the item number. If the contract does not cover that claim, then the hospital does not get paid.
“For the health fund it is a saving immediately. The hospital gets an incentive immediately, and the member gets the benefit,” Mr Savvides said.
No consumers will be hit with out-of-pocket costs.
The agreement with Healthscope ups the pressure on Ramsay Health Care, Australia’s biggest private hospital operator, to reach a deal with Medibank.
Medibank’s contract with Ramsay is due to expire in August 2016.
Mr Savvides said there is “plenty of runway” left on the Ramsay talks but he believes the global hospital giant shares the same spirit that led Healthscope to sign a deal.
“We are talking about hospital-acquired complications. Why would a health fund pay for them? Would you pay for your car during a warranty period when a breakdown occurs?” he said.
Mr Savvides is stepping down as CEO in March, much earlier than expected, raising the ire of some investors who bought shares in Medibank’s $5.7 billion float in November 2014.
He said the search for his replacement is under way and is being aided by executive recruitment firm Russell Reynolds.