Why private hospitals are so stretched

There has been a great deal of deliberation about why private hospitals are under such strain. Most of it reaches for the complicated explanations — contract disputes, theatre utilisation, workforce costs, the shape of default benefits. All of those are real. None of them is the main event.

Here is our take, and it is a simple one. Australia now has roughly half as many contributing-age policyholders per claiming-age policyholder as it had in 2000. That means about twice the burden on the people footing the bill.

Why the ratio is the thing

Private health insurance in Australia is community rated. A 32-year-old and an 82-year-old pay the same premium for the same product, even though their expected claims differ by an order of magnitude. The system works — and it does work — because enough people in the low-claiming years are in the pool to carry the people in the high-claiming years.

That balance is not a policy setting anyone chose. It is an arithmetic outcome of who joins and who stays, and it has moved a long way:

• In 2000, the year after the rebate was introduced, there were around 4.3 working-age policyholders for every retiring-age policyholder.
• Today that figure is approximately 1.9.
• On current trajectory we project roughly 1.6 by 2030.

What this does not mean

It is tempting to read this as an argument that older members are the problem. It is the opposite. The number of Australians over 65 holding private cover has increased around 2.5 times since 2000, from roughly 934,000 to about 2.39 million. That is an enormous volume of demand held off the public system, and it is unambiguously a good outcome.

The pressure comes from the other side of the ratio. Working-age policyholders are what makes community rating function. They support the system, and in many households they are quietly supporting a parent's cover as well. Policy that makes it harder for them to hold cover does not redistribute the burden — it removes the base underneath it, and the public hospital system absorbs the difference.

What follows for operators

For a private hospital operator, insurer or investor, the ratio is not background context. It is the denominator underneath every forecast:

• Premium growth has a ceiling set by affordability at the contributing end, not by cost growth at the claiming end. Those two things are diverging.
• Benefit outlays will keep growing faster than membership for as long as the mix keeps shifting, regardless of how well any individual fund is run.
• Out-of-hospital service innovation stops being optional. In 2022, out-of-hospital service innovations represented around $83 million — about 0.53% of total fund outlays. Care coordination, hospital-in-the-home and community programmes that substitute for admissions are one of the few levers that move cost without moving price.
• Scale arguments get stronger. Thirty-plus funds, most under 1% market share, sitting on a shrinking contributing base is a consolidation setup whether or not anyone welcomes it.

How we use it

When we model a private health insurer, a private hospital group or a service provider selling into either, this ratio is one of the first things we build the forecast around — not as an assumption imposed on the model, but as a driver whose movement produces the margin outcome. It is the difference between a forecast that says "margins compress by 40 basis points a year" because someone typed that in, and one that says it because the underlying membership arithmetic requires it.

If you are weighing an investment, an acquisition or a strategy in this part of the market and you would like the version of this built against your own numbers, that is the conversation to have.