Healthcare Economics
Why Private Hospitals are Going Broke in the Middle of a Pandemic
It’s counter intuitive to think that hospitals would be going broke at this time of pandemic but when you look at the economics or business models of private hospitals, it’s easy to see how they have trouble coming out of the shut down and maintaining a positive cashflow.
Ramsay Healthcare, a global glomerate of healthcare based in Australia but with sites in eleven countries, just announced a share issue to raise $AU 1.2 billion. This is so that it can service its current debt obligations and also “to have some cashflow available for possible opportunities.”
The possible opportunities would be other healthcare facilities that will hit bargain basement pricess, presumably, as they struggle to maintain operations but I highly doubt that Ramsay will actually be able to take advantage of these, given that its debt obligations alone will take up the $AU1.2 billion and possibly more, for it just to stay afloat.
So why are organisations like Ramsay and other private health operators in trouble? The problem is two fold:-
- Stopping elective surgeries Category 2 and 3 for over a month
- Private health insurance premiums continue to increase while many of the holders of these policies now find themselves unemployed.
Elective private surgeries are the bread and butter of Ramsay and other operators. Private health funds cover the cost of the bed, theatre and the staff to run the surgeries. Category 2 is classified as non-urgent elective surgery, would could include removal of cancer, bowel surgeries, total knee replacements, hip replacements etc. You can still survive if these surgeries aren’t performed but a delay may cause a decrease in your quality of life and longevity of life.
Category 3 is more elective but still important. Curettes, colonoscopy, endoscopy, diagnostic laparoscopies, biopsies etc. These procedures are important for diagnostic purposes of a problem. Failure to diagnose early delays treatment and improvement of quality of life.
So the only surgeries that were allowed were Category 1 surgeries i.e. result of car accident, life threatening heart attack, donor organ harvesting and insertion and birthing services. So pretty much if you’re walking and breathing you didn’t get surgery.
So when surgeries are cancelled, lots of staff get laid off because with no patients, there is no need for nursing staff, theatre staff, administration officers or medical officers. They work and are rostered on a demand basis.
In monetary terms, the organisation is losing the theatre fee which can be anywhere from $400 to $2500 a procedure (usually there are 8 procedures on a full day theatre list but this can also increase to up to 20 or more depending on the speciality) per theatre, per day. Most facilities have 8–10 theatres.
Then patients are transferred to either a day bed or overnight stay bed. These beds garner the health facility around $1500 per episode. Per episode is key here, because it’s not necessarily a daily rate. Thanks to improve anaesthetics, patients are recovering much more quickly and you can have two patients (one from the morning list and one from the afternoon list) using the same bed in a single day, across the period of the day.
One of Ramsay’s hospitals has 600 overnight beds. Again at a cost of $1500 per day (roughly these figures can vary depending on the healthfund but it’s a pretty good average).
So let’s look at the maths.
So Ramsay, for example as a rough example has lost revenues per day of approximately $AU1.3 million. Surgeries were closed for four weeks so 28 days give or take and that’s over $AU36 million dollars.
Presently only Category 2 surgeries are allowed so let’s be generous and say that they are now only losing $AU18 million dollars.
The second stage will be harder to calculate but will go on for far longer with more wide reaching ramifications. With an estimated 10% of Australians out of work for the foreseeable future, health insurance policies will be the first thing to go. They have increased to be the equal of a mortgage payment and as most people can’t pay their mortgage either, health insurance will be left by the wayside. It may be years before people can afford to take it out again and will most likely have to wait out their qualifying periods again of at least 3 months.
So conservatively that that 2.5 million people who cancel their health insurance policies. That means those people will be now try to access the public health system for their health needs and this will impact waiting times for all of us.
As an industry, health insurance can expect to lose 2.5 million x $300 a month for top hospital and extras (as an average) and that’s $AU 750 million lost each MONTH from private health funds.
It also translates to empty beds in private hospitals unless people opt to pay as they go. Empty beds means lower revenues so I’m estimating that Ramsay would be losing approximately $AU18 million of revenue per month for at least 12 months.
This is just their Australian arm of operations. In international countries conditions are much more harsh and will impact their bottom line far more significantly.
But what about all the sick patients from the pandemic, won’t they go to private hospital?
No. Most cases go to a public facility. In Australia the government agreed to send some public beds into the private empty beds and pay private hospitals less per day than they would normally earn per bed, but it was a token gesture. Our infected numbers were so well controlled that the overflow from public beds never eventuated, leaving private hospitals empty across the nation, bleeding money.
Ramsay may be able to recover but they have had to go into more debt just to service their current debt and the short and long term conditions look even more dire for private health. Smaller health organisations will not be able to absorb the loss and will most likely close, in the red, and become either opportunities for larger sharks to eat them, or cease to exist at all.
I wrote another piece that goes into more details about why people are opting out of private insurance here.
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