EXCLUSIVE: Not everyone is happy with the yet to be publicly released document, with the DoHDA’s choice to use the average cost as the PNEP questioned.
The federal government is contemplating a major shift in the funding model for private hospitals with a draft Pricing Framework for Australian Private Hospital Services, including a Private National Efficient Price, circulated to leaders in the private sector for consultation.
Although not available publicly, Health Services Daily has obtained a copy of the framework which floats a phased implementation, including an indicative PNEP by July 2026, a comprehensive price by July 2027 “following data improvements” and full replacement of default benefits by July 2028.
At the moment, funding of the private hospital sector is a chaotic mix of over 30 private health insurers, multiple government players and a variety of compensation schemes – all of which apply different pricing models, negotiating individually with each hospital operator.
“Contract negotiations are often adversarial, funders struggle to assess value and smaller or regional hospitals face growing financial strain,” says the draft Framework.
“This draft Pricing Framework proposes a nationally consistent, transparent, and evidence-based approach to funding private hospital services, anchored by a Private National Efficient Price informed by activity-based funding principles.”
According to the draft proposal the PNEP would:
- provide a robust reference point for pricing and benchmarking;
- reduce administrative burden by replacing the current default benefit regime;
- address systemic cross-subsidisation of services by aligning funding with the actual cost and complexity of care; and
- preserve the private sector’s strengths – patient choice, clinical independence and innovation.
“A growing body of evidence including the 2024 Private Hospital Sector Health Check, stakeholder feedback and other data points to significant complexity, inconsistency, lack of transparency and pressure on the long-term viability of private hospital operations,” says the proposal.
The Framework proposes:
- the adoption of consistent classifications across all private hospital services;
- the collection of robust patient cost data;
- the establishment of a PNEP to replace the current default benefit regime; and
- a series of adjustments to the PNEP to account for the unavoidable costs of delivering services in different locations, and by different size and type of private hospital.
Some leaders in the private hospital sector have been calling for a PNEP for some time.
Dr Katharine Bassett, director of health policy at Catholic Health Australia, wrote in HSD as early as September that a PNEP was a reform whose time had come.
“This funding reform offers a pragmatic way to stabilise Australia’s struggling private hospital sector,” Dr Bassett wrote.
“By setting a transparent, independent floor for what insurers must pay, it would keep funding aligned with real costs, establish a fair baseline to stop hospitals being squeezed out, and bring accountability to the nearly $8 billion the government spends on the private health insurance rebate.
“Some critics scoff at the idea, pointing to the National Efficient Price in the public system and saying it’s not really national, not really efficient, and not really a price. That may be true, but it misses the point.
“The lesson from the public system is simple: independent, transparent pricing works.
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“It has kept public hospitals funded in a way that matches real costs. It has contained runaway inflation. It has supported efficiency without destroying equity. A fit-for-purpose National Private Price would do the same for private hospitals.”
Key to the success of a PNEP would be its existence as a floor price, not a ceiling, she said.
“Insurers and hospitals would still negotiate,” said Dr Bassett.
“Hospitals with strong brands, better outcomes, or specialist services could secure higher rates, moving us toward value-based funding.
“But at least everyone would know there was a baseline — a fair price below which hospitals can’t be squeezed. Far from killing competition, the National Private Price would give it a level playing field.”
The bad news is, the draft proposal does not support the PNEP as a floor. Instead, the draft proposal says the PNEP “should initially be set at the average”.
“This is the approach taken to determining the National Efficient Price (NEP) for the public sector, where the NEP is the average cost of one National Weighted Activity Unit,” says the draft Pricing Framework.
“In the private sector, adopting the average may be appropriate. It reflects the full range of costs required currently to deliver services, and in aggregate reflects the prices currently paid by funders.
“Furthermore, the average has the benefit for being easy to explain and is widely understood as a concept.
“It could be argued that an average price is not ‘efficient’ enough and does not provide enough incentive to drive technical efficiency improvements in the sector.
“Additionally, the average can be subject to volatility … and would need to be closely analysed each year to ensure the price remains stable.”
Not everyone in the sector is happy with that idea.
Brett Heffernan, CEO of the Australian Private Hospitals Association, told HSD that moving away from the concept of the PNEP has a floor price was reneging on the original intent of the PNEP.
“The department must get back on track to develop a floor price with annual indexation as promised,” said Mr Heffernan.
“What has been served up in this first draft fails to address the point of the exercise – the viability and investability of private hospitals.
“Instead, the proposal drives a ‘race to the bottom’ based on cheapest costs and trades off the innovation, quality and safety, and choice and access for which private hospitals are renowned.
“It would undermine any reason to opt for private healthcare and have dire implications for public hospitals.
“This was supposed to be a cure for the viability and investability crisis impacting private hospitals.
“It fails to even address them. At no stage in the draft paper is there any call on private health insurance companies to dip into their skyrocketing profits and exorbitant management fees to meet rising healthcare costs.”