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Saving private health 1: reining in hospital costs and specialist bills

Private health insurance Private hospitals Medicine Medicare Rebate Australia

Private health insurance will continue its death spiral unless excessive private hospital costs and specialist bills are reined in.

Insurers are in a vice, squeezed between rapidly increasing costs, and consumers – especially the young and the healthy – who baulk at paying premiums that are rising much faster than their incomes. Almost two thirds of increases in benefits paid out by insurers to members in the past decade are due to escalating hospital costs, partly driven by the ageing of the population. Another one seventh is due to increases in payments to doctors.

A small minority of doctors are greedy – a handful of specialists who bill their patients at more than twice the official Medicare Benefit Schedule fee. Only about 7 per cent of all in-hospital medical services are billed at this rate, yet these bills account for almost 90 per cent of all out-of-pocket medical costs for private hospital patients. Patients are often not told of these costs in advance, and are not happy when they get surprise bills. If these high-charging specialists only billed patients 50 per cent more than the official Medicare Benefits Schedule fee, then patients would save $350 million each year.

Patients have little power to negotiate: they are at their most vulnerable and most trusting when dealing with their specialist. So this egregious billing needs to be challenged by a more powerful entity: the private hospital. Private hospitals should issue a single bill for each patient, covering all the costs of treatment – including doctors’ costs – and the hospital should be responsible for informing the patient in advance of any extra costs they will face.

This report recommends a practical way to make these savings. Public hospitals have become more efficient since being paid for treating a patient, rather than for keeping the patient longer, doing more tests, or ordering more drugs. This decades-old system, called activity-based funding, should now be extended to private hospitals. There should be an ‘Efficient Price’ set for different classes of patients admitted to any private hospital. The Efficient Price should bundle all costs – doctors’, hospitals’, prostheses, medications, and diagnostic tests. Private hospitals would have to absorb any excess costs from doctors – or charge patients a declared and upfront fee to cover those costs.


  • A handful of greedy doctors charging more than twice the Medicare Benefit Schedule fee account for the vast majority of out-of-pocket costs private patients pay.
  • Private hospital patients stay longer than equivalent public hospital patients.
  • More care which is of low value to patients is provided in private hospitals than public hospitals.


  • From 2022, private patients should receive a single bundled bill for a hospital admission.
  • The bill should be issued by the hospital and include all the costs of the treatment – hospital, diagnostics, prostheses, and doctor costs.
  • Private health insurers should pay private hospitals on the basis of a national fee schedule which takes account of the patient’s complexity. (This is the way public hospitals are paid now.)
  • Patients should choose their medical specialists the same way they do now, but specialists should send their bills to the hospital rather than to the patient.
  • Private hospitals should be able to charge patients an extra fee for each day of stay, or an extra bundle fee for the whole stay. These extra fees should cover any extra medical costs charged by specialists. Patients should be told of these fees before they are admitted.
Related Information


Publication Details


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Grattan Institute Report No. 2019-12