Higher inflation is driving up the cost of delivering hospital care, threatening to blow out the budgets of state-run facilities and pushing up private hospitals’ costs to the point where one major healthcare provider terminated its deal with an insurer due to cost increases.

With annual inflation at 5.1 per cent – its highest in 20 years – the Australian Medical Association (AMA) warned public hospitals would not be able to tackle ambulance ramping and elective surgery waiting lists if the federal government’s 6.5 per cent funding cap remained.

Australian Medical Association president Omar Khorshid says inflation is driving up hospital costs.Credit:Alex Ellinghausen

“We desperately need those extra services,” AMA President Dr Omar Khorshid said.

“We have a growing and ageing population with more complex needs, and we have hospitals around the country that are struggling.”

Inflation is also threatening the viability of private health insurance as insurers resist private hospital operators’ pleas to meet their higher expenses.

Private Healthcare Australia chief executive Dr Rachel David, representing health funds, said whichever party won the election would face a significant challenge in keeping premium rises below inflation as hospitals sought to pass on costs.

Australia’s largest private hospital provider, Ramsay Health, last week terminated its agreement with the nation’s largest health insurer, Bupa, after contract negotiations broke down when it demanded a 7 per cent increase. While the two sides are still negotiating, it means Bupa members who go to Ramsay Health could soon face higher out-of-pocket costs.

David said insurers were expected to drive a hard bargain to keep annual premium rises – which must be approved by the federal government – below inflation, which they achieved with the 2.7 per cent rise that came in April.

Funds could not absorb a 7 per cent annual increase, she said, and passing on a rise this large to members would push Australians to drop their cover.

Prime Minister Scott Morrison and Health Minister Greg Hunt.Credit:Alex Ellinghausen

“This will be an issue for the new health minister,” David said.

A major private hospital provider, which shared data on the condition its name not be published, said the cost of chemicals and cleaning products rose 12 per cent over the past year, while consumables and equipment rose 4.5 per cent.

Food costs rose 3 per cent over the past month, with more hikes expected.

Public hospitals are run by states and territories and funded jointly with the federal government according to a so-called “efficient price” determined by the Independent Hospital Pricing Authority, based on data that is two years old.

Each year, the Commonwealth contributes what it paid the previous year, along with 45 per cent of the increase in costs of providing services, capped at 6.5 per cent.

“Whatever is left over from the 6.5 per cent after you take out the increasing costs of healthcare each year is what is left to allow our hospitals to care for more patients,” Khorshid said.

“The Commonwealth’s minority funding share only covers activity. If you need to build more beds to free up the emergency department, stop ambulances ramping or clear waiting lists – state and territory governments must, for the most part, fund that expansion.”

The AMA, along with all state and territory governments, are pushing for whichever party wins the federal election to remove the 6.5 per cent cap on the growth in public hospital spending and increase its contribution from 45 to 50 per cent.

But Prime Minister Scott Morrison has refused, claiming states would reduce their contribution.

Labor leader Anthony Albanese promised only to “sit down and negotiate” with premiers.

Asked why he would not commit to the change – which would cost taxpayers about $20 billion over four years – he told the ABC on Tuesday: “We are going to inherit, if we’re successful, a trillion dollars of debt, so we’re being at this election fiscally responsible.”

Private Hospitals Association of Australia chief executive Michael Roff said the pandemic had driven up operational costs by up to 10 per cent over the past two years “because of things like increased use of [personal protective equipment],” which became more expensive due to global demand.

“You’ve got to have screening on all the doors to make sure that the only people coming in are the ones who are supposed to be there, increased cleaning and disinfection … That’s added to the cost base of hospitals run across the country,” Roff said.

He said hospitals were yet to fully realise the impacts of higher inflation on their running costs, but expected global rises in transport costs to make medical devices and supplies more expensive.

Hospitals are already grappling with an increasing volume of patient care, due to Australia’s ageing population with its higher chronic disease burden and health inflation – the increase in costs of delivering care – is traditionally higher than general inflation.

When inflation was low in 2019-20, public hospital wage costs rose 5.6 per cent – four times the rise in the consumer price index – despite wage caps, likely due to staff shortages driving up overtime expenses.

An AMA analysis of public hospital data showed cleaning costs rose 35 per cent in the five years to 2019-20, when the cost of treating emergency room patients for heart attacks, septicaemia, and kidney or urinary tract infections rose by 6 to 9 per cent in a year.

Victorian Health Minister Martin Foley said the nation’s health systems “are under extreme pressure and the current funding arrangement with the Commonwealth where the states pay more, is unfair and unsustainable”.

NSW Health Minister Brad Hazzard has also highlighted rising costs in his push for the federal government to raise its contribution to the state’s hospitals.

A spokesman for Health Minister Greg Hunt said the Commonwealth “currently pays more than 61 per cent of total government health funding across Medicare, hospitals, medicines and mental health.”

“Since coming to office, our government has doubled funding for public hospitals,” the spokesman said.

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