Managing Private Medical Practice in Public Hospitals

Tabled: 20 June 2019

Audit overview

The Australian Government provides health funding to Victoria under the National Health Reform Agreement (NHRA), which outlines the roles and responsibilities of the Commonwealth and state and territory governments. It also provides health funding to Victoria through the Medicare Benefits Schedule (MBS).

The NHRA specifies rules for how patients can elect to be treated in public health services. Public health services must offer emergency department treatment free of charge to all Medicare-eligible patients. However, a patient in Victorian public health services may elect to be treated as a private patient when receiving inpatient or outpatient services. When this occurs, the health service should not provide the patient with preferential access.

The Health Insurance Act 1973 provides a legislative framework for health services to claim MBS payments for patient services. Outpatient clinics can bill MBS if patients provide informed financial consent. For inpatient services, patients who elect to be treated privately can be billed directly, or, with their consent, the health service will bill their private health insurer.

The three health services we audited—Latrobe Regional Hospital, St Vincent's Hospital Melbourne (SVHM) and Western Health—derived more than $207 million from private practice patients in 2016–17 and 2017–18.

To facilitate private practice in public hospitals, health services enter into private practice arrangements with senior medical practitioners. There are two types of private practice arrangements typically used in Victoria:

  • 100 per cent donation model—the senior medical practitioner donates all their private practice income to the health service.
  • Retention model—the senior medical practitioner keeps their private practice income and may share a portion of the income with the health service as an administration or facility fee.

While individual health services are responsible for negotiating and administering private practice arrangements, the Department of Health and Human Services (DHHS) is the steward and manager of the Victorian public health system. This includes responsibility for the overall planning, funding and oversight of Victoria's public health system, and for ensuring compliance with the NHRA.

DHHS sets objectives for what private practice in public health services is intended to achieve. The three intended benefits for health services are:

  • providing an additional source of revenue
  • attracting and retaining highly specialised staff because of the patient mix (public and private)
  • maximising care to the community, through opportunities to reinvest revenue into expanded public service offerings.

This audit examined whether DHHS and health services are effectively managing private practice in public hospitals to optimise outcomes for the health sector and Victorians.


Health services have not taken enough action to ensure that their private practice activities comply with the NHRA, the Health Insurance Act 1973 and national MBS billing requirements. Non-compliant practices include not ensuring patient consent for private treatment and billing Medicare for services already paid for by the state and Commonwealth under standard activity-based funding arrangements for public services.

DHHS does not guide the management of private practice in public health services and does not monitor whether health services comply with national requirements. Health service non-compliance with national requirements places the state at risk of the Australian Government seeking repayment for incorrectly billed services.

DHHS can more strategically consider Victoria's funding approach for health. DHHS should acquire and analyse funding and activity data to better inform decisions about the best mix of state, Commonwealth and private revenue sources to support healthcare delivery. DHHS's current funding model does not incentivise health services to ensure their combination of public and private services deliver the most effective and cost-efficient services for the state. In some cases, we found that public health services have given medical specialists the use of public hospital facilities, including support staff and facilities services, to run their private operations for no or minimal cost, without assessing the cost-benefit of these arrangements.


Managing private medical practice

Compliance and oversight

DHHS does not currently have health services' data to determine whether MBS billing practices comply with the NHRA or the Health Insurance Act 1973, nor can it assess whether the current mix of public and private funding is the best mix for the state.

Forgone revenue

DHHS does not have a strategy for how Victoria can achieve the best mix of state, Commonwealth and private revenue funds. We found examples of the state forgoing revenue it could claim and opting for funding sources where alternatives may be more cost beneficial.

We examined the three audited health services' outpatient funding data for 2016–17 and 2017–18, and identified lost Commonwealth Government funding for Victoria totalling over $10.65 million through:

  • unclaimed MBS billing
  • forgone Commonwealth activity-based funding (ABF), paid in National Weighted Activity Units (NWAU), as a result of using MBS instead of public occasions of service.

MBS billing for outpatient clinics means that the patient has elected for their treatment to be billed to MBS. Patients do not pay for this service. Health services record this treatment as 'private' in their data.

A common reason for unclaimed MBS is a health service recording a patient's outpatient service as 'private', but later determining that it has not met Medicare's requirements to make a claim—for example, because the patient does not have a valid referral. Western Health and SVHM had 28 649 unclaimed MBS outpatient services in the two years we examined, totalling over $2.37 million in unclaimed revenue.

The state can lose revenue even when health services bill Medicare for outpatient services. Our analysis found that the NWAU payment for some specialist outpatient clinics if the service was provided publicly would be greater than the MBS payment. When we compared the three audited health services' specialist outpatient MBS claims against the applicable NWAU payment for 2016–17 and 2017–18, we found that the NWAU payments would have exceeded the MBS payments by more than $8.2 million.

By not undertaking these in-scope services as public, the state forgoes the revenue under the NHRA. While the activity is reported to the Commonwealth, it does not attract Commonwealth funding and therefore does not contribute to Victoria's growth funding. In 2017–18, if Victoria had reached its 6.5 per cent activity growth cap, it could have accessed an additional $48 million of Commonwealth health funding for in-scope reported activity. While this funding would require a co‑contribution from the state, reported by DHHS as approximately $108 million—which becomes an ongoing commitment—the Commonwealth model also allows this to be made up of savings from delivering services more efficiently. DHHS has not undertaken analysis or modelling to test their current funding arrangements against such alternate approaches.

Monitoring health services' activities

Clauses 5 and G19b of the NHRA require health services to provide public patients with the same level of access to services as private patients and treat eligible patients free of charge unless they choose to be treated as a private patient.

DHHS guidance on the NHRA is outdated and spread across multiple documents. While DHHS has some data to enable it to monitor health services' compliance with the NHRA, it does not do this.

ABF pays health services for the number and mix of patients they treat. If a health service treats more patients, it receives more funding. ABF pays different prices based on the complexity of the patient and the treatment.

The NHRA commits to funding health services using ABF, where practicable.

Western Health's Sunbury Day Hospital provides a day-surgery facility, including support staff and supplies, at no cost to medical specialists three days a week, to operate their private medical services. Western Health then places these doctors' private patients on the public elective surgery waiting list. Medical staff predominantly place private cataract and wisdom teeth removal patients in the highest urgency category, usually reserved for emergency cases, which is inconsistent with clinical practice. Western Health bills the patient or their health insurer for these services. However, in addition, Western Health has unintentionally claimed state payment contributions through Victoria's ABF model from DHHS for these private patients. This is a breach of the NHRA. In response to this finding, DHHS advises it is undertaking a review of Sunbury Day Hospital.

Clause G20 of the NHRA stipulates that where a patient chooses to be a public patient, components of the patient's treatment such as pathology and medical imaging are bundled into the cost of the treatment, and health services cannot bill separately for them. There is a lack of clarity on correct billing practices for episodes of care. DHHS should provide health services with greater clarity on this issue to help them comply with the NHRA.

In 2016–17 and 2017–18, Western Health, SVHM and Latrobe Regional Hospital did not comply with the NHRA or the Health Insurance Act 1973 due to claiming MBS payments that were already covered as part of the public treatment. However, non-compliance at Latrobe Regional Hospital was significantly less than the other two health services due to practice improvements implemented in 2018. These wrongful claims total over $5.8 million and made up about 6 per cent of all records we examined. The Australian Government could require Victoria to repay money wrongfully claimed under clause G20, but DHHS does not monitor health services' compliance with this clause.

Section 19(2) of the Health Insurance Act 1973 allows medical practitioners to undertake private practice and use the 100 per cent retention model only when the arrangement exists within a 'broader' employment arrangement with the public health services. SVHM may not comply with this section, because it has retention model arrangements with six fee-for-service Visiting Medical Officers (VMO) who do not have an employment arrangement with SVHM. These fee-for-service VMOs do not receive a salary or sessional fee from SVHM, and directly bill their services to MBS.

DHHS does not issue guidance on the types of private practice arrangements health services may establish. Consequently, the audited health services do not manage these arrangements consistently. Arrangements at Western Health are particularly complex, with various types of agreements across the health service leading to an uneven distribution across medical staff and difficulty with compliance oversight.

While DHHS's private practice principles state that one of the benefits of private practice is that it provides an additional income source for health services, DHHS has never sought to examine its true cost. Our observations of each audited health service demonstrate that managing private practice arrangements is administratively burdensome, and none of the health services know the cost of administering them.

DHHS notes in its guidance that another benefit of private practice is staff recruitment and retention. While it is difficult to assess this benefit, we found no evidence that private practice arrangements encourage the recruitment or retention of medical practitioners. DHHS has also not measured or monitored this.


We recommend that the Department of Health and Human Services:

1. form a network within the Department of Health and Human Services—comprising its finance, health policy, and hospital performance areas together with representatives from health services—that reports to a responsible Deputy Secretary, to lead a comprehensive review of Victoria's health funding in relation to Commonwealth and private funding sources, including the funding model for outpatient services, to ensure the funding model represents the best mix of state, Commonwealth and private revenue (see Section 2.2)

2. subsequent to the funding review, create guidance for health services to align their practice with the Department of Health and Human Services' chosen funding approach explaining best-practice arrangements for utilising Commonwealth and/or other revenue sources (see Section 2.2)

3. examine section 19(2) of the Health Insurance Act 1973 and clarify for health services whether medical practitioners can undertake private practice on a 100 per cent retention model when not employed by the health service (see Section 2.3)

4. evaluate private practice arrangements to measure and monitor the benefits and share results with health services to inform their practice (see Section 2.3)

5. review its Medicare Benefits Scheme billing guidance to provide health services with clarity and ensure health services comply with Australian Government legislation and Independent Hospital Pricing Authority criteria (see Section 2.2)

6. monitor whether health services comply with the National Health Reform Agreement and other key Commonwealth legislation (see Section 2.2)

7. provide clear guidance to health services that they should not include private patients from specialists' private surgical lists on the health service's elective surgery waiting list system and monitor health services' compliance with this (see Section 2.2).

We recommend that health services:

8. examine unclaimed Medicare Benefits Schedule services from outpatient clinics and ensure they are either claimed or reported as public occasions of service (see Section 2.2)

9. examine and ensure their compliance with the National Health Reform Agreement, Medicare Benefits Schedule billing, Department of Health and Human Services' guidelines and Independent Hospital Pricing Authority criteria (see Section 2.2).

We recommend that Western Health:

10. examine its current private practice arrangements at its Sunbury Day Hospital to ensure they are compliant with Department of Health and Human Services requirements, properly documented and cost-effective (see Section 2.2).

Responses to recommendations

We have consulted with DHHS, Latrobe Regional Hospital, SVHM and Western Health, and we considered their views when reaching our audit conclusions. As required by section 16(3) of the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions or comments. We also provided a copy of the report to the Department of Premier and Cabinet.

The following is a summary of those responses. The full responses are included in Appendix A.

All agencies have accepted our recommendations, with DHHS noting work is currently underway to address several of the recommendations.

Western Health has accepted the majority of findings relating to Sunbury Day Hospital. However, Western Health does not agree with or accept some of our findings on outpatient services or billing.

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