Managing Private Medical Practice in Public Hospitals

Tabled: 20 June 2019

1 Audit context

Public health services in Australia receive a combination of funding from the Commonwealth and state and territory governments. This provides free healthcare to all Medicare-eligible patients. Victoria currently has 85 publicly funded health services, including public health services, public hospitals, multipurpose sites, and denominational and privately operated public hospitals.

The Commonwealth Government provides health funding to Victoria under the NHRA, which outlines the roles and responsibilities of the Commonwealth and state governments with respect to the provision of healthcare. The NHRA specifies the business rules for treating private patients in a public hospital, seeking consent from patients to be a private patient, and how to charge for private patients.

The Australian Government's Department of Health administers MBS. MBS benefits include medical consultations, procedures, and tests that are subsidised. The Commonwealth Government also provides block funding and grants for some health services, such as for regional and remote multipurpose sites that provide integrated health and aged-care services.

The Commonwealth Government funds efficient ABF growth for in-scope public health services through NWAUs. It also provides health funding through MBS and the Pharmaceutical Benefits Scheme.

Victoria's health system follows a devolved governance model. Under the Health Services Act 1988, DHHS is the manager and steward of the public health system. Independent boards appointed by the Minister for Health are responsible for the strategic management and governance of Victorian public health services. Denominational and privately operated public hospitals are exceptions to this.

1.1 Health system funding

Commonwealth funding for Victoria public health services

The national efficient price is based on the average cost of an admitted acute episode of care provided in public hospitals during a financial year. It determines the amount of Commonwealth Government funding for public hospital services and provides a price signal or benchmark about the efficient cost of providing public hospital services.

The national efficient cost is used when activity levels are not suitable for funding based on activity, such as small rural hospitals. In these cases, services are funded by a block allocation based on size, location and the type of services they provide. Public hospitals also receive block funding to support teaching and research, and for some services where it is more appropriate.

The Independent Hospital Pricing Authority (IHPA) is an independent government agency established by the Council of Australian Governments as part of the National Health Reform Act 2011 to give independent and transparent advice about the funding of public hospitals.

IHPA sets the national efficient price and national efficient cost to enable ABF in Australian public health services. To do this, IHPA developed the NWAU as a measure of health service activity expressed as a common unit, against which the national efficient price is paid. NWAU price weights are adjusted annually and applied to all past years to reflect changes in reported activity and costs.

NWAUs provide a way of comparing and valuing public health service activities by weighting clinical complexity. For example, an average inpatient service is worth one NWAU—$5 012 in 2018–19—while more complex and intensive services are worth multiple NWAUs. Simpler services are worth a fraction of an NWAU.

The Commonwealth Government contributes to states and territories approximately 42 per cent of the cost of base-level health activity and then will pay Victoria 45 per cent of the national efficient price for annual growth in inpatient and outpatient services delivered in Victorian public health services, up to a cap of 6.5 per cent of the base level. This cap was set in 2017–18, prior to which there was no cap. The NWAU base plus growth becomes the base for the next year. Victoria must then contribute 55 per cent of the base funding in the next year.

If a state exceeds the 6.5 per cent growth cap, it has the opportunity to access NWAU growth funding of other states that have not reached their full 6.5 per cent growth, in the form of a once-off payment.

Health funding in Victoria

Health funding is a combination of Commonwealth and state and territory government money, as shown in Figure 1A.

Figure 1A
National health reform payment and funding flows

National health reform payment and funding flows

Source: National Health Funding Body.

Victoria introduced ABF in 1993 for acute inpatient services, and health services have collected and reported on activity-based data since then. DHHS takes into account the Commonwealth Government funding received by Victorian public health services when allocating capped funding and grants to health services using Weighted Inlier Equivalent Separation (WIES), which is used for acute inpatient activity. WIES is specific to Victoria and is determined by DHHS using clinical costing data.

DHHS makes WIES payments to health services for each acute patient treated or 'separated' from the hospital. A 'separation' refers to the patient's journey from admission to discharge. Like NWAUs, a WIES unit has a set price, which DHHS determines and which is different to the NWAU price. In 2018–19, the WIES unit is $4 883 for metropolitan health services and regional health services and $5 083 for sub-regional and local health services for public patients. DHHS adjusts the number of WIES units paid according to the patient's condition, treatment and length of stay.

For private patients, DHHS makes a private WIES payment, which is about 76 per cent of the cost of a public WIES payment. For 2018–19, a single private WIES unit was $3 560 for metropolitan health services and regional health services and $3 741 for sub regional and local health services. Figure 1B shows the public and private WIES targets set by DHHS for the audited health services against actual figures for 2016–17 and 2017–18. The WIES targets are estimates of activity in health services to determine budget and overall activity targets.

DHHS caps the WIES funding it provides to health services. If health services provide inpatient services beyond this cap, they do not receive state funding to cover those costs. However, health services can access a 50 per cent payment for services between 100 to 104 per cent of the cap.

Figure 1B
WIES public and private targets and actual figures, 2016–17 and 2017–18
















Western Health

80 708

82 800

6 770

6 969

83 886

82 059

6 983

6 618

Latrobe Regional Hospital

19 384

19 647

1 656

1 613

23 280

19 903

1 947

1 761


45 731

48 073

6 806

6 940

49 279

46 072

7 460

6 294

Source: DHHS.

DHHS funds specialist outpatient clinics differently. From 1997 to 2017, Victoria used an output-based funding model called the Victorian Ambulatory Classification and Funding System (VACS). VACS was a way for DHHS to estimate the weighted cost of providing a service. It was based on 35 weighted medical, surgical and clinical specialties and 11 unweighted allied health specialties. DHHS used VACS to fund 19 health services and provided block funding for the remaining health services.

Public hospitals receive block funding to support teaching and research, and for some services where it is more appropriate. Smaller rural hospitals are block funded to ensure certainty of funding, irrespective of activity.

In 2017–18, DHHS introduced an ABF model, Weighted Ambulatory Service Event (WASE), which replaced VACS and the block grant funding for specialist outpatient services in all Victorian public health services. The WASE model includes a public and private price for outpatient services. DHHS sets WASE targets for health services that match historical specialist outpatient clinic funding and take into account the public and private activity split. DHHS monitors outpatient activities in each health service against WASE.

On average, government funding covers approximately 80 per cent of the total costs incurred by health services. The caps on activity, and the gap between the price paid and health service costs, creates an incentive for health services to seek alternate revenue, including through private practice arrangements.

1.2 Governance arrangements for Victorian health services

National Health Reform Agreement

The NHRA provides a framework for the Commonwealth and state and territory governments to jointly fund public health services. It aims to improve healthcare outcomes and create a more sustainable funding arrangement. It specifies financial and funding arrangements and outlines the roles of the governments. Premiers and chief ministers of states and territories and the Prime Minister of Australia signed the NHRA in August 2011.

The NHRA specifies the business rules for treating private patients in a public hospital, requirements for seeking consent from patients to be a private patient, and how to charge for private patients.

The NHRA defines the role of the states and territories, and makes Victoria responsible for:

  • establishing the legislative basis and governance arrangements for public health services
  • setting policy and procedures for public health services
  • system-wide planning and performance
  • monitoring service delivery
  • state-wide industrial relations functions, including negotiating enterprise bargaining agreements.

Department of Health and Human Services

The Health Services Act 1988 gives the DHHS Secretary a range of principal functions to ensure its objectives are met, such as to:

  • develop policies and plans with respect to healthcare provided by health services
  • fund or purchase health services and monitor, evaluate and review publicly funded or purchased health services
  • in consultation with health services, develop criteria or measures that enable comparisons to be made between the performance of health services that provide similar services
  • encourage safety and improvement in the quality of healthcare provided by health services
  • collect and analyse data to enable the Secretary to undertake their functions under the Act.

DHHS is also responsible for administering the NHRA on behalf of Victoria.

DHHS guidance to Victorian public health services is important to provide consistent information on how to best manage key processes and comply with funding rules. For example, DHHS, through its Policy and Funding Guidelines, sets business rules for public health services. While guidance does not need to be prescriptive, it should aim to help health services comply with legislation or required policy. Guidance should also be strategic, recognising that public health services are partners in ensuring that Victoria can access its proper share of Commonwealth Government funds, as per the NHRA.

Public health services

Under the Health Services Act 1988, the Minister for Health appoints independent boards for health services, except for denominational and privately owned public hospitals. The boards have a range of duties, including setting the health service's overall strategy, determining service offerings, setting the budget and governance arrangements and ensuring there is appropriate executive talent in place. The chief executive officer is responsible for managing the public health service in accordance with the framework set by the board, such as ensuring compliance with all relevant rules and guidelines, as well as the day-to-day operations, management and governance. This includes employing staff and negotiating and entering into private practice arrangements with senior medical practitioners.

1.3 Private patients in public health services

Patients in Victorian public health services can choose to be public or private patients for inpatient or outpatient services. However, emergency department treatment must be provided on a public basis and free of charge to all Medicare-eligible patients. Patients should not receive preferential access to services if they choose to be private patients.

Inpatient care

An admission is a process whereby a hospital accepts responsibility for a patient's care or treatment. Admission follows a clinical decision that a patient requires same-day, overnight or multi-day care or treatment.

Health services admit inpatients because they require treatment and/or monitoring (same day, overnight or multi-day). Health services can admit patients through an emergency department, referrals from external providers, and referrals from internal outpatient services when they require elective procedures, such as surgery.

The NHRA states that all Medicare-eligible patients will be treated as public patients unless they elect to be treated privately. If this is the case, patients must sign an informed financial consent either on admission or as soon as practicable after admission. These private patients may choose their treating medical practitioner.

Private patients may have some components of their care billed to MBS. The remainder is either paid by the patient directly, or by their private health insurance company, or a combination of both. Some private health insurers require patients to pay an excess payment when they make a claim on their policy. All three audited health services cover a patient's excess when patients choose to be treated privately. Health services do not charge patients a gap payment—that is the difference between what their health insurance provider pays and what their doctor charges. In addition, patients eligible through the Transport Accident Commission, WorkCover or the Department of Veterans' Affairs are compensated for the cost of their treatment.

DHHS's guidance document Private patients: Principles for public health services, published in 2016, sets out the principles that apply to private patients who receive care in public health services. The document notes that health services must not prioritise private patients above other patients for the care provided or timeliness of treatment.

Outpatient care

Patients in specialist outpatient clinics receive medical care to treat acute health conditions in a non-admitted setting. Public health services run a wide range of specialist outpatient clinics, such as pre-admission or fracture clinics. Patients can be referred to a specialist outpatient clinic by treating staff within the health service, or external medical practitioners such as general practitioners.

Specialist outpatient clinics can be funded as a public clinic, where health services record a public occasion of service. This contributes to Victoria's NWAU growth. Specialist outpatient clinics can also be funded using MBS, where a health service has private practice arrangements in place. These appointments are billed to MBS and do not contribute to Victoria's NWAU.

The requirement for informed consent applies to patients attending MBS specialist outpatient clinics in public health services. Clause G19 of the NHRA states that an eligible patient presenting at a public hospital outpatient department will be treated free of charge as a public patient unless:

  • there is a third-party payment arrangement with the hospital or the state or territory to pay for such services, or
  • the patient has been referred to a named medical specialist who is exercising a right of private practice and the patient chooses to be treated as a private patient.

DHHS provides the following guidance to health services for specialist outpatient clinics:

  • Specialist clinics in Victorian public hospitals: A resource kit for MBS-billed services (2011)
  • Specialist clinics in Victorian public hospitals: Access policy (2013)
  • Specialists clinics service improvement guide (2013).

1.4 Right of private practice

The history of right of private practice in Victoria

DHHS guidance specifies that public health service specialist outpatient clinics cannot be exclusively private. The guidance also requires health services to display signage to inform patients whether a clinic is public, private or mixed, and that patients have a choice of public or private treatment.

Dillon Review

The October 1959 report to the Hospitals and Charities Commission, titled Salaries, Terms and Conditions of Service of Medical Officers Employed in Public Hospitals, was chaired by John Dillion SM and became known as the Dillon Review. The review included the first documented analysis and assessment of private practice in Victoria's public health system. It recommended, among other things, that full-time medical specialists put all of their private practice income into private practice funds, which later became speciality group special purpose funds (SPF). These funds could be used for research, tools and resources. This system aimed to promote collegiality within specialty groups because specialists who earn more private income share with those who have a lower capacity. Some health services still refer to SPFs as 'Dillon funds'.

Other reviews

Since the Dillon Review, there have been further reviews of the salaries, terms and conditions of medical specialists that have also touched on the role and arrangements of private practice income in the overall remuneration of full-time medical specialists in Victoria. These reviews include the:

  • June 1995 report of the Ministerial Review of Medical Staffing in Victoria's Public Hospital System, chaired by Ben Lochtenberg (the Lochtenberg Review)
  • June 2000 unpublished report of the Ministerial Review of Victorian Public Health Medical Staff,chaired by Dr Heather Wellington (the Wellington Review).

The reviews note that over time the Dillon arrangements for private practice had fractured and some specialties have less capacity for private practice earnings than other specialties. Both reviews recommended supplementing the salaries of full-time medical specialists in specialties with less earning capacity with wage increases of 10 and 25 per cent respectively.

Current models of private practice arrangements

Senior medical practitioners employed by a public health service may carry out private practice within that health service, if they have an agreement with the health service to do so.

There are typically two types of private practice arrangements 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.

Fee-for-service VMOs may also conduct private practice at public health services, however, they are generally not employed by the health service. VMOs bill their services directly to health services, MBS or other funders such as private health insurers. Health services may or may not charge VMOs for the use of facilities.

Donation model

Under the donation model, senior medical practitioners donate private practice revenue to the health service. Senior medical practitioners allow the health service to use their Medicare provider number to bill on their behalf. The health service accepts risks and liabilities associated with billing errors, however, senior medical practitioners are liable for non-compliance with the Health Insurance Act 1973.

All senior medical practitioners who follow the 100 per cent donation model have access to medical indemnity insurance through the Victorian Managed Insurance Authority.

Under the donation model, health services may donate a percentage of the private practice income to an SPF. The medical or surgical specialty that the senior medical practitioner belongs to, for example, cardiology or dermatology, manages the SPF. SPFs are typically spent on training, equipment, or research to support their specialty.

Retention model

Under the retention model, senior medical practitioners keep all or a portion of their private practice billing income. Under this arrangement, the senior medical practitioner is responsible for their own billing. However, health services may bill on their behalf if both parties agree.

Under an agreement with their employer, the senior medical practitioner may share a percentage of their private practice income with the health service in return for administration services or as a facility fee.

Medical Specialists Enterprise Agreement 2018–2021

The Medical Specialists Enterprise Agreement 2018–2021 sets out the working conditions and pay scales for medical specialists working in public health services. The agreement has two separate base pay scales for 'full-time doctors' and 'full-time doctors (who receive additional private practice income)'. The 'full‑time doctors' pay scale is between 19 and 25 per cent more than the 'full-time doctors (who receive additional private practice income)' pay scale.

The agreement specifies that health services are able to pay the lower base rate to full-time doctors (who receive additional private practice income) if the combination of their salary and private practice earnings is equal to or greater than the higher base rate.

Under the agreement, health services must correctly bill for services and provide the medical specialist with the details of what it has billed against their provider number. The agreement also specifies that health service processes must be consistent with national healthcare agreements.

1.5 Why this audit is important

There is limited public information available about private practice in Victoria's public health services. DHHS sets out the benefits of private practice in its document Private patients: Principles for public health services. DHHS asserts that private practice:

  • provides health services with an additional source of revenue
  • helps health services attract and retain highly specialised staff
  • maximises services provided to the community, through opportunities to reinvest revenue into expanded public service offerings.

However, there is no assurance that private practice achieves its intended outcomes or delivers efficient, effective or economical health services to Victorians.

This audit provides insight into an area of the health system where there is currently limited visibility.

1.6 What and who this audit examined

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

Department of Health and Human Services

DHHS is the manager and steward of Victoria's public health system. It is responsible for reporting to and advising the Victorian Minister for Health on the operations of the Health Services Act 1988.

The Health Services Act 1988 gives the DHHS Secretary a range of principal functions to ensure the objectives of the Act are met. DHHS is also responsible for administering the NHRA on behalf of Victoria. The NHRA provides a framework for the Commonwealth Government and states and territories to jointly fund healthcare and sets out agreed rules for states' health systems.

DHHS guidance provides Victorian public health services with consistent information on how best to manage key processes and comply with funding rules. For example, DHHS's Policy and Funding Guidelines and other documents set business rules for public health services.

Latrobe Regional Hospital

Latrobe Regional Hospital offers medical and specialty services for the Gippsland region, servicing a population of 260 000. It has 313 beds and treatment chairs, and services about 130 000 patients each year, with about a quarter of those through its emergency department. It employs about 1 900 staff and is one of the largest employers in the region.

Latrobe Regional Hospital offers elective surgery, emergency care, aged care, obstetrics, mental health, pharmacy, rehabilitation and medical and radiation oncology.

Western Health

Ambulatory clinics provide healthcare to individuals with chronic diseases, or those that are frail or recovering from surgery. Ambulatory clinics aim to prevent or reduce the need for hospital admissions.

Western Health services Melbourne's western suburbs. It has three acute public hospitals located in Footscray, Sunshine and Williamstown. It also operates the Sunbury day hospital, and a transition care program at Hazeldean in Williamstown.

Western Health has more than 1 000 beds and services a population of approximately 800 000. It employs nearly 6 500 staff.

Western Health provides acute tertiary and subacute care, including emergency medicine, intensive care, medical and surgical services and specialist ambulatory clinics.

St Vincent's Hospital Melbourne

SVHM is a denominational tertiary public healthcare service, with a main campus in Fitzroy and two other campuses in Kew. It has 880 beds and more than 5 000 staff. It primarily services the municipalities of Yarra, Boroondara, Darebin and Moreland, yet only 43 per cent of SVHM patients live in these municipalities.

SVHM provides a range of services, including acute medical and surgical services, emergency and critical care, aged care, diagnostics, rehabilitation, allied health, mental health, palliative care and residential care.

1.7 How we conducted this audit

We analysed DHHS's oversight of private practice, including its guidelines, monitoring, and whether private practice achieves the intended outcomes outlined by DHHS.

We examined how three Victorian health services administer right of private practice: SVHM, Western Health and Latrobe Regional Hospital. We selected these health services based on their diverse geographic location, based in inner Melbourne, metropolitan Melbourne and regional Victoria respectively.

We examined how health services implement private practice arrangements, including:

  • whether the three audited public health services comply with the NHRA when undertaking billing
  • how patients elect to be private
  • whether they receive the same access to services as public patients.

We also examined the types of private practice arrangements in the audited public health services, how health services collect and account for private practice revenue, and whether health services use that revenue to expand services. To do this, we collected data from SVHM, Western Health and Latrobe Regional Hospital for the 2016–17 and 2017–18 financial years.

We spoke to staff at all three audited public health services involved in administering right of private practice. This included:

  • patient liaison officers, who provide public patients with information to obtain their informed financial consent to be treated as private patients
  • senior medical practitioners employed by the audited health service
  • staff responsible for human resources, finance, and billing related to private practice
  • Chief Medical Officers and senior administrators of each audited health service.

We conducted our audit in accordance with section 15 of the Audit Act 1994 and ASAE 3500 Performance Engagements. We complied with the independence and other relevant ethical requirements related to assurance engagements. The cost of this audit was $560 000.

1.8 Report structure

Part 2 covers DHHS's management of private medical practice in public hospitals. Findings from the three audited public health services are outlined throughout the report.

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