Collapse of Healthscope, Australia’s second-largest private hospital chain, could have grim ripple effect

The collapse of Australia’s second-largest private hospital chain, Healthscope, could have a ripple effect that results in the closure of tens of facilities and a government takeover of acute care facilities like the 300-bed Northern Beaches hospital in Sydney.

An investor who has viewed the investor memorandum detailing the health of the business, said only “three to five” of the hospitals were profitable. The investment manager, who asked to remain anonymous, said the changing nature of private healthcare stays meant the high fixed costs and rents expected for the facilities meant that smaller hospitals in particular would be unprofitable and the best option would be to transfer them into aged care facilities.

On Monday, Healthscope’s lenders appointed McGrathNicol as receivers after rejecting a proposal to restructure the company’s $1.6 billion debt.

While Healthscope’s parent companies are in receivership, the operational business — which runs the hospitals — is not.

The firm said all 37 hospitals across the country — including the Prince of Wales in Sydney and Melbourne’s Knox Private Hospital — would remain open and operating on a business-as-usual basis with no impact on its 19,000 staff, doctors or patient care.

Healthscope chief executive Tino La Spina said there was no interruption to patient care.

“Our incredible teams are all working as normal, providing the high standard of care they always have,” he said.

Mr La Spina said the company had attracted significant interest from outside buyers.

“I think we’re confident that there is interest in taking the Healthscope business as a whole. We have 10 non-binding indicative offers,” La Spina said.

In the interim, Healthscope is being propped up by a $100 million lifeline by major creditor CBA, and has $110m cash on hand.

Health minister Mark Butler said the Government would not bail out the failed group and expected to see an “orderly sales process that maintains the integrity of the entire hospital group and will provide the best outcome for patients, staff, landlords and lenders.”

“We expect that these hospitals remain a critical part of our healthcare system. The government does not want any of these important assets to be put in jeopardy to satisfy international investors,” Mr Butler said.

Healthscope, which was purchased for $5.7b by US private equity giant Brookfield in 2019 had fallen victim to both timing and market forces.

As part of its bid, Brookfield loaded the hospital group with debt, and sold off its real estate to fund managers, before leasing them back.

In brokering the real estate deal, however, Brookfield valued the assets on the basis of rent payments that were equivalent to 50 per cent of the hospital’s earnings before interest, tax, depreciation and amortisation (EBITDA).

However, the takeover coincided with COVID, which meant a halt on elective surgeries, the core revenue driver of private hospitals.

According to the fund manager, private hospitals routinely make a loss on the actual surgeries, but recoup the revenue via patient stays.

“Basically they are luxury hotels, with a surgery attached” he said.

However, with COVID, surgery volumes declined but more importantly, patient stays have not recovered.

“Surgeons, hate doing patient rounds, so they have no incentive to keep you in hospital,” the fund manager said. “The private health insurers also don’t want to keep you in there.”

With declining volumes of patient stays, the rent cost as a percentage of EBITDA has now soared to 70 per cent.

Mr La Spina said rental costs were one of the three major issues behind the company’s woes.

“The rentals that the company are paying ... are out of the market. [They are] too high. That will get addressed as part of this process,” he said.

With declining revenues for stays, the company attempted to recoup its rising costs by charging more to private insurance companies.

In 2024, it attempted to charge customers from certain health funds a “hospital facility fee” of $50 for same-day services and $100 for overnight stays, setting up a fight with health insurer Bupa, who offered doctors $500 to switch to non-Healthscope facilities.

At the time, the peak body for health insurers described the fee as “deeply unethical” and a “new low.”

“Brookfield was only ever in the Australian hospitals market for the short term. It is trying to squeeze out as much profit as possible before it abandons Healthscope hospitals, potentially making private healthcare unaffordable in the process,” Private Healthcare Australia chief executive Rachel David wrote at the time.

For their part, private hospitals have argued the entire sector is under growing financial pressure, with the amount insurers pay out to cover treatment failing to keep up with rising costs and changes to government rules that have cut back hospital benefits.

Over the past five years, the sector has argued price increases from health funds have fallen well behind the pace of inflation, eating into hospital margins and weakening their financial position.

That was confirmed as one of the core issues for the company’s failure by Mr La Spina.

“The industry structure with private health insurers basically having squirrelled away billions and not putting it back to the private sector. That is a fight for another day,” he said.

“As the most efficient operator in the hospital sector, I believe that we can, we will be in good stead to be able to address this issue.”

Mr Butler acknowledged there had been “some viability challenges to private hospitals”.

“That is why a couple of months ago I announced my expectation to insurers they would lift the benefit payments ratio – the amount or percentage of their income from private health insurance members that is actually paid out to hospitals rather than going into profits or management expenses of private health insurance companies,” he said.

“The private part of the system receives about $8 billion a year in taxpayer support through the private health insurance rebate. With that comes social licence, that obligates operators of private parts of the system to benefit patients, not just their shareholders.”

The Government is hoping that a single buyer will come forward for Healthscope but the fund manager has warned that “everyone will take a bath”, including the lenders, who are facing a return of 40 cents on the dollar, the real estate managers, who will need to renegotiate rent, and the Government, who may have to step in to bail out acute care hospitals.

If buyers can’t be found for the smaller 100 bed facilities, they would most likely be converted to age care, he said.