An extraordinary letter, sent to the new treasurer and other ministers, reveals details of a staggering deal done in the Morrison government’s final month in office. By Mike Seccombe.

Greg Hunt’s $400 million ‘secret deal’

Greg Hunt in Tasmania during the election campaign.
Greg Hunt in Tasmania during the election campaign.
Credit: Mick Tsikas / AAP Image

The first concerning phone call came from former Health minister Greg Hunt’s office to the chief executive of Private Healthcare Australia, Rachel David, on November 3 last year. The caller, she claims, wanted money.

The person on the line wasn’t Hunt, or any of his policy people with whom she usually dealt, but another staffer in the minister’s office.

According to David, the caller suggested a $20,000 donation to Hunt’s own electorate conference.

“I said, ‘Well, I don’t give donations to specific electorates,’ ” she tells The Saturday Paper. “You know, in situations where we’re in an acrimonious negotiation, I can’t do that.”

A spokesman for Hunt denied “absolutely and unequivocally” that any such call happened. The Saturday Paper is not suggesting Hunt was aware of it or directed it.

David, whose organisation represents 20 providers of health insurance covering almost 14 million Australians, says she is “prepared to name the person under the right circumstances” – those circumstances being that she has the protection of a parliamentary committee or formal legal process.

Her allegation about the phone call is one in a series of inflammatory claims contained in a lengthy document entitled “Prostheses List reform – interactions with the Coalition Federal Government”.

It was compiled by David and the PHA in support of their complaint that they were misled by the former Morrison government about promised reforms that would have saved the insurers, and ultimately policyholders, millions of dollars. All were included in a letter addressed to Treasurer Jim Chalmers and Finance Minister Katy Gallagher, and copied to the incoming Labor Health minister, Mark Butler, a couple of weeks ago.

Most Australians would never have heard of the Prostheses List, by which prices are set for more than 11,000 types of medical devices, including things ranging from heart pacemakers to artificial hips and knees, to simple screws and plates, staples and glues, and all manner of other medical hardware used in surgery.

For too long, those prices have been too high, as numerous inquiries have found over many years. Australia pays far more for these devices than many other comparable countries, in some cases several times more. And the device suppliers, mostly foreign-owned multinationals, have creamed off billions of dollars in profit, mostly from private insurers but also from taxpayers.

Explaining why this flawed system came to be and was allowed to persist, Dr Stephen Duckett, now an honorary enterprise professor at the University of Melbourne and recently health program director at the Grattan Institute, says it comes down to politicians pandering to vested interests.

“You’ve got four big players. You’ve got the private doctors, who are interested in spending more on doctors. You’ve got private hospitals, who are interested in spending more money on private hospitals. And you’ve got device manufacturers, who have got an interest in spending more money on devices,” he says of the first three. “And then you’ve got the private insurers, who’ve got an interest in trying to keep costs down.”

At various times on various issues, he says, “each of the interest groups try and persuade the government of the day that one or other of the other interest groups are evil. So you’ve got this game that’s been played by these interests, and they wax and wane in political salience.”

In the case of medical devices, he says, it was three interest groups against one. “So you ended up with the prices set by this Prostheses List Advisory Committee being multiples of the prices that states pay for exactly the same prostheses used on public patients in public hospitals. The insurers say, rightly in my view, that this is actually not an efficient system.”

In a submission to a review of the system by the Health Department in February last year, Duckett noted private hospital insurance paid out more than $2 billion each year for prostheses, and described the pricing arrangements as “part Soviet-era price control and part Monty Python sketch”. They were, he said, a “case-book example of regulatory capture”.

The benefit of high prices to the manufacturers is obvious. But doctors and hospitals also had reason to want the status quo maintained, he says. Duckett suggests surgeons, who choose the prostheses, were subject to “a whole lot of incentives … some of which we know about and some of which we don’t”.

He says surgeons might choose expensive devices out of habit or because they haven’t looked at the cost-benefit between different prostheses. Or it may be a more nefarious influence. “It might be that they get a special deal from the device manufacturer who might send someone into the operating theatre to help them.”

The private hospitals, he says, benefited financially from the system, because some – particularly the big ones, such as Ramsay Health Care – were able to buy devices below the nationally regulated price but charge the private insurers full price.

As Health minister, Hunt, to his credit, tried to change the system. He did so in a staged way, over four years. But this was not enough or as quick as the PHA wanted. It claims that, having promised measures that would bring down prices substantially in the 2021 budget, Hunt then walked it back in a “secret” memorandum of understanding (MoU) with the peak body representing device makers, the Medical Technology Association of Australia. This would see private insurers continue to pay inflated – albeit less inflated – prices.

In Rachel David’s letter to the incoming ministers she noted a commitment by Chalmers to conduct an “audit of rorts and waste in the Federal Budget”, and continued:

“I ask you to consider the secret deal made by the Minister for Health, the Hon Greg Hunt, with the Medical Technology Association of Australia (MTAA) on 14 March 2022 which will transfer an estimated $250-$400 million from Australians with private health insurance to large international medical device companies over the next four years.

“Taxpayers will be directly contributing approximately a quarter of this amount through the Private Health Insurance Rebate.

“The 2021 Federal Budget decision began the process of slowly reducing private prices to the equivalent public hospital prices over several years. This decision would still have Australians paying the highest prices in the world, but would have reduced costs by over $1 billion over four years.

“However, in the last month before the 2022 election was called, Minister Hunt announced a deal with the big international MedTech companies that put a surcharge of 7-20% for private patients on top of the often-inflated public prices.”

The letter was strongly critical of both the deal and the process by which Hunt and the MTAA reached it. But the really incendiary stuff was contained in an attachment.

Reference to the November 3 phone call was only one part of a detailed time line of events indicating an increasingly hostile  relationship between the PHA and the government in the months before the election.

According to this version of events, after extensive consultations with various stakeholders, Hunt wrote to health funds on December 16, saying “savings from Prostheses List reform would be around $140 million in 2022-23”.

Three days later, the funds agreed to “a low premium increase” on the basis of the promised cost savings. David now says they promised the government a zero increase, but eventually put them up by an average of 2.7 per cent.

Around that time, the document says, the PHA and its member funds were hearing “rumours” that Hunt’s office and the MTAA were “attempting to negotiate another binding agreement”.

It says, “Departmental officers deny this and claim they have advised against it.”

Three months later, on March 16, there was a 10am videoconference between David and Hunt, at his instigation.

“At exactly one minute prior to the organised time for the videoconference the PHA CEO receives a one-page document from the Minister’s office which appears to be a summary of a further agreement between the government and the MTAA,” says the document.

Under this new memorandum, the projected savings in the first year had been reduced from $140 million to $90 million. Some promised measures were delayed and there also was “the addition of a 7-20% surcharge on implants purchased for private patients”.

The details had already been released to the media and were being published as David waited for the call.

Things escalated fast. There was another phone call between Hunt and David that day in which, according to the letter, “the Minister screams expletives ... He also threatens to call APRA and the ACCC and ‘claw back every dollar of profit made by health funds’.”

If true, the suggestion that the government might respond to a disagreement over policy by calling in regulatory agencies is extraordinary. Hunt’s spokesman also denies this.

Following the announcement, the PHA wrote to Scott Morrison, querying “whether the winding back of the budget measure was actually a government decision”. It also sought legal advice as to whether the deal could be challenged in court. On the basis of that advice, it wrote to the secretary of the Health Department, Brendan Murphy, questioning the MoU’s status.

In his reply, a couple of weeks ago, Murphy said the department did not believe the agreement between the minister and the MTAA was legally binding and that “the Department is not a party to the MoU. Rather, the MoU sets out an understanding between the former Minister and MTAA in respect of certain intentions for future PL [prostheses list] reforms”.

Murphy’s letter continues, “The new Minister for Health and Aged Care, the Hon Mark Butler MP is being briefed on the current status of the PL reforms with a view to determining the current Government’s policy on PL reforms.”

Neither Butler’s office nor Chalmers’ nor Gallagher’s offered any clarification about where things stand under the new government. David is hoping to meet with Butler this week to press the insurers’ case for bigger, faster cuts to the costs of items on the list.

Unsurprisingly, other organisations with other vested interests tell a quite different story.

Ian Burgess, chief executive of the MTAA, suggests the private insurers were not blindsided by Hunt: “The previous minister met with all stakeholders and certainly met with PHA and kept all stakeholders informed in terms of what was announced around the MoU when that was announced.”

Burgess says all those involved, including his members, who will lose money as a result, were accepting of the proposed reforms. “There was only one stakeholder group that wasn’t happy, and that’s PHA. And I suspect that’s because they overpromised to their members ... totally unrealistic and unsupportable expectations …”

He suggests they are simply greedy. “This is the most significant reform of the prostheses list ever,” he says. “And this will deliver significant savings for insurers – in excess of $900 million over the term of the agreements, which is over four years. And the total prostheses list spend is $2 billion a year. So that’s a significant saving on an annual basis.”

Burgess also worries about the pace of reform, but his are the opposite to health insurers’. This is logical: a loss for one is a gain for the other.

“Our concern is that … the Department of Health is developing a framework evaluating the impact of these cuts,” he says. “A key factor that has to be considered is the impact on the sustainability of the med-tech industry, particularly small/medium enterprises.”

There is no love lost between the device makers and the insurers. Each accuses the other of profiteering and each argues the other needs to be reformed. Perhaps both are right.

In a recent media release, for example, the MTAA pointed to record profits for insurance companies “as another clear example of the need for private health insurance reform to address the cost-of-living crisis in Australia”. The release said: “Quarterly data released by the Australian Prudential Regulation Authority (APRA) has revealed private health insurance companies have raked in their highest ever profits at $2 billion, an astounding 107.8% increase on last year.

“The record profits come while expenditure on medical devices, via the Prostheses List, plummeted by 17.9% in the March quarter compared to the previous quarter.”

Burgess repeated the same statistics to The Saturday Paper. “The insurers’ management expenses increased 7.3 per cent last year, to $2.6 billion. So they are spending more on themselves than they are on the prostheses now. Yet they’re claiming that devices are the reason for premiums having to go up, which is blatantly false.”

He said the MTAA had received from Labor a “written, firm commitment to upholding the MoU”.

Michael Roff, chief of the Australian Private Hospitals Association, is another critic of the insurers. “They’ve got costs that are lower than they were last year. Because of these reductions, they can map out further cost reductions over the next four years,” he says.

“Activity in both public and private hospitals is still down on historical levels, mostly because of workforce capacity constraints – the private sector alone is short about 6000 nurses at the moment.

“And on top of that you have a layer of ongoing absenteeism due to Covid and flu, all of that. And health funds are actually collecting more premium revenue, because membership has gone up over the last two years ... So fund outlays are lower than they otherwise would have been, which is why they pocketed $2 billion last year.”

As to the claim that the insurers were misled by Hunt, he says: “I can’t see how they can say they’ve been blindsided, because … we all sat around the same meeting tables where all of these options were being discussed.”

Matthew Koce, chief executive of the Members Health Fund Alliance, which represents 25 non-profits covering almost five million members, gives Hunt considerable credit as “the first minister to really grab the bull by the horns and do substantial reform in this area”.

He refers to data released a couple of years ago by the Independent Hospital Pricing Authority and Commonwealth Department of Health, showing device manufacturers charged patients with private health cover up to three times more than patients in public hospitals.

Subsequent analysis by his organisation found individual private health fund members paid more than $100 a year extra in premiums because of the “exorbitant costs” of medical devices under the national Prostheses List.

The reforms, he says, represent “great progress. Of course, there is still a way to go. We’d like to see, you know, reference pricing internationally as well as against public hospitals in Australia.”

Because prices here are still relatively high, and they vary even among public hospitals, the best model, he says, is that of the Victorian government. “It’s a centralised body that goes out for tender and procures for the public hospital system very efficiently.”

Ideally, Koce says, that model could be rolled out nationally, not just for public hospitals but for private as well, “so you could have a centralised buying authority for the whole country”.

That would put the fear of god into the device makers. It would also satisfy even the PHA. For now, he says, the Hunt outcome is reasonable enough.

“Look, none of the parties have got 100 per cent of what they wanted,” Koce says. “But I think we’ve made some amazing progress.”

It doesn’t feel like that to Rachel David. It feels like a long, hard battle just to get to this point.

“This started about five years ago,” she says, “and since that time, we’ve had some incredibly acrimonious negotiations with the government about it. The big multinationals have so much to lose, they make more profit in this country than pretty much anywhere else. And they fought very hard – with lobbyists at 10 paces – to be able to retain the value that they’ve been getting.”

David worked for former Liberal Health minister Michael Wooldridge for about four years from 1996. She knows how ugly politics can be. But this is worse.

It all comes down to the huge money involved. “Particularly,” she says, “as the world sort of sinks into chaos and recession and so forth, desperate people … will fight nastily.”

She’s talking about the other guys, of course. 

This article was first published in the print edition of The Saturday Paper on July 9, 2022 as "The ‘secret deal’ making surgery more expensive".

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