The insurer contract is an operating plan

In most private hospital groups I know, the agreement with a health insurer is negotiated by a commercial director and a finance team, signed by the chief executive and then delivered to operations rather as weather is delivered to farmers. A nurse unit manager learns the result when her staffing budget arrives. A theatre manager learns it when a procedure is moved to a bundled price. Nobody intends this division of labour to cause harm, and the people who negotiate are usually skilled. I have come to think it is still a mistake, because the contract is not a financial document that happens to affect operations. It is the operating plan, written in a different vocabulary.

About 70 per cent of Kelvarra Health's revenue arrives through agreements with private health insurers. Most pay per episode of care, grouped by diagnosis-related group, with separate arrangements for prostheses, same-day admissions, rehabilitation and mental health. The doctors who treat our patients bill separately: Medicare pays most of the schedule fee for their in-hospital services, and the insurer pays part of the rest. What the hospital receives for the bed, the theatre, the nursing and the pharmacy depends almost entirely on what we and each fund have agreed. Once that agreement is signed, the room for operating choices narrows sharply.

What an indexation clause really decides

Consider indexation, the clause that sets how much the price of each episode rises each year. It looks like a commercial term. In practice it decides how many hours of nursing we can provide per patient day, because wages are about 60 per cent of our costs and nurses are the largest share of wages. When our nursing enterprise agreement added 4.5 per cent in 2023, an insurer offering 1.9 per cent a year was not offering a price. It was proposing, without saying so, that our wards run with fewer nurses for that insurer's members, or that other patients pay for the difference.

Other clauses work the same way. A per-episode price for a hip replacement decides how long the patient can stay before the episode loses money, which shapes when physiotherapy begins and when discharge planning starts. A clause that refuses payment for readmission within twenty-eight days pushes the hospital towards caution at discharge, which is good, but it can also push towards keeping patients longer than they need, which is not, and it says nothing about readmissions caused by events outside the hospital's control. A bundled price that includes rehabilitation decides whether a patient recovers in a rehabilitation ward, at home with visiting therapists or somewhere in between.

None of these effects is hidden. They are simply invisible to people who have never run a ward. An analyst can model the revenue effect of 1.9 per cent with great precision and still not know that it means one fewer nurse on a twenty-eight-bed surgical ward at night. That is the knowledge operators hold, and in my experience it is the knowledge most often missing when the price is agreed.

Bring the ward to the negotiation

Since 2021 I have co-led our insurer negotiations with our chief financial officer. That sounds like a change in the organisation chart. The real change was in the evidence we take into the room. Before each negotiation, nurse unit managers and theatre managers help prepare a cost pack for every ward and for our highest-volume procedures: nursing hours per patient day, the skill mix those hours require, the consumables and prostheses each procedure uses, typical length of stay and the share of patients who need high-dependency care. Analysts check and price it, but the people who run the ward own the description.

Insurers have responded better than I expected. Their negotiators are measured on claims cost, and they are understandably sceptical of hospitals that ask for more money in general terms. They find it much harder to dismiss a specific statement: that this ward, at this price, would lose a night nurse, and here is what happened to falls and pressure injuries the last time a ward of ours ran that way. Several of our contracts now include jointly reviewed quality measures, because the conversation moved from price alone to what the price buys.

The benefit runs in both directions. When nurse unit managers have helped build the cost pack, they understand why the contract reads as it does, and they stop treating the insurer as a distant antagonist. Our ward managers can now explain to a patient why a particular rehabilitation pathway is funded and another is not. That makes them better advocates for patients and better partners for funds.

Walking away without walking out on patients

The hardest question in any negotiation is when to walk away. In 2023 we let our agreement with Wyralee Health Fund lapse rather than accept its offer, and we spent forty-one days out of contract. Without a contract, a fund pays an eligible hospital a default benefit set under federal rules, below the average contracted rate, and members can face bills they did not expect. I do not think a hospital should ever take that step lightly, and I would not take it to win a point.

What made it defensible was the preparation. We decided in advance that every member already booked would be treated as if the contract still applied, at our cost; that maternity and cancer patients would be protected throughout; and that we would not argue our case through the press. Those commitments cost us about A$1.3 million, on top of roughly A$5.9 million of lost revenue. They also meant that the patients least able to change their plans were not the ones who paid for the dispute.

I would add two lessons from that episode. The first is that surgeons must hear about a dispute from the hospital, in person, before their patients do; several of ours learnt of it from a patient's letter, and our relationship with them took a year to recover. The second is that walking away is only credible if the operating plan for the out-of-contract period exists before the contract expires. A hospital that threatens to leave without knowing how it would run its lists, protect its patients and fund the gap is bluffing, and an experienced insurer can tell.

Insurers are not adversaries. They face their own pressures, including premium increases that require the federal health minister's approval and members who drop cover when it becomes unaffordable. A good agreement is one both parties can explain to the people who depend on it. My argument is narrower than it may sound: that the people who will have to deliver what a contract buys should be at the table when it is written. A contract that has been tested against the ward is more honest, and in my experience it is also more durable.