So, you want to start a private hospital…

The private hospital industry may seem like an attractive business prospect. It’s no surprise then, that year-round we get asked for advice on the requirements for opening a private hospital and running it successfully.

If you’ve got your sights set on a new private hospital, we’re here to help. But first, let’s walk through the top things you need to consider to make your private hospital a success.

What’s the market doing?

When deciding whether a private hospital is a viable business proposition or not, you need to find out whether there are enough patients to fill it.

• If the market is growing, there’s room for new hospitals.

• If the market is not growing, you’ll have to think of ways to take patients from existing providers.

For most private hospitals, the bulk of revenue comes from private health insurers—a possible exception being hospitals focused on aesthetic or dental surgery. Each quarter the Australian Prudential Regulation Authority (APRA) releases numbers on health insurance. The APRA figures are a solid indication of what the market is doing, which could influence your business case (see 4 below).

The chart below is from the September 2020 quarterly summary. This shows a very slow growth in health insurance policies covering people aged 50 and above, and a decline in health insurance policies covering younger people.

The bulk of (private) hospital patients are over 50, so there is some market growth. However, insurance for patients under 50 helps pay for the healthcare of those over 50. This means that health funds are currently trapped in a situation of stagnant revenue and increasing outgoings.

As an overall trend, demand for private hospital services is slowly increasing, but as a new hospital you’ll need to demonstrate your value to health funds in order to win contracts.

The different kinds of private hospital owners

Prospective hospital owners are not peas in a pod. You are unique and will have different requirements to your competitors. Any recommendations need to be tailored to your particular situation. However, there are a few broad groups, one of which you may fit into:

• Doctors who would like their own facility (whether solo or in a group), perhaps in order to have more control over the perioperative environment, or to capture a larger piece of the healthcare value chain.

• Existing hospital owner/operators who want to expand their geographical reach or medical scope.

• International operators looking to expand in Australia.

• Property developers looking for either a good developer’s fee or a solid high-yielding tenant.

The first three have existing operational experience within healthcare. Property developers without this specific experience may have to work hard at finding a suitable operator. We cover this in more detail in the “Property vs Operations” section below.

The top 10 considerations for opening a private hospital

Regardless of where you’re coming from, the following are our top 10 considerations to help you determine the right course of action:

1. Objective

What is your fundamental objective of starting and running a hospital? Do the plans to date address and match that objective?

2. Exit

At some point sooner or later you will want to stop running a private hospital. What is your exit strategy? Is the plan to establish and operate (almost) in perpetuity, or would you prefer to sell to another operator as quickly as possible?

3. Team

Health care is a team sport. Your project and the operating company need to have (access to) a great team. There are a wide range of team members required. Some of the most important include:

• An experienced DON / CEO

• Quality manager

• Health architect

• your accountant or other financial adviser

• a chief medical officer, and perhaps the start of the MAC and other committees.

4. Plan

Do you have a reasonable business case which demonstrates that the hospital can succeed? Your business case should include at least the following components:

• Revenue model, including realistic estimates of volume by procedure type and realistic rates of reimbursement by funders and/or patients as appropriate

• Expenses budget, particularly the cost of the team

• Specialty-specific investments/operating expenses, and from this a good understanding of unit cost for common procedures

• How you will attract clinicians to practice at your facility, and whether this tallies with your revenue model.

All of these costs, investments and revenues should tie together in a coherent whole.

5. Regulatory

Get in touch with the private hospitals unit within the state Department of Health. These people are extremely approachable, and happy to help to the extent possible. You’ll need to understand and comply with the relevant:

• State licencing procedure

• Accreditation process

6. Investment

Make sure to have a reasonable estimate of the investment required of each entity verified by more than one person. Once you have this information, you’ll need to check the estimate is within each entity’s financial capacity.

7. Marketing

You have a couple of audiences you’ll need to think about attracting to your private hospital. First, you need a strategy for attracting clinicians to practice at the facility. The number, practice profiles and specialties of the clinicians who will bring their patients to your facility will impact revenue. Secondly, what other factors might influence patient flow?

8. Location

If you already have a location picked for the hospital, consider whether the site matches with the answers to the questions above (patient flow, clinicians, marketing, investment, etc). Is it an existing building, or an empty site? Converting an existing building into a hospital may be possible, but it is more challenging than starting with an empty site. Make sure to keep your options open to any eventuality. Ask yourself:

• Is there an opportunity to expand if things go well?

• Is there a way to change the use of the building if things don’t go to plan?

9. Design

Your project architect should be an experienced health architect. They’ll need to be able to match any existing designs (floor plans, blocking diagrams) with envisaged procedures and patient volumes, and at the same time incorporate state licencing and national accreditation requirements into the design.

10. Revenue

Your hospital can expect to receive most of its revenue from the health funds of your patients. Therefore, you need a plan on how to approach the health funds. Build Unique Selling Points (USPs) into the hospital and its operations to increase its attractiveness to the funds. Think about a back-up plan, should the health funds not engage with the hospital.

Property and Operations

Usually in healthcare, there’s a boundary between property investments and operating companies. This is because they are quite different types of investment, carrying different risk profiles throughout their investment life.

Colloquially these two companies are often referred to as “OpCo” and “PropCo”.

• PropCo: Provides the venue in which the OpCo works.

• OpCo: Hires the staff, carries the contracts with the health funds, owns the equipment, and pays rent to the Propco.

Some prospective founders plan to operate without a clear distinction between OpCo and PropCo. There is nothing strictly wrong with this. Some of the large, long-established, faith-based not-for-profit operators own their property and don’t pay rent.

A common goal among those that own both OpCo and PropCo is to divest the operating company. This is a great strategy once the OpCo is sustainable without the founder’s involvement.

A common goal for property developers is to find an existing operator who wishes to expand. For this group a business case (as described in 4 above) is even more important.