In October 2024, Australia’s second-largest private hospital operator, Healthscope, started charging customers of certain health funds including Bupa a $100 gap fee for overnight stays.

Healthscope told patients if they were upset by the additional charge they should switch health funds.

Patients thus became the meat in the sandwich in a battle between the funds and Healthscope, owned by the private equity (PE) arm of giant Canadian firm Brookfield.

Rachel David, Chief Executive of Private Healthcare Australia, the peak body representing private health funds, described the Healthscope fee as “a deeply unethical move”.

“Targeting patients is a new low. I have never seen a hospital group do this before,” she told The Australian newspaper.

David said Brookfield was “holding privately insured patients hostage and trying to bully health funds into paying them more so they can increase profits”.

“Brookfield was only ever in the Australian hospitals market for the short term,” she added.

“It is trying to squeeze out as much profit as possible before it abandons Healthscope hospitals, potentially making private healthcare unaffordable in the process.”

In November, Healthscope cancelled its funding arrangements with Bupa and a collective of not-for-profit insurers.

This affected more than six million people, the Australian Financial Review reported.

No government bailout

Brookfield paid $4.1billion for Healthscope in 2019.

Its investment has not yielded the expected profits so Healthscope wants health funds to pay a bigger share of treatment costs.

The insurers said they and their customers should not have to pay for Brookfield’s poor commercial decisions.

Healthscope then launched a PR  campaign against the insurers.

The Australian Financial Review described the PR blitz as “a warning to patients that hospitals will close, surgery waiting lists will grow, patients may have to travel further for rehabilitation, and out-of-pocket expenses will rise if insurers don’t pay more for procedures”.

Health Minister Mark Butler has commissioned a review of the health of the private hospital sector and Healthscope appears to be hoping for government help.

However, Butler told the Australian Financial Review in December there was “no silver bullet or government-funded bailout on the cards”.

Saddled with debt

Rachel David’s description of Healthscope as a short-term investment points to the major flaw in the PE investment model (private equity refers to investment in businesses that are not publicly traded on stock markets).

PE firms don’t use a lot of their own money when they buy companies.

Instead, they borrow money from institutional investors (including superannuation funds) to buy businesses for the purpose of selling or publicly listing them on the stock market within a few years.

Investors are promised fat profits.

These transactions are funded by debt but it is the business being bought – not the PE firm – that takes on the debt.

According to The Australian, Brookfield has loaded up Healthscope with about $1.6 billion of debt.

Healthscope must pay this back to a syndicate of at least 25 lenders at a time when the industry is struggling with higher costs.

A common PE tactic is to sell the target company’s physical assets such as real estate then rent the properties back.

This can extract a fast profit for the PE firm but often burdens the target company with high rents.

When Brookfield bought Healthscope, it sold Healthscope’s properties to NorthWest Healthcare and Medical Properties Trust for about $2 billion combined.

One of Healthscope’s new landlords, Medical Properties, has since sold the Healthscope properties it owned to another company, to which Healthscope must pay rent.n