The changing face of private medical practices

" Financial viability of private medical practices can be a key issue, especially in regional areas. But there are no national data on the costs or profitability of running a private medical practice."Existing data and analyses have focused on doctors themselves, rather than the businesses they are part of. Yet business decisions can influence the costs of medical care, the care patients receive and access to medical care in different geographic areas.

The sudden closure of GP practices reduces access to healthcare for communities and there are widespread reports of reduced access to bulk billing (where there are no out of pocket costs).

Patients are charged a fee for each service they receive and Medicare (and private health insurers for non-GP specialists) provide subsidies to patients that help reduce out of pocket costs. Medicare subsidies comprise about 84 per cent of the total revenue these businesses receive from fees.

Financial viability of private medical practices can be a key issue, especially in regional areas. But there are no national data on the costs or profitability of running a private medical practice. In addition, continuing growth in the numbers of non-GP specialists is leading to more competition for medical businesses which can reduce revenue. It is important to examine how businesses respond.

Our new ANZ-Melbourne Institute Health Sector Report uses new administrative data on all medical businesses in Australia to examine trends in growth, costs, profitability and how their financial health has been affected during the COVID-19 pandemic.

The growth of private group practice

It was not too long ago that GPs and specialists worked largely on their own. But the benefits of working with others in group practices have led to a growth in private group medical practice. GPs were first off the blocks in working together and now almost 90 per cent report working in a group practice.

Percentage of all doctors in private practice who are in group practice, 2013 to 2020

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But non-GP specialists are rapidly catching up. About 70 per cent now work in a private group practice. The total number of doctors in a solo private practice fell 0.5 per cent between 2013 and 2020 while the number in group private practices increased 28.9 per cent. While more non-GP specialists are working in private practice, they are on average spending less time there.

In group practice doctors can share fixed overhead costs such as premises, administrative costs, nursing wages and medical equipment costs. Working together can also improve the quality of and access to health care.

Patients can easily see another GP in the practice if their preferred doctor is too busy and doctors can more easily share knowledge. But getting too big in a geographic area might be an issue as this could mean less choice for patients and less competition that could further increase out-of-pocket costs.

Financial health

For the first time we use data on the number of medical businesses. We know very little about the number of GP or non-GP specialist ‘practices’. Relationships between and ownership of businesses can be complex.

For example, a single group practice might involve each doctor having their own business as a ‘sole trader’. Alternatively, they may contract their services to the ‘practice’ which might be a private company and be owned by other doctors or a large corporate business owned by non-medical shareholders.

Medical businesses operate in a private market and need to cover costs and make a profit while maintaining access to medical care and attracting patients. GP and non-GP specialist medical businesses saw profits rise by an average of 2.4 per cent a year for GPs and 5.4 per cent a year for non-GP specialists before the COVID-19 pandemic.

Median gross profits for GP and non-GP specialist medical businesses, 2006-07 to 2019-20

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Both turnover and costs have been increasing over time. Costs for GPs rose by an average of 2.9 per cent a year between 2006-7 and 2020-21. Overall, the growth in costs for GP businesses was higher than for non-GP specialists and the growth in turnover was lower.

This gap has grown over time. Non-GP specialist businesses made 50 per cent more profit than GP businesses in 2020-21, compared with 10 per cent more in 2006-7.

Impact of COVID-19

Though there was an initial concern about the viability of medical businesses during the pandemic, support from telehealth and the government’s Job Keeper payments meant the number of closures actually fell during the 2019-20 financial year and this support helped maintain turnover.

There has been continued net growth in the number of medical businesses throughout the pandemic. Though profits initially fell during COVID-19, they have since increased due to pent-up demand, especially for non-GP specialists.

However, medical businesses experienced sudden increases in costs as they adapted to COVID-19 settings. For GP businesses, costs increased 4.1 per cent between 2018-19 and 2020-21.

Medical businesses have shown they are flexible and can adapt and recover to maintain profitability and the provision of medical care, with government support. It is expected demand will remain high for private medical care provided by GPs and other specialists as people who delayed care and treatment during the pandemic return to seek care.

Medical businesses, in particular non-GP specialists, remain very profitable compared with other businesses such as law, accountancy, finance, construction and agriculture.

Comparison of profitability across different industries, 2020-21
 

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Our analysis is the first to use this national administrative data to examine trends in costs and profitability of GP and non-GP specialist medical businesses. Since we use national averages, our analysis masks the variation in the experiences of different medical businesses. For example, those in major cities compared with regional and rural areas and those serving low-income populations.

Implications for patients

Access to high-quality medical care requires businesses to locate in areas of need and out-of-pocket costs should be kept to a minimum for low-income populations. The growth in private group medical practice can mean medical businesses are run more efficiently, with continuing cost pressures leading to the formation of larger medical groups.

However, there is a trade-off between maintaining profitability that ensures the survival of medical businesses and higher fees for patients that can reduce access to medical care.

The private business model for medical practice remains alive and well despite the challenges it has faced. But more research is needed about the circumstances of when it fails communities as well as when it succeeds.

Professor Anthony Scott leads the Health and Healthcare theme at The Melbourne Institute: Applied Economic & Social Research at the University of Melbourne