Private hospitals will need to hold "greedy" specialists to account if they want to survive the so-called "death spiral" gripping the health insurance industry, according to the latest report from the Grattan Institute.

Key points: The paper said insurance premiums could drop by as much as 10 per cent if recommendations were adopted

The paper said insurance premiums could drop by as much as 10 per cent if recommendations were adopted An earlier report found young and healthy people are abandoning private health cover

An earlier report found young and healthy people are abandoning private health cover But Australian Private Hospitals Association chief executive said the report was full of "incorrect assumptions"

The public policy think tank has made a raft of recommendations identifying $2 billion in possible savings a year, declaring if the changes are realised, it could "save private health care in Australia".

It comes as Health Minister Greg Hunt confirmed he was working on a plan to shake up private health insurance in a bid to force down premiums.

Under the planned changes, health funds would be allowed to cover some specialist treatment delivered outside hospitals.

Mr Hunt said his goal was to improve treatment options, and reduce hospital and private health insurances costs.

"It is very, very clear that this is likely to have a significant improvement in the costs and efficiency and therefore make private health more affordable," he said.

The Grattan report said insurance premiums could drop by as much as 10 per cent if those savings were passed on to consumers.

The paper paints yet another bleak picture of the private health system, just months after it declared the sector had become increasingly unfair, costly and confusing.

It names "excessive" private hospital costs and "egregious" specialist bills as two key factors contributing to the "death spiral," where young and healthy people abandon private health cover, leaving a larger proportion of unhealthier, older and expensive users.

"A small minority of doctors are greedy — a handful of specialists who bill their patients at more than twice the official Medicare Benefit Schedule fee," the report states.

"Patients are often not told of these costs in advance, and are not happy when they get surprise bills."

Hospitals must negotiate with doctors

To combat excess charges, the report suggests an "Efficient Price" system be implemented.

Under the proposed model, private hospitals would bundle all costs — from doctors, hospitals, medications, prostheses and tests.

The hospitals would either absorb the excess costs from doctors, or charge patients a "declared and upfront fee" to cover the charge.

The report identified $2 billion in possible savings a year. ( Unsplash )

The Grattan Institute's Health program director, Stephen Duckett, said because patients had little power to negotiate, they could not reasonably be expected to challenge their specialists.

"We've got to get some way of holding those doctors to account, and one of the ways of doing that is for the private hospitals to say to them: 'If you're going to practise in this hospital, you're going to negotiate with us what your fees are'," Mr Duckett said.

"The private hospitals will say: 'We want to attract more patients, and patients will know if they come to this hospital, they'll have lower out-of-pockets'.

"It's in the interest of private hospitals to start to get on top of the bills, because patients are dropping out."

Health policy experts have previously floated several reforms to curb excessive specialist fees, including government regulation, banning specialists from accessing Medicare rebates if they charge too much, or an opt-in Medicare system only for doctors who agree to certain fee restrictions.

The Federal Government has announced it will publish the fees of individual specialists on a searchable website, to help patients avoid "bill shock".

However, it is a voluntary scheme, with specialists having to opt in and supply their fee information.

Private HealthCare Australia chief executive Rachel David said the issue needed to be addressed.

"The report has identified that actually only a very small number of doctors are charging high fees, but that small number are ruining it for everyone," she said.

"Under the current law it's very difficult to prevent a specialist charging what they like, but I think more can be done by government, health funds and hospitals to direct patients away from those people."

Private hospitals 'need to lift their game'

The report also found private hospitals "need to lift their game", accusing them of being less efficient than public hospitals.

It said private patients stay in hospital 9 per cent longer than public patients with similar conditions.

"Take maternity care for example — patients stay in private hospitals about a day longer for a normal delivery than patients in public hospitals," Mr Duckett said.

"Then you say — well that's because the patient wants to stay a day longer and many, many women do want to stay longer, and that's part of the value proposition of health insurance, and that's great.

"But the problem is — should that be subsidised by the taxpayer? If it's solely a patient choice, and not really a clinical necessity, should the taxpayer be subsidising that extra?"

Private patients stay in hospital 9 per cent longer than public patients. ( Pixabay, CC0 )

However, Dr David said the comparative analysis should be approached with caution.

"I think they're looking at apples and oranges in some cases," she said.

"The private hospital system is incredibly efficient at getting people in and out of surgery without waiting times.

"Where I think perhaps we could do better is the length of stay for things like rehabilitation, where the care could be provided in the community, and in fact that's what patients want."

Report 'fundamentally ignorant'

Australian Private Hospitals Association chief executive Michael Roff slammed the report, saying it was "riddled with selective analysis", "incorrect assumptions" and demonstrated a "fundamental ignorance of how the private sector operated.

"The report fails to identify any mechanism to force doctors to negotiate fees with private hospitals who do not employ these doctors," he said.

"It sounds like a good idea in theory. In practice, I'm not even sure that it would be legal."

Mr Roff also said the negotiations between hospitals and doctors, proposed in the report, would increase hospital costs.

"Hospitals would be deemed quasi-employers of doctors, which would drive up the costs of the hospitals' indemnity insurance," he said.

"These cost increases will result in higher health insurance premiums."

Government will carefully consider report

In a statement, a spokesman for Health Minister Greg Hunt said the Government would consider the report's findings.

"The Government welcomes suggestions that could further improve the affordability and value of private health insurance as part of a planned second wave of reforms," he said.

"The Government will carefully consider these suggestions and other proposals in the context of consultation on further reforms to improve private health insurance, that are being worked through with the sector."

Stephen Duckett said if nothing changed, premiums would continue to go up.

"People are going to continue to drop out, and health insurance is going to be less and less viable," he said.

"That will then require private hospitals to think through what their strategies are for surviving."