Medibank Private puts the squeeze on hospital payments

Details of the agreement that ended the public battle between Australia's biggest health insurer and largest private hospital operator have come to light.

Insurance giant Medibank Private will increase payments for hospital services provided to its members by Ramsay Health Care by 7.55 per cent over three years, Fairfax Media has been told.

This comprises increases of 2.2 per cent in the first year, 2.6 per cent in the second and a final 2.75 per cent.

Sources say private hospitals would normally expect an annual rise of 3 per cent to account for salary rises, new technology and the cost of caring for an ageing population.

"It would appear that rates agreed by Medibank are more in line with inflation trends than what we have seen previously," another said.

Sources also revealed there will be no increases over the three-year period for rehabilitation and psychiatric care, but 4 per cent annual increases for acute care.

Medibank and Ramsay Health Care declined to comment on Tuesday, citing confidentiality. The figures were "speculative", a Medibank spokeswoman said.

The dispute between Medibank and Ramsay flared in August when the insurer accused Ramsay of unfairly driving up the cost of a night in hospital, and Ramsay said it would not be coerced into accepting pricing that could threaten patient safety.

Shares in Ramsay, which is estimated to account for a quarter of Australia's private hospital beds, fell on the news.

Had an agreement not been reached, members of Medibank and its lower-cost brand AHM would have faced higher out-of-pocket costs for services delivered by Ramsay.

The deal was announced on August 29 - the day Ramsay released its results, reviving its share price - with the companies saying it was a good result for both parties.

They did not reveal the price increases, although analysts said the deal appeared to be in line with increases across the industry.

According to investment bank Morgan Stanley, Ramsay had claimed "Medibank had offered Ramsay an increase of just 2 per cent for services provided".

"It is possible that Medibank Private has seen its net margin fall below industry average and is trying to protect its profitability by paying a lower claims rate to private hospital providers such as Ramsay Health Care," analysts Sean Laaman and James Rutledge told clients.

The analysts said costs at private health service providers were rising at 4-5 per cent.

Medibank Private was last permitted by the federal government to increase its average premiums by 6.2 per cent.

Fairfax Media has previously reported industry complaints that government-owned Medibank had become more aggressive in negotiations, in preparation for a privatisation that it now expected late next year or in 2015.

Ramsay Health Care last month tipped 12-14 per cent earnings growth in the 2014 financial year, an improvement on its typical earnings growth guidance, and also won praise for locking in prices for 70 per cent of its Australian contracts for the next three years.

Macquarie Private Wealth said "insurers remain very healthy, in our view, with an industry return on equity of 19 per cent".

Shares in Ramsay Health Care are up 34 per cent in the year to date, taking its market capitalisation to $7.39 billion.