A Porters Five Forces Approach

to the Australian

Private Hospital Industry

Bruce Perrott University of Technology Sydney

Raechel Hughes, University of Canberra
Abstract
This is the first stage of a project designed to better understand
dynamics

of the private hospital

industry in Australia.

the business

and marketing

This stage will use a Porter's

Five Forces

framework

to analyse the main forces at play in the industry. It will attempt to make an objective

assessment

of the operating

environment

taken mainly from a range of secondary

for industry members.

Data for this first stage will be

sources

Ind ustry Overview

The underlying

driver of the demand for health services will be the ageing Australian

population.

With a current median age of about 35 years ( a 14% rise over the past 15 years), it is expected
rise another

14% to a median age of 40 years by 2016 (Macquarie

providing

a strong basis for the projected

Australia

there are 748 public hospitals

Research

growth and development

and 549 private hospitals.

Equities

the industry dynamics,

2003),

of private health services.

In these hospitals

52,000 licensed beds in the public sector and 27,000 in the private sector (Citigroup
order to understand

to

In

there are
2005).

we have utilised the five forces model (Porter

In

1980).

Competitive Rivalry and Industry Growth

Key changes to industry structure
such as the Ramsay acquisition

in recent times have occurred

of the Benchmark

number of private beds and strengthening

addition often

hospitals

owned by Affinity

in Victoria

group of hospitals

Ramsay's

and South.

mainly in the for-profit

geographical

sector,

in May 2004, increasing

market coverage

the

with the

In the for profit sector, the largest market share is

with 5360 beds (42%). This is followed

by Ramsay

with 3680 beds (29%).

Healthscope

holds a 20% share, with 2585 beds. Nova Health, with 768 beds, holds a 6% share,

and finally with just 2% share is Macquarie

would have looked different

Health, with 256 beds. The competitive

to this if Ramsay had been successful

in 2003 from the Mayne Group. If this had occurred,

acquisition

would have happened

as it did in 2004. Under this scenario,

with 8% market share.

5367 beds; Ramsay 3967 and Healthscope

as intense as expected
strategically

the Affinity beds

then it is unlikely that the Benchmark

bed market share near 70% (say 8105 beds), Healthscope

leaving Benchmark

in acquiring

Ramsay could have had a

with about 22% share (2585 beds),

More recently, it has been estimated

2400 (Greenblat

due to the geographical

landscape

positioning

2004).

that Affinity has

Competitive

intensity is not

of each hospital, which is located

near the markets that yield both patients and medical referrals.

Geographical

positioning

also substantially

product, service and brand strategies.

number of elements

reduces the need to aggressively

To the degree that these companies

that need to be considered,

doctors ( General Practioners

and Specialists);

differentiate
compete,

including the type and reputation

the geographical

the product/ case mix offered and the availability

with

there are a
of referring

location of the hospital facility;

of quality staff (Patrick Grier, a) 2004).

Industry growth is also a factor that can impact on the degree of competitive

rivalry existing in an

industry at a point in time - if growth is slow, it would be expected that rivalry would be
increased (Johnson,
level of attractiveness
measure of operating
was marginally
occupancy
compared

Scholes and Whittington

to potential
efficiency.

2005).

Growth will also have an impact on the

new entrants to the industry, with bed occupancy

In 2002-03,

this segment had an occupancy

higher than the previous year with 75.2%. It is also significant

rate was higher in hospitals

located in the Capital City Statistical

with 70.9% in Rest of State and Territory

Divisions

(ABS, 2004).

a good

rate of 75.6% which

to note that the
Divisions

at 77.3%,

This creates a strong

competitive

advantage

for companies

established

networks of referring doctors.

2002-03, the net operating

with hospitals with established

For acute and psychiatric

operations
private

which have

hospitals

during

margin was reported to be 6%, steady at the leve I of the previous year

but above the average margin for the five years to 2002-03 of 5% (ABS, 2004).

Non Profit Private Hospitals: Private hospitals operated

offer an alternative

source of private hospital services to some Australian

2002-03. religious or charitable

and psychiatric

private hospitals.

acute and psychiatric

hospital groups accounted

Their occupancy

bed occupancy

75.6% for 2002-03(ABS

with 2586 beds.

by religious or charitable

2004).

Little Company

patients.

for 37% of the available

rate of77.5%

for 2002-03

institutions
For the year
beds in acute

was higher than for

in the private hospital group overall which was reported at

In this sector, the Sisters of Charity hold a 30% market share,

of Mary follows with 1416 beds (17.2 % share), St John of God

has 1300 beds (a 15.8 % share); Mercy Health has a 13% share, with 1100 beds.

Uniting Health

Care, with 993 beds, holds a 12% share, and finally with a 10% share is Mater Health Services
(830 beds) (Department of Health and Ageing. ASS,

!\'fRE August 2DD]).

Potential Industry Entrants

The two important

considerations

in reviewing

the topic of new entrants to the Australian

Hospital Industry are the levels of attractiveness

the focus of operations

and the barriers to entry. Industry

for this analysis (acute and psychiatric)

9% per anum over the five years to 2002-03.

Removing

has increased

the adjustment

period, the figure shows a 6% growth. Taking income as a key indicator

it can be concluded
Net operating

income form

in money terms by

for price changes over the

of industry growth, then

that the industry would be only moderately attractive to potential

margin can be reviewed

Private

entrants.

in our effort to assess the level of industry attractiveness

in

terms of future profitability

of potential entrants. This has been discussed

above and shows an

average of 5% for the five years to 2002-03. In terms of profit attractiveness,

that the level of industry attractiveness

There are a number of complications

establishing

new greenfield

is

10\1'

in can be concluded

to moderate.

that potential entrants would face in executing

a strategy of

( ie building hospitals from scratch) private hospital operations

Australia.

The first is the substantial

$450,000

per private hospital bed in 2004, making is difficult to achieve an acceptable

capital cost involved, estimated to be in the order of

profit margin under current operating

lead times necessary
capacity strategically

land, gain the various approvals,

markets. The third and probably the

and securing the optimum mix of referring medical

that is already suffering from a critical shortage. The run on effect

of this would be for the tendency

private hospital industry operating

A general conclusion

to push up ongoing costs for this important

from the potential

to enter the Australian

ingredient

to the

dimension.

new entrant dimension

is that it would be relatively

private hospital industry by way of setting up new facilities.

Hence the most likely entry strategy would be through the acquisition
which was most closely aligned to meeting the strategic objectives
organisation.

and build hospital

The fourth most critical factor would be the recruiting of nursing and hospital general

staff in a market environment

unattractive

level of

(Patrick Grier, b), 2004). The second is the long

adjacent to prime Australian

most difficult would be in recruiting

practioners.

conditions

to find sites, purchase

positioned

in

This could be a large offshore company

of an existing operation

and fit of the acquiring

looking to diversify

geographically

in terms of product and case mix. As the assets of each company are specialised
only able to be applied to the business of private hospital operations,

and/or

and therefore

assets could not be readily

applied to another business or industry on a similar scale. Hence the likelihood

would be by way of selling the whole business or individual
competitors

Industry

of industry exit

hospitals combinations

to existing

or new industry entrants.

Attractiveness

Overview

This section will briefly summarise

forces and make a summary
unattractiveness;

9to

the circumstances

assessment

of each of the five industry elements

in terms of each areas relative attractiveness:

industry members.

or
or

Industry Core
Through progressive
theoretically

rationalisation

and consolidation,

the for-profit

operates as an oligopoly with three main companies

private hospital beds. In the not-for-profit

sector of the industry

owning 92% of the market in

sector there are only four main groups operating

industry. Under such a market structure one would expect to see intense rivalry manifest
of aggressive

marketing

activity in order to maintain or build market shares.

However

in the
in terms

in the

case of the private hospital industry, each company and hospital has its unique positioning
key markets and referring doctor networks,
companies

in the industry.

limiting the competitive

The negative effect of limited competitive

would be more difficult for an individual

rivalry between the

rivalry also means that it

company to build market share through aggressive

marketing

similar to what could happen in most other industries when markets are not as

protected.

This limit on the level of competitive

shareholders

rivalry also has longer term benefits to

of the three key companies.

near

Another favourable
population

dimension

is the outlook for industry growth. Due to the ageing Australian

outlined in this paper and the increasing

awareness

of the need for high quality health

care, the demand for health services is likely to continue to grow in the foreseeable
the return to shareholders

of companies

provided costs are contained

future. Hence

in the private, for profit industry should be maintained

and market shares are not lost to competing

industries

such as the

not for profit or day care. The search for growth may involve varying degrees of diversification,
whether it be into closely associated

health services not currently being offered by the private

hospital sector or moving into the closely associated

those more adventurous,

diversifying

currently

(Pilzer 2002). The beginning

'Wellness

being forecast
Industry"

is anticipated.

proactive and dedicated

In summary,
generally

for

into the emerging wellness industry, the birth of which is

of a huge industry described

as the

Health care is reactive, while the well ness industry will be

to preventing

people becoming

it can be stated that the competitive

favourable;

industry of aged care. Alternatively,

customers

environment

of the healthcare

industries.

for private hospital members

is

Entrants
There are moderately

high barriers to entry in this industry. High capital costs and the difficulty

in finding and building new hospitals

hurdle for potential

new entrants to the industry. It has been suggested

costs of building and commissioning

a relatively

in locations close to viable markets presents a formidable

a hospital bed is about $450,000 (Grier, b) 2004).

large scale could take place through acquisition.

with substantial

funds to invest into diversified

large US health care company,

that the current capital

geographical

Entry on

Such an entrant could be a company

markets. An example here may be a

or a health insurance company wanting to integrate forward from

insurance to health service provision.

Industry entry under these circumstances

cannot be

classified

as a negative threat to shareholders

need to pay a premium

to encourage

shareholders

interest in a private health care company.

new entrants impacting

as it could be assumed that such an entrant would

of the target organisation

Following

this rationale

to sell controlling

it can be said that the threat of

on industry players in a negative or damaging

way to shareholder

assets,

and returns is low;

Substitutes
Substitutes,

or alternative

health services,

include:

- Not for Profit hospitals:

Medium to High threat depending on hospital location
- Public Hospitals:
Low to Medium threat depending upon type of service
- Day Care hospitals: Medium threat depending upon type of service and location
- Technology as a Substitute to private hospital care (eg e-health):
Low threat
- Reduction in need/demand for private health services:
Nil threat
Following

this rationale

it can be summarised

on industry players in a negative or damaging

is low. Hence this element

is favourable

that the combined

threat of substitutes

way to shareholder

impacting

interests or assets, and returns

to industry members;

Suppliers
This variable has the potential
industry in managing

to be most critical for members of the for profit private hospital

viable hospital units. Individual

organisations

rely on key groups to supply

quality and timely services and products to the various hospital locations.
supplier components

are summarised

Each of the main

as follows;

Medical practitioners: Having a strong network of referring doctors is a fundamental

prerequisite

to viability and success. Case histories show that non support of doctor groups can lead to serious
underperformance

of both individual

hospitals and company

groups in this industry (Grier,

a)

2004).

In Australia,

Nursing

Staff are well organised

in terms of union representation

and enjoy

a strong positive image with the press and the public. Nurses therefore have strong collective
bargaining

power with private hospital groups. Hence they are in a strong position to negotiate

conditions

and pay structures.

Consumable Medical supplies:

industries that are oligopolies

Most consumables
in structure.

used in private hospitals are supplied by

Hence individual

exercise some control over price and supply conditions.

supplying

companies

can usually

Protheses are a costly component

some medical treatments

and are supplied by a limited number of suitable manufacturers.

been said that supplying

manufacturers

that require the use of a prothesis

Medical Equipment:
dependent

on advancing

are specified by medical practitioners

It has

in 20 -40% of cases

(Grier, b) 2004).

Over time the private health industry has become increasingly

technology

diagnostics

and treatment

opportunity

for competitive

by way of high capital cost equipment

of medical conditions,

with limited suppliers,

buying. In summarising

which is used for

creating limited

the impact of the suppliers,

they have the potential to impact on industry players in a negative or damaging

influence is not activated,

of

it can be said that

way. Even if this

they hold a latent power which can be used in negotiating

supply to industry members.

conditions

Buyers
In summarising,

the role of patients in isolation to other influencing

factors, it can be said that

their ability to impact on industry players in a negative or damaging way to shareholder

or assets and returns is low. Hence this element is favourable

to industry members:

interests

of

Overview
Figure 0 summarises
environment

the status of the private hospital.

for industry

members.

only one as being potentially

Figure D

Overall it is a favourable

with four assessments

being summarised

operating

as favourable

and

unfavourable.

Industry Attractiveness

Summary

Potential Industr,
E:\TRA'\TS

(,\DUSTRY
CORE:

Rev loll of the

nature and
dimension of
competition

Ro le and Paller
SlPPLIERS

Role and Power

of BlTERS

",iR"TITli'n'

Adapted from Michaet Porter

Implications
Following

for marketing

& future issues

on from this analysis,

what are the implications

private hospital

industry?

A major and constant

strong pressures

from the health insurance

Hence a critical and ongoing

standards

management

with less costly resources

for marketers

and managers

focus on profit margin management;

funds to contain prices charged

skill is to run hospital operations

is constant

operational

innovation.

for hospital

in the
there are
services.

to acceptable

Another

dimension

quality
of

margin management

is to actively manage case mix by increasing

higher profit margins.

Strategic

management

of; the successful

to high priority market segments,

of services with

skills will become more critical as pressure builds

to find future revenue and growth opportunities.

combinations

the proportion

introduction

These opportunities

will come through varying

of new products and services,

increased

new markets not currently

being served.

or accessing

penetration

opportunities

may be in areas closely related to the existing business or could include

opportunities

more diverse from the traditional

private hospital business such as; aged care,

preventative

health care, 'well ness' and disease prevention

established,

detailed marketing

with cost accountability

progress.

objectives

Given the power distribution

management

and strategies

and key performance

indicators

government

and State level will impact on management

coverage,

as individual

companies

As strategic

used for tracking

a key ongoing

funds and equipment

health policy and strategy both at the Federal

in this sector, and there will be further industry

and gain from the benefits of economies

Rising costs and pressures

on revenue will also cause a squeeze on profit margins,

causing industry members

to diversify

achieve growth targets, diversify

with key

attempt to achieve growth targets, gain effective

reduce market area competition,

are

and implemented

ofrelationships

health insurance

priorities

and monitoring

in the industry,

skill and process will be the effective management

It is likely that changing

consolidation

services.

need to be formulated

of key stakeholders

supplier groups such as the medical practitioners,

suppliers.

These

from the traditional

core business

of scale.
ultimately

in their attempts to

risk, and build profit margins and return on investment.

10

market

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11up

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fli 11iI \11

l'a

Ilh .co

111.a 1I

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12