ASX healthcare shares are firmly in the spotlight on Friday as the Australian private health insurance confirms it is in turmoil.

The revelation comes after Healthscope, the nation's second-largest private hospital operator, announced plans to terminate contracts with health insurance giants Bupa and the Australian Health Services Alliance (AHSA).

This decision will impact more than 6 million Australians who hold health insurance funds and could ripple across the broader sector.

The S&P/ASX 200 Health Care Index (ASX: XHJ), which represents healthcare stocks on the ASX, hasn't been phased by the news. At the time of publication, it is up 1.2% on the day.

Listed hospital operator Ramsay Health Care Ltd (ASX: RHC) is up more than 1%, whereas clinical service providers Sonic Healthcare Ltd (ASX: SHL) and Healius Ltd (ASX: HLS) are up 2% each. Here's a closer look.

Why is Healthscope cutting ties with insurers?

ASX healthcare shares could feel the aftershocks of Healthscope's decision if they cause widespread impact for Aussie savers.

The hospital operator revealed it would sever ties with Bupa in February 2025 and with AHSA in March. The latter represents 22 smaller not-for-profit funds.

At the core of the dispute is Healthscope's proposed hospital facility fee, designed to cover the rising costs of private healthcare. Bupa and AHSA opposed the fee, threatening legal action to block it.

Healthscope CEO Greg Horan defended the move, stating that the private hospital sector in Australia is experiencing a "viability crisis".

"In an environment of rising costs and private hospital closures, it is unacceptable for insurers to fail their core purpose – funding the care of their members", he said.

Horan also highlighted that 70 private hospitals have closed in the past five years, according to The Sydney Morning Herald. This has been seen in the returns of some ASX healthcare shares.

What does this mean for ASX shares and policyholders?

No doubt those policyholders impacted are feeling a bit like the meat between two slices of bread. Or the butter, whichever way you look at it. Those owning ASX healthcare shares may feel the same.

From early 2025, policyholders with Bupa and AHSA may face hefty "out-of-pocket fees" at Healthscope's network of hospitals across the nation.

It currently operates 38 hospitals nationwide, including major facilities like Melbourne Private and Norwest Private in Sydney.

It's not just these funds that have been affected, though. Many others ASX healthcare shares have also been affected.

Teachers Health, which provides health insurance to the education sector, said the proposal would have resulted in "an unacceptable and unfair increase in cost for [its] members".

Healthscope's proposal also included additional fees to meet industry minimum standards for rehabilitation and mental health treatment…

…This opportunistic and exploitative behaviour demonstrates the lack of competition faced by Healthscope and its ability to make take it or leave it offers to health funds.

Considering the current climate, supporting the physical and mental health needs of our teachers should not be used as a bargaining tool.

Due to this, we were unable to accept the excessive increases demanded by Healthscope and there are no longer agreed charges for our members attending a Healthscope hospital.  

Alternatively, patients might need to change health funds or seek care at hospitals outside the Healthscope network. This will require some research as to what funds apply. ASX healthcare shares may or may not be impacted.

What's behind the decision?

Healthscope's decision relates to soaring national healthcare costs, which increased by nearly 6% last year, with household spending on health up nearly 16%, according to the Australian Bureau of Statistics (ABS). ASX healthcare shares have been hit by this fact, too.

Healthscope's owners, Canadian private equity giant Brookfield Corp (NYSE: BN), are grappling with a $2.4 billion debt load following their 2019 acquisition of the hospital operator. Back then, Brookfield Corp had paid $4.1 billion to acquire Healthscope.

Still, many argue that Brookfield's 'profit-driven' strategy is prioritising shareholders over patients.

AHSA's CEO Andrew Sando accused the group of "gouging the Australian public to generate profits."

Meanwhile, the peak body for health funds, Private Healthcare Australia, labelled Healthscope's move "unethical" and warned it could destabilise an already strained system. Not to mention its impact on ASX healthcare shares.

If Healthscope was serious about delivering patient care, it would negotiate an affordable and sustainable outcome rather than holding health fund members hostage.

Talk about a tense situation.

Takeout for ASX healthcare shares

ASX healthcare shares have been a mixed bag in the past year of trade. As one can clearly see, there are multiple headwinds facing the sector.

Health insurance is an important feature of adult life. Its worth is proven when none of us wishes to actually have to use it.

What happens from here is anyone's guess, but safe to say we haven't heard the last of this saga.