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Budget takes hospital funding arrangement back to the future

It was only seven years ago, but it seems like a lifetime; then-opposition leader Kevin Rudd was promising to end the “blame game” in health-care funding. Fast forward a few years, he’d received a report…

The federal budget has shifted costs rather than controlling them. Quentin Jones/AAP

It was only seven years ago, but it seems like a lifetime; then-opposition leader Kevin Rudd was promising to end the “blame game” in health-care funding.

Fast forward a few years, he’d received a report from the National Health and Hospitals Reform Commission and embarked on a disorganised caravanserai around Australia to work out his next steps. To cut the long story that followed short, his proposals didn’t fly.

But former prime minister Julia Gillard was able to negotiate a deal with the states which stuck. Or so we thought. Now, this week’s budget has reneged on the deal.

Adding some dignity

The Gillard deal was enshrined in the National Health Reform Agreement signed by all states and territories (and the Commonwealth) in 2011. It changed hospital funding arrangements in profound ways.

Hospital funding by the Commonwealth used to be based on weighted population (recognising that older people use more health care than younger people), CPI and a “betterment factor” of around 2% per annum to take account of the fact that hospital admissions grow faster than the population.

So, prior to the agreement, it was insulated from the cost impact of changing patterns of hospital care. Indeed, since the early 1990s, the Commonwealth’s share of government funding of public hospitals had eroded from just over 50% to 40%.

The states contribute more to public hospitals than the Commonwealth Author

Under the old system of periodic health-care agreements, there was an undignified public stoush (aka “negotiation”) at renewal time, which usually resulted in a slight uptick in the Commonwealth share. But the general pattern was still a steady decline in its share.

The Gillard solution had two main components. First, the Commonwealth would share the costs of growth, paying for 45% of new costs in the period 1 July 2014 to 30 June 2017 and 50% of new costs thereafter.

Second, the costs to be met by the Commonwealth would be based on an efficient level of costs, as measured using a “national efficient price” of care determined by an independent body.

Other elements of the deal (and previous deals negotiated by Rudd when he was prime minister) poured substantial funds into hospitals to fix problems, such as long waiting times for elective procedures, and to facilitate other system reforms.

But the current government condemns the rapid growth in Commonwealth funding of hospitals in the last few years as if it were uncontrolled, rather than the result of specific, purposive policy initiatives.

The states' options

The new Gillard-negotiated scheme will start in six weeks (July 1). Under the budget announcements, it will last for three years and the clock will then be turned back to a CPI plus population, with no mention so far of a betterment factor.

All the states are moving in the opposite direction by linking hospital funding to the average cost of care instead of mindlessly ratcheting it up in line with inflation. The budget changes will save the Commonwealth over $1 billion a year, at the cost of a substantial breach of faith with their Coalition (and occasional Labor) colleagues in state government.

The states have three options to address the funding shortfall:

  • look for more revenue to fill the gap – increasing or broadening the GST is one option, as is creating a state income tax;

  • look for efficiencies – there’s certainly scope to improve the efficiency of public hospital care but, unfortunately, the places for efficiency gains don’t necessarily line up with where the revenue losses occur and the savings won’t be sufficient to meet costs of future demand growth; or

  • allow services to get worse – waiting times for admission or in the emergency department could increase, states could attempt to shift the blame for this onto the Commonwealth but patients would suffer.

Under the arrangements the government is scrapping, both the Commonwealth and state governments have a common interest in controlling hospital cost and admission growth. This gives the Commonwealth, which controls policy for primary care, a direct financial stake in getting primary care to reduce potentially preventable hospital admissions. That’s now gone.

Reopening old wounds

Turning full circle on public hospital funding will reopen old wounds. The blame game will be back, with states attempting to shift responsibility for public hospital deficiencies to Commonwealth parsimony.

The budget changes are clearly a retrograde step. Funding incentives that had been brought into alignment are now out of kilter. An agreed, equitable and efficient cost-sharing arrangement, which should have ended the blame game, has been dumped.

Conservative and Labor premiers alike are crying foul, and legitimately so. And their cries of outrage will probably fall on deaf ears.

But something good could still come out of this budget. It has completely evaded the big question of how Australia should fund health care. But if we all work at it, maybe the shouting match between the Commonwealth and the states can stimulate a meaningful discussion about real, long-term solutions.

In the meantime, even if it rips money out of the state system, the Commonwealth government should rethink dumping efficient hospital funding. Its decision means a big chunk of hospital funding will go back to being arbitrary. But governments need a rational way to set an efficient price, which is perhaps their most powerful tool to control costs.

If it wants to find savings, the government could keep the emphasis on efficiency but reduce the share of activity growth it would meet (subject to some form of negotiations).

In some ways, funding care the wrong way is more insidious than simply cutting funding. In the short-term, it skews the debate away from treating patients and into the murky realm of indexation formulae. And in the long-term, it takes away pressure to keep hospital costs under control.

The federal budget makes the wrong choice: it shifts costs rather than controlling them, and achieves a short-term Commonwealth budget fix at the cost of potentially creating longer-term problems.

Join the conversation

14 Comments sorted by

  1. Trevor Kerr


    Quite right, Stephen, if public hospitals allow governments to take charge with a drawn-out squabble over "indexation formulae" they'll have lost the plot.
    Would it be reasonable to say that if "we all work at it" is the key to a solution, then that applies more to public hospitals than to governments? I mean, it seems to me that the 'public hospital industry' (for want of a better expression) needs to engage the public. That won't happen if public hospitals operate as individual institutions competing with each other for funds.
    So, are there any aspects of public hospitals' 'business models' that they will not want the public to see? For example, co-location and the influence of private medical practices?

    1. Stephen Duckett
      Stephen Duckett is a Friend of The Conversation.

      Director, Health Program at Grattan Institute

      In reply to Trevor Kerr

      Thanks Trevor. It's a both and issue. Public hospitals have a role in engaging with their communities/constituencies and so do state governments. The issue of public hospital 'business models' is an interesting one. There are complex interplays between public and co-located private hospitals, not sure what the public would think about it all. Engaging the public on 'adult conversations' shouldn't hurt though

  2. Owen Molloy

    logged in via Facebook

    Hi Stephen. Good article.
    I am confused though. This week the PM has said that the commonwealth plays no part in hospital or education funding because it is a state mater. I think I heard Joe Hockey say that the constitution says that health and education were excluded from commonwealth support.
    Are they correct? If so, what does this mean for future of health and education funding? Should we be asking to change the constitution so it does become an ironclad federal issue?

    1. Stephen Duckett
      Stephen Duckett is a Friend of The Conversation.

      Director, Health Program at Grattan Institute

      In reply to Owen Molloy

      Hi Owen
      Section 51 (xxiiia) of the Constitution (added following a referendum in 1946) gives the Commonwealth power to make laws about:
      The provision of maternity allowances, widows' pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits, medical and dental services (but not so as to authorise any form of civil conscription), benefits to students and family allowances:

      So the Commonwealth certainly has power to make laws about medical services and hospital benefits.The Commonwealth is heavily involved in health (think MBS, PBS) and is likely to continue.


    2. Owen Molloy

      logged in via Facebook

      In reply to Stephen Duckett

      Thanks Stephen for clarifying. It is so confusing these days. I believe it is in the government's best interest to provide world class health care to it's citizens. This, along with education and infrastructure, I believe are the 3 fundamental pillars of a prosperous nation. So far the current govt. has focused on one of these, infrastructure, and it surprises me that they seem to be distancing themselves from the other 2. If they are serious about maintaining their position, I hope they re-assess and re-invest funds back into health and education next time.

    3. Richard Schmidt

      Programmer/Analyst at CSSP (construction industry software company)

      In reply to Owen Molloy

      I'm sure they'll promise to increase the health budget at the next election, and (right on cue), the election budget will be full of sweeteners (made up of funds ripped out of the public during the interim three years)!
      Such is the way of governments these days!

  3. Phillip Chalmers

    Doctor at Private and Hospital medicine

    This country has had more than its share of the $50M taxpayer funded quango Grattan Institute socialism, thank you.
    Any plan coming out of it, just think Pink Batts, Cash for Clunkers, Building the Education Revolution etc etc
    Talk to the hand, Stephen - the country is in new hands.
    Who knows, we might even get to give doctors and nurses and medical scientist and dieticians a say in how the tax dollar is spent on illness, suffering and disability instead of bean counters.

    1. Sue Ieraci

      Public hospital clinician

      In reply to Phillip Chalmers

      Phillip Chalmers - what would be your model for "how the tax dollar is spent on illness, suffering and disability" ?

    2. Phillip Chalmers

      Doctor at Private and Hospital medicine

      In reply to Sue Ieraci

      A thorough and serious consideration of the numerous other first world attempts at generating a system satisfactory to the people in need of health care and the health care providers at the coal-face.

      Some not-too-bad could be named as the UK NHS, the Canadian or the German.
      These are discussed in the reference above, and you will note that in contrast to Australia the actual providers are seriously involved in the deliberations…

      Read more
    3. Sue Ieraci

      Public hospital clinician

      In reply to Phillip Chalmers

      I haven't worked in the UK or Germany, but I have direct experience as a clinical consultant in both Canada and Australia.

      Your reference states (about the Canadian system):
      "Physicians in ambulatory care and in hospitals are commonly paid on a fee-for-service basis, according to fee schedules negotiated between physicians' associations and provincial governments. There are few private, for-profit hospitals in Canada. Most acute-care hospitals in Canada are legally private, nonprofit institutions…

      Read more
  4. Sue Ieraci

    Public hospital clinician

    In reality, the incentive to shift funding between feds and states has never gone away, even though there was a short period when there was some hope that it might.

    The fact is, there are no hard-and-fast descriptors of what constitutes a "GP-type" service, a "specialist" service or a "hospital service".

    A ninety-two year old lady who still manages alone at home may fall over on a Saturday night, getting up to the toilet at 11pm. She is sore and worried, so she calls the ambulance, which takes…

    Read more
  5. Jude Silber

    Disability pension

    I wondered if this was a way for all public hospitals to be encouraged to put in place Public/Private Partnership's as a way to increase their funding. As the Children's Hospital is a PPP, it has been queried how much of the money raised at 'The Good Friday Appeal' will be paid to the private partnership.

    1. Sue Ieraci

      Public hospital clinician

      In reply to Jude Silber

      PPPs are generally ways of funding the building works rather than the ongoing service.

      If the hospital staff are government employees, the salaries (one of the largest hospital costs) remain the same.

      All public hospitals get some income from privately-insured patients if they choose to use their insurance (it's not compulsory).