Federal-state health relations: can anything be salvaged?

The chances of a single level of government taking charge of Australia’s health system are slim. AAP/Quentin Jones

The federal budget reignited debate over federal-state relations with a decision to cut $80 billion funding for the state responsibilities of schools and hospitals over the coming years. So how can federal-state co-operation in health make Australia a better country?


Maybe there is a parallel universe where the Commonwealth and states work in harmony to improve the health and health care of Australians. But that is a vision unlikely to be realised in Australia for years to come, after the 2014 federal budget took a wrecking ball to trust in Commonwealth-state relations.

Instead, the blame game is back, and the states can now blame Commonwealth cuts for service shortfalls. But what if we could start again and redesign Australia’s system for delivering health care?

What do health professionals want?

Ask clinicians and they will give you a litany of Commonwealth-state disjunctions that they see in day-to-day practice. Their panacea is often that a single level of government should be responsible for the whole health care system. That is usually the Commonwealth because of its access to more secure revenue growth. The benefits of state responsibility in terms of potential for innovation and local political accountability are forgotten.

Doctors often want the Commonwealth to take over responsibility for health care because they see how tight state budgets are. These budgets are a victim of the federation’s endemic problem of vertical fiscal imbalance.

Transferring responsibility to the Commonwealth would better align revenue and expenses. The states opposed a greater Commonwealth role when the Rudd government suggested it. The Abbott government, however, is pursuing the reverse direction.

So the chances of the single government option occurring in Australia are slim. A continuation of the current dual responsibility is inevitable. How, then, can it work better?

Assessing the idea of ‘reciprocal interdependence’

In countries with both single and multiple funders, the health system suffers from the most complex of co-ordination problems. It exhibits what organisational theorist James Thompson calls “reciprocal interdependence”: in other words, the outputs of one system are the inputs of another, and vice versa.

Australia has dozens of examples. One is that inadequate primary care – the Commonwealth’s responsibility – causes increased (and potentially avoidable) public hospital admissions and increased emergency department presentations, for which the states pay.

Also, better rehabilitation and geriatric care in state public hospitals could reduce Commonwealth costs in residential aged care.

Budget night rhetoric suggested that a neat dividing line between the Commonwealth and the states could be established. Public hospitals would be on the state side. But even ignoring the issues of reciprocal interdependence, some public hospital services, such as specialist medical outpatient clinics in public hospitals, are direct substitutes for Commonwealth-funded activities.

Reciprocal interdependence requires effective co-ordination. This can occur in two complementary ways: government can ensure that health structures talk to each other, and that financial incentives are aligned. All the talk in the world will not lead to effective co-ordination if financial incentives pull in the wrong directions.

Breaking promises and agreements

Effective talk – such as joint decision-making - requires trust. Negotiations rely on agreements being adhered to. But decisions in the budget meant that an existing signed agreement – the National Health Reform Agreement – between the Commonwealth and the states was torn up.

The agreement, announced in 2011, was a good one. It introduced better alignment of financial incentives: the Commonwealth would share the costs of growth in demand on state public hospitals. So good was this policy that the Coalition made an explicit commitment before the election to support it:

A Coalition government will support the transition to the Commonwealth providing 50% growth funding of hospital services as proposed.

Further, pre-election, the Coalition claimed that only they had “the economic record to deliver” on that promise.

However, the Coalition government’s first budget negated this commitment. It abolished the commitment to meet 50% of the cost of public hospital activity growth and replaced it by simply indexing in line with population growth and CPI from 2017-18. This resulted in a budget saving of nearly A$1.2 billion at the expense of the states collectively.

If both the Commonwealth and the states are sharing the cost of growth, then both have an interest in moderating growth. The Commonwealth could mount a business case to invest in prevention and primary care to reduce its costs from increased hospital admissions. States would be assisted to meet the future challenges of public hospital cost growth, but still have an incentive to control growth.

The National Health Reform Agreement, signed by the Commonwealth and the states under the Gillard government, was torn up in the budget. AAP/Julian Smith

Talk is cheap

In order to turn talk into actions, the first step is to reduce the trust deficit. This would require the Commonwealth to restore its commitment to share in the cost of hospital growth. If 50% is too high, a slightly lower rate, say the current 45%, would still create an alignment of interests.

With more trust, joint decision-making and pooling of funds could have the potential to iron out the disjunctions caused by the overlapping boundaries of Commonwealth and state responsibilities. New governance structures and legally binding agreements might be required.

But a gabfest of talk and financial alignment won’t be enough if states don’t have adequate fiscal capacity to meet the needs for which they are responsible. The Commission of Audit proposed a realignment of income tax. Increasing or broadening the GST and increasing payroll tax have also been mooted.

States have other potential tax opportunities. The Commonwealth doesn’t tax superannuation fund earnings, and someone should.

The more dramatic of these opportunities will be needed if we can’t get more co-operative arrangements, with shared responsibility, to work. All options need to be on the table to reduce state exposure to Commonwealth vicissitudes and to meet the state share of health care cost growth.

For taxpayers, an ideal system would mean an efficient system in terms of the cost of doing things and the choices about how we invest our health care dollars. For consumers, it would mean a system where necessary services are available and the Commonwealth and states work to ensure continuity of care.

More importantly, it would mean consumers are not used as the rope in a Commonwealth versus state tug-of-war. Sadly, the recent short-term budget fixes don’t provide a good ground for any of that.


Further reading: The Reforming the federation series