Commonwealth government is not pulling its weight on hospital funding

4 minute read

AIHW health expenditure data shows federal government public hospital funding has dropped to 41%. Negotiations for a new funding agreement, to take effect in mid-2025, just got harder.

A constant of Australian health policy over the last few decades has been the blame game – Commonwealth and state governments blame each other for the woes of public hospitals and claim the other level of government is responsible for the underfunding that bedevils the system.

Prime Ministers Kevin Rudd and Julia Gillard both tried to fix the issue once and for all with a fixed share of cost growth policy, initially set at 45% of a designated “efficient price”, but with a scheduled increase to 50%.

Alas, the policy was not implemented.

Prime Minister Tony Abbott together with then Health Minister Peter Dutton consigned the policy agreed between the Commonwealth and all states just a year or two earlier to the garbage can of history in their 2014 budget. The Abbott-Dutton proposal was not implemented either, and new Prime Minister Malcolm Turnbull restored the 45% share but with a cap on growth in the Commonwealth share.

The result is now clear and, as expected, the Commonwealth share of government funding of public hospitals dropped from a peak of 45% in 2016-17 to just 41% in 2021-22.

The Commonwealth-state funding arrangements are formalised in the National Health Reform Agreement, the current iteration of which expires on 30 June 2025. An independent review of the Agreement is being finalised with the expectation that negotiations for a new agreement will start this year.

The states will walk into the negotiations with their hands outstretched, looking for an increase in the sharing ratio and removal of the cap. The Commonwealth will rightly respond that if the ratio is to increase there should be demonstrable benefits to patients. Vanity “health reform” projects are also always part of the mix in these agreements, although apart from keeping both Commonwealth and state bureaucrats occupied, these have no discernible impacts.

So, what should a new agreement look like?

A declining Commonwealth share of public hospital spending fails the ubiquitous “pub test”, so an increase in the average Commonwealth commitment towards public hospital costs is inevitable. But the Commonwealth should expect something in return for its increased largesse. There is room to enhance hospital efficiency, so the dollars spent on hospital care could be used more wisely and both the Commonwealth and states get more bang for their bucks. Public hospitals have a major role in preparation of the health workforce and serious workforce reform should also be on the agenda.

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Most attention, however, will be paid to the magic number of what the new Commonwealth share formula should be. Here there is an opportunity for the Commonwealth to use the new agreement to pursue its reform agenda.

Currently the formula is 45% Commonwealth share across growth in all types of public hospital services – acute inpatients, outpatients, mental health, and so on. There is no reason to stay with this simplistic approach and indeed, there are good reasons to have different sharing arrangements in different areas.

Hospital outpatient services are often direct substitutes for specialist services reimbursed under the Medicare Benefit Schedule. A higher share, say 75% of growth, might be appropriate here. Similarly, the Commonwealth government might provide states with a greater incentive to expand services for people with severe mental illness, and again a 75% Commonwealth share of growth might be appropriate. More sophisticated incentives might provide performance payments to states to ensure that all planned surgery occurs within 90 days of referral.

The base sharing rate could stay at 45% but higher rates in targeted areas to encourage expansion and new models of care, together with performance payments, will mean the average share will be above 45%, but the extra funding would be more tailored to achieve policy objectives.

The new AIHW data showing the decline in the Commonwealth share of government public hospital spending is a wake-up call, and hopefully it should evoke a policy driven response to move towards a more responsive and efficient hospital system.

Stephen Duckett, an economist, is an Honorary Enterprise Professor in general practice and in population and global health at the University of Melbourne, chair of the board of Eastern Melbourne PHN, and a member of the Strengthening Medicare taskforce.

This article was originally published by Pearls and Irritations. You can read the original version here.

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