April 2010


Health Reform

By Bill Bowtell
Illustration by Jeff Fisher.

In a bold reform package unveiled in March, Kevin Rudd proposes that the Commonwealth government should assume the dominant responsibility for funding Australia’s public hospital system. His reforms would strip from the states and territories their century-old stewardship of public hospitals. These proposals are the first instalment in what should be a complete renovation of the health system, but the ramifications of his reform package go much further, possibly compromising the long-term financial viability of the states and territories.

The Australian health system is fragmented. If it is to serve the needs of a growing, ageing Australian population, it needs radical and deep reform. Presently, the states and territories administer the public hospitals. They raise from their own revenues about 60% of the money required to run public hospitals, while the federal government provides the rest. The primary, aged care and pharmaceutical benefits systems, meanwhile, are funded federally. This split has never made the slightest administrative sense. The health-care workforce, numbering in the hundreds of thousands, is employed under terms and conditions that vary widely between jurisdictions. A century since Federation, no single national system exists for the accreditation of health-care qualifications, or for many key health-care performance indicators.

As a consequence of these fractures and divisions, lines of authority, accountability and assessment are hopelessly tangled. The system is wasteful and inefficient. Many functions are duplicated or overlap. It institutionalises disagreement and conflict, and is therefore prone to resolve problems by reaching lowest-common-denominator compromises. The adoption of new information technologies in the health-care sector has been notoriously slow, and the productivity reforms that have transformed most other sectors of the Australian economy have not significantly impinged on the sprawling, over-regulated health-care sector.

There is no doubt that the system delivered outstandingly good results for most of the last century. Australians live longer, healthier and therefore happier lives than do citizens of almost any other advanced industrial country. But the system now faces severe challenges. The states and territories can no longer affordably meet their share of the cost of running the public hospitals. If nothing changes, by 2050 the entire budget outlays of the states and territories will be consumed by their health budgets. There are too few clinical staff for too many hospitals. Too much concentration on care and treatment and not enough on prevention. Too many intermediaries absorbing resources that should be spent at the front-line. The present system is the product of a century of muddling through, and decades of fixes and fudges. Short-term thinking and political expediency have almost always prevailed over long-term planning. It is time for a single national health-care system to replace the staggeringly wasteful and inefficient structure that no longer serves the nation well.

Under Rudd’s plan, the federal government will become the dominant funder of the Australian public hospital system, covering 60% of the system’s costs. It will also assume all funding and policy-making responsibility for GPs and primary health-care services. The federal government will then devolve responsibility for managing public hospitals to “local hospital networks”. These networks will be made up of small groups of public hospitals that will work together to deliver care, manage their budgets and answer for their performance. They will be run by autonomous “governing councils”. Instead of channelling federal funding through the states and territories, the federal government will pay the local hospital networks directly for each service they provide.

As Rudd has explained it, responsibility for setting the price of each service will be vested in an independent national umpire. Funding for a hip replacement, for example, will thus reflect the cost of delivering the treatment properly and efficiently, while taking into account the varying costs in different parts of the county and in each patient’s individual circumstances. In conjunction with the new funding model, a comprehensive set of national standards and reporting will be imposed. These standards will include access to hospital care, access to general practitioners and other health-care professionals, safety, equity and financial performance. A common national standard will therefore govern such vital indicators as the waiting times in emergency departments and for elective surgery. This transparent set of national standards will form the basis for the payment of performance incentives; underperforming hospitals will be obliged to meet or exceed national standards.

Rudd’s proposals thus seek to establish the federal government once and for all as the dominant policy-maker in a better-integrated and centrally controlled national health system. In a recent speech to the Australian Medical Association, Rudd pitched strongly for the support of clinicians by promising a fundamental reassessment of the relationship between doctors and their ritual sparring partners: the 36,000 federal, state and territory bureaucrats it takes to administer the existing health system. His wooing of the AMA clearly reveals who will be the biggest losers under the new regime – the state and territory governments.

Under Rudd’s proposal, the hospital networks will be funded by the federal government’s retention of 30% of GST revenues. Currently, under the deal struck in 1999 by John Howard and the state and territory leaders, the states and territories receive 100% of GST revenues, and are free to allocate them in their budgets as they see it. Rudd’s reform package is therefore two separate reforms rolled into one: a revolutionary new public hospitals structure, and a dramatic reordering of the Australian Federation.

The central question will be whether Rudd can be persuaded by the states and territories to abandon the second of these reforms. On 11 April, Rudd will take the entire deal to the Council of Australian Governments (COAG) for approval. If the states and territories accept the redirection of GST revenues to fund the health reforms, they will implicitly be accepting the federal government’s right at some stage in the future to do the same with the remaining GST revenue. And if the federal government forces through Rudd’s reform package, it will set a precedent for action across the entire spectrum of policy areas presently administered jointly by the federal government and the states and territories. National action is urgently required in, for example, the management of the Murray–Darling Basin, the operation of the national energy grid and the national highway system. All of these could benefit from GST revenue.

Rudd is proposing nothing less than a momentous re-alignment of the Federation. If this happens, the states and territories will have no one to blame but themselves. The GST deal struck by John Howard in 1999 gave the states and territories a chance to redeem themselves. Only one state, Victoria, rose to the challenge and transformed itself from basketcase to relative superstar. If the other seven states and territories had invested their GST windfalls to build lean, efficient, modern and responsive administrations, their political position would now be much stronger than it is. Instead, decades of slothful incompetence, reckless spending, under-investment in essential services and increasingly baroque displays of venality, cronyism, malfeasance and corruption have severely undermined their legitimacy. The Australian people long ago lost confidence in their state and territory governments.

We are faced with national challenges that demand unified national action. The states are not suited either to provide this or to deliver services at the local and municipal level. The entire federal system was a nineteenth-century idea that reflected the political, economic and geographical realities of those times. These are no longer relevant or useful. But is it wise to use health reform as a front for an argument about the future of the Australian Federation? The conflation of the issues is risky. The states and territories can be expected to cut up very rough when their viability and authority are threatened.

On the principle that the best defence is to attack, the states and territories will no doubt provide a range of helpful suggestions as to how the package might be funded without touching the GST revenues. They might argue that, for example, the federal government could impose an income-tax levy, as happened in 1984 when the extra costs associated with Medicare were funded by a 1% levy on income taxes (later increased to 1.5%). Or it could increase the GST from its current rate of 10% to, say, 12.5% or 15% and use this increase to fund the hospitals reform package.

Finally, the states and territories might suggest that the federal government look to its own large budget outlays and reduce them in order to fund the hospital reforms. The most obvious target is the bloated defence department budget. As the recent revelations about the defence department’s scandalous overspending make clear, billions of dollars are being wasted with little accountability, transparency or control. The federal government can hardly take a high moral tone about mismanagement when it presides over such a recklessly spendthrift department.

But while the looming gunfight at the COAG corral promises to be highly entertaining, in the end it is not the main game. We are a rich country, and, one way or another, we will have to invest in root and branch reform of our health system. The various governments may bitch and moan, but they have no alternative but to agree to substantial changes. Rudd’s package raises the question: changes to funding aside, why did the government not make the case for more radical reform?

There should be one single funder (the federal government) providing health dollars to a series of separate providers, which would be organised on a regional basis and responsible for all forms of health care. The state and territory governments should be bypassed entirely. Regional providers of integrated health care would be able to reflect local concerns and priorities and, over time, specialise in the provision of different forms of care. Although the federal government would fund them, these authorities would be responsible for their own budgets and administration.

At best, the proposed local hospital networks might be an intermediate step towards such a single national system. At worst, they may replicate the most problematic features of the existing system and be too small and fragmented to deliver more cost-effective outcomes. Under Rudd’s proposal, the states and territories will still have a considerable role in the management of public hospitals. This hardly seems likely to reduce duplication and conflict.

The hospitals reform package is the first of several health reforms to be unveiled between now and the election. While we should wait until the entire mosaic is assembled before assessing the big picture, the hospitals package is clearly a major and welcome step forward and should be supported. But the Rudd government does not have unlimited time to get things right in health or indeed in any other part of its reform agenda. The Australian people are harsh taskmasters and are increasingly impatient with governments that promise change and fail to deliver.

Bill Bowtell
Bill Bowtell is a strategic–policy analyst and consultant and the executive director of the Lowy Institute’s HIV-AIDS project. He was a political adviser to Paul Keating.

Cover: April 2010
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