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Will we ever have hospital funding certainty?

· Catriona McNaughton,Hospital,Funding,Analysis

Hospitals have faced a history of funding uncertainty with the balance of costs, control and responsibility likened to a moving beast between State and Federal Governments. The 2014-15 Federal Budget is remembered for leading to the unravelling of former Prime Minister Tony Abbott, but it is also the Budget that cemented hospital funding uncertainty that still exists today.

In the lead up to the 2013 election Abbott firmly committed to “no cuts to health, no cuts to education, no cuts to pensions”, but with the 2014-15 Budget, all three promises were put on shaky ground. The reinvestment of “health savings” into a new medical research fund, along with the post-2016-election implementation timeframe meant that the health promise was technically kept, however in reality, $57 billion was stripped from hospital funding. A new, profound chaos was created for hospitals at a time when, for the first time in their history, they had just begun settling into certainty.

Hospital funding has a complex history, marred by political uncertainty and change. Across the second half of the 20th century the State-Commonwealth funding relationship became increasingly complex and political. Through the late 1940s, the Commonwealth made successive attempts to increase involvement in public hospitals, culminating in the National Health Services Act 1948 which allowed the Director-General, on behalf of the Commonwealth to “establish, maintain and manage hospitals, laboratories, health centres and clinics”[1]. Formal Commonwealth involvement was introduced in the mid-1970s through Medibank, but this was short-lived and largely removed with a change of government. It wasn’t until Medicare Agreements Act 1992 that high-level principles were established to guide State-Commonwealth public hospital funding agreements, but even in this framework the agreements became increasingly complex and were characterised by disputes between State and Federal Government over scope, power and matched funding.

In 2007, the alignment of Labor State and Federal Governments was recognised as an opportunity to progress significant reform to intergovernmental financial arrangements. The 2010 National Health and Hospitals Network Agreement was signed by all states except Western Australia and established the Commonwealth as the majority funder of public hospital services (60%). It was quickly followed by the National Health Reform Agreement, signed in August 2011, that set the foundation for the Commonwealth and State health funding relationship. The agreement provided a new level of funding certainty centred on specified payments based on activity levels and gave the first real long-term funding certainty to the sector establishing certainty through to 2024-25.

Less than three years later, the established certainty again evaporated with the announcement of the 2014-15 Budget that unilaterally cancelled the existing agreements. The years of work that went into developing the National Health Reform Agreement were undone overnight and damaged any sense that future agreements, were they to be negotiated in the first place, would be maintained.

As outlined in the Budget Overview, the Abbott Government’s position was that:

“State Governments have primary responsibility for running and funding public hospitals and schools…In this Budget the Government is adopting sensible indexation arrangements for schools from 2018, and hospitals from 2017-18, and removing funding guarantees for public hospitals. These measures will achieve cumulative savings of over $80 billion by 2024-25. The Government will also reduce or terminate some Commonwealth payments that are ineffective or duplicate state responsibilities. These include National Partnership Agreements on Preventive Health, Improving Public Hospital Services and Certain Concessions for Pensioners and Seniors Card Holders. The States will be expected to continue contributing to these arrangements at their expense.”[2]

While the decisions of the 2014-2015 Budget demonstrated the extraordinary imbalance of power between the negotiating parties that will be evident in any future negotiation, the policy did aim to create an environment of clearer and more direct accountability for public hospitals. The community would be able to hold a single government (their state) accountable for any failings beyond the immediate financial hole. But, following an increasingly familiar pattern, that certainty was again undone following the leadership spill motion against Abbott in September 2015, which at least in some part was attributed to the cuts of the 2014-15 Budget. Recovering from the public fallout over failed election commitments, Abbott’s successor, Malcolm Turnbull walked back some of the changes, ultimately agreeing to retain many of the former funding principles and allocating around $3 billion over three years to 2020.

With the Turnbull agreement due to expire in mid-2020, the Commonwealth drafted a Heads of Agreement in February 2018 reaffirming that “States will remain system managers of public hospitals and will remain responsible for their infrastructure, operation, delivery of services and performance”[3] and proposing a 45% Commonwealth funding contribution. The process returned to the adversarial negotiation that characterised former agreements and initiated a round of highly political media commentary with Labor state governments criticising it as significantly less than offered under the Rudd-Gillard governments, and the Commonwealth pointing to it being higher than under the Abbott Government cuts.

Five months ahead of the 2019 Federal election and while the Heads of Agreement was yet to be signed by all states, Prime Minister Scott Morrison announced a $1.25 billion pledge to a Community Health and Hospitals program. The program increased funding for hospitals but focused on capital, which has usually been the sole domain of states and was specifically referenced as a State responsibility in the Heads of Agreements. This added to the ongoing confusion and uncertainty by aligning state-based planning with a new and unpredictable grant program, that has not been committed to beyond forward estimates.

The complexity of health service delivery means that, compared to other systems, it requires significant time and certainty to plan and implement change. This certainty remains challenging in such a highly political environment and expecting future governments to engage in extensive reform when facing the history of 2014-15 Budget is challenging. Not only will those that are attempting reform have to wade through the negotiation process, they will do so knowing that any progress made could be undone in years to come.


Catriona McNaughton is Manager - Communications at FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.