What is the hospital funding agreement politicians are talking about today?

The National Cabinet will meet today to discuss the following three major issues:

  • GST allocation,
  • National Disability Insurance Scheme funding (NDIS).
  • A Commonwealth Government proposal to start negotiations on a National Health Reform Agreement that would take effect in 2025.

What is the Reform Agreement? What are the odds that it will result in improved access to hospital treatment when Australians require it? What is the GST’s role in this?

Read more: A tussle between the federal and state governments over disability supports is looming. What should happen next?

What is the reform agreement?

The Commonwealth government provides funding for public hospitals in the amount of approximately 40%.

Any discussion of health funding is incomplete without mentioning the National Health Reform Agreement. It was designed to be negotiated every five years.

  • Increase the Commonwealth’s share in public hospital funding
  • Transparency about the use of Commonwealth funds by states
  • Drive efficiency in public hospitals.

The performance of the company on all three goals has been mixed.

The efficiency initially improved but has since regressed. Even in the years before COVID, the average price of admission to a public hospital increased more than the inflation.

Transparency is a double-edged blade, as it has caused a greater focus on the formula and the agreement while de-emphasizing the GST in its broader context.

In its first budget, the previous Commonwealth Liberal Government reduced the planned increase of the Commonwealth share in public hospital funding. Its share has declined now to 41%.

Due to tight state budgets and rising costs per patient, hospitals have not been able to expand their capacity in line with the population growth. This has resulted in poorer service and longer waiting periods.

Calculating the Commonwealth’s Fair Share

The National Health Reform Agreement will see the Commonwealth’s total funding to all the states increase in proportion to the growth of “activity” at public hospitals across the country.

The “nationally efficient price” is used to measure “activity,” which includes both hospital admissions and outpatient activity. The price per unit is currently set at 6,032.

Currently, the Commonwealth pays 45% of costs associated with increases in hospitalizations, emergency department visits, and outpatient attendance. However, this is only at “nationally efficient prices.” The total Commonwealth funding growth each year is limited to 6.5%.

Commonwealth hospital funding has declined. 

It’s not always understood.

Many government officials and commentators assume that the same model is used for funding each state. It’s not. The funding for each state is determined differently (we’ll explain this process shortly).

This false assumption of how the National Health Reform Agreement for each state works leads to complaints that the agreement restricts good policy initiatives and rewards “volume over value.” It also encourages unnecessary hospitalizations.

It allows the states to blame this agreement for mismanagement in their hospitals.

It encourages fruitless conversations between Commonwealth and State officials about “reforms projects,” which usually go nowhere but can be used to fool the public into believing that the big issues of the health sector are addressed.

Read more: Ambulance ramping is a signal the health system is floundering. Solutions need to extend beyond EDs.

How funding to the states is really allocated

The National Health Reform Agreement (NHRA) and GST are two ways to consider the funding from the Commonwealth for the states.

On the website of the National Health Funding Organization, you will find tables that purport to show the allocation of Commonwealth funding to services in Australia down to the very last dollar. This is in line with the National Health Reform Agreement’s transparency goal.

These are real numbers. These dollars are actually in state bank accounts.

GST is a way to bring the whole picture together.

The money collected by the GST is distributed among the states according to their needs. The goal is to make sure that each state can “provide services and infrastructure at the same level.”

Commonwealth Grants Commission is an independent body that assesses state needs, including public hospital expenditure. The Commonwealth Grants Commission also looks at how the states can raise funds through taxes in order to meet their own needs.

The GST allocation of a state depends on the difference between its estimated revenue-raising capacity and its expenditure needs.

The Grants Commission takes into consideration the majority of Commonwealth grants, including the National Health Reform Agreement, in the same way it does when assessing the ability of the state to increase payroll tax or stamp duties.

This means that the funding a state receives under the National Health Reform Agreement will be reallocated to it, with a delay, and not according to the formula of the agreement but in accordance with the GST formula. (This is based primarily on the population of the state, weighted by factors like age, proportions living in remote areas, and proportions of First Nations Australians).

The reform agreement has been criticized for encouraging hospitalizations. 

The National Health Reform Agreement, while impressively precise, is a bit of a fantasy, as it provides a funding stream that is overridden by a few more years.

In reality, the National Health Reform Agreement has a major impact on determining the total national contributions that the Commonwealth makes to public hospitals.

Because states assume that the National Health Reform Agreement is real, the formula has its own life and can influence the health care system positively or negatively.

National Cabinet: What to look out for

It is important to examine the details of the National Cabinet’s decision today. There are two things to watch out for.

Will the cap of 6.5% be raised? How much will it increase? The total amount that the Commonwealth may be required to pay the states is determined by this.

What will the states agree to as a result of any potential increase in Commonwealth spending? A commitment to share expenditure on NDIS reform (and work together) may be in the cards.

The funding commitments made for “reform” projects send signals to the government about what they collectively consider to be important issues within the public hospital system. For example, joint commitments are made to improve efficiency and increase access to digital services such as telehealth.

Patients could benefit from an improved public hospital system if the Commonwealth shares and the cap are increased if they are coupled with tighter accountability (such as commitments for reducing the waiting time for planned procedures).


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