Health-care reform in Australia: advancing or side-stepping?


  • Jane Hall

    Corresponding author
    1. Centre for Health Economics Research and Evaluation, Faculty of Business, University of Technology, Sydney, NSW, Australia
    • Centre for Health Economics Research and Evaluation, Faculty of Business, University of Technology, Sydney, PO Box 123, Broadway, NSW 2007, Australia; Level 4, 645 Harris Street, Ultimo, NSW 2007, Australia
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The Australian Prime Minister and State premiers, after an intense period of negotiation, announced ‘the most significant reform to Australia's health and hospitals system since the introduction of Medicare, and one of the largest reforms to service delivery in the history of the Federation’ (Council of Australian Governments, 2010a).

The Australian health-care system has remained structurally stable since the introduction of national tax financed universal health care in 1984, with subsequent governments mostly preferring incremental change (Hall, 1999). The most interesting feature of Australian health care to those outside Australia has been the public subsidy of private health insurance, despite universal free access to public hospitals, universal subsidies for medical care and most prescription pharmaceuticals. Within Australia, the role of private health insurance and the cost of its subsidy have been the dominant national issue, while other components of the system have been unchanged. This new agreement is strongly focussed on public hospitals. Whether this will indeed prove the start of significant reform or merely a side-step is yet to be determined.


Although Australia appears to have a national health system, this is not the case for all aspects of health service delivery. Australia is a federation, comprising six States and two self-governing territories, with a national (hereafter Australian or Federal) Government. Currently, the Australian Government subsidises medical services and pharmaceuticals for all Australians. But public hospitals are owned and operated by State and Territory governments. As a result, hospital governance structure varies from state-to-state. For example, Victoria, with a population of 5.5m, has 18 statutory authorities responsible for public hospitals, each with its own Board of Directors appointed by the State Health Minister; while NSW, population just over 7m, has 8 Area Health Service Boards, organised regionally to encompass all State funded services. Other States, with much smaller population bases, have some form of regional structure, principally organised around hospitals.

The Australian Government has greater tax powers, and hence a stronger revenue base, than States and Territories (hereafter States can be taken to include Territories). States rely on financial transfers from the Australian Government for much of their revenue. Existing arrangements provide joint funding of public hospitals under cost sharing agreements negotiated five yearly by the Australian and State governments. In the period since the implementation of Medicare, the Australian government share of public hospital funding has been around 50%, leading some commentators to suggest this should be the benchmark (Deeble, 2008). However, it has fluctuated, depending on the political cycle of elections, and Health Care Agreements negotiation cycle (Australian Institute of Health and Welfare, 2008). Currently, it is closer to 40% and has been as low as 38% in 2007 (Australian Institute of Health and Welfare, 2008). This funding is provided to State treasuries, which then determine how to channel it to hospitals and other services. Some States use case-mix as a funding mechanism though none appear to use it as the only basis for allocating funds to hospitals. All use case-mix in some way to track performance.

Public hospitals, even in those States with some form of case-mix funding, are subject to budget caps. Public hospitals are also a crucial pressure point in the system, as they are more likely to treat those with fewer social and economic resources, for whom inadequate community care and aged care places lead to difficulties in effecting discharges, creating longer lengths of stay. Concurrently, there has been increasing demand for Emergency Departments associated with declining working hours in general practice. Public concern about the state of public hospitals is focussed on elective surgery waiting times and cancellations, demand in emergency departments, and safety and quality. The States have blamed the Federal Government for insufficient funding to match the growing population needs, and in turn, the Federal Government has blamed poor management at the State level. State-funded services, under tight budget constraints, shifted costs to Federally funded services or programmes, even though patients' were inconvenienced and total costs may have been higher. Many commentators wished that just one level of government managed all health responsibilities (National Health and Hospitals Reform Commission, 2009).


The role and cost of private health insurance was the dominant national health policy issue until 2007. By the national election of that year, the issue was public hospitals. In particular, how they should be governed, how they should be financed, and which level of government should take responsibility? The new Prime Minister took office with a commitment to ‘end the blame game’ between the Australian and State governments, and promised to develop a national reform plan ‘designed to eliminate duplication and overlap between the States and the Commonwealth’ (ABC News, 2007). The process has involved wide consultation, a great deal of public debate, intense political negotiation, and finally offers additional funding to the States. The resultant plan has been agreed by all governments except that of Western Australia (another consequence of a federation; see Deeble, 2008 for further discussion of the Agreements process).

The plan provides for a National Health and Hospitals Network, of which the centrepiece is the creation of Local Area Hospital Networks. A Local Hospital Network (LHN) will be a geographic grouping of hospitals around a principal referral (tertiary) hospital, although some special services may be organised on a State-wide basis (possibilities are specialist children's hospitals and services currently determined as state wide such as blood transfusion). Current planning provides for approximately 50 across the country, suggesting a population base of 400–500 000. These will be separate statutory authorities under State legislation, each with its own Council, appointed by the State Minister, and comprising health management, business management and financial expertise, clinical expertise from outside the local network, representatives of universities, clinical schools, and research centres. Some individuals will be able to represent more than one interest. Interestingly, local community and clinician representatives are not nominated as Council members although Councils are also required to incorporate their views. Thus, the change imposes a more nationally consistent governance structure, and will require some transformation of existing State regional structures.

The State health authorities will be the managers and planners of the system. They have the responsibility for determining the local area boundaries and establishing the Networks and their Councils. They will also be owners of public hospital assets, determine capital investments, make policy, and set service agreements with each LHN on volume, mix, and quality of services. States are also left with the responsibility of negotiating industrial relations, determining remuneration and conditions, so while there may be some competition across LHNs, it will not translate into competitive bidding for staff. In terms of structure and function, this does not appear to be very different to the current structure, particularly as the Federal Government has explicitly agreed to take no part in these functions. Thus, there has been no take over of public hospitals.


However, there is a significant change in financing arrangements. The Federal contribution to funding will be 60% of ‘efficient’ public hospital costs including research, training, and capital (that additional contribution is funded by a change in tax-sharing arrangements). The ‘efficient price’ will be the case-mix weighted average cost, determined by a new independent pricing authority. These funds will flow to another new set of agencies, State Health Funding Authorities, and will be distributed to the LHNs on a case-mix basis, other than for smaller regional areas or areas of special need where some form of block funding will be used. As a result, the split between Commonwealth and States of hospital funding will have a predetermined basis, and thus remove the five yearly tussle and rounds of offer, refusal and counter-offer, and political stand-off right up to the eleventh hour that characterise the current Australian Healthcare Agreements (Deeble, 2008). The clearer basis is a plus; at least to the extent that it is indeed clear. At this stage, what is not clear is whether the case-mix payment will be on agreed predicted volumes, or whether claimed on actual volumes retrospectively. The ‘efficient’ case-mix price will be determined by an independent arbiter, but exactly what will be taken into account in determining efficiency is still unknown. While substantial work has been done on acute care episodes, the weights for sub-acute, emergency, and rehabilitation have had less extensive research.

The States will fund the additional costs of their public hospitals, i.e. the additional 40% of the efficient price plus any other costs. Their contribution will also be distributed through the State Funding Authority, but the allocation basis for the State contribution will be determined by the State. It seems that this will be a capped budget, thereby ameliorating one of the undesirable incentives of case-mix funding as initially envisaged in the Prime Minister's plan (Australian Government, 2010). One of the desired incentives under case-mix funding is to shift some of the funding risk to providers, by enabling ‘efficient’ providers to keep at least some of any savings made on the case-mix price. LHNs ability to hold funds earned in excess of their costs will be determined by the States, ‘in accordance with State policy and practice’, again a variation from the Prime Minister's plan.

Although the States have retained responsibilities for policy and planning, and the Federal Government has accepted the role of principal funder, this has not left the central government without any policy leverage. In addition to case-mix based funding, the Federal Government has established the means by which LHNs can be paid for performance in meeting specified targets, initially in emergency care and elective surgery. There will be a new National Performance Authority, which will report on the performance of every LHN, the hospitals within it, and every private hospital. Alongside this, there will be expanded roles for existing bodies around safety and quality and performance monitoring.

Primary care in Australia is predominantly fee for service, in private general practice. Over the last 20 years, Divisions of General Practice have been established and funded by the Federal Government to bring independent GPs into a network both to educate and inform, encourage new initiatives (for example, support for practice IT, development of practice managers), and provide a means of communication between general practice and other health agencies. The Divisions are also required to address prevention and early intervention, better co-ordination of care, and better chronic disease management. General Practice fee for service funding does not flow through Divisions. The new Plan will see these replaced by Primary Health Care Organisations (PHCOs), although it is not clear how much broader their scope would be than current Divisions. PHCOs will cover as far as possible the same geographic regions as the LHNs and with some overlapping Board members but funded under a service contract by the Federal Government. The PCOs will have responsibilities for facilitating access to allied health care, identifying underserved groups in the community particularly those with chronic disease, and ensuring ease of transition between hospital and community. A further responsibility is population health and prevention, to be implemented in co-operation with the new National Preventive Health Agency. PHCO performance will also be publicly reported by the new Health Perfomance Agency. Although LHNs are creatures of the States, and PHCOs creatures of the Federal Government, there will be a ‘formal engagement protocol’ negotiated between the PCO and its corresponding LHN.


There are a number of issues that the reform has failed to address. Incentives for individual providers, whether in hospitals, or in community care, remain unchanged. Better co-ordination across hospital and community care relies on the co-operative agreements between the LHNs and the PHCOs. The incentives under case-mix funding encourage increasing volume and decreasing lengths of stay, thus shifting some costs to community services, and shifting complex cases to other providers. The relationship between PHCOs and individual providers remains unclear. Funding streams for hospitals, out of hospital medical services, and other community services have remained as separate. There has been no attempt to include private hospitals (or private health insurance) in the new arrangements. No attention has been paid to developing a more national approach to the assessment and dissemination of medical technologies, particularly in public hospitals. Yet, the Australian Government's review of Health Technology Assessment was released just days before the Prime Minister's announcement on public hospitals (Australian Department of Health and Ageing, 2009). The new structure can also be criticised for simply rearranging current hospital structures (new regions) while leaving the States predominantly in charge. The explicit commitment to ‘no new bureaucrats’ also suggests this is rearranging the current incumbents.

On the other hand, the plan is quite clear that this is not the end of the reform process. It explicitly states that this is a plan for the foundations of Australia's future health system. From this perspective, the most interesting aspect of these proposals is the clear change in language, to that of funder/purchaser/provider split. The Federal Government has accepted an ongoing role as the principal funder of the health system, and it is setting up the structure to use funding to leverage change through performance monitoring and incentive payments. Currently, the States are being asked to transform their role from funders and managers of hospitals to focus on purchasing and overall planning of the hospital system. The PHCOs seem to be somewhat isolated from the rest of the system. However, the Agreement also specifically mentions a potential fund holding role for PHCOs, ‘in areas of market failure and where patient needs are not being met’. Once these new agencies are functioning, they could provide a basis for the purchasing role to shift to the regional level, with a greater pooling of funds and budget holding. The rhetoric around more focus on chronic disease management is reinforced, in the one instance of diabetes, with changed funding arrangements. Diabetic patients will be given the option of enrolling with a GP and the practice will be paid on a capitation basis with additional performance payments for achieving set benchmarks. This could prove to be a model for the development of new payment methods in primary care.

There has been no consideration of how private hospitals, which are increasing in size and the complexity of case-mix, will fit into the new arrangements. The contentious private health insurance rebate has been excluded from consideration as part of these arrangements, although it is set to be drawn into the debate about implementation in an interesting way. The Government has proposed part funding of the new package by imposing a means test on the rebate, a move so far opposed by the Opposition.


The stated objective of the Network plan is to improve health outcomes and the sustainability of the Australian health system. Contemporary health reform in other parts of the world has focussed on incentives, to manage both allocative and technical efficiency, whether through competitive insurance or some form of funds pooling and budget holding. This also requires changing provider behaviour. The impact of better information, such as clinical guidelines, has been limited, and reform efforts have moved to the use of financial incentives to reinforce change, generally known as pay for performance in the US, and commissioning and outcomes payment in the UK. In both the UK and the US, there is a strong emphasis on primary care as the focus of reform. Against this framework, the Australian reform with its emphasis on public hospitals and activity-based funding seems overly narrow, with little immediate prospect of better outcomes. There has been no consideration of the role of the private hospital sector, or the role of private insurance. No attention has been paid to incentives. There is no attempt to develop more flexible funding across service delivery pathways.

The problem though with all reform is not just where do we want to go, but how do we get there from here. Perhaps more importantly, in considering prospects for the reform plan, is its expressed purpose to establish the foundations of Australia's future health system (emphasis added) (Council of Australian Governments, 2010b).

There are some interesting hints: the move to identify the functions of purchasing separately from provision; the development of a funding role, with a commitment to monitoring and performance measurement; the establishment of Primary Care Organisations with a population focus and responsibility that are broader than medical practice; the small but significant move to capitation and performance funding in chronic care. An alternative interpretation is that, given the real problems and high level of public concern, public hospitals had to be reformed first to clear the way for more fundamental reform. Whether the Health and Hospitals Network can achieve its stated objectives will depend on whether it does indeed provide a basis for advancing reform or merely a side-stepping of the persistent and familiar challenges.