Election 2016: Hospital funding debate a ‘black hole’ for policy substance

by Stephen Duckett

Published by Australian Financial Review, Wednesday 15 June

Of all the tired metaphors being volleyed back and forth during this election campaign, the “budget black hole” is my least favourite.

States and medical interest groups accuse the Liberal government of creating a hospital-funding black hole by reneging on the core funding commitments made in a 2011 agreement. The Liberals have accused Labor of creating a black hole for the budget by sticking to the (then bipartisan) 2011 agreement, in which the commonwealth and states would equally finance the growth in hospital costs.

Now both parties have backed away from the 2011 agreement, albeit to different extents, with neither proposing any plan for funding hospital cost growth beyond 2020. The budget black hole is now a bi-partisan one.

In astronomy, black holes are known for invisibly vacuuming up light. In Australia, they are becoming notorious for obliterating policy substance.

Refusal to fund hospital cost growth does not make either party fiscally responsible. There will be no savings from tearing up the 2011 commitments. Demand for hospital services will continue to grow as new medical treatments are developed and the population grows. The costs will continue to fall on taxpayers – the only question is whether it is the state or commonwealth that bears them.

It is unfortunate that this campaign is focussed on rehashing policy squabbles thought to be resolved five years ago. Political parties are serving us poorly if policy debate is to re-open and close the same can of worms.

The more mature policy discussion we deserve would focus on how we want to constrain growth in hospital costs – whether by improving prevention, reducing less effective services, substituting more-expensive health workers with less-expensive ones, or trying to increase incentives for cost-control within hospitals.

The 2011 National Health Reform Agreement pursued this exact focus: developing substantive, evidence-based measures to achieve long-term cost control. It did this by establishing a bipartisan agreement for constraining growth in hospital costs through the introduction of Activity-Based Funding (ABF). As its name suggests, ABF ensures that hospitals get paid for what they do – their activity. Importantly, it introduces powerful incentives for efficiency by paying hospitals at a National Efficient Price for each treatment – not according to how much money the hospital did or didn’t squander during a treatment.

ABF has succeeded. Victoria, which has had ABF for decades, has consistently achieved the best hospital cost control in the country. Since it was introduced nationally, average treatment costs have gone down across public hospitals. The original 2014 National Efficient Price was $5,007 per average patient treated. This year’s price should be higher, given inflation, but instead has fallen to $4883.

While the average patient is now less expensive to treat, there are more and more of them – so total costs will continue to grow. However these costs are not growing as fast as originally projected.

To tackle these costs, we need a strategy focussed on prevention, effectiveness and efficiency of care. The latter requires further payment system reform, not regarding average as good enough for example, and focusing on quality of care as well.

Whoever leads the next government should focus on developing a concrete strategy for ongoing funding certainty to hospitals and state budgets, and provide the coherence and vision of the 2011 agreement – not the stop-start forward-back acrobatics of the last few years.