Spending on Australia’s public hospitals has increased by an average of $3 billion every year in the past decade. Yet hospitals are still under strain. Ambulances are ramping outside emergency departments, waits for surgery are getting longer, and staff say they’re burning out.
And demand will only grow as Australians gets older and sicker. There’s no doubt governments will have to spend more – but with ever more pressure on budgets, they’re going to need to be smarter about spending.
On this podcast, health experts Peter Breadon and Elizabeth Baldwin discuss their new report, Smarter spending: Getting better care for every hospital dollar, and how to fix hospital funding in Australia.
Transcript
Kat Clay: Spending on Australia’s public hospitals has increased by an average of $3 billion every year in the past decade. Yet hospitals are still under strain. Ambulances are ramping outside emergency departments. Waits for surgery are getting longer, and staff say they’re burning out. Demand will only grow as Australians get older and sicker.
There’s no doubt governments will have to spend more, but with ever more pressure on budgets, they’re going to need to be smarter about spending.
Smarter Spending: Getting better care for every hospital dollar is the new report from our health program at Grattan. I’m Kat Clay, and with me are the report authors. Peter Breadon and Elizabeth Baldwin. So, Peter, what is wrong with hospital funding right now?
Peter Breadon: Well, you mentioned at the start, hospital funding is growing really fast and yet hospitals are still struggling to keep up with demand. And the big problem is that funding is unpredictable, chaotic, often insufficient, and it leads to continual bailouts of the system to top up the funding that should have been there in the first place.
And why is that a problem? It means that hospitals end up not certain about what their funding is going to be next year, even late into the financial year. They might not know how they’re going to staff certain teams, and they certainly don’t have the financial security to plan and invest in multi-year productivity improvement initiatives.
So this chaos in funding that we see for such a vital public service, it happens at the federal level with their contribution being too low in recent years, and it happens at state levels where states routinely predict that hospital spending is somehow miraculously going to decrease when they put out their state budgets. But then of course, they top it up and on average in the last decade, they’ve topped it up by 6%, which is a really significant amount of money in a system that’s worth around $90 billion.
So, for such a crucial service under such strain, if we want to get more efficient spending, we have to get more rational budgeting. And so, we’ve got lots of arguments and recommendations about how to do that.
Kat Clay: Peter, as soon as you start talking about hospital spending, I can almost hear the health professionals’ hackles going up as they listen to this, and I mean, rightly so, when they’re working on the frontline of a stretched system. But you are not talking about cutting hospital funding, you’re talking about improving hospital productivity, so each dollar is better spent.
Peter Breadon: That’s right, because when you have that unstable, chaotic, inadequate budgeting that I spoke about, you don’t have the incentives or the resources at the hospital level to improve productivity and efficiency. And that’s what we found when we looked into best practices that are scattered across Australia.
When we looked at what’s happening around the world and when we looked at really detailed analysis of hospital cost data, we found that the variation in costs between different hospitals is really huge and that there’s a massive amount that can be gained just by spreading best practices. And as you say, making those hospital dollars stretch further.
Kat Clay: Liz, one of the things you’ve studied in the report is how varied the cost of common operations are across the country. For example, the cost of a knee replacement varies by more than $13,000 in Victoria. What is driving this variation?
Elizabeth Baldwin: You talk to anyone in a hospital and they can tell you that every hospital does things in a slightly different way from the way they use their staff, whether it’s a nurse or a nursing assistant who does particular jobs, the way they organize the discharge of their patients. How many routine blood tests are ordered when someone’s staying, and all those differences add up to big differences in the cost of a particular procedure or a particular admission.
But we wanted to take a look at that kind of variation more systematically. So, we use data on every single hospital admission in the country, and we adjusted for patients’ characteristics that might affect the complexity and cost of their admission. So, these are things like a patient’s age, how many coexisting health conditions they have and their socioeconomic status. We also adjusted for fixed hospital characteristics, like whether they’re in a regional or remote area, things that might affect the cost, but that they can’t control. Even after we did all those adjustments, we still found that there’s really big unexplained differences in the cost.
So, you mentioned one example. Just for a fairly simple routine procedure, like a hip replacement. We found that can vary by, by up to $15,000 from the highest cost hospital to the lowest cost hospital in Victoria. It’s the same for Caesareans. One of the most common reasons people go to a hospital. If you go to the most expensive hospital in Western Australia, that costs taxpayers about $13,000 more than at the lowest cost hospital. And when we added up all of these differences across all of the admissions in the country, we estimate that there’s about $1.2 billion of avoidable costs that could be recouped and reinvested back into more care if the most costly hospitals on the end of that spectrum just caught up to the middle of the pack in their state.
Kat Clay: Liz so, why does this level of waste persist year after year, and why aren’t those better ways of working spreading throughout the hospital system?
Elizabeth Baldwin: We were able to actually track how hospitals performed on those cost measures that I mentioned over time, and we found that a high cost hospital one year tends to stay high cost the next and a low cost hospital one year tends to stay low cost the next. So, there’s clearly kind of something systematic that’s happening across those different hospitals. It’s not just that some are magically more efficient than others, Kat, we think that it’s actually something systematic about the way funding works across the system. So, as Peter mentioned, hospitals are funded by the state governments.
They get allocated a budget at the start of the year, but that budget is often too low to realistically cover the demand that will come. Often, it’s actually a fall in real terms from what was spent last year, which almost never happens when we have an aging population, increasing demand as people are getting sicker and living with more chronic conditions.
Kat Clay: I think my favourite term in your report is the one that says these bogus budgets.
Elizabeth Baldwin: These bogus budgets. That’s right. They’re wishful thinking budgets because that almost never plays out in real life. And instead, we see these bailouts at the end of the year, but what the effect of this kind of annual rollercoaster of finances is, Kat, is that. If you’re a hospital, CEO, a hospital executive, you have a lot of competing priorities.
You’ve got waiting lists to worry about, emergency departments, ambulance ramping, staff satisfaction. You know, a lot of staff were really burnt out and, and stressed, particularly after COVID. You’ve got a lot of competing priorities and if the budget that you’ve been given isn’t realistic to start with and there probably will be a bailout at the end of the year. It’s easy for productivity to fall to the bottom of the list, and it’s also hard in a practical sense for hospitals to invest in productivity improving initiatives. So, we think that’s a big reason that we have these persistent waste year after year because the budgets have been broken.
Kat Clay: Peter, Anthony Albanese wrote to, the States about their health spending. Did you want to talk a little bit about that before we get into what governments can be doing?
Peter Breadon: Yes, it’s a live debate and a very hot one. The Premiers and the chief ministers have expressed outrage that the Prime Minister’s called on them to trim costs.
And I can see their side of the story here because since the federal government placed a cap on their share of growth in hospital funding, the states have borne three quarters of the extra spending. So that’s clearly a problem, and they feel like that is the big thing that needs to be solved.
But from the Prime Minister’s point of view, we have seen costs spiking. We have seen these signs of avoidable costs or waste in the system, and so the federal government wants some reassurance that you know, this isn’t going to continue forever. They’re not just tipping more money into a system where costs will keep spiralling higher and higher without necessarily benefiting patients.
So, we really tried to focus on a compromise that could help these warring parties come together and agree a new kind of hospital deal, one that would set the system up for success over the long term.
Kat Clay: Liz has mentioned that there’s these cycles of bailouts. Who’s responsible for stopping this and how do we stop these cycles. Is it just a matter of being very realistic about how much hospitals actually cost to run?
Peter Breadon: That’s right. We say that you’ve really got to, like many other countries do, base hospital funding on the predictable drivers of spending growth. That is population growth, it’s populations getting older, and it’s people needing more treatments per person over time. Other places have built that formula into how they plan budgets.
They’ve provided multi-year funding for hospital systems and even in some cases looking at providing multi-year funding for hospitals. That’s the kind of certainty, reality and stability we want to build into hospital financing in Australia, and both levels of government can play their part here. So, the Commonwealth government, they can move away from this arbitrary crude cap that’s proved to be too low, and they can have a cap that’s based on those predictable factors.
Have we got a population growth in a state? How much older and sicker are populations getting in a given state? So, let’s base the federal government’s contribution on those predictable drivers of spending. The same thing can happen with state budgets. Instead of seeing these implausible declines coming through in state budgets year after year, the federal government should also cover the growth in the cost of care.
But only up to a point. As long as there is this evidence of inefficiency in the system, they should be allowed to put a deduction on to try and drive more productivity because it is a big ask for the federal government to be exposed to cost growth in a system that they do not directly control.
Now, we argue that that deduction is fair to drive productivity. But they should give that deduction back as a sweetener for states that adopt pricing reforms. There are many other countries that have tighter pricing for hospital care that really focuses on best practice. In some cases, prices that promote discharging people the same day, they go in for care when it’s safe to do so.
Other countries are way ahead of Australia on that. Or they just count the care differently, including more efficient practices to make sure what we pay is actually paying for value. So, we would say that governments could agree you’ll get a higher Commonwealth contribution if the states adopt new prices that better reflect high value care.
Kat Clay: Liz, will this actually help or will we just get trapped in the same old cycles?
Elizabeth Baldwin: We think it’s a real two-way street here. We need to kind of break out of this toxic cycle that we’ve been stuck in for the last few years. And so, we think that there needs to be a give and take from both sides, between the state government and the hospitals, as well as between the federal government and the states . So, this is what we think it has to look like. The state government should unlock realistic budgets that are based on those real demand drivers, but then that’s accompanied by really clear expectations and clear performance frameworks for the hospitals to make sure that we’re getting great value for those extra dollars. So for hospitals that do really well, that are well managed you know, managed to run a surplus even by doing some of those efficiency measures that we were talking about, they should be able to keep that surplus and reinvest it in more care and new initiatives. That’ll provide a really strong incentive for doing well, which at the moment is kind of, lacking, at least in the formal performance measures often. And we also think that hospitals that demonstrate great performance year after year, really strong financial management should be able to get three-year budgets. These are multi-billion-dollar organizations, Kat, and there’s not many other businesses that size that don’t plan on a multi-year basis.
So, we think that where hospitals have the capacity to do that, it makes a lot of sense for them to be able to plan and invest. On a, a larger timeline, like those other highly sophisticated businesses that they essentially are.
But then on the flip side, there also needs to be an escalating series of interventions for hospitals that look like things are going off track. So, it’s not all cheque and no check Kat. It’s support from the department where there are concerns about some of the cost control that’s in place. Maybe some help to identify any issues that are emerging. And then if things are still going off the rails, maybe some stronger intervention, an advisor from the government might join the board to keep a really close eye on the decisions. And then in the event that there’s multiple, you know, large or repeated deficits, the CEO or the board might turn over. We think there really needs to be a clear consequence. This has happened before in other countries. In England when National Health Service organizations ran over budget in the early 2000s, CEOs were more likely to turn over and after that performance improved.
So, we know that hard consequences can really help with enforcing the best practices in the sector. But that’s only fair if that’s accompanied by the better budgeting practices that we’re talking about.
Kat Clay: Peter, we’ve talked about some serious issues here and serious consequences for not making effective use of those budgets. What else needs to change in the system?
Peter Breadon: There are many best practices we’ve briefly touched on here today that can reduce costs. You know, we spoke about sending patients home earlier when it’s safe to do so. You know, we send one in 200 knee replacement patients home the same day. In Canada it’s surpassed one in five and getting up towards one in four and they were where we were just 10 years ago.
So that’s one great example. But it also goes to the hospital system as a whole and how it’s planned and managed. It’s not all things that hospitals can do even with the right budgets, support and incentives, you also need to use the purchasing power that the state has to get the best value for money.
And we’ve seen New South Wales is the furthest ahead in Australia here, where their central procurement includes things like all hospital meals and uniforms as well as a lot of equipment. We can use that purchasing power better in other states and small states can join forces with big states to get a better deal.
And there’s also a clinical dimension to this, which is you can consolidate some high-volume surgeries into individual sites where they do a lot of them. And that means you get them done more cheaply. It means the team is more practised at doing them, so you also improve quality and safety. So, it’s a double win for efficiency.
So those are the kind of things we want to see buying in bulk, consolidating activity.
And in the case of Victoria, amalgamating the governance or sort of senior management tier of hospital sites because there are more hospital networks in Victoria than there are in the rest of the country combined.
And that just leads to fragmentation and inefficiency. So, look, those are some of the things about setting the whole system up to succeed, as well as getting the incentives right at the hospital level.
Kat Clay: Liz, one last question for you. What happens if we don’t fix this?
Elizabeth Baldwin: We really don’t have much choice. Hospital spending is already gobbling up a lot of state budgets. It’s already the largest spending item for most state governments. Just based on the trajectory we’re currently on; our population is aging. New treatments are constantly being developed. We’re living longer with more chronic conditions. We estimate that just in the next decade alone, hospital spending per person is going to increase by a third. And those spending pressures are already starting to be felt at the state government budget level. Just this year, the ACT government introduced a new levy on taxpayers to pay for its hospital bailout. Ratings agencies like S&P are warning that this persistent cycle of bailouts and overspending can’t continue or it’ll start to become a concern for state’s credit ratings. So, we think that something really needs to shift here.
And our concern is that if we don’t take the opportunity now to do this in a smart way, to spend smarter and be really targeted about where we’re trying to get the best value out of every dollar, the other path that we might be forced down the track is austerity. We’ve seen in England, the National Health Service was starved of new money for a decade. Its per person funding was flat, and that’s led to serious consequences for the quality of its health system. Waiting times are blowing out, and in fact, it’s the poorest people who have experienced the biggest declines in access to care. It’s also been really detrimental for staff in the NHS. They’re really overworked. It’s really damaging to morale to work in crumbling buildings and not be able to serve the patients that they’re meant to serve. So, we think that it’s really important that we take stock now before we’re in that crisis state, and work to get the best value out of every dollar that we can.
Kat Clay: Thank you so much Peter and Liz If you’d like to read our report, you can read it for free online at grattan.edu.au. And you can also make donations to Grattan on our website as well. We do rely on your kind support because we are a not-for-profit organization and put our work out into the world for free. If you’d like to contact us on social media, find us on all networks at Grattan Institute and please do take care and thanks so much for listening.