At the urging of the premiers, Prime Minister Anthony Albanese on Friday agreed to extend current public hospital funding until the end of the year.

The federal government will keep paying for 50% of new costs, up from the usual 45% in pre-pandemic times. The limit on how much costs can go up each year has also been suspended. The extension will cost A$760 million.

The premiers have long argued for a permanent 50:50 share of new public hospital costs. They have pointed to growing demand for hospital care, new costs from the pandemic, and the fact that states only get about one third of the nation’s taxes.

The decision kicks the can down the road. In the next few months, the prime minister and premiers will need to forge a new deal for health reform that breaks a long-standing stalemate.

New funding should reshape the system

The states need help to meet rising costs, but this shouldn’t just mean shifting more of the financial burden onto the federal government while ignoring the underlying causes.

Instead, any further extension of funding should reshape the healthcare system, shifting care out of hospitals and keeping people well so they don’t need hospital care in the first place.

Activity-based funding for public hospitals was introduced nation-wide a decade ago. It funds hospitals based on the number and mix of patients they treat, using the average cost of care. That gives hospitals an incentive to bring their costs down, and it has worked well.

But demand for care is rising as the population grows bigger, older and sicker. That means new funding must help keep people out of hospital, not just tamp down hospital costs once they get in the door.

We need to shift care away from hospitals

The quickest way to do this is to move care, providing it at home, and virtually, when it is safe to do so, in a hospital-in-the-home model.

Evidence shows there’s no place like home when it comes to hospital care: patients prefer it, it improves outcomes, frees up beds and slashes brick-and-mortar spending.

Other countries and some states in Australia are expanding in-home care. The federal government should push this further by tying a significant share of new funding to these models.

Knee replacements are a good example. In other countries, patients increasingly have a one-day hospital stay for their surgery, with preparation and recovery supported at home. The results are much better than staying in hospital for multiple days, which remains the standard in Australia.

Some emergency department care can also be moved out of hospitals. The Albanese government’s promised investment in urgent care centres is a welcome step in this direction. Once these urgent care centres are established, new funding for growing hospital demand could be used to refine the model and set up more clinics.

We need to keep people healthy

The harder way to keep people out of hospital is to keep them healthy. New hospital funding can help here too, by paying for hospital staff to spend more time supporting GP clinics.

Waiting times to see a public hospital specialist were long before the pandemic and have blown out since. Many GP referrals to specialists, and many emergency departments visits, could be avoided by hospital specialists advising GPs, helping them to keep patients well.

These changes won’t help the bottom line immediately, but ultimately, freeing up hospital beds and better management of chronic disease will cut costs, waiting times and pressure on the healthcare workforce. More importantly, it will mean a healthier population.

The clock is ticking on broader reform

Public hospital funding is just one piece of the health reform puzzle that the Commonwealth and states will have to solve together under a new health reform agreement.

Equity remains a burning problem, with big gaps in care access and outcomes for people who are poorer, live in rural areas, or for Aboriginal and Torres Strait Islander people. Closing these gaps – and explicit funding and accountability for them – should be a key focus.

Solving health worker shortages will take a shared plan that brings together training places, clinical placements, migration and new workforce models.

Since preventing disease is a shared responsibility, all governments should agree how they will align their work with Labor’s proposed centre for disease control.

Perhaps most importantly, the new agreement should be clear on the overarching goals of the health system and how we will measure progress and value as a nation.

Striking a new funding and reform deal by the end of the year is a big challenge, but these reforms are long overdue, so a sense of urgency is welcome.

Too much of the federal-state healthcare debate is about how much each side should spend. It would be a wasted opportunity if our political leaders came back again in six months without a long-term plan about how to fund and improve the system.

The Conversation

Peter Breadon

Health Program Director
Peter Breadon is the Health Program Director at Grattan Institute. He has worked in a wide range of senior policy and operational roles in government, most recently as Deputy Secretary of Reform and Planning at the Victorian Department of Health.

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