Why the Budget’s health reforms are a breach of faith

by Stephen Duckett

Published by The Australian Financial Review, 21 May 2014

The 2014 budget transforms Commonwealth–state relations in health. It is a setback for good policy and a major breach of faith. It will make it harder for the Commonwealth and states to work together for decades.

The government has unilaterally cut $1 billion a year from state budgets from 2017. It has torn up the 2011 National Health Reform Agreement that set a new framework for Commonwealth–state funding, under which the Commonwealth would pay for some growth in hospital services, but only based on an efficient cost set by an independent body. That was good for two reasons. It rewarded efficiency and made the Commonwealth’s contribution transparent and fair.

Second, it helped to align the interests of the Commonwealth and the states.

By sharing the costs of growth, the Commonwealth was exposed, for the first time in 40 years, to the challenges states face in managing their hospital systems. Paying part of the hospital bill was a good reason to keep hospital costs in check. The Commonwealth could do this by making primary care work better. That’s the part of the system, largely controlled by the Commonwealth, that keeps people healthy enough to stay out of hospital.

That’s all gone now. Instead of thinking about how primary care and hospitals interact, the Commonwealth is simply cutting hospital funding while charging people more to visit the GP. From 2017 it will only increase funding in line with inflation and population growth. This is a lurch in the wrong direction.

It won’t reward states for making their hospital systems more efficient. It will decouple funding from the services that hospitals deliver, and return it to an arbitrary formula.

Budget destroys trust, incentives

This approach to the Federation is the worst of all possible worlds. It doesn’t hand health to the states, it simply shifts costs onto them without shifting the revenue to go with them. It’s not a Commonwealth takeover either. It makes the only alternative – cooperation – so much harder. For the States and the Commonwealth to work together they need shared incentives and some basic level of trust. The Budget demolishes both.

Cooperation is a word that seems to have vanished from the Canberra lexicon.

Health bureaucrats are often there for the long haul and relationships build up over decades. Budget 2014 destroys much of that social capital.

As a result, we’ll probably go back to the bad old ways of blame shifting (‘the Commonwealth is not giving us enough money for growth’) and cost-shifting. We’ll all be the poorer for that.

The budget could turn sour Commonwealth-state relations. In the new environment, agreements are there to be broken. This is no way to run a business, let alone a country. Signed agreements should be adhered to.

If you don’t like them, you should negotiate a new deal, not just tear them up and throw the pieces into the faces of the other signatories. Trust has now gone out the window, jettisoned in the name of a “budget emergency”.

The long-term consequences of this major breach cannot be overestimated. A quick budget fix, shifting the burden of finding savings to the states, will have long-term consequences for the good management of the health system.

Yet there’s one consolation prize, for the states there’s no need to spend so much money travelling to Canberra for ‘negotiations’. Agreements can obviously be ripped up before the ink is dry. Sometimes deals ain’t deals.