Don’t hike the GST, reform hospital spending instead

Rather than raise taxes to prop up Medicare, the Commonwealth should revise the way it funds the ‘free’ public hospital system and encourage the states to address the inefficient way these services are run.

The perpetual blame game over health funding is a distraction from what should be the main game: a micro-economic reform agenda that will control the cost and improve the productivity of public hospitals.

Public hospitals, like Medicare as a whole, face a sustainability crisis. However, the demand and cost pressures associated with an ageing and growing population, combined with technological advances, are compounded by public hospitals’ seemingly endless capacity to absorb public funding inputs without delivering a proportional increase in outputs.

The 2013 Queensland Commission of Audit found that while expenditure on public hospitals in the state had increased by 43% over the previous five years, activity had increased by less than half — just 17%. This is consistent with a 2013 NSW Auditor-General’s report that found thousands more patients could be operated on if public hospitals were managed more efficiently.

At the heart of the inefficiencies are the state-wide industrial agreements negotiated between state governments and health unions, which set the terms and conditions of employment for doctors, nurses and allied health professionals. These highly centralised and inflexible ‘sweetheart’ deals are a major barrier to productivity, as they entrench high cost and inefficient work practices. These include rules that prevent nurses’ from task substituting for doctors, and strict nurse-to-patient ratios (which nurse unions want included in legislation not just in awards.) These workplace rigidities prevent innovation that can deliver services more cost-effectively.

These problems are compounded by the way public hospitals are run under a command-and-control regime, and more or less as branch offices of state health departments. This means financial responsibility for hospital budgets is ultimately held by state governments, and lack of financial accountability means frontline hospital managers lack proper incentives for good management to deliver services cost-effectively.

Health consumes one-quarter of the state government’s recurrent expenditure, and public hospitals account for about two-thirds of total recurrent health spending. The NSW Auditor-General famously found that if spending on health continues to grow at current rates, health will consume the entire state budget in 20 years’ time.

This implies that regardless of the tax hike band-aids being mooted, there is no alternative to figuring out how to bend the projected cost curve down to increase the amount of services delivered for the funding available and reduce the quantity of taxpayer’s money consumed by public hospitals.

The prospect of bankruptcy ought to be sufficient motivation for state governments to undertake overdue reform.  However, changes to federal financial relations could facilitate this process by spurring state governments into action.

Ending all specific purpose payments, and giving the states one pot of money to fund all responsibilities, would encourage state governments to make more rational decisions about how best to use scarce public resources amid competing priorities — including the operation of public hospitals.

Conditional grants have allowed the states to hide behind the excuse of inadequate federal health funding, instead of tackling the structural problems in their hospital systems.

Instead, state governments should implement a three-stage reform process designed to re-orientate the system around more market-based arrangements.

Instead of state health departments acting as both funder and provider of hospital services, they should be transformed into purchasers of hospital care.

Creating a purchaser-provider split would require the corporatisation of public hospitals, whereby managerial and financial responsibility would be devolved to an independent board of management with full control over all operational and budgetary matters. This would include full control over the employment terms and conditions of their workforces, which is essential to permit innovation to drive efficiency and productivity improvements.

Selective privatisation of public hospitals, via Public Private Partnerships, would inject competitive pressures into the mix. Allowing state health departments to purchase services from better performing private operators would force corporatised services to lift their games and introduce the more efficient and business-like practices found in the private sector.

For too long, a political quarantine has protected public hospitals from the kind of structural reforms commonplace for decades in other parts of the public sector. Lack of political will to take on the vested interests of public sector health workers — who have long benefited from government employment on favourable terms — is why public hospitals remain the number one public administration and financial challenge facing state governments.

Hiking the GST is no substitute for political leadership that will pursue the public interest in containing health spending and maximising the return for taxpayer’s on health spending.