Half a cheer for hospital reform

The most telling criticism of the federal government’s public hospital reform plan is that it overpromises and under-delivers. It does not restore genuine community control over local hospitals. It simply rebrands the State health bureaucracies and adds another layer of bureaucracy. 

While the  government has got the practice wrong, it has got some principles of hospital reform right. Public hospitals should be ‘funded nationally, run locally’. Unfortunately, the Rudd plan is not sufficiently national and not genuinely local.

Converting block grants to the states into federally-funded, activity-based payments is an overdue step in the right direction.

But this does not go far enough. The promise to fund 60% of the ‘efficient’ cost of public hospital care does not address the counter-productive culture of command-and control by State-based hospital bureaucracies. They display all features of the failed Soviet system: bureaucratic excess, demotivation of frontline staff, crippled innovation, and ignorance of real costs.

 The great lesson of the 20th century is that central-plan bureaucracies defeat any attempt at reform and streamlining. The only way is to replace them with independent, competing producers. This can of course be made compatible with public access for all by funding from taxes

The Rudd plan falls far short of this. Area health bureaucrats are to be seconded to the ‘local hospital networks’. These are to be established and controlled by State governments. Each local network will have its own board of governance, but their independence and authority will be superficial. The fine print says that boards are to consist of ‘local’ bureaucrats rather than rank-and-file community representatives. Because the States will still contribute 40% of the funding, network boards and bureaucrats will still answer to the area health services that remain in overall operational control of the system.

Rather than indulge in another round of cost shifting and administrative window-dressing, federal and state leaders need to accept the current system is fundamentally flawed and unsustainable. Establishing clear and exclusive responsibilities for the Commonwealth is the only way to terminate the old blame game. Genuine reform will require the Commonwealth to finance all public hospital care on an activity-basis, of course within some overall budget caps.

 In return for getting hospitals off their budgets, the States should replace area health services by autonomous community-controlled local boards, which are genuinely responsible for managing hospitals. Culling the huge State health bureaucracies will be as costly and difficult as it was to sack the strongmen in Australian ports. Any federal government that means business will have to cover the redundancy costs that the States will incur.

Each public hospital should be self-governing. The local board, in cooperation with the CEO, should have full operational control over its facilities and complete responsibility for planning and budget management. This will free local hospitals from the stifling sameness of bureaucratic interference and mobilise the power of grass-roots problem solvers.

The key to success would be that boards are held financially accountable for performance, as well as directly responsible to local communities. 

Because they have to earn revenue by treating patients to cover their costs, hospitals will compete by offering services that their clients want (product innovation) and will search for ways to increase productivity (process innovation). Hospital managers will no longer have an incentive to close beds and push patients to other facilities. The most productive hospitals will be rewarded for clearing waiting lists. Those communities that allow local boards to mismanage will be faced with the danger of losing their hospital, and competent boards will be able to offer better services.

Canberra can only fund, but never run hospitals around the country.  Kevin Rudd and Tony Abbot accept the public’s overwhelming demand for local ownership of ‘their’ hospitals. The PM and Opposition leader have obviously also realised that the centralised command-and-control way of providing welfare services has failed in virtually all welfare states. Greater community engagement can help to overcome these failures.

Private profit-driven production and coordination in markets and centrally-planned allocation of government-controlled resources are not the only ways to supply goods and services. Important amenities have always been provided to the public by clubs and small, not-for-profit community organisations. It is time to modernise the traditional community approach that can draw on local loyalties and resources, to cope with the huge challenge of giving Australians world-class health care.

Wolfgang Kasper is a Professor Emeritus in economics at the University of New South Wales. Dr Jeremy Sammut is a Research Fellow at The Centre for Independent Studies.