HEALTH ECONOMICSHealth Econ. 19: 1259–1263 (2010)Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/hec.1652

EDITORIAL

HEALTH-CARE REFORM IN AUSTRALIA: ADVANCINGOR SIDE-STEPPING?

JANE HALL�

Centre for Health Economics Research and Evaluation, Faculty of Business, University of Technology, Sydney, NSW, Australia

The Australian Prime Minister and State premiers, after an intense period of negotiation, announced‘the most significant reform to Australia’s health and hospitals system since the introduction ofMedicare, and one of the largest reforms to service delivery in the history of the Federation’ (Council ofAustralian Governments, 2010a).

The Australian health-care system has remained structurally stable since the introduction of nationaltax financed universal health care in 1984, with subsequent governments mostly preferring incrementalchange (Hall, 1999). The most interesting feature of Australian health care to those outside Australiahas been the public subsidy of private health insurance, despite universal free access to public hospitals,universal subsidies for medical care and most prescription pharmaceuticals. Within Australia, the roleof private health insurance and the cost of its subsidy have been the dominant national issue, whileother components of the system have been unchanged. This new agreement is strongly focussed onpublic hospitals. Whether this will indeed prove the start of significant reform or merely a side-step is yetto be determined.

BACKGROUND: AUSTRALIAN GOVERNMENTS AND PUBLIC HOSPITALS

Although Australia appears to have a national health system, this is not the case for all aspects of healthservice delivery. Australia is a federation, comprising six States and two self-governing territories, witha national (hereafter Australian or Federal) Government. Currently, the Australian Governmentsubsidises medical services and pharmaceuticals for all Australians. But public hospitals are owned andoperated by State and Territory governments. As a result, hospital governance structure varies fromstate-to-state. For example, Victoria, with a population of 5.5m, has 18 statutory authorities responsiblefor public hospitals, each with its own Board of Directors appointed by the State Health Minister; whileNSW, population just over 7m, has 8 Area Health Service Boards, organised regionally to encompassall State funded services. Other States, with much smaller population bases, have some form of regionalstructure, principally organised around hospitals.

The Australian Government has greater tax powers, and hence a stronger revenue base, than Statesand Territories (hereafter States can be taken to include Territories). States rely on financial transfersfrom the Australian Government for much of their revenue. Existing arrangements provide joint

*Correspondence to: Centre for Health Economics Research and Evaluation, Faculty of Business, University of Technology,Sydney, PO Box 123, Broadway, NSW 2007, Australia; Level 4, 645 Harris Street, Ultimo, NSW 2007, Australia. E-mail:Jane.Hall@chere.uts.edu.au

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funding of public hospitals under cost sharing agreements negotiated five yearly by the Australian andState governments. In the period since the implementation of Medicare, the Australian governmentshare of public hospital funding has been around 50%, leading some commentators to suggest thisshould be the benchmark (Deeble, 2008). However, it has fluctuated, depending on the political cycle ofelections, and Health Care Agreements negotiation cycle (Australian Institute of Health and Welfare,2008). Currently, it is closer to 40% and has been as low as 38% in 2007 (Australian Institute of Healthand Welfare, 2008). This funding is provided to State treasuries, which then determine how to channel itto hospitals and other services. Some States use case-mix as a funding mechanism though none appearto use it as the only basis for allocating funds to hospitals. All use case-mix in some way to trackperformance.

Public hospitals, even in those States with some form of case-mix funding, are subject to budget caps.Public hospitals are also a crucial pressure point in the system, as they are more likely to treat those withfewer social and economic resources, for whom inadequate community care and aged care places lead todifficulties in effecting discharges, creating longer lengths of stay. Concurrently, there has been increasingdemand for Emergency Departments associated with declining working hours in general practice. Publicconcern about the state of public hospitals is focussed on elective surgery waiting times and cancellations,demand in emergency departments, and safety and quality. The States have blamed the FederalGovernment for insufficient funding to match the growing population needs, and in turn, the FederalGovernment has blamed poor management at the State level. State-funded services, under tight budgetconstraints, shifted costs to Federally funded services or programmes, even though patients’ wereinconvenienced and total costs may have been higher. Many commentators wished that just one level ofgovernment managed all health responsibilities (National Health and Hospitals Reform Commission, 2009).

THE NATIONAL HEALTH AND HOSPITALS NETWORK

The role and cost of private health insurance was the dominant national health policy issue until 2007.By the national election of that year, the issue was public hospitals. In particular, how they should begoverned, how they should be financed, and which level of government should take responsibility?The new Prime Minister took office with a commitment to ‘end the blame game’ between the Australianand State governments, and promised to develop a national reform plan ‘designed to eliminateduplication and overlap between the States and the Commonwealth’ (ABC News, 2007). The processhas involved wide consultation, a great deal of public debate, intense political negotiation, and finallyoffers additional funding to the States. The resultant plan has been agreed by all governments exceptthat of Western Australia (another consequence of a federation; see Deeble, 2008 for further discussionof the Agreements process).

The plan provides for a National Health and Hospitals Network, of which the centrepiece is thecreation of Local Area Hospital Networks. A Local Hospital Network (LHN) will be a geographicgrouping of hospitals around a principal referral (tertiary) hospital, although some special services maybe organised on a State-wide basis (possibilities are specialist children’s hospitals and services currentlydetermined as state wide such as blood transfusion). Current planning provides for approximately 50across the country, suggesting a population base of 400–500 000. These will be separate statutoryauthorities under State legislation, each with its own Council, appointed by the State Minister, andcomprising health management, business management and financial expertise, clinical expertise fromoutside the local network, representatives of universities, clinical schools, and research centres. Someindividuals will be able to represent more than one interest. Interestingly, local community and clinicianrepresentatives are not nominated as Council members although Councils are also required toincorporate their views. Thus, the change imposes a more nationally consistent governance structure,and will require some transformation of existing State regional structures.

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The State health authorities will be the managers and planners of the system. They have theresponsibility for determining the local area boundaries and establishing the Networks and theirCouncils. They will also be owners of public hospital assets, determine capital investments, make policy,and set service agreements with each LHN on volume, mix, and quality of services. States are also leftwith the responsibility of negotiating industrial relations, determining remuneration and conditions, sowhile there may be some competition across LHNs, it will not translate into competitive bidding forstaff. In terms of structure and function, this does not appear to be very different to the currentstructure, particularly as the Federal Government has explicitly agreed to take no part in thesefunctions. Thus, there has been no take over of public hospitals.

FUNDING PUBLIC HOSPITALS

However, there is a significant change in financing arrangements. The Federal contribution to fundingwill be 60% of ‘efficient’ public hospital costs including research, training, and capital (that additionalcontribution is funded by a change in tax-sharing arrangements). The ‘efficient price’ will be the case-mix weighted average cost, determined by a new independent pricing authority. These funds will flow toanother new set of agencies, State Health Funding Authorities, and will be distributed to the LHNs on acase-mix basis, other than for smaller regional areas or areas of special need where some form of blockfunding will be used. As a result, the split between Commonwealth and States of hospital funding willhave a predetermined basis, and thus remove the five yearly tussle and rounds of offer, refusal andcounter-offer, and political stand-off right up to the eleventh hour that characterise the currentAustralian Healthcare Agreements (Deeble, 2008). The clearer basis is a plus; at least to the extent thatit is indeed clear. At this stage, what is not clear is whether the case-mix payment will be on agreedpredicted volumes, or whether claimed on actual volumes retrospectively. The ‘efficient’ case-mix pricewill be determined by an independent arbiter, but exactly what will be taken into account in determiningefficiency is still unknown. While substantial work has been done on acute care episodes, the weights forsub-acute, emergency, and rehabilitation have had less extensive research.

The States will fund the additional costs of their public hospitals, i.e. the additional 40% of theefficient price plus any other costs. Their contribution will also be distributed through the State FundingAuthority, but the allocation basis for the State contribution will be determined by the State. It seemsthat this will be a capped budget, thereby ameliorating one of the undesirable incentives of case-mixfunding as initially envisaged in the Prime Minister’s plan (Australian Government, 2010). One of thedesired incentives under case-mix funding is to shift some of the funding risk to providers, by enabling‘efficient’ providers to keep at least some of any savings made on the case-mix price. LHNs ability tohold funds earned in excess of their costs will be determined by the States, ‘in accordance with Statepolicy and practice’, again a variation from the Prime Minister’s plan.

Although the States have retained responsibilities for policy and planning, and the FederalGovernment has accepted the role of principal funder, this has not left the central government withoutany policy leverage. In addition to case-mix based funding, the Federal Government has established themeans by which LHNs can be paid for performance in meeting specified targets, initially in emergencycare and elective surgery. There will be a new National Performance Authority, which will report on theperformance of every LHN, the hospitals within it, and every private hospital. Alongside this, there willbe expanded roles for existing bodies around safety and quality and performance monitoring.

Primary care in Australia is predominantly fee for service, in private general practice. Over the last20 years, Divisions of General Practice have been established and funded by the Federal Government tobring independent GPs into a network both to educate and inform, encourage new initiatives (forexample, support for practice IT, development of practice managers), and provide a means ofcommunication between general practice and other health agencies. The Divisions are also required to

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address prevention and early intervention, better co-ordination of care, and better chronic diseasemanagement. General Practice fee for service funding does not flow through Divisions. The new Planwill see these replaced by Primary Health Care Organisations (PHCOs), although it is not clear howmuch broader their scope would be than current Divisions. PHCOs will cover as far as possible the samegeographic regions as the LHNs and with some overlapping Board members but funded under a servicecontract by the Federal Government. The PCOs will have responsibilities for facilitating access to alliedhealth care, identifying underserved groups in the community particularly those with chronic disease,and ensuring ease of transition between hospital and community. A further responsibility is populationhealth and prevention, to be implemented in co-operation with the new National Preventive HealthAgency. PHCO performance will also be publicly reported by the new Health Perfomance Agency.Although LHNs are creatures of the States, and PHCOs creatures of the Federal Government, therewill be a ‘formal engagement protocol’ negotiated between the PCO and its corresponding LHN.

OUTSTANDING ISSUES

There are a number of issues that the reform has failed to address. Incentives for individual providers,whether in hospitals, or in community care, remain unchanged. Better co-ordination across hospitaland community care relies on the co-operative agreements between the LHNs and the PHCOs.The incentives under case-mix funding encourage increasing volume and decreasing lengths of stay,thus shifting some costs to community services, and shifting complex cases to other providers. Therelationship between PHCOs and individual providers remains unclear. Funding streams for hospitals,out of hospital medical services, and other community services have remained as separate. There hasbeen no attempt to include private hospitals (or private health insurance) in the new arrangements.No attention has been paid to developing a more national approach to the assessment anddissemination of medical technologies, particularly in public hospitals. Yet, the AustralianGovernment’s review of Health Technology Assessment was released just days before the PrimeMinister’s announcement on public hospitals (Australian Department of Health and Ageing, 2009). Thenew structure can also be criticised for simply rearranging current hospital structures (new regions)while leaving the States predominantly in charge. The explicit commitment to ‘no new bureaucrats’ alsosuggests this is rearranging the current incumbents.

On the other hand, the plan is quite clear that this is not the end of the reform process. It explicitly statesthat this is a plan for the foundations of Australia’s future health system. From this perspective, the mostinteresting aspect of these proposals is the clear change in language, to that of funder/purchaser/providersplit. The Federal Government has accepted an ongoing role as the principal funder of the health system,and it is setting up the structure to use funding to leverage change through performance monitoring andincentive payments. Currently, the States are being asked to transform their role from funders andmanagers of hospitals to focus on purchasing and overall planning of the hospital system. The PHCOsseem to be somewhat isolated from the rest of the system. However, the Agreement also specificallymentions a potential fund holding role for PHCOs, ‘in areas of market failure and where patient needs arenot being met’. Once these new agencies are functioning, they could provide a basis for the purchasing roleto shift to the regional level, with a greater pooling of funds and budget holding. The rhetoric around morefocus on chronic disease management is reinforced, in the one instance of diabetes, with changed fundingarrangements. Diabetic patients will be given the option of enrolling with a GP and the practice will bepaid on a capitation basis with additional performance payments for achieving set benchmarks. This couldprove to be a model for the development of new payment methods in primary care.

There has been no consideration of how private hospitals, which are increasing in size and thecomplexity of case-mix, will fit into the new arrangements. The contentious private health insurancerebate has been excluded from consideration as part of these arrangements, although it is set to be drawn

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into the debate about implementation in an interesting way. The Government has proposed part fundingof the new package by imposing a means test on the rebate, a move so far opposed by the Opposition.

CONCLUSION AND PROSPECTS

The stated objective of the Network plan is to improve health outcomes and the sustainability of theAustralian health system. Contemporary health reform in other parts of the world has focussed onincentives, to manage both allocative and technical efficiency, whether through competitive insurance orsome form of funds pooling and budget holding. This also requires changing provider behaviour.The impact of better information, such as clinical guidelines, has been limited, and reform efforts havemoved to the use of financial incentives to reinforce change, generally known as pay for performance inthe US, and commissioning and outcomes payment in the UK. In both the UK and the US, there is astrong emphasis on primary care as the focus of reform. Against this framework, the Australian reformwith its emphasis on public hospitals and activity-based funding seems overly narrow, with littleimmediate prospect of better outcomes. There has been no consideration of the role of the privatehospital sector, or the role of private insurance. No attention has been paid to incentives. There is noattempt to develop more flexible funding across service delivery pathways.

The problem though with all reform is not just where do we want to go, but how do we get there fromhere. Perhaps more importantly, in considering prospects for the reform plan, is its expressed purpose toestablish the foundations of Australia’s future health system (emphasis added) (Council of AustralianGovernments, 2010b).

There are some interesting hints: the move to identify the functions of purchasing separately fromprovision; the development of a funding role, with a commitment to monitoring and performancemeasurement; the establishment of Primary Care Organisations with a population focus andresponsibility that are broader than medical practice; the small but significant move to capitationand performance funding in chronic care. An alternative interpretation is that, given the real problemsand high level of public concern, public hospitals had to be reformed first to clear the way for morefundamental reform. Whether the Health and Hospitals Network can achieve its stated objectives willdepend on whether it does indeed provide a basis for advancing reform or merely a side-stepping of thepersistent and familiar challenges.

REFERENCES

Australian Department of Health and Ageing. 2009. Review of Health Technology Assessment in Australia.Commonwealth of Australia: Canberra.

Australian Government. 2010. A National Health and Hospitals Network for Australia’s Future. Commonwealth ofAustralia: Canberra.

Australian Institute of Health and Welfare. 2008. Australia’s Health 2008: The Eleventh Biennial Health Report ofthe Australian Institute of Health and Welfare. Australian Institute of Health and Welfare: Canberra.

Council of Australian Governments. Meeting Communique, 2010a. (Available from: http://www.coag.gov.au/coag_meeting_outcomes/2010-04-19/index.cfm?CFID=94156&CFTOKEN=19291146.)

Council of Australian Governments. 2010b. The National Health and Hospitals Network Agreement. Council ofAustralian Governments: Canberra.

Deeble JS. 2008. Medicare: where have we been? Where are we going? Australian and New Zealand Journal of PublicHealth 23: 1–7.

Hall J. 1999. Incremental change in the Australian health care system. Health Affairs 18: 95–110.National Health and Hospitals Reform Commission. 2009. A Healthier Future for all Australians: Interim Report

December 2008. Commonwealth of Australia: Canberra.

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