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Social Policy Section
Public hospital services in Australia are jointly funded by
the federal and state and territory governments under a national agreement,
complemented by payments from non-government sources such as private health
insurers. State and territory governments manage and operate public hospital
services (a small number are operated by charitable organisations on behalf of
state governments). Services are provided free to public patients, but waiting
lists may apply. Patients can elect to be treated as either a public or private
Until recently, the federal Government provided recurrent funding
for public hospitals as specific purpose payments to the states and territories
under a series of bilateral agreements, which were generally indexed to
population growth and other factors. The signing of the National Health Reform
Agreement (NHRA) in 2011 signalled a shift in how public hospitals were funded
that was based on growth in activity levels, known as activity based
funding (ABF)—‘a way of funding hospitals whereby they get paid for the
number and mix of patients they treat’.
A 2014–15 budget proposal to discard the ABF funding formula
in favour of indexation was abandoned in 2016. The current national agreement
for the funding of hospital services based on ABF principles is due to expire
in mid-2020. A new agreement on hospital funding has been offered by the federal
Government; all but two state governments have signed. This quick guide
provides an historical overview of funding arrangements for public hospitals
and recent developments. It does not address funding for capital and hospital
Prior to 2007
When Medicare was introduced in 1984, the federal government
negotiated bilateral funding agreements with each of the states and territories
for the provision of free public hospital services. This funding was meant to
compensate the states for increased costs and loss of private patient revenue
associated with the introduction of Medicare and free public hospital services.
Prior to 1984, public hospitals were funded mainly through cost-sharing
arrangements between the federal Government and the states and territories,
based on a 50-50 split. Details of these early arrangements are provided in the
Senate Community Affairs Committee’s First
Report: Public Hospital Funding and Options for Reform (2000), from
which much of this section is drawn.
Section 24 of the Health Insurance Act 1973 (now
repealed) allowed for the Commonwealth and the states to make agreements with
respect to ‘public hospital services’ and ‘other health services’, subject to
certain standard ‘heads of agreement’ (listed in Schedule 2A of the Act). These
bilateral agreements were initially known as the Medicare Agreements. Under the
Howard Government these were renamed the Australian Health Care Agreements
(AHCAs). These agreements included a commitment to the so-called ‘Medicare principles’
which, among other matters, guaranteed free public hospital treatment to public
patients. In 1992, the Medicare principles and funding arrangements were enshrined
in the Medicare
Agreements Act 1992 (repealed).
Commonwealth grants to the states and territories for
public hospitals were in the form of specific purpose payments (SPPs). The
Parliamentary Library paper Specific
purpose payments and the Australian federal system, provides an
historical overview. Health SPPs largely comprised a base funding level
adjusted (at various times) for population growth, inflation, ageing, the veteran
population, hospital output costs and private health insurance membership
Changes under the Labor Government
With the expiration of the last AHCA agreement (2003–08), new
federal financial arrangements were introduced. In March 2008, the Council of
Australian Governments (COAG) agreed to implement a new framework for federal
financial relations. These changes were outlined in the 2008–09 Budget and included reducing
the number of SPPs from 90 to just five. These SPPs would cover healthcare,
early childhood development and schools, vocational education and training,
disability services and affordable housing. In November 2008, the Intergovernmental
Agreement on Federal Financial Relations (IGA) was signed.
Healthcare Agreement (NHA) outlined financing for the health sector
(Schedule F of the IGA), and set out the key principles for the provision of a
range of health services. It established national objectives in prevention,
primary and community care; hospitals; aged care; social inclusion and Indigenous
health; sustainability; and the patient experience. Performance indicators and
benchmarks for each reform area were specified. Significantly, following many
years of debate, the NHA committed to the national implementation of ABF in
provide a basis for more efficient use of taxpayer funding of hospitals, and
for increased transparency in the use of those funds’. ABF uses a
nationally consistent approach, where payments are based on the same price for
the same service across hospitals. The NHA also sought to clarify the
respective roles and responsibilities of the different tiers of government, which
had frequently been a source of friction between the Commonwealth and the
states and territories.
The Commonwealth agreed
to provide funding of $60.5 billion over five years to the states and
territories to deliver their health services. This included an additional $4.8
billion in base funding over the forward estimates for public hospitals, and
the introduction of a more generous indexation formula of 7.3
per cent per annum. The NHA was intended to be an interim arrangement until
the new National Health Reform Agreement was agreed. The NHA framework was
reflected in the 2009–10
Budget. Under this framework, the states continued to receive GST revenue.
The IGA established National Partnership Payments (NPPs) to drive
specific initiatives across sectors and improve outcomes. NPPs offered reward
and incentive payments to jurisdictions for the delivery of outcomes in key
areas. Each NPP was underpinned by an agreement (known as a National
Partnership Agreement or NPA). In the health sector, NPPs initially covered Hospitals
and Health Workforce Reform, Preventative Health, Taking Pressure off Public
Hospitals and Indigenous Health. Several
more NPPs were later developed for national priorities such as health
infrastructure, Indigenous health, preventive health, mental health, public
dental services, vaccines and other health services (such as bowel cancer
screening, kids health checks and antimicrobial surveillance).
A National Health and Hospitals
The next major reform was the National
Health and Hospitals Network Agreement (NHHNA) signed on 20 April 2010 by
all heads of government (except Western Australia).The NHHNA committed the Commonwealth
to become the majority funder of public hospital services and the sole funder
of all primary health and aged care services. Specifically, it committed the Commonwealth
to fund 60 per cent of the ‘efficient price’ of hospital services (based on the
cost of the efficient delivery of public hospital services), in addition to a
guarantee of no less than $15.6 billion in top-up funding over the period
2014–15 to 2019–20. Local Hospital Networks (LHNs) (to be established by the
states and territories) would manage hospitals within a defined area, while responsibility
for managing the hospital system as a whole would be retained by state
governments. A new national funding body would be established to distribute
pooled Commonwealth and state and territory contributions to hospitals, based
on ABF arrangements. New primary health care organisations (later named
Medicare Locals) would improve primary care and work with LHNs. The National Health and
Hospitals Network Act 2011 gave legislative basis to these reforms.
National Health Reform Agreement
The NHHNA arrangements were soon superseded due to political
developments. Under the new Labor Prime Minister, Julia Gillard, the
commitment for the Commonwealth to become the majority funder of public
hospital services was modified. Under a Heads
of Agreement on National Health Reform signed at the COAG meeting in
February 2011, the Commonwealth promised to retain its base funding commitment
as agreed; but from July 2014 funding would be limited to 45 per cent of the
efficient growth in hospital services (based on an efficient price), rising to
50 per cent from 1 July 2017. Other elements of the NHHNA, such as the
establishment of LHNs and new funding agencies, were retained.
In August 2011, the National
Health Reform Agreement (NHRA) was signed formalising the Heads of
Agreement and replacing the superseded NHHNA. The NHRA detailed the new framework
for the future delivery of funding for health and aged care services. This included
the establishment of Medicare Locals, as well as new independent bodies to
administer key financial arrangements. The NHRA retained the commitment to
national ABF arrangements for public hospital services.
Schedule B of the NHRA outlined the roles of new statutory
bodies that would oversee particular aspects of the agreement:
- the Independent Hospital Pricing Authority (IHPA) to set a
national efficient price (NEP) for hospital services
- the National Health Funding Pool, and the National Health Funding
Body (NHFB) to administer pooled funding
the National Health Performance Authority to measure health
the Australian Commission on Safety and Quality in Health Care to
lead and coordinate improvements in safety and quality.
Clause A5 of the NHRA reiterated a Commonwealth guarantee to
provide an additional $16.4 billion for hospitals between 2014–15 and 2019–20.
Health Reform Act 2011 enacted these reforms, replacing the superseded National
Health and Hospitals Network Act 2011. The first two years of the NHRA were
transitional to allow for the establishment of new agencies.
Changes under the Coalition Government
Budget included an announcement that the ABF formula agreed to under the
NHRA would be abolished from 2017. From July 2017, Commonwealth contributions
would be based on a new formula, comprising population growth and changes to
the consumer price index (CPI). In addition, from 2014–15, the funding
guarantees agreed to under the NHRA ceased. During the period July 2014 to
July 2017, funding for public hospitals would be calculated using the ABF model
agreed to in the NHRA—that is, committing to funding 45 per cent in ‘efficient
growth’. From July 2017, however, the Commonwealth’s contribution would use the
This revised approach to hospital funding was expected to
generate considerable savings, which the Parliamentary
Budget Office estimated would total $56.2 billion to 2024–25.
These proposed reforms proved to be controversial, with
key stakeholders—including state governments—voicing their opposition. A Senate
Select Committee was established to examine the impact of these changes.
Shortly after becoming Prime Minister, Malcom
Turnbull indicated that the Government was reconsidering public hospital
funding arrangements, including retaining ABF and the NEP from 2017 onwards.
Funding for 2017–20
At the April 2016 COAG meeting, the Commonwealth and the states
and territories signed a Heads
of Agreement specifying that 2017–20 funding for public hospitals would
retain ABF principles and the NEP—thus confirming the reversal of the
controversial 2014–15 Budget decision to apply a new indexation formula. The
Commonwealth agreed to fund 45 per cent of the efficient growth in activity
levels over the three years (an estimated additional $2.9 billion in funding
for public hospital services), with growth in funding to be capped at 6.5 per
cent a year according to the Communiqué.
to the NHRA, signed in March 2017, formalised these revised arrangements. It
committed all parties to implement reforms designed to improve health outcomes
for patients and decrease avoidable public hospital admissions; and to support
trialling new funding models, such as Health
Proposed funding 2020–25
The current public hospital agreement is due to expire in
mid-2020. In February 2018 at COAG, the Commonwealth presented an offer of $130.2
billion from 2020–21 to June 2025 for public hospitals. Consistent with current
arrangements, the Commonwealth is offering to fund 45 per cent of the efficient
growth of activity based services, capped at 6.5 per cent per annum. So far,
six states have signed a Heads
of Agreement with only Victoria
and Queensland yet to agree. Key features of the agreement include:
- implementing ‘new long-term system wide reforms’ (including ‘paying
for value’, ‘joint planning’, ‘nationally cohesive technology assessment’, ‘health
literacy empowerment’, ’ prevention and wellbeing’ and ‘enhanced health data’)
enacting My Health Record implementation and the Australian
Health Performance Framework.
The federal government is providing $100 million towards a
Health Innovation Fund to support trials of health prevention projects. States
and territories that sign up to the Heads of Agreement will obtain early access
to 50 per cent of the Fund.
In addition, all parties agreed ‘to ensure the information
and process for patients electing to use private health insurance in public
hospital emergency departments is appropriate, robust and best supports
consumer choice’. This followed on from concerns that increasing numbers of
private patients in public hospitals were leading to longer wait times for
public patients. The IHPA, in its Private
Patient Public Hospital Service Utilisation: Final report (March 2017),
found that the number of public hospital separations funded by private health
insurers had increased substantially over the period from 2008–09 to 2014–15. It
suggested that agreements between LHNs and state and territory governments
appeared to create incentives to increase the number of privately insured
patients because this increased revenues.
A 2017 report from the Australian Institute of Health and
Welfare (AIHW), Private
health insurance use in Australian hospitals, 2006–07 to 2015–16,
confirmed that public hospital admissions funded by private health insurers had
increased, from 8.2 per cent of hospitalisations in 2006–07 to 13.9 per cent
in 2015–16. The AIHW report also found that public patients experienced longer median
wait times for elective surgery than private patients in public hospitals.
Minister Greg Hunt expressed concern that these practices may be driving up
private health insurance premiums and increasing public hospital waiting lists.
At the time, the Minister flagged
that the issue would be considered in the context of negotiating the next health
The Heads of Agreement includes a Commonwealth offer to
provide $100 million for a Health Innovation Fund to fund trials that support
health prevention and the better use of health data.
Notably, the Heads of Agreement no longer commits the
parties to the Medicare principles, which have been enshrined in previous
agreements. Instead, the parties are to ‘note’ Medicare principles and agree
‘to examine historic changes to the original Medicare principles and ensure the
final agreement supports access to public hospital services by all patients on
the basis of clinical need’.
While all states are yet to sign the agreement and further negotiations
may become complicated due to looming elections, it would seem that ABF is now
firmly entrenched as the basis for public hospital funding. As the Productivity
Commission found, ‘[the ABF]
has significantly slowed national growth in the average cost of providing
Recent and current funding levels for public hospitals are
shown in a table on the Department of Health’s website.
Activity based funding pricing arrangements
National efficient price
Under ABF arrangements, hospital activities or services are
priced according to their complexity and the resources required. Under current
arrangements, each year the IHPA
determines the NEP
for public hospital services, which covers admitted acute care, admitted
subacute care, non-admitted (that is, outpatient) care and emergency department
care. The NEP forms the basis for the federal government’s NHRA funding for
public hospitals and is based on the average cost of an admitted episode of
care provided in public hospitals in a financial year—known as a National
Weighted Activity Unit (NWAU). The ‘average’ hospital service is worth one
NWAU. More complex, more expensive activities are worth more NWAUs, while simpler,
less expensive activities are worth a fraction of an NWAU. The NEP is adjusted
for special types of care (such as paediatric or intensive care) and for other
factors (such as remoteness or Indigenous status).
Based on the advice of the IHPA each financial year, the federal
Health Minister determines the total amount and the manner in which NHRA
payments are distributed between the states and territories, via legislative
instrument. According to the 2018–19
NEP determination issued in March 2018, the NEP for 2018–19 is $5,012 per NWAU.
The IHPA also determines a ‘National
Efficient Cost’ (NEC) for smaller rural hospitals not deemed suitable for
ABF funding. Instead, these hospitals receive block funding based on the NEC. The
NEC for 2018–19 is $5.171 million, which represents the average operational
cost of a block-funded small rural hospital.
The release of the seventh NEP continues to demonstrate the
impact that ABF is having in reducing the rate of growth in public hospital
costs; since the first NEP in 2011–12, there has been an average growth rate of
1.3 per cent per annum.
A key component of the NHRA is that the Commonwealth and the
states and territories pool funding for public hospitals through the National
Health Funding Pool (the Pool). The Pool is administered by the National Health
Funding Pool Administrator (NHFPA), assisted by the National Health Funding
The Pool comprises eight state and territory bank accounts. Commonwealth
payments into the Pool are made monthly, while state and territory payments are
made either weekly or monthly. The NHFPA administers the funds contributed to
the Pool; and oversees distribution of payments to public hospital networks
(LHNs as described above), third parties on behalf of LHNs, state health
departments and other providers. Payments are not made direct to individual
hospitals. Payments from the pool are known as NHR payments.
Two main types of payments for public hospitals are
distributed from the Pool: ABF payments based on activity levels; and block
funding, which is for smaller regional hospitals (and which also supports
teaching and research). The Pool does not include funds for capital
expenditure. The flow of current NHR payments to and from the Pool is explained
in a graphic from the NHFB, ‘Payment
and funding flows’.
Further, the NHFPA administers:
cross-border funding contributions (when a resident from one
state or territory receives treatment in another state or territory, the
resident’s home state compensates the provider state) and
a public health component paid by the Commonwealth into the Pool
for disbursement to state and territory governments for public health
activities (such as vaccinations).
The NHFPA publishes monthly and annual reports on NHR payments
made by the Commonwealth and state and territory governments to LHNs. These
reports are accessible on the public hospital funding website. Details
of funding for individual hospitals are not included in these reports.
Note that NHR payments to the states and territories are
taken into account by the Commonwealth
Grants Commission when calculating the distribution of GST revenue.
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