Hospital funding

Budget Review 2016–17 Index

Amanda Biggs

The 2016–17 Budget re-affirms commitments for public hospital and public health funding made by the Commonwealth at the Council of Australian Governments (COAG) meeting on 1 April 2016 and contained in the Heads of Agreement (the Agreement).[1] The Budget provides up to $2.9 billion over three years in additional hospital funding to the states and territories commencing in 2017–18.[2] The Agreement committed the Commonwealth to meet 45 per cent of the efficient growth[3] in the cost of hospital services for the period 2017–2020 (capped at 6.5 per cent growth in Commonwealth funding per annum) and retained activity based funding (ABF) and the National Efficient Price (NEP) as the basis for hospital funding for this period.

The Budget indicates that the Commonwealth’s contribution to public hospitals will be $17.9 billion in 2016–17, rising to $21.1 billion by 2019–20.[4]

ABF is a key component of the National Health Reform Agreement (NHRA) signed in 2011.[5] ABF applies a funding methodology based on the level of hospital activity and the complexity of cases (case-mix) using the NEP to calculate the cost of these. Since 2014 most public hospitals have been funded using ABF although some smaller or regional hospitals have continued to receive block grant funding. In the 2014–15 Budget it was announced that the ABF methodology would be abolished from 2017 onwards and replaced with a formula using population growth and movements in the Consumer Price Index (CPI).[6] The Agreement has effectively reversed this earlier budget decision. The Commonwealth has also agreed to meet 45 per cent of the efficient growth in block grant funding for smaller or regional hospitals. Payments for public health activities for the period will be consistent with the process as outlined in the NHRA. The Agreement will be the basis for an addendum to the NHRA to be negotiated with the states and territories before commencement on 1 July 2017.

This NHRA addendum anticipates the development of a longer-term public hospital funding agreement to commence from 1 July 2020. This longer-term agreement will be developed by the Commonwealth and all jurisdictions and be considered by COAG before September 2018.

The abolition of some key agencies supporting ABF that was announced in the Mid Year Economic and Fiscal Outlook (MYEFO) 2015–16, will not proceed. [7] The National Health Funding Body (NHFB) and the Administrator of the National Health Funding Pool (NHFP), which administers and makes payments from the NHFP, will receive $8.5 million over three years from 2017–18 to continue operating.[8] The operational functions of the Independent Hospital Pricing Authority (IHPA)—an independent agency which determines the NEP and resolves disputes over cost-shifting and cross-border issues—will be transferred to the Department of Health from 1 July 2016.[9]

The Agreement also committed all parties to begin to implement a range of reforms designed to improve health outcomes for patients and decrease potentially avoidable demand for public hospital services. This includes initiatives to support coordinated care and flexible funding models for patients with complex and chronic conditions, including implementation of a pilot of Health Care Homes (HCH) in selected Primary Health Networks (PHN).[10]


The COAG announcement followed a concerted campaign by the states and territories to oppose the 2014–15 budget changes, supported by the Australian Medical Association (AMA), the Australian Healthcare and Hospitals Association (AHHA), consumer health groups and other stakeholders.

There was a broadly positive response when the COAG Agreement was announced, although some state governments argued that the amount of funding still fell short of what was needed. The Queensland Government described the funding as a ‘small first step in addressing the funding gap created by the Federal Government’s 2014–15 Budget’.[11] The AMA went further, stating that ‘the COAG agreement is an inadequate short-term public hospital funding down-payment to appease desperate States and Territories ahead of the Federal election’ which ‘will not be sufficient to meet current and future demand’.[12] The AHHA described the Agreement as a ‘partial turnaround from the $57 billion cuts to health funding imposed in the 2014 Budget’, and strongly welcomed the continuing commitment to ABF.[13]

The initial response to the Budget announcement has been similar, with both the AMA and AHHA welcoming the confirmation of hospital funding, although both expressed the view that it remained insufficient. The AMA characterised the funding as a ‘down-payment only’, while the AHHA argued ‘it returns less than half of the expected funding that was removed’.[14] At this stage, the Library is not aware of any comments made by state and territory governments. However, the transfer of the IHPA’s functions to the Department of Health may raise questions over its capacity to remain independent.

[1].          Council of Australian Governments (COAG), Heads of Agreement between the Commonwealth and the States and Territories on Public Hospital Funding, 1 April 2016.

[2].          Australian Government, Budget measures: budget paper no. 2: 2016–17, p. 117.

[3].          Efficient growth is explained in the National Health Reform Agreement at clause A3. Efficient growth consists of the national efficient price for any changes in the volume of services provided the growth in the national efficient price of providing the existing volume of services. Council of Australian Governments (COAG), National Health Reform Agreement, 2011.

[4].          Australian Government, Federal Financial Relations: budget paper no. 3: 2016–17, 2016, p. 13. These figures are indicative only until the efficient price growth funding is determined. The figures include allocations for public health services as well.

[5].          COAG, op. cit., clause 3(a).

[6].          Australian Government, Budget measures: budget paper no. 2: 2014–15, p. 126.

[7].          Australian Government, Mid-Year Economic and Fiscal Outlook 2015–16, p. 183.

[8].          Australian Government, Budget measures: budget paper no. 2: 2016–17, op. cit., p. 117.

[10].       See separate Budget Review ‘Medicare’ article for an overview of this measure.

[13].       Australian Healthcare and Hospitals Association, ‘Hospital funding agreement welcome; more support needed for primary care’, media release, 1 April 2016.

[14].       J Doggett (ed), ‘Health Budget 2016 – the reaction’, Croakey, 4 May 2016.


All online articles accessed May 2016. 

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