Health funding agreements

Budget Review 2014–15 Index

Amanda Biggs

The Budget included announcements affecting Commonwealth funding for public hospitals and other programs that will be significant for federal relations. A number of related health funding agreements with the states and territories are slated to be terminated, deferred or redrawn. The expected savings from changes to public hospital funding arrangements are significant. Hospital and education savings from this budget are expected to total $80 billion by 2024–25, with the largest component of this accruing from savings to hospital funding.[1] All savings from these budget measures are to be directed to the new Medical Research Future Fund.

Public hospitals—change to funding arrangements

The budget announced that the hospital funding model agreed to in the Rudd Government’s National Health Reform Agreement 2011 (NHRA) will cease from July 2017.[2] The NRHA agreed by all jurisdictions, sets out the shared Commonwealth and states and territories funding for public hospitals.

From July 2014 to July 2017, funding for public hospitals will be calculated using the model agreed to in the NHRA. This applies an activity based funding approach to determine an ‘efficient price’ for hospital services.[3] The Commonwealth pledged to meet 45 per cent of the growth in the efficient price initially, rising to 50 per cent after 2017. The states and territories will meet the balance. But from July 2017, the Commonwealth’s contribution will no longer use this funding model. The Commonwealth contribution will be linked to movements in the consumer price index (CPI) and population growth—essentially a return to the funding model the NHRA replaced. If CPI movements track below the growth in the cost of medical services, the states and territories will face a shortfall in funding under this new formula.

From 2014–15, the Commonwealth will also cease the funding guarantees agreed to under the NHRA. Under the funding guarantee, the Commonwealth promised that no state would be financially worse off as a result of transitioning to the NRHA activity based funding arrangements which apply from 2014–15. The Commonwealth guaranteed that its contribution would be at least $16.4 billion greater than the amount the states and territories would have received under the superseded funding model.[4] The cessation of the funding guarantee means payments of up to $574 million which were due to commence from July 2014, will not proceed.[5]

The government has indicated that these changes are a ‘platform’ for moving towards longer term health funding arrangements.[6] The development of these would involve new agreements with jurisdictions. The combined savings from implementing these two measures are forecast to be $1.8 billion over four years.

National Partnership Agreement on Improving Public Hospital Services

The Budget also announced the cessation of the National Partnership Agreement on Improving Public Hospital Services (NPAIPHS) from July 2015. Under the NPAIPHS, the states and territories receive funding for improving access to elective surgery, emergency care and subacute care. Funding involves both facilitation and reward payments for meeting agreed targets. The budget announced that the reward payments for emergency care and elective surgery would cease from July 2015. Around $30.7 million in these payments were made to states and territories in 2013–14.[7] Savings of $201.1 million over three years are forecast.

Funding for new subacute care beds (palliative care, rehabilitation, psychogeriatric care, geriatric evaluation and management and subacute mental care) will also terminate in July 2014, but this component was always due to expire at this time.[8]

Other measures

The $5 billion Health and Hospitals Fund (HHF), established under the Nation-building Funds Act 2008[9] as part of the Commonwealth’s commitment to the National Partnership Agreement on Health Infrastructure, will soon cease operation. The HHF funds health and hospital infrastructure projects of national significance, such as for cancer services or projects in regional areas. The new Medical Research Future Fund announced in this budget will be funded in part with $1 billion in uncommitted funds from the HHF. After this the HHF will be abolished, through a repeal of Nation Building Funds Act 2008. Projects that have funds committed to 2017–18, including the national cancer system component and the regional priority round, will continue to be funded after its abolition through a special appropriation.[10]

The $7 patient co-payment for previously free GP visits may encourage patients to visit public hospital emergency departments (ED) where treatment is free. To address this, the budget announced that the government would seek to remove the restriction in the NHRA which prevents hospitals charging a co-payment. This requires agreement with jurisdictions, with NSW already rejecting the proposal.[11]

Another national partnership agreement will also cease. The abolition of the National Partnership Agreement on Preventive Health (NPAPH) is forecast to generate savings of $367.9 million over four years. The NPAPH provides funding to state and territory initiatives that support healthy behaviours and address the rising prevalence of lifestyle related chronic diseases such as type 2 diabetes. It was initially due to expire in June 2015, but was extended under the previous government to June 2018.

As part of the NPAPH the Australian National Preventive Health Agency was established. This will also be abolished (legislation to enable this was recently introduced into Parliament) with savings of $6.4 million over five years.

In addition, savings of $390.0 million over four years will be achieved with the decision to defer the commencement of the National Partnership Agreement for Adult Public Dental Services, from 2014–15 to 2015–16. This measure was to support the provision of public dental services to adults in state-run public dental clinics.

The abolition of these partnership agreements is in line with the Commission of Audit recommendation to review and reduce their number.[12] Legislation is not required.


Unsurprisingly, the response from state and territory governments to the loss of Commonwealth hospital funding has been negative.[13] The Australian Health Care and Hospitals Association, representing the public hospital sector, expressed its concern that the change to hospital funding commitments will have an immediate effect on hospital waiting times and standards. Others hold concerns that the potential efficiencies from applying an activity based funding model with an efficient price, will be lost with a return to a population/CPI model which provides no incentive for such efficiencies.[14]

[1].           Australian Government, Overview: budget 2014–15, p. 7, accessed 15 May 2014.

[2].           Australian Government ‘Part 2: expense measures’, Budget measures: budget paper no. 2: 2014–15, p. 126, accessed 16 May 2014. Unless otherwise specified the budget figures in this article are taken from this document.

[3].           Activity based funding involves funding hospitals based on activity levels. It requires the setting of an efficient price for services. This price is determined by the Independent Hospital Pricing Authority. Commonwealth and states pool their contributions into the National Health Funding Pool, which then disburses payments. Some smaller regional hospitals continue to receive block funding.

[4].           The guarantee covered the period between 2014–15 and 2019–20. Australian Government, Australia's federal relations: budget paper no. 3: 2013–14, 2014, pp. 24–25, accessed 16 May 2014.

[5].           Clause A72 of the National Health Reform Agreement 2011¸sets out the schedule of payments, accessed 19 May 2014.

[6].           Australian Government, Health: budget 2014–15, 2014, p. 14, accessed 16 May 2014.

[7].           Australian Government, Federal financial relations: budget paper no.3: 2014–15, 2014, pp. 14–15, accessed 16 May 2014.

[8].           Department of Health and Ageing, National Partnership Agreement on Improving Public Hospital Services, July 2011, Part 5, Table 1, p. 8, accessed 16 May 2014.

[9].           Nation-building Funds Act 2008, accessed 19 May 2014.

[10].         P Dutton (Minister for Health), J Hockey (Treasurer), M Cormann (Minister for Finance) ‘Establishing a new Medical Research Future Fund joint media release, 13 May 2014, accessed 15 May 2014.

[11].         J Skinner, (NSW Health Minister), ‘NSW government puts patients first’, media release, 14 May 2014, accessed 16 May 2014.

[12].         National Commission of Audit, Towards responsible government: Phase one, February 2014, p. xx, and p. 75, accessed 20 May 2014..

[13].         E Griffiths, ‘Budget 2014: States accuse Federal Government of forcing them to push for GST hike’, ABC News online, 15 May 2014, accessed 16 May 2014.

[14].         S Duckett, ‘Budget takes hospital funding arrangement back to the future’ The Conversation, weblog, 16 May 2014, accessed 16 May 2014.


For copyright reasons some linked items are only available to Members of Parliament.

© Commonwealth of Australia

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to

This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.