We need more bang for our health dollars

Public hospitals are a critical part of Australia's health care system and its single most expensive component. While generally regarded as delivering excellent health care, there are serious concerns about the cost, efficiency and productivity of the public hospital sector.

Over the last decade, real (adjusted for inflation) expenditure on public hospitals increased by 77%, with all jurisdictions recording substantial rises. Since 2001–02, the average annual national expenditure growth rate has far exceeded the general rate of inflation, and the cost of public hospital care has grown almost three times as fast as national income over the period.

Australia will face problems funding its public hospital and other publicly funded health services if cost increases continue at the current rate in the context of ever-increasing use and an ageing population.

The challenges of sustainably financing the cost of health will be exacerbated by inefficiencies in the public hospital sector-unless productivity improvements reduce the quantity of public resources consumed by public hospitals.

Medicare (Australia's 'free,' universal, taxpayer-funded national health scheme) obliges public hospitals to provide hospital care to all Australians without user charges in return for government funding. The absence of market disciplines accounts for the Productivity Commission's finding that productivity is generally superior in Australia's private for-profit hospitals compared to Australia's public hospitals.

Fully addressing the structural problems that constrain the ability of public hospitals to contain costs and increase outputs requires fundamental reform of Medicare. However, the major governance issues that impede performance can be revised within the existing Medicare framework via state government-initiated reforms, principally by adopting quasi market-based initiatives.

Governance problems that impede good management and affect productivity stem from the flawed relationship between local hospitals and central agencies. Australian public hospitals are run as branch offices of state and territory health departments, and are micromanaged by departmental bureaucrats.

The 'command and control' public monopoly model of hospital governance and service delivery features a centralised setting of policies that includes state-wide, union-negotiated industrial agreements (especially for nurses) which also entrenches poor work practices. Frontline managers are expected to meet centrally mandated KPIs, but have limited managerial prerogatives and little ability to overcome workplace rigidities. Lack of control over the clinical workforce, in particular, is inimical to cost-effective management and efficient delivery of quality hospital care.

Devolution of responsibility to the local level has been a policy goal articulated for many years by state and federal politicians, but hospital management has remained highly centralised despite periodic and repeated redesigns of administrative arrangements. State health departments continue to function as 'system managers' with high levels of involvement in the operational affairs of hospitals because financial risk for hospital budget overruns continues to be carried by state treasuries.

Alternative governance arrangements for public hospitals can address existing management problems and also mimic the key factors that international studies show account for better management and superior hospital performance.

The Foundation Trust hospital management and service provision model was introduced into the National Health Service (NHS) in England by the Blair Labor government.

Foundation Trusts combine true managerial independence with genuine financial accountability. Trust hospital boards of directors and CEOs are responsible for managing the hospital's budget, setting the employment terms and conditions of staff, and overseeing all other operational matters. Trusts have the right to borrow funds based on the hospital's capacity to repay out of earnings, and can retain and reinvest surpluses. They can also become insolvent, and sanctions to deter financial mismanagement include the removal of the board.

Adapting the Trust model to the Australian health system will transform the role of central agencies and the relationship with local hospitals by establishing a purchaser-provider split. Instead of acting as both funder and provider of hospital services as under the existing public monopoly model, health departments will be responsible for negotiating service agreements and contracts with Trusts.

Crucially, Trust hospital boards and CEOs will have the managerial authority to negotiate enterprise agreements with staff that take local conditions and financial realities into account. Workplace flexibility will eliminate restrictive and inappropriate 'one size fits all' industrial agreements, and facilitate the implementation of innovative ways of delivering cost-effective services-a process encouraged by the incentives created by financial accountability.

Improving the performance of public hospitals by placing them under the control of Trust-style boards of management-especially if 'corporatisation' is complemented by a broader microeconomic reform agenda encompassing competitive pricing and selective privatisations-would help control the escalating health expenditure and substantially contribute to the long-term sustainability of the health system as demand rises and population ages.