Hospital funding reforms could save $1b in wasted money

Every year, NSW’s public hospitals are trapped on a financial rollercoaster. For most of the past 10 years, the state has budgeted for real spending to fall – even though that’s happened only once, straight after COVID-19.

Faced with unrealistic budgets, many hospitals run a deficit. Then the government swoops in at the last minute with a bailout, but tries to wrest back savings with another impossibly tight budget the next year. Rinse and repeat.

It’s a false economy. Hospital leaders, faced with dozens of competing priorities and no funding certainty, can’t plan and invest for productivity. It’s harder to hire staff for new projects or invest in efficiency.

The perverse consequence is avoidable costs.

Some hospitals spend much more than others to deliver the same care. The cheapest hospital in NSW spends $9000 less on a knee replacement than the most expensive. The cost of a Caesarean delivery varies by $5600. For an appendix removal, the gap is $3800.

If the state’s most costly hospitals reached the middle of the pack, NSW could save $224 million a year – enough to pay for an extra 30,000 admissions.

To break the cycle, the state government should give hospitals fair, predictable budgets that reflect population growth, ageing, and cost growth. That doesn’t mean more spending – it just means putting the inevitable bailouts on the books from the start of the year.

Broken hospital funding isn’t just a NSW problem. It reflects dysfunction across the nation, with federal and state governments fighting over public hospital funding.

Since 2017, the federal government has capped its contributions to spending growth at 6.5 per cent. When there’s high inflation, like we had for several years, that doesn’t fund many new admissions at all. Since 2018, the NSW government has covered 84 per cent of all new public hospital spending in the state.

Problems with the federal government’s aged care and disability systems leave some people stranded in hospital while they’re waiting for a place. That’s bad for patients, and takes up beds that could be used by people who really need them.

The federal and state governments are aiming to sign the next five-year public hospital funding deal before Christmas.

The federal government should step up and pay its fair share. A new federal spending cap should cover reasonable growth in hospital demand and costs. And the federal government should cover the full cost of patients stranded in hospital waiting for a place in aged care or an NDIS plan, including the cost of temporary accommodation that the states arrange in the meantime.

But in return for billions of dollars in new funding, states must make concrete commitments to make the system more efficient. That starts with the prices paid for care.

Hospitals aren’t paid in one big chunk – they get a fixed payment for every admission. Those payments are anchored on the average cost of each procedure in hospitals across the country. The average includes a lot of waste.

The independent hospital pricing authority should develop a new system of payments that nudge hospitals to adopt cheaper methods when they’re available and safe. The new system should cut out $1 billion of waste nationwide.

The NSW government should adopt the new prices as soon as they’re developed. As a sweetener, the federal government should make its funding cap more generous if NSW does.

With better budgets and productive prices in place, the NSW government should keep pushing to make the system more efficient. It should continue driving safe, same-day care and consolidate procedures into efficient, high-volume centres. And the government should enforce good financial management – including firing chief executives and boards who run big deficits.

Hospital reform might not seem urgent in NSW, which has the lowest elective surgery and ED wait times in the country. NSW already does more than other states to buy supplies in bulk, saving through scale.

But the state can’t rest on its laurels. There are dark spending clouds on the horizon.

NSW doctors, the lowest paid in the country, are striking to demand higher pay and better conditions.

Wages for nurses and nursing assistants could also increase, after a Fair Work Commission decision last year increased aged care nurse pay after years of gender-based undervaluation.

In the longer term, hospital demand will only grow as Australians live longer, and with more chronic disease. Public hospital spending per person could increase by a third in the next decade.

By committing to a new productivity agenda, NSW can unlock fairer federal funding and future-proof hospitals. The new hospital deal is an opportunity to set public hospitals up to weather the coming storms.

Elizabeth Baldwin is a co-author of Grattan Institute’s new report, Smarter spending: Getting better care for every hospital dollar.

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