Forget health takeovers, here's how to fix hospital funding and chronic disease care

After a shaky start, the Commonwealth Government is finally starting a debate about how Australia’s future health system should look. Next week, the prime minister and premiers will meet to discuss some big reform options, such as a radical centralisation or devolution of health care. It looks like Treasurer Joe Hockey will ask the states to take responsibility for their budgets and wholly fund public hospitals.

But don’t bet on radical, single-level-of-government health takeovers. History suggests that proposals to shift health responsibilities are likely to languish in the Department of Prime Minister and Cabinet’s draft federalism green paper, which was leaked then released last month.

Public hospitals and chronic care both need serious reform, but there are more realistic ways to achieve it. Demand for hospital services has grown rapidly and public hospitals have struggled to keep up. In the community, people with chronic diseases receive fragmented care from separate and disconnected providers.

Successful change in these areas requires the right funding structures and incentives. The green paper contains two ideas that could work and should be the focus of the leaders' discussions on health.

Public hospital funding

Australia’s health care funding system is mostly an accident of history. The Commonwealth has ended up the major funder of medical practice outside hospitals, and states responsible for managing and planning public hospitals.

The Commonwealth, however, contributes about 40-45% of public hospital costs and can, as it did in the 2014 budget, slash its contribution at whim. The 2014 budget shredded the Commonwealth’s previously bipartisan commitment to share the costs of growth in hospital services, reverting to a formula based on state populations.

One idea in the federalism green paper improves on the previous bipartisan commitment in the 2009 National Health Reform Agreement. It proposes a Hospital Benefit Schedule. Like the Medicare Benefits Schedule, which sets the fees for GP visits and procedures, a Hospital Benefits Schedule would set the level of Commonwealth funding for public and private hospital services.

The change could produce a welcome return to shared incentives by exposing both the Commonwealth and states to the cost of growing demand for hospital care.

The Commonwealth contributes about 40-45% of public hospital costs and can slash its contribution at whim.Nikki Short/AAP

However, a few criteria need to be met. First, a new Hospital Benefits Schedule should give both sides good reason to keep growth in hospital services under control.

Under the changes in the 2014 Budget, the Commonwealth’s payments to states for hospitals are unrelated to growth in public hospital costs. Because of this, the Commonwealth now has less reason to fund primary care, which keeps people healthy and out of hospital. It’s already cut back funding for primary care through a freeze to the Medicare Benefits Schedule. In effect, the Commonwealth is shifting some costs onto public hospitals, where states bear more of the burden.

In response, the states can be expected to fight back, shifting costs the other way. States can (and do) bill hospital services to the Medicare Benefits Schedule, so that the Commonwealth picks up the tab. But there would also be problems if the states paid too little for hospitals. They would be free to build vote-winning hospitals without worrying too much about whether they are run efficiently or used unnecessarily.

As well as having skin in the game, both sides need more certainty about how public hospitals will be funded. Health systems can’t be planned and managed well if hospital funding agreements can be unilaterally revoked, as happened last year. The new Hospital Benefits Schedule should be set and adjusted by an independent body, such as the Independent Hospital Pricing Authority. The funding split should be fixed over the medium term, say ten years, and locked in with legislation.

If states contribute too little to hospital funding, there’s little incentive to ensure they run them efficiently.UK Ministry of Defence/Flickr, CC BY-SA

Finally, the new shared and secure funding agreement should encourage efficiency. The current pricing system for hospital procedures essentially uses the average price across all hospitals. Including inefficient hospitals in this average lets wasteful practices drive up funding across the whole system.

Grattan Institute’s 2015 report, Controlling Costly Care, shows that about A$1 billion a year could be saved by tightening up state pricing practices. The Hospital Benefit Schedule should use the same approach at the Commonwealth level. Instead of setting prices at the average cost across all hospitals, excessive and avoidable costs should be left out.

Care for people with chronic illnesses

A second key challenge facing our health system is how to improve the quality of care for people with chronic illnesses, and to do it at a reasonable cost.

The current GP funding system pays for atomised, episodic care. The majority of payments are on a fee-for-service basis, rewarding GPs for visits instead of continuity of care, quality of care, or health outcomes.

General practice should be the cornerstone of good care, but people with chronic illnesses need a wide range of primary health services. When care for people with chronic illnesses isn’t multidisciplinary, patients will keep shuttling between different health care providers without a coherent health care plan. The result is waste from duplicated tests, treatments and appointments, and lower quality of care.

The federalism green paper proposes a funding solution to this problem. The Commonwealth and states would jointly fund “packages of care” for people with chronic diseases or complex conditions. The packages would cover GP visits, specialist appointments, hospital care and allied health care.

This option would also create a system of blended payments, in which a doctor would receive some payments on a fee-per-service basis, and some for looking after a patient for over a year, or even for achieving health outcomes. The approach is being tried in many other countries, although the evidence on its effectiveness is not yet clear.

Care for people with chronic illnesses must be multidisciplinary.DFID/Flickr, CC BY

Pooling Commonwealth and state funding could help promote seamless, coordinated health care. Blending payments seems like a good way to focus health care professionals on helping patients look after their health between visits. But the green paper is not clear about how these new packages would be managed.

The new Primary Health Networks, which took on their responsibilities on July 1, could manage these packages of care. To do it well, the networks should be neutral, allocating both Commonwealth and state funding without belonging to one level of government.

By coordinating chronic disease packages, Primary Health Networks can be built up and tested. If a few participating networks demonstrate good outcomes from pooling funding for people with chronic disease, the approach can be expanded to other types of patient.

Eventually, Primary Health Networks might purchase all the primary and outpatient care in their region. But before contemplating this scenario (an option the green paper raises), they should build their capacity and demonstrate their worth on a more modest scale.

Remaking the federation was never going to be easy. But rather than trying to do the impossible, the prime minister and premiers should focus on two options that point to a better future, and that have half a decent chance of actually happening.

Stephen Duckett has received funding from the Australian Research Council and the National Health and Medicare Research Council to examine aspects of hospital funding. He is a consultant to the Independent Hospital Pricing Authority and a member of a number of its committees.

Peter Breadon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.