Hospitals are under pressure. These changes could save $1.2 billion a year – and fund 160,000 extra hospital visits
- Written by: Peter Breadon, Program Director, Health and Aged Care, Grattan Institute
State and territory governments have reacted angrily to a letter from Prime Minister Anthony Albanese in September asking them to rein in hospital spending.
This comes amid negotiations for the next five-year funding agreement to determine the federal government’s contribution to state-run public hospitals.
The states are angry because hospitals are under intense pressure. Demand is rising, emergency departments are packed, and workers are stressed. More money will be needed as Australians get older and sicker.
But public hospital spending has surged by an average of A$3 billion, or 4.5%, every year for the past decade. The federal government is understandably concerned about such rapid spending growth, some of which may not be good value.
To lighten the load, the federal and state governments should invest in prevention and primary care from GPs and others to prevent people getting sick enough to need to go to hospital.
Governments must also strike a deal to pay for rising costs, and to spend hospital dollars better. Our new Grattan Institute report explains how.
Not all spending is necessary
Some hospitals spend a lot more than others on similar admissions. Those gaps can’t be fully explained by differences between patients (such as being older and sicker), or hospitals (such as being smaller, or more specialised).
Instead, variable practices are partly to blame, such as keeping people in hospital longer, higher rates of infections and falls, using more tests, less efficient workforce roles, or costly local procurement of supplies and services.
We estimate there is $1.2 billion of avoidable cost in the system each year, enough to fund 160,000 extra hospital visits.
Get budgeting back on track
Too often, state budgeting for hospitals is a sham that repeats year after year.
First, hospitals overspend. Then, governments cover the deficit because hospitals are too important to fail. Next, trying to enforce discipline, governments set the next budget unrealistically low. With uncertainty and short-termism baked in, hospitals struggle to plan and invest. Then the cycle repeats.
Even before the COVID pandemic, budgets routinely predicted that hospital funding would fall, which almost never happens. Since 2015-16, actual spending has exceeded state budget funding by an average 6% a year.
It’s a chaotic way to run a vital system. It leaves hospitals without the stability, or the incentive, to invest in productivity.
Breaking the cycle requires predictability and responsibility on both sides. States should set realistic system-wide budgets based on the projected growth in demand and costs.
Consistently well-run hospitals should get three-year budgets so they can plan and invest. In exchange, bailouts should stop, with consequences for boards and CEOs that oversee persistent deficits.
Federal contributions should be predictable and fair too. Since 2017, the federal government has capped its hospital funding growth at 6.5% a year. That means the federal share of growth shrinks when inflation or population growth spikes, leaving states funding the shortfall.
The cap should be redesigned so the federal government automatically shares funding for reasonable increases in demand and cost. But it can also push productivity. The cap should rise along with state populations and need for care, but it should go up a little below the projected rise in costs.
Price for best practice
Public hospital pricing is based on paying the average cost of care for a visit of a standard length. But how a standard length is defined is way out of date.
Australia’s independent pricing authority should develop prices that promote shorter stays, when they’re safe. States should be rewarded with more federal funding if they embrace these changes.
Other countries have made pricing changes to promote safe same-day care. France, Denmark, Germany and Norway pay the same amount for same-day and longer stays for many surgeries. That creates a strong incentive to send eligible patients home sooner.
Australia, by contrast, often pays less for one-day stays.
It’s no wonder same-day joint replacements are common overseas but rare here. In 2022–23, just 0.3% of hip replacements and 0.2% of knee replacements were same-day, whereas comparable countries have climbed to 5, 10, or even 20%. This cuts costs, without compromising patient outcomes.
Australia currently promotes longer stays.
Grattan Institute, CC BY
Fund solutions for stranded patients
Some patients stay in hospital long after they are medically ready to leave, because they are waiting for residential aged care or disability services. Those extra bed days shouldn’t be funded like bed days that are needed for health reasons.
The average National Disability Insurance Scheme (NDIS) participant waits 16 days in hospital after being medically ready to leave. State governments report that about 8–10% of public hospital bed days are taken up by people waiting to be discharged somewhere else.
No one likes being in hospital longer than necessary, and every extra day carries the risk of infections or complications. And it’s expensive. The average cost of a hospital visit for a new resident at a residential aged care facility is more than $6,500 higher than for an otherwise identical patient returning home.
Like in England, Sweden and Norway, Australia should impose financial penalties for keeping people stranded in hospital. The federal government is responsible for aged care and the NDIS. It should pay for hospital stays after someone is medically ready to leave, or alternative temporary accommodation arranged by the hospital.
Use purchasing power
Supplies and services are roughly a quarter of hospitals’ operating costs. Bigger contracts mean better deals and less duplicated administration. But many states leave money on the table by letting hospitals buy separately what they could buy together.
Centralised procurement lowers prices and cuts duplication. New South Wales’ HealthShare model shows what’s possible across uniforms, meals, linen, payroll and patient transport. Smaller jurisdictions should piggyback on their bigger neighbour’s buying, and for some specialised technologies, a national approach makes sense.
Spending on temporary doctors and nurses has surged since COVID. Hospitals often end up bidding against one another, driving wages up. States should set maximum daily rates, as Queensland does, or consider an in-house locum agency, like Western Australia’s.
There’s also a clinical dimension to scale: centralising some procedures in high-volume surgical centres is often safer and cheaper. States should steadily consolidate where the evidence supports it, and make sure patients who need help to travel to hospital get it.
Time for a productivity pact
Governments are currently debating the next national health agreement. Recent deals have mostly been about slicing up the funding pie, not making it go further. Now there’s a chance to change that.
With productive prices, and a fairer federal cap, states can give their health systems more certainty and better incentives.
Add tougher, more realistic hospital budgets and savings through scale, and we’ll get more care for every hospital dollar.
Authors: Peter Breadon, Program Director, Health and Aged Care, Grattan Institute
