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Labor has one last chance to save public hospitals. But will they?

Only the federal government has the capacity to put the hospital system back together. And a disaster unfolding in one state reveals what is already beginning in all the others.

You can die waiting

In health departments round the country, meeting rooms are busy. The bureaucrats are preparing for the next big shift in federal hospital funding, which will happen in 2025.

That’s when the new National Healthcare Agreement, which controls almost every aspect of federal health funding to the states, comes into effect. In November, National Cabinet will hold its first major discussion on the issue: the first, certainly, of many. For the cash-strapped states, every one of them facing an ever-worsening hospital crisis, it could be a lifeline.

Or not.

So far, the Albanese government has tried to present itself as a reformist outfit without actually spending much money. Many of its initiatives so far – the Voice, better diplomacy, the corruption commission, climate, the Robodebt royal commission – are undeniably significant. But there is little movement on the big-ticket items that will roll back decades of trickle-down economics and small-government, and actually change the country and the way we live.

They’re squibbing any fundamental changes to funding schools and universities, housing, homelessness, the dole, the financial relationship with the states, paying for aged care.

Then there’s health.

According to the most recent budget, the federal government expects to spend $107 billion on health this financial year. That’s a billion dollars every three-and-a-half days, and 16% of the total federal budget.

By international standards, though, it’s not a lot. In most of the developed nations with which we compare ourselves, governments spend far more.

The cost of not spending enough, and of not spending effectively, is excessively high. In Australia, the government share of public hospitals funding falls more on the states than on the Commonwealth: in 2020-21, it was 43% for the feds and 57% for the states.

But the states and territories lack the money-raising powers to meet those costs. The Commonwealth has most of the tax-raising powers but federal politicians have preferred to cut taxes rather than to fund necessary services – particularly when they can blame the states for the inevitable consequences.

Though the federal government funds about half the cost of recurrent, or day-to-day, public hospital costs, it leaves capital investment – building and equipping hospitals – to the states. But no state can afford to build significant hospital infrastructure without borrowing. Some, like Tasmania, refuse to borrow or to build. Others, like Victoria, find they can’t go on borrowing forever.

The result is predictable. In every state and territory, the number of patients has gone up much faster than the number of beds. On average, it’s a two-for-one ratio: one extra bed, two extra patients.

The high price of parsimony

As recently as 2010, health experts were encouraging governments not to allow average bed occupancy rates to rise beyond about 85%. The evidence showed clearly that rates above that endangered patient outcomes, produced dangerous bed block in emergency departments resulting in ambulance ramping, jeopardised the physical and mental health of staff, and meant any surge in demand was destined to produce a crisis.

Today, most major hospitals around the country are effectively full. There are no official figures for occupancy rates, but the indirect evidence shows few if any are likely to be below 90% and many are customarily at 100% or higher.

For a time, the imbalance between resources and demand produced cost savings. Patients were discharged earlier, staff worked harder, and the failure to invest in infrastructure produced apparently good news for government budgets. Per-patient costs fell.

About five years ago, that all changed. As this chart shows, in the five years up to 2016-17, the cost of treating an average inpatient fell in every state and territory. But then came a turnaround: costs began to surge.

We already know the devastating impact that this country’s ongoing healthcare crisis is having on patients. But the failure to provide enough beds – and to provide enough alternatives to expensive acute inpatient care – is now backfiring on state and federal budgets as well. That failure to invest is starting to cost more money than it’s saving.

To see the likely future impact of these developments, we can look at one state’s experience. All states are on the same road, but Tasmania is further along. What has already happened there can be expected everywhere.

A cautionary tale for the nation

For many years, demand for public hospital services in Tasmania has outstripped their supply. But until fairly recently, per-patient costs were kept low. There were more and more patients per staff member, so productivity increased and – despite the impact on people being denied care, and on the stress levels of staff, there were savings for the state budget.

After 2016-17, all that changed. The growing pressure and constant crises had got to  the point at which staff could no longer work at normal levels of efficiency. Costs, which had been lower than the national average, soared. The weighted cost of each separation rose from 1.7% below the national average in 2015-16 to 8.3% above by 2020-21.

This trend predates the pandemic. In fact, costs fell slightly at that time (and stabilised in the rest of Australia) as fewer people sought care during the lockdowns.

From the time the current national funding model was introduced in 2011, admissions to Tasmania’s acute public hospital wards increased, on average, by 5,818 or 5% a year.

But bed numbers increased by an average of only 3.3%, or 44 beds, a year.

That situation was unsustainable in the long term. Ever since 2016-17, the previous budgetary savings have turned into a serious deficit. Apart from the Northern Territory – Australia’s perpetual basket-case – Tasmania’s costs of inpatient care are higher than in any other jurisdiction.

A similar pattern is found in emergency department care. After 2015-16, the cost of an ED presentation went from below the national average to around 25% - 30% above.

Increasing rates of bed-block – in which patients needing admission to a specialist ward have to be kept in the ED because there are no available beds – is responsible for a substantial share of the cost blowouts. As direct consequence of the failure to provide beds, the cost of treating each of these patients has doubled.

The main measure of bed block is the time waited in the ED at the 90th percentile by patients needing admission. That’s the time in which 90% of these patients have left the ED and 10% are still waiting. This table shows how Tasmania’s four main hospitals rank against the nation’s 293 public hospitals with emergency departments.

When emergency departments cannot deal adequately with everyone, they must – like all other areas of a hospital – concentrate on the most serious cases. In Tasmania, the increase in presentations has been in the most complex and expensive triage categories: resuscitation, emergency and urgent.

Semi-urgent and non-urgent cases are increasingly staying away. According to staff, there are two reasons for this: people know they may have to wait for many hours, and they do not want to add to workload. This disproves the common assumption that people who could otherwise be cared for in general practice are instead crowding emergency departments. They are not. Instead people not able to see a GP are tending not to be treated at all.

The impact on the Tasmanian budget

A policy aimed at saving money by scrimping on capital investment has, in the end, produced the opposite effect. That policy now costs the state budget more than a quarter of a billion dollars a year.

Commonwealth funding for state public hospitals is mostly based on a National Efficient Price, which the Independent Hospital and Aged Care Authority calculates to be the amount any reasonably efficient hospital needs. In other words, the federal government refuses to fund inefficiency. Any extra cost, above the efficient price, must be borne by the state.

This chart shows the effect on the state budget. Until 2017-18, the state and federal governments put about equal amounts into recurrent funding of Tasmanian public hospitals. Now, that has shifted to a 40% share for the Commonwealth and a 55% share for the Tasmanian government. (The rest comes from other sources, mostly various insurances carried by patients).

When expressed in dollar terms, the impact is dramatic.

The failure to provide enough resources – mainly hospital beds – no longer saves money. But even the chart above under-estimates the real impact.

Until 2017-18, the Commonwealth’s share of funding was, on average, $33 million dollars more than the amount the state put in. So, with that figure as a baseline, we can see that the cost-cutting policies now add around $280 million a year to the Tasmanian government’s share of recurrent hospital funding

The situation has been made worse by another cost-cutting policy, this time originating in Canberra. The previous federal government first removed federal funding incentives for emergency care and elective surgery, then put a cap of on its main hospital funding program, no matter what happened to real increase in patient numbers, wages and other costs.

Abbott and Turnbull .. cost cutters
These federal measures have affected all jurisdictions fairly equally by shifting costs onto the states and territories. While present also in Tasmania’s case, they are a relatively minor element in the overall funding picture; but they again illustrate the futility of crude cost-cutting programs which, almost always, end up reducing efficiency, increasing real costs, and crippling services.

There is no reason to believe that the situation has changed since 2020-21 and many reasons to believe it may have become worse. In that case, the added cost to the state budget will amount to around $1.1 billion over a four-year budget period.

That amounts to about 9.3% of the Tasmanian government’s total health budget and 3.2% of its overall budget.

That money, if it had been used for capital investment, would not only have saved many millions of dollars in the long term but would have provided the Tasmanian people with a public hospital system that is fit for purpose. Instead, the state is paying heavily for a system that is failing on almost every parameter, including budgetary responsibility.

What should Albo do next?

Health has always been the Labor Party’s strongest issue. It’s the party of the Pharmaceutical Benefits Scheme, of free public hospitals and of Medicare. The electorate, generally, trusts the ALP to produce a more equitable and capable health system whenever it is in office.

That trust comes with responsibilities and risks. If the Albanese government is seen to preside over an ever-worsening healthcare crisis, that trust will be seriously damaged. It won’t much benefit the Coalition but the Greens and some independents would do well from it, and it would seriously annoy the Labor base.

There are, for the moment, pressing economic reasons for avoiding reforms that would inject lots of cash into the economy at a time when the first priority is to reduce inflation. But inflation is now fairly low: in the most recent (June) quarter, national CPI rose by just 0.8%. That’s just 3.2% on an annualised basis, the merest shade above the Reserve Bank’s target range. (The RBA’s figure of 6% is misleading because it includes what happened in the previous nine months, when inflation was much higher than it is now.)

With inflation now under control, the dangers of spending on essential services is massively reduced. They would be reduced further if the spending was balanced with tax increases, which would take money out of the economy to invest it in potentially more productive areas.

Major initiatives are unlikely before 2025, when the new National Healthcare Agreement takes effect. By then, more ambitious spending programs will be easier to contemplate.

What, then should be in it?

There are two imperatives: improve the supply, quality and accessibility of hospital and other services while bringing soaring costs under control. They can both be done at the same time and with the same initiatives.

The new agreement, as a first priority, should make the Commonwealth – for the first time – a significant funder of hospital infrastructure. Without that commitment, we will get more of the same forever.

The investment program should not concentrate not only on providing more acute beds, which are badly needed, but on facilities designed to keep people out of those expensive beds. It costs over $2,000 a day to keep someone in one of those beds, even without treatment.

Build ... but be cleverer
There are far too many people who should be somewhere else – but too often, there is nowhere else. Aged care, home care, step-down convalescent facilities, community clinics, are all vastly cheaper and far more appropriate for people who don’t need acute care. But they need to be funded. Matched funding, in which costs are split, can drag habitually recalcitrant states like Tasmania into action: if they don’t co-operate, they don’t get the federal cash.

Improved primary care has the potential of keeping some people out of hospital altogether. That won’t happen unless Medicare and the PBS are revitalized – not only with money but with new structures. Patient copayments need to go, both at the GP’s office and at the pharmacy. According to the Australian Bureau of Statistics, an estimated 610,000 people avoided going to a GP in 2021-22 because of cost, and 780,000 didn’t fill a prescription because of the copayment.

Overall, Australia’s entire health system is in disrepair. Putting it back together will take time, political will and a lot of money. 2025 seems like a good place to start.

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