Anatomy of a blame game.

As public hospitals sink further into disarray, federal and state governments go to war over money. And nobody wants to take responsibility for fixing the system.

By rights, Australia’s new five-year hospital funding agreement ought to have been in operation by June 2025 and signed well before that. At the time of writing (December 2025) there is still no sign of agreement. The states are accusing the federal government of welshing on its responsibility to ensure the nation’s struggling hospitals can keep going and, perhaps, improve. The Prime Minister accuses the states of wasting the money they’ve already got.

They’ve been talking about this for at least two years and appear to have gone steadily backwards, the barbs and accusations escalating. In February, with time on the old agreement running out, they signed a one-year extension so the nation’s public hospitals wouldn’t have to close. That extension will run out at the end of June 2026.

The nation’s peak health bodies are united in calling on Canberra to put more money into the system and to take the lead in redesigning a system which is clearly not working for anyone – not for the Commonwealth, for the states, for staff – and certainly not for patients.

 How on earth did this happen?

Who’s to blame for the eternal blame game in health? Gough Whitlam, perhaps.

When Whitlam created a universal health and hospital system, making decent health care available to everyone, poor as well as rich, he inadvertently created a permanent stand-off between the Commonwealth and the states.

Until 1975, only Queensland and Tasmania had free public hospitals. Whitlam used the Commonwealth’s revenue-raising heft to make all public hospitals free for everyone. But the states still had primary responsibility for running the system, no matter what happened to the money from Canberra. From then on, whenever anything went wrong, it would be politically convenient for the states to blame the feds for short-changing them, and the feds could blame the states for inefficiency and inadequate funding.

And that’s happening, yet again, right now.

“The Commonwealth blaming the states and vice versa doesn't help the problem when you're sick,” said Kevin Rudd. ”It's time to end the blame game between Canberra and the states on health and hospitals.

“I believe the mood of the nation is that we need to ask the Australian people for a mandate to take Commonwealth responsibility for full funding for public hospitals.”

That was in 2007, three months before he became Prime Minister.

That promise, together with John Howard’s overreach in industrial relations, propelled the Labor Party into government and Rudd into the Lodge. Night after night for months, news bulletins showed the Prime Minister and Nicola Roxon, his hapless Health Minister, touring hospitals around the country and promising a shining new deal for patients everywhere.

Nothing much happened. Rudd had given little attention to the details. The federal Health Department, always a policy-based outfit, had no experience or ability in actually running hospitals. Only the states could do that.

Rudd wanted the states to surrender a third of their GST money to fund his grand proposal. They said no.

The federal government wanted to take over the hospital system on the cheap, failing to provide enough new money to transform the system and secure a genuinely universal health system. Despite all of the promises, delivery was a squib.

In 2011, Julia Gillard announced a replacement for Rudd’s vision splendid. The Commonwealth would pay for 45% of a “national efficient price” (NEP) for every extra patient treated in a public hospital. That price would be based on national average costs, calculated by a new independent authority, and would rise to 50% in 2017. A less well-publicised aim was to pressure hospitals to be more efficient, reducing costs and saving government money.

“Over the last decade the Commonwealth's share of public hospital funding has been in sustained decline, and states and territories have had to enter negotiations over health funding with the Commonwealth every five years” she said.

“Today's agreement permanently puts an end to the uncertainty of public hospital funding. It is money the states – and Australian patients – can depend on.”

As it turned out, that money could not be depended on. Labor lost the 2013 election and the new Liberal Prime Minister, Tony Abbott, moved to destroy the whole edifice. He flagged $50 billion in cuts to hospital funding over eight years. But Abbott was kicked out of the prime ministership by his own party before those highly unpopular changes could come into effect. His successor, Malcolm Turnbull, returned – sort of – to the Gillard model. The Commonwealth would fund 45% of the national efficient price but slapped a cap on growth. If costs increased by more than 6.5% in a given year, the state concerned would have to wear it. The promise of increasing funding to 50% of the NEP has never been kept; but never have the states forgotten it, nor forgiven successive federal governments for breaking it.

That is where we are now.

The states’ case

Commonwealth funding has never kept up with the actual costs of running the nation’s public hospitals. The new funding system was signed in 2011 actually began in 2014-15. But – apart from a short-lived initial bump – the federal share declined and the states had to pick up the difference. Immediately before the system changed, the states were footing 52.8% of the bill; by 2023-24, that had risen to 58%. The extra cost to the states was about $2.8 billion in that year alone.

The main federal funding mechanism – the National Efficient Price – has consistently failed to keep up with average costs. In the first eight years of this funding stream, the NEP rose by 16% and costs by 91%.

The states also point out that the Commonwealth has much greater capacity for raising money than they do. This chart compares the proportion of tax revenue going to health for all jurisdictions in 2014-15, and in 2023-24. In all states and territories, the increase has been substantial and, in some (particularly Tasmania) dramatic. For the Commonwealth, total health expenditure – which includes Medicare and the private insurance rebate as well as public hospitals – fell slightly.

This chart shows how health costs are becoming more and more dominant of state budgets: it is by far their greatest area of expenditure. For the Commonwealth budget, the health share – apart from the pandemic – has been generally stable.

The Commonwealth’s case

The federal government points out that public hospital funding to the states has increased by 40% since the new scheme began. This is second only to the rise in private hospital costs (mostly for the health insurance rebate). Even the amount spent on primary care, mainly through Medicare, has not increased by as much.

They can also point out that some jurisdictions have managed to control their costs and are doing quite well out of the federal funding system. In the eight years after its inception, the National Efficient Price rose faster than costs in Victoria and South Australia; Queensland was line-ball. States which are able to treat their patients more cheaply than the NEP keep the change. So Victoria and South Australia have been profiting from the scheme.

But Tasmania, the ACT, New South Wales and the Northern Territory lose. It is these jurisdictions – particularly the biggest, NSW – which make the national average costs look so high. The federal government is entitled to ask: why can’t some states control their costs, when others clearly can?

Two years ago, the states thought they had a deal. In December 2023, the federal government promised to increase its share of funding.

"National Cabinet endorsed [the] Commonwealth increasing National Health Reform Agreement contributions to 45% over a maximum of a 10-year glide path from 1 July 2025, with an achievement of 42.5% before 2030," the Prime Minister's Office said in a statement.

It was little enough. If the 42.5% increase had been applied in 2022-23, it would have cost $4.2 billion, or 0.61% of federal government revenue. The 45% would have cost $6 billion, or 0.87% of revenue. But costs would continue to increase massively before any substantial new federal money appeared, and the states would continue to have to cover it.

The states now say the Commonwealth is going back on that promise.

“Under the arrangement now proposed by the Commonwealth, the actual share of Commonwealth funding will be closer to 35 per cent, falling tens of billions of dollars short of what is needed," they said in a joint statement.

As part of any deal, the federal government also wants the states to take over responsibility for people being kicked off of the National Disability Insurance Scheme because of its “Thriving Kids” program.

The Prime Minister is having none of it. As hospital costs rise, the promises made in 2023 also become more expensive. So he wrote a stern letter to the states, which has predictably been leaked.

“For states and territories to realise a Commonwealth contribution of 42.5% of public hospital costs by 2030-31, under the capped glide path model,” Albanese told the premiers. “it will be necessary for your government to work to reduce growth in hospital activity and costs to more sustainable levels.”

In other words: those promises are off.

The states’ reaction was predictable and sharp. “Does he want us to go out there and close the front door to our emergency departments or stop taking ambulances delivering sick patients to our emergency wards?” said the Queensland health minister, Tim Nichols.

“Demand is growing with an older and growing population with more severe acuity and presentations, it's just unrealistic to expect the states to say, ‘oh, well, we can control demand.’”

Why did costs rise so much?

In fact, per-patient costs came down steadily for many years until, around 2017, they started to rise again. All jurisdictions showed increases but the results were not spread evenly. The change from the 2017-18 low point was particularly evident in Tasmania – the standout state for plunging cost-efficiency – but also in Western Australia and the ACT.

For decades, all major hospitals met the squeeze between increasing demand and inadequate facilities by discharging patients ever more quickly: quicker and sicker, as many doctors attest. That could not go on forever: there would inevitably come a point at which lengths of stay could not be reduced any further without seriously endangering patients. That point, not coincidentally, was reached at the same time as costs started to go up: in 2017.

The easy option for state governments – reducing patient care rather than building enough hospitals – was no longer available.

Comparing Australia with other developed countries shows how far down this country’s hospitals have pushed length of stay. Of the 18 nations on this list, only three – Sweden, Norway and the Netherlands – have lower figures. And that’s likely to be because they have provided more step-down care, so patients no longer needing expensive treatment in an acute hospital can be moved elsewhere for rehabilitation and convalescence.

But there are many reasons for soaring costs. Length of stay is only one. This chart shows the relationship between costs and average length of stay in each jurisdiction, and how each state compares with the national average.

Take a look at two states: NSW and Western Australia. Costs in NSW were 5% below the national average even though its average length of stay was 50% higher. In WA, in contrast, costs were 15% above the national average even though length of stay was 11% below. 

Availability of beds is likely to be involved here. In 2023-24, and taking population into account, NSW had 6.7% more beds than WA. This fits with the widely-held observation that when hospitals become overcrowded, they become less efficient – and therefore more expensive.

Tracking bed availability over the long term reveals how and why that overcrowding, and its resultant inefficiency, happened. This chart looks at a quarter-century of data on the number of patients being admitted nationally, against the number of beds available for them. Over that time, bed numbers went up by 18% and patient numbers by 98%. No wonder there’s a problem.

The right stuff

State authorities have a fixed mindset about what constitutes a hospital bed. If it doesn’t fit into one of the established categories – emergency, medical, surgical – it’s not really a bed and therefore isn’t considered.

The problem with that is that it’s bad for patients, bad for staff and hellishly expensive. According to anecdote from hospital staff – there are no coherent figures – as a quarter of people occupying high-level acute beds in major hospitals don’t need that level of care but can’t be discharged because there’s nowhere more suitable for them to go. Most of those people could be accommodated much more cheaply in rehabilitation and convalescent facilities, built to nursing-home standards but with appropriate nursing and allied-health staff. In the Australian context, that would save at least $1,000 per patient per day in recurrent costs. And those facilities could be built for a fraction of the cost of a conventional hospital.

But it’s not being done.

Half a century ago, governments around the world closed their 19^th century psychiatric hospitals in favour of treating mental illness “in the community”. Those with acute and potentially dangerous symptoms would be treated in general hospitals, usually for less than two weeks. It was intended to save a lot of money. It didn’t, but it did produce a debacle in mental health care.

Busy, noisy general hospitals are not a suitable place for people with serious mental health problems; and the split between various elements of the system make continuity of care almost impossible; and there is an overall shortage of adequate, therapeutically appropriate facilities. It all costs too much and delivers too little.

The time has come to rectify the mistake – not by returning to the 19^th century model but to establish comprehensive mental health precincts, surrounded by gardens. These would become the focus of a new era in psychiatric care.

Far too many people wait far too long for important elective surgery, both because there are not enough beds and theatres, but also because elective patients are subject to being
“bumped” to make way for emergency cases. Providing separate, stand-alone elective surgery centres have repeatedly been shown to produce massive improvements in cost efficiency, throughput and staff satisfaction.

Such centres are being built in some places, but we need many more.

What we need from Canberra

Leadership. Money too, but mostly leadership.

Many of the problems in Australia’s health and hospital systems seem intractable for one reason: fragmentation – between federal and state, public and private, GPs and hospitals. While this persists, the chances of developing a structure that puts the interests of patients in front of everything else remain discouragingly slim. For decades, experts have urged governments to adopt the most obvious answer: that there should be a single funder for the entire system, because money drives everything. That would require a trusted, independent body to coordinate money coming in from all sources, and it would require the Commonwealth – the only level of government with the revenue-raising capacity – to become the dominant contributor.

Today that dream seems as far away as ever, so we need to work with what’s possible.

The federal government could ensure better cost-efficiency by bankrolling infrastructure that the states have not built: step-down facilities which would free up thousands of acute beds; mental health precincts; elective surgery centres. There are many other possibilities, but these would be a good start.

By putting up all or some of the money, the Commonwealth could require the states to do this work. The government could also mandate sensible and efficient development practices, reducing the waste and confusion that squanders so much money and goodwill.

When the pressures of overcrowding and under-resourcing are eased, many other issues can be addressed. A long list already exists in the work of multiple government reviews and think-tanks such as the Grattan Institute. But many of their suggestions seem, for now, little more than tinkering at the edges while the main game continues unaddressed.

It is not useful for the Prime Minister to write to the states, as he did, simply demanding that they reduce their costs – and quickly! It’s not that simple. Without a substantial and well-directed investment by Mr Albanese’s government, the only way spending can be reduced in the short term will be by treating fewer patients.

It is difficult, in the present circumstances, to feel other than despondent about the prospects for meaningful change. More money will need to be spent, because even if much greater efficiency is achieved, demand for health services will not go down. At best, spending may rise a little less quickly.

But the federal government is unwilling to take the political risks of increasing its taxation revenue. There are many candidates for reform: minerals rent taxes, capital gains discounts, negative gearing, multinational tax-avoiding corporations just for a start. Earmarking tax measures for health and hospital investment would ensure wide community support.

It’s not as if Australia, overall, spends too much on health, or cannot afford to spend more. Our economy has all the capacity needed to fund a much better system. Compared with most other developed nations, Australia’s health expenditure as a proportion of its GDP is benign.

The United States, as ever, provides the cautionary tale. That country tries to sideline government involvement, putting its faith in the private sector. It refuses to combat price-gouging by drug companies, hospitals, doctors and insurers. The interests of patients do not figure.

And if we look at the long-term trajectories of these figures, we can see Australia has the economic power to spend substantially more than it does. Compare our trajectory with Britain’s: at the beginning of the century, we spent more than they did; now we spend less. And, for all the problems of Australia’s health system, Britain’s National Health Service is vastly worse.

Everything we have discussed here is achievable. All we need are governments – specifically, the federal government – with the vision and the will for reforms that could put us ahead of the world. Thousands upon thousands of lives would be saved, millions of people would be freed from illness and worry.

All it needs is the political will. Pity about that.