Why the seemingly tidy, leaked proposal for hospital funding may be a problem policy

Leaked documents reported by Fairfax Media yesterday reveal Commonwealth bureaucrats are considering a proposal to simplify how public hospitals are funded in Australia.

While Labor has jumped on the leaks as further proof of the government’s risky approach to public health, Health Minister Greg Hunt has said the proposals would never be government policy.

A byproduct of Australia’s fractured federalism is that both the Commonwealth and state governments fund public hospitals. Currently, public hospital funding is split 38% to 53% between the Commonwealth and state governments respectively – the remaining 9% is private funding.

The Commonwealth also funds a major share of private hospital costs, albeit indirectly through the private health insurance rebate. So about 50% of private hospital funding comes from private health insurers, with a further 30% coming through health insurers, but sourced from the Commonwealth government, because of the private health insurance rebate.

So complex are these arrangements that a funding flow diagram for public hospitals resembles an upended bowl of spaghetti. The leaked plan proposes a seemingly tidy new funding formula dubbed the “Commonwealth Hospital Benefit”.

What we know so far

The leaked plan’s reported headline proposal is that the government rebate, which aims to encourage people to take out private health insurance, be transformed into a direct private hospital subsidy.

In other words, the private health insurance rebate – which subsidises up to 35% of the cost of both hospital and general (ancillary) insurance – would be abolished, as would the Medicare rebate for medical services for private patients in hospitals. Instead, a new rebate would be paid directly to private hospitals, with the level of the payment depending on the type of treatment and procedures provided.

Similarly, Commonwealth block grants to the states for public hospital care would be replaced by a direct payment to public hospitals, again depending on the treatments and procedures provided.

The Commonwealth Hospital Benefit would work in a similar way to the Medicare Benefit Schedule. So the Commonwealth would publish a list of fees it would pay for particular types of hospital care. These fees would be equally available to public and private hospitals.

Presumably the fees would be based on what is called the National Efficient Price – currently used to determine Commonwealth payments to states for increases in public hospital activity – published by the Independent Hospital Pricing Authority. Basing payment on a National Efficient Price will help make the private hospital sector more efficient, in the same way that it has improved efficiency in public hospitals.

Neat and tidy, but…

A Commonwealth Hospital Benefit would certainly be neat and tidy. It would increase transparency of Commonwealth funding support for both public and private hospitals. And it would replace the complex arrangements for private hospitals, where Commonwealth support for private hospital care is partly channelled through private health insurers and partly offered through the MBS rebate and the Pharmaceutical Benefits Scheme (PBS).

But important questions remain. At present, Commonwealth support for public hospitals is capped: it can grow no faster than 6.5% each year. Commonwealth support for private insurance, however, grows with any growth in membership; and growth in MBS and PBS outlays is uncapped. Will the proposed scheme be capped? If so, how?

Current Commonwealth support for public hospitals is conditional on there being no out-of-pocket costs to patients. Would the new scheme retain that condition?

Similarly, the Commonwealth’s indirect support for private hospitals is available only to those with private health insurance – because it is paid through the private health insurance rebate. About 7% of overnight-stay patients and 9% of same-day patients in private hospitals pay in full for their own care.

Further reading: The multi-billion-dollar subsidy for private health insurance isn’t worth it

Will these patients also become eligible for Commonwealth subsidies? That is, will the new private hospital subsidy be available only to those with private insurance and, if so, will any type of private insurance fulfil this condition?

Fairfax claims the leaked report suggests that, on current modelling, the share of Commonwealth support for public hospitals might decline from around 40% now to around 35%. This would require the states to devote a bigger proportion of their already tight budgets to health care.

The premiers could be expected to object loudly to any reduction. They might pass on the budget cut to public hospitals, and sheet home the blame to the Commonwealth. Certainly, the political optics for the federal Coalition – still reeling from Labor’s 2016 election “Mediscare” campaign – would not be good.

What about private hospitals?

Private hospitals and doctors might also not welcome the proposed arrangement. Private hospitals might enjoy the reduced scrutiny by private insurers, but some negotiations would presumably still be needed between insurers and hospitals about what level of out-of-pocket costs members could face.

Private hospitals might also become responsible for paying medical rebates to surgeons, psychiatrists and other doctors who treat patients in their hospital. The private hospital administrators might find dealing with insurers much easier than negotiating how to divide the new “hospital benefit” between the doctors, pharmacists, allied health staff and the hospital, all of whom currently bill separately.

Alternatively, private insurers might be expected to cover these costs. Again, this would require complex negotiations on precisely what payments might be appropriate.

If there was no net change in Commonwealth funding to private hospital care, the financial position of private insurers would be unchanged, because their outlays would be reduced in line with the reduction in the Commonwealth subsidy. But again, there are risks here for insurers.

If the benefit was available to all patients, and not just the insured, private insurers might lose business as members downgrade to the minimum acceptable product. And it could become harder for insurers to persuade people to take up private insurance, given many people see the current private health insurance rebate as ensuring they get value for money from their insurance purchases.

There are good reasons to want to simplify and make more transparent the extremely complex flows of Commonwealth funding to both public and private hospitals. But there are also risks in the change.

Stephen Duckett 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 appointment above. Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.