In the ongoing debate on the reform of Australia’s federal system of government no issue features more prominently than Commonwealth-State responsibilities for the funding and delivery of health care services. In October 2004, the then Premier of NSW, Bob Carr, flagged his willingness to renegotiate responsibilities between the Commonwealth and State governments and to even consider surrendering administration of health to the Commonwealth. In April 2005 the Prime Minister, while acknowledging that there ‘will always be room for improvement’, said he was not persuaded ‘by some of the options for radical reform that are often canvassed’. He continued, ‘In particular, I am not persuaded that the effectiveness or efficiency of health care in Australia would be improved by the Australian Government assuming responsibility for public hospitals’.In the communiqué from COAG of 3 June 2005, the Commonwealth, State and Territory ‘governments recognised that the health system can be improved by clarifying role and responsibilities, and by reducing duplication and gaps in services’ (pages 1-3).

Today’s health system is the product of past practice and decision-making. At the time of federation, the question of health was not at the forefront of public policy. By 1945 the situation had changed, with health firmly on the political agenda and health spending increasing. Before the Second World War the Commonwealth had only a limited stake in the health system. It had direct responsibility for quarantine, under s 51(ix) of the Australian Constitution and for ‘invalid and old age pensions’ under s 51(xxiii). In 1946, under new s 51(xxiiiA), the Commonwealth was granted power over social services, including ‘pharmaceutical, sickness and hospital benefits, medical and dental services (but not do as to authorize any form of civil conscription)’. Other sources of Commonwealth power include: s 96 (the power to make special purpose grants); ‘insurance’ (s 51(xiv)), the corporations power (s 51(xx)); the defence power (s 51(vi)); and, as amended by the referendum of 1967, s 51(xxvi) which empowers the Commonwealth to make laws for the benefit of Indigenous Australians (pages 4-11).

Politically, health has traditionally been a source of ideological difference between the Coalition parties and Labor, with the latter championing a national health insurance scheme, the current form of which is embodied in Medicare. The role played by private health insurance remains controversial (page 10 and page 39). Financially, in health as in all other areas, the Commonwealth is now the dominant force, as shown by the fact that the share of total tax revenues collected by the State (and local) governments has fallen from 87% in 1901-02 to 18% in 2004-05 (page 11).

From this mix of factors, the broader point to make is that constitutional responsibility for health care in Australia is divided between the Commonwealth and the States along lines that owe at least as much to the vagaries of history as to any principles of rational public administration. The result is a fragmented health system operating in the context of a form of co-operative federalism and maintained by complex bureaucratic and political mechanisms, some informal, other formal in nature (page 11-18).

Issues in health funding include health inflation. Between 1994-95 and 2004-05 the average rate of general inflation was 2.5% per year. Health inflation during that period averaged 2.9% per year, giving an excess health inflation rate of 0.4% per year. From 2003-04 to 2004-05, health inflation was 4.2%, the highest it has been over the decade. The Productivity Commission projects growth in public spending on health (excluding aged care) from 6% to over 10% over the next 40 years, with public spending on aged care increasing from under 1% to around 2.5% (pages 19-20).

Particularly contentious is public hospital funding. Between 1994-95 and 2004-05, the Commonwealth’s funding dropped from 47.6% to 44.2% (a decrease of 3.4 percentage points), whereas the States and Territories lifted their share from 43.3% to 48% (an increase of 4.7 percentage points). Further, between 2002-03 and 2004-05, the Commonwealth share of public hospital funding declined 1.8 percentage points from 46% to 44.2%, whereas State and Territory government funding during this period increased 1.2 percentage points from 46.8% to 48% (page 22).

In 2004-05, the Commonwealth’s funding of health expenditure was an estimated $39.8 billion, up from $35.7 billion the year before. This was 45.6% of total funding for health by all sources of funds. State, Territory and local government sources provided $19.7 billion, or 22.6% of the total from all sources, with the remaining $27.7 billion or 31.8% coming from non-government sources (page 24).

State and Territory governments are the main providers of publicly provided health goods and services in Australia, primarily through public hospitals. Those health goods and services are financed by a combination of Special Purpose Payments from the Commonwealth, funding by the States and Territories out of their own fiscal resources, and funding provided by non-government sources (usually in the form of user fees). State and Territory governments also provide or purchase ambulance, dental and community health services, for which they provide most of the funding. Further, they are a major source of public health activities, such as infectious disease control and health promotion campaigns (page 26).

Major issues in the health debate include: cost shifting between the different levels of government; Indigenous health; access and equity in remote and rural Australia; and health workforce shortages. Some of these are more closely aligned to the Commonwealth-State division of responsibilities than others (pages 33-46).

The various proposals for a more integrated health system begin by setting out the major options for reform, usually in terms of: (a) the Commonwealth assuming responsibility for health care; (b) the States assuming responsibility for health care; and (c) some kind of combined administrative structure, based on the pooling of funds for allocation at the regional level. Option (a) is of course very appealing to many, as are different versions of option (c). Option (b), however, seems to have no champions and is so politically unviable that it can be discounted for all practical purposes (page 64).

The main case of the Productivity Commission and others for major reform is founded on the contention that the big challenges to the health system lie in the near future, as funding pressures increase. In which case, the distinction between those problems that are caused in whole or part by the federal division of responsibilities, as against those caused by other factors needs to be clearly drawn (page 67).