​SUMMARY

In 2006 the NSW Parliamentary Library published a Briefing Paper titled Commonwealth – State Responsibilities for Health: Big Bang or Incremental Reform. Some four years later, in March 2010 the Federal ALP Government released its health reform agenda, and has clearly chosen the ‘Big Bang’ reform option.

The Federal Government proposes fundamental changes to the governance and financing of health, including the establishment of Local Hospital Networks and governing councils. This paper focuses on those issues most relevant to the major reforms proposed by the Commonwealth, namely governance and funding of the health system.

NSW Governance of the Health System
Through its Area Health Services (AHSs), NSW Health provides a vast range of inpatient, outpatient and ambulatory care services. NSW Health is the consolidated parent which controls eight AHSs. Area Health Services are statutory corporations constituted under the Health Services Act 1997, and each are principally concerned with the provision of health services to residents within a defined geographical area.

Prior to reforms in 2005, there were 17 Area Health Services across NSW. Prior to 2005 each of the AHSs had a chief executive officer and a board of directors. The CEO reported to both the Director-General of NSW Health and the Chairman of the AHS board. AHS boards over-saw the direction of the health operations within their geographic region. Responsibility for the management of day to day operations was vested directly with the CEO.

A 1998 review of the health system by IPART identified that there was a lack of clarity in the roles of the AHS in relation to NSW Health. IPART noted the progressive centralisation of decision making by NSW Health. It stated that NSW Health had developed a tendency to review and approve all the commercial decisions of each AHS. In contrast, AHSs tended to focus excessively on balancing budgets, meeting waiting list targets and avoiding events which would cause adverse publicity.

A subsequent 2003 IPART report focussed on the same themes as in 1998, and concluded that little had changed. It also recommended a national inquiry under the auspices of COAG to address Commonwealth and State funding and division of responsibilities to better coordinate health care delivery.

The two IPART reports commented on the tussle of health governance between the 17 Area Health Boards on the one hand, and the central control of the Department of Health on the other. The Government’s response was firmly in favour of centralising control.

With the passage of the Health Services Amendment Bill 2004, the State ALP Government reduced the number of Area Health Services from 17 to 8. At the same time, the Act fundamentally changed governance arrangements. Area Health Boards were abolished, with Area Health Services being controlled and managed by a chief executive, answerable to the Director-General, and in turn the Minister for Health. The creation of fewer, larger Area Health Services, and the abolition of their respective boards, was not supported by the Opposition.

On 29 January 2008 Peter Garling SC was appointed by the Governor of NSW to conduct a Special Commission of Inquiry into Acute Care Services in NSW Public Hospitals. This followed several tragic incidents, including the death of 16 year old Vanessa Anderson at Royal North Shore Hospital. The Garling Report was three volumes and some 1200 pages long. This review of the report focuses on those issues relevant to this paper, in particular governance of the hospital system.

Garling noted that he had received a huge number of submissions highlighting that there had been a shift from clinical governance of corporate matters to corporate governance of clinical matters. He reviewed the Area Health Service structure, and noted the 2005 reforms. Garling concluded the present governance structure, and other factors, have caused a serious loss of morale in senior medical staff and hospital management.

Garling revisited some of the themes that emerged from the IPART reports. For instance, he noted that the solution to the above identified problems is to devolve decision-making capacity to health services. However, he identified that there is a lack of clarity about the extent of authority of general managers of hospitals, and that this needs to be clearly defined.

Garling concluded that governance needs to be devolved to a more local level by:

greater delegation to hospital and unit or ward level;
greater involvement of clinicians in management decisions; and
strengthening the structures, including committee structures at hospital level, for communication between management and clinicians.

The NSW Government response to this issue was the establishment of Hospital Clinical Councils.

National Health and Hospitals Reform Commission
On 25 February 2008 the Commonwealth Government announced the establishment of the National Health and Hospitals Reform Commission. The Commission issued a final report in June 2009.

The Commission noted that the case for health reform is compelling. It noted that while the health system has many strengths, it is a system under growing pressure. Furthermore, it is fragmented with a complex division of funding responsibilities and performance accountabilities between different levels of government. The report identified actions that can be undertaken by governments to reform the health system under three reform goals:

Tackling major access and equity issues that affect health outcomes for people now;
Redesigning our health system so that it is better positioned to respond to emerging challenges; and
Creating an agile and self-improving health system for long-term sustainability.

The Commission’s Final Report included 123 recommendations. In its work the Commission considered options for governance reform. It recommended:

The Commonwealth Government to be responsible and accountable for the strategic direction, planning and public funding of primary health care. The Commonwealth Government assumes full responsibility for primary health care services.
The Commonwealth Government assume full responsibility for providing universal access to basic dental care.
The Commonwealth Government assume full responsibility for public funding of aged care services.
The Commonwealth Government assume full responsibility for the purchasing of all health services for Aboriginal and Torres Strait Islander people.

In regard to the funding of public hospitals and health care services, the Commission recommended that the Commonwealth Government should:

pay 100 per cent of the efficient cost of public hospital outpatient services using an agreed casemix classification and an agreed, capped activity-based budget;
pay 40 per cent of the efficient cost of every public patient admission to a hospital, subacute or mental health care facility and every attendance at a public hospital emergency department; and
pay 100 per cent of the efficient cost of delivering clinical education and training for health professionals across all health service settings, to agreed target levels for each state and territory.

Following the release of the National Health and Hospitals Reform Commission report, the Commonwealth government began a period of consultation around Australia. The Commonwealth subsequently released its health reform plan on 3^rd March 2010, entitled: A National Health and Hospitals Network for Australia’s Future. The Commonwealth proposes radical reform to the governance of the Australian health system.

The Commonwealth Proposal
The Commonwealth stated: “To overcome fragmentation, blame shifting and cost shifting across the health system, the Commonwealth will move to ensure that one level of government has majority funding responsibility for the hospital system.”

In a fundamental change to hospital funding arrangements, the Commonwealth will increase its funding contribution for public hospital services to:

60 per cent of the efficient price of every public hospital service provided to public patients;
60 per cent of recurrent expenditure on research and training functions undertaken in public hospitals;
60 per cent of capital expenditure, to maintain and improve public hospital infrastructure;
over time, up to 100 per cent of the efficient price of ‘primary health care equivalent’ outpatient services provided to public hospital patients.

The Commonwealth Government will take full responsibility for funding all general practice and primary health care services in Australia. The Government noted that the importance of this reform is that by taking funding and policy responsibility for all primary health care services, and 60 per cent of public hospital funding, the Commonwealth will have the ability to drive ‘allocative efficiency’ across the system. This will encourage integrated care and ensure patients are cared for in the most appropriate and efficient setting.

Monitoring and reporting will be undertaken on the performance of the whole health system and that of individual hospitals.

The Commonwealth will require the States to introduce Local Hospital Networks to run small groups of hospitals. The Networks are to established as separate state statutory authorities, and comprise between one and four hospitals. Local Hospital Networks will have a professional Governing Council and Chief Executive Officer (CEO), who will be responsible for delivering agreed services and performance standards within an agreed budget. Each Network’s CEO will be appointed by the Council and accountable to the Council.

States will continue to be responsible for meeting the remaining costs of public hospital services, including meeting any costs over and above the efficient price, as well as the remainder of teaching, research and capital costs. State governments will also continue to own public hospital assets. They will work with Local Hospital Networks to determine the range and number of public hospital services to be provided within their jurisdiction and to be responsible for all aspects of industrial relations policy and employment of the public hospital workforce.

The Commonwealth supports the delivery of free public hospital services through block grant funding paid to the states. Each State then determines funding for individual hospitals. The Commonwealth proposes to fund Local Hospital Networks directly for each service provided to a patient, through activity based funding. An independent umpire is to be established to set an efficient price for each procedure. It will finance these changes by dedicating around one-third of total GST revenue — all of which is currently provided to the states — directly to health and hospital services across the country.

In response to the Commonwealth proposals the NSW Premier has welcomed the potential of the reforms, but wants to ensure that NSW communities will be protected. The State Government announced a three-step process it intends to follow before responding to the Commonwealth’s proposal, including the publication of a discussion paper and the creation of an on-line forum.

If COAG cannot agree on the reforms, the Commonwealth has stated that it will seek a mandate from the Australian people to implement the Plan.