A new federal bureaucracy costing $27 million a year, set up to control public hospital funding, will be negated by competing federal government policies and will have no practical effect, according to officials.

The Independent Hospital Pricing Authority has been set up as the centrepiece of the Rudd and Gillard governments’ national health reform process. Its job is to set an efficient price to be paid for each hospital service – rewarding efficiency and penalising inefficiency.

But a combination of deferment, funding guarantees and interstate GST equalisation policies will mean the money actually received by the states for public hospitals will not change until at least 2019.

Confidential authority statistics, obtained by the Tasmanian Times, have shown huge losses to be inflicted on ‘loser’ states. Under the new pricing system hospitals in Tasmania would lose $80.7 million or 16.2% of their budgets, Queensland $653.9 million (9.1%), South Australia $29.9 million (2.4%), Western Australia $123.9 million (7.8%), the Northern Territory $36.1 million (11.1%) and the Australian Capital Territory $84 million (20.1%).

According to the official figures, Victoria and New South Wales would be the winners. Victorian hospitals would get an extra $653.9 million (17.2%) and New South Wales an extra $377.8 million (6.7%).

The Authority has since disowned this document, saying it was outdated and a theoretical exercise, but has not released any alternative data.

Experts say the document seeks to represent a view of relative efficiency across the states. It also indicates that the two most populous states – Victoria and NSW – are big enough to employ economies of scale which look good in this kind of program. Smaller states are likely to need a more sophisticated system of loadings than those the Authority currently uses to recognise their legitimately higher costs.

But two other federal policies – adjustments by the Commonwealth Grants Commission and long-term funding guarantees given by the Gillard government to the states – will mean the expensive and complex new system is unlikely to have any eventual effect on the total amount of funding for hospitals received by the states and territories. It is therefore unlikely to have its intended effect on hospital efficiency.

Officials say compliance costs at state, territory and hospital level around the country are likely to rival the cost of the new authority. If this is the case, it would bring the total cost of the new bureaucracy to a probable level of $50 million to $60 million. This money will be taken from Commonwealth, state and territory health budgets and will not therefore be available for health services.

Another long-standing promise made by the Rudd and Gillard governments – that the national reform program will not lead to an increase the total number of health bureaucrats – will not be able to be delivered. The Commonwealth is creating too much bureaucracy of its own and demanding too much extra administrative work from the states for this well-publicised promise to be feasible.

As part of the lengthy and often-fraught negotiations between Commonwealth and the states over health reform, the states extracted a guarantee that ‘loser’ states – like Tasmania, Queensland and Western Australia – would not see federal money for hospitals reduced. The guarantee, to run until 2019, will cover increases in the number of patients and health price inflation as well as existing baseline costs. This means that regardless of what efficient-price determinations are made or how much activity increases, all states are guaranteed to receive a higher level of funding than they did under the old system. This will have the effect of reducing the new efficient-price system to – at best – a pricing signal easily ignored by states and hospitals.

Although money under the funding guarantee would come to the states through a different administrative channel to the efficient-price money, the pressure on state government to spend this money on hospitals or hospital-alternatives such as step-down care or hospital-in-the-home – rather than on programs in other areas – would be overwhelming. Doctors, health unions and opposition politicians would not tolerate further cuts in real funding.

In any case, price signals based on efficiency (or Casemix) funding are already available in most states. Victoria and South Australia have long used this method to fund their hospitals. Most other states, including Tasmania, have advanced Casemix systems which, though they are not tied directly to the funding of each service, are used as a guide to inform existing block funding levels.

Another potential challenge to the new system’s relevance comes from the Commonwealth Grants Commission, which calculates which states have received more than their population share in federal payments, and which have received less. It then adjusts up or down the amount of GST each state receives to rebalance the federation and to ensure overall fairness.

The Commission has its own criteria for allotting health payments, which will remain in place. The National Health Reform Agreement, signed by all nine Australian governments, specifies that the Pricing Authority process and criteria will not negate those of the Grants Commission. In effect, the existing Grants Commission process will trump the new Pricing Authority process.

It would be possible for the federal Treasurer to issue instructions to the Grants Commission to exempt the new pricing process from its redistribution process. But state officials believe this will not happen.

In any case, the issue is moot. The new activity-based pricing system will not kick in until 2014, and the funding guarantee will last until 2019. Until then, there will be little for the Commission to do on this issue. By 2019 – unless the Gillard government manages to score a perfect ten on the Lazarus scale of political resurrection, the Abbott government will be in its sixth year. The Liberals will have their own health priorities and are unlikely to maintain such a costly and ultimately pointless exercise.

Martyn Goddard has worked in national health policy, mostly in the consumer sector, for more than 15 years. Before that he was a journalist at the ABC in Melbourne and Sydney.

First published: 2012-07-18 07:49 AM