Fri Jan 30

The government has promised a $25 billion boost to hospital funding – but only hints at real reform

Written by: Peter Breadon, Program Director, Health and Aged Care, Grattan Institute

Federal and state governments have finally resolved their long-running standoff on public hospital funding.

The deal struck at National Cabinet on Friday includes a A$25 billion boost to hospital funding, and state government commitments on disability services for children.

But while public hospitals will get more money, there’s no clear plan to manage surging costs and rising demand.

Let’s take a look at what’s been agreed, and what’s still missing.

But first – how did we get here?

The states run public hospitals, but both the federal government and the states fund them. Since 2011, a series of deals called National Health Reform Agreements ^[1] has set out how that funding works.

From 2017, under the second five-year agreement, federal spending growth was capped ^[2] at 6.5%. That has left the states paying for around three quarters ^[3] of cost growth since then.

In December 2023, National Cabinet committed ^[4] to reversing that trend. The federal government agreed to increase its share of spending from around 40% to 42.5% by 2030, and then to 45% by 2035.

The plan also tied hospital funding to progress on disability reforms ^[5], including states delivering foundational supports outside the NDIS.

But when the 2020 agreement expired last year, governments failed to land a new five-year deal. Instead, they agreed to a one-year extension for 2025–26, with the Commonwealth providing an additional $1.7 billion ^[6].

Since then, there has been a fierce debate between the two sides, often spilling out into public accusations.

The federal government argued it has put record funding on the table. And Prime Minister Anthony Albanese called on states to rein in ^[7] hospital cost growth, which has surged higher in recent years, helping to blow a hole ^[8] in the federal budget.

The states countered that long-term funding promises are too far-off for a system in crisis today. They have also pointed to challenges stemming from failures in federal government systems.

This includes thousands of “stranded patients” stuck in hospital for weeks or months because they can’t get aged care places, or disability supports. It means up to one in ten ^[9] public hospital bed days are being used by patients who shouldn’t be there.

What’s the deal?

The federal government has now agreed ^[10] to boost public hospital spending by $25 billion over five years. Its total spending is expected to be $220 billion from 2026–27 to 2030–31, so the increase is 12%. It means the federal government’s share of total spending should rise.

The investment has been welcomed by state governments and it’s badly needed as demand for care, the cost of care, and wait times have all been rising sharply ^[11].

Some media has reported ^[12] a federal commitment of $2 billion to help get stranded patients out of hospital and into aged care, but this has not been formally announced.

In return for federal investment in public hospitals, the states have agreed to match $2 billion in federal funding for the Thriving Kids program. The program will provide support outside the NDIS for children with developmental delay and disability. Its start date will be pushed back by three months.

All governments agreed to aim for NDIS cost growth of 5–6% a year, down from the previous target of 8%, and well below the current growth rate of 10%.

What’s missing?

A last-minute deal on hospital funding is welcome, as is progress on NDIS reform. But a rare opportunity to commit to substantive national health reform may have been missed.

An independent review ^[13] of the last deal, commissioned by the federal, state and territory health ministers, found that although it is called a “National Health Reform Agreement”, the deal is really just a public hospital financing mechanism.

The review recommended 45 changes, arguing that the next agreement must be more than narrow and transactional, achieving real changes such as shifting care out of hospitals, driving innovation in health care, and joining up a fragmented system.

Even the main focus of these narrow agreements – the mechanics of prices and funding for public hospital care – should be improved to promote hospital productivity ^[14] and reduce the length of patients’ hospital stays.

If you want national reform, it helps to buy it. This $25 billion deal will help secure new foundational supports for children. But it’s still not clear if much-needed reforms to public hospitals have been agreed.

The National Cabinet announced ^[15] that the new agreement “has key reforms embedded throughout to make Australia’s hospital and health-care system more effective, efficient and equitable”.

With public hospital costs rising by $3 billion a year, and hospitals around the country under strain as Australia’s population gets bigger, older, and sicker, those reforms are increasingly urgent. A full assessment of today’s agreement will have to wait until they are revealed.