Australia’s public hospital system is complex and confusing, even for many doctors. This short section — a new addition to the Public Hospital Report Card — is intended to provide an overview of how the system functions for the benefits of all readers.
By better understanding how our system functions, readers can also better appreciate the basis behind the AMA’s proposed solutions. As the peak body representing Australia’s doctors, these solutions are informed by extensive consultation with our members combined with qualitative research and economic modelling.
With this report card containing important lessons for decision makers and the public, we hope this explanatory section can help improve your understanding of how Australia’s public hospital system works in practice.
Who manages Australia’s public hospitals?
East state and territory government manages their own public hospital system, with funding arrangements shared between the state and the federal governments. For this reason, our report card looks at both national performance and state-by-state performance, with introductions by each state president highlighting key policy issues within their own jurisdiction.
Although the federal government plays a central role in managing funding, monitoring performance, and supporting specific programs, healthcare is not explicitly mentioned within the Australian constitution. Instead, healthcare responsibilities are divided between governments through various agreements and legislative frameworks, leaving the bulk of public hospital policy to state and territory governments.
Each state and territory government approaches public hospital policy in their own way, with consistent rules laid out under the National Health Reform Agreement (NHRA). One central part of the NHRA is the establishment of Local Hospital Networks (LHNs). LHNs are organisations that manage local public hospital services in accordance with the rules laid out in the NHRA.
Every public hospital in Australia is part of a LHN, despite the fact some states and territories use their own local terminology — such as local health districts, health organisations, and hospital and health services — to describe these networks. For example, Victoria has 81 individual “public health services” within the state, while New South Wales, a state with a greater population than Victoria, operates only 15 “local health districts” divided between six metropolitan and nine rural districts.
LHNs are valuable parts of our health system, allowing for more local approaches to be applied to public hospital care. The AMA has proposed potential revisions to funding models that allow LHNs to drive increased co-ordination between public hospitals and primary health care, incentivising increased co-ordination of care.
In summary, public hospitals are managed by their Local Health Network, with state and territory governments setting the overall policy agendas, pay rates and performance targets for public hospitals, and the federal government co-ordinating funding.
How are public hospitals funded?
Australia’s public hospitals are funded through a combination of federal and state and territory government contributions defined by the National Health Reform Agreement (NHRA). Although state governments manage and define their own budgets, the federal government provides some funding to states through Activity Based Funding (ABF), is paid to hospitals according to the amount of their activity, and the distribution of block grants.
Prior to 2011, all funding from the federal government to the states was provided through block grants, but the introduction of the NHRA in 2011 introduced an activity-based model with the aim of improving efficiency and transparency. Block funding is still used to support services that are not deemed suitable for ABF, such as teaching, training, research, and certain public health programs. It also funds smaller rural and regional hospitals where ABF may not be practical due to lower patient volumes.
The Independent Health and Aged Care Pricing Authority (IHACPA) is an independent statutory authority that sets the guidelines for how ABF is distributed to all states and territories. IHACPA is responsible for determining the National Efficient Price (NEP) and National Weighted Activity Unit (NWAU), two essential components of ABF. The NEP represents the average cost of providing a standard unit of hospital service, while the NWAU is a measure of health service activity that accounts for variations in clinical complexity. The AMA has argued that inadequate increases to these figures have not kept up with the true cost of delivering healthcare, resulting in underfunding of services.
As highlighted within this report card, the states and territories fund the bulk of public hospital services in Australia. Advocacy by the AMA was central in driving the federal government to commit to lift the cap and raise their future funding to 45 per cent. To date, this commitment has not been realised, nor can it be fully implemented due to a lack of capacity to increase activity within our hospitals. States and territories must work together to address this capacity shortfall with a near-term injection of funding.
How are performance metrics decided?
Performance metrics for public hospital performance are consistent across each jurisdiction in Australia and are designed to measure how well hospitals provide care to patients. These metrics, which are reported by the Australian Institute of Health and Welfare (AIHW) and used within this report card, are defined by the Australian Health Performance Framework (AHPF).
The AHPF is developed in conjunction between the AIHW and the Australian Commission on Safety and Quality in Health Care. The indicators within the framework, particularly those relating to accessibility to the health system, help us monitor the performance of Australia's Hospitals.
While some parts of health system reporting such as ambulance ramping times remain inconsistent between the states and territories, the AHPF provides a nationally consistent framework to help government, the public and organisations like the AMA monitor performance of the public hospital system.
What are the greatest challenges facing our public hospitals
Australia’s publicly funded hospital system has long been considered one of the best in the world. However, as highlighted by consecutive AMA Public Hospital Report Cards and research reports, our performance has been waning. Key indicators for future performance, such as capacity and planned surgery waiting times, paint a worrying picture.
Understanding the greatest challenges facing the future of our public hospital system is necessary to build pragmatic and effective policy responses for governments of today to consider.
- Australia’s aging population
Australia, like many OECD nations, is facing an aging population as life expectancy increases and birth rates remain below the replacement rate (2.1 children per female). While it is good news that we are living longer than before, the reality of an aging population will place an ever-growing burden on Australia’s public hospital system.
As analysed in this report card, Australians over 65 represented 17.1 per cent of Australia’s total population in 2023 (compared to 15.9 per cent in 2019), yet this portion of our population represented 49.7 per cent of the total patient days occupying beds within public hospitals in 2022–23. Without increased investment in capacity, Australia will fail to address the inevitable increase in older patients who use the public hospital system, placing greater strain on our staff and patients.
- Inadequate funding
Chronic underfunding of public hospitals at both the federal and state and territory levels over several decades has led to inevitable declines in public hospital performance. Inadequate indexation of Medicare and bulk-billing rebates has created a system where many Australians no longer feel confident that they can access affordable healthcare, whether it be at the GP or at the hospital, when they need it.
With a population that is both growing and aging, Australia has no choice but to fully fund our health system to cope with future demand. This will require long-term commitment by all levels of government to explore new ways to fully fund not on the public hospital system, but the delivery of public health, preventative health and primary health care to keep Australians healthy for longer, allowing them to avoid the need to use public hospital services for as long as possible.
- Workforce shortages
Australia, like many countries, is grappling with a health workforce shortages and maldistribution. The effectiveness and efficiency of healthcare services are intrinsically linked to the availability of a workforce that can meet the evolving needs of communities. Despite our world-class medical workforce, there are many regions where access to the appropriate healthcare professionals remains a challenge due to the maldistribution of healthcare professionals.
It is imperative Australia builds a medical workforce aligned with future needs, with a workforce that is balanced accorded to geographical needs with the appropriate mix of medical specialties. Without this workforce, Australia’s public hospitals will be left without the first prerequisite to drive high-quality patient care — our irreplicable doctor workforce.
What are the AMA’s proposed solutions for these challenges?
Fund public hospitals to improve their performance and increase capacity
Urgent reform of public hospital funding is needed. The AMA’s vision is for a new funding approach to supplement the current focus on activity-based funding — one that includes funding for positive improvement, increased capacity, and reduced demand, and puts an end to the blame game.
Hospitals running near or at capacity have less scope to improve efficiencies. Without spare capacity (beds and staff), they can't plan blocks of surgical time dedicated to alleviating waiting lists efficiently. This is removing the effectiveness of the efficiencies that ABF funding has been able to deliver up to 2021–22. This further limits the amount of activity afforded with the same funding.
While the federal government has committed to increase its share of future funding to 45 per cent of all activity in a future agreement, as well as lifting the cap on their contribution towards public hospitals in the next funding agreement, states and territories will need increase their capacity, and their funding/funding caps, to fully use this opportunity. Furthermore, the agreement should recognise and allow for periods where some of the additional funding cap is used up in the increasing costs of delivery of services, and accounts for this.
However, the negotiations, agreement and commencement of a new agreement have been further delayed, due to protracted negotiations and political elections. In the short term, the existing agreement will continue, albeit with additional federal funding added for the 12-month extension. The AMA has welcomed the additional federal funding, while criticising the delay of further, long-term reform and matched funding increases. As such, the AMA continues to call for funding in addition to the latest federal announcement. A further commitment is needed by the federal, state and territory governments to increase funding for hospitals to lift activity to better meet community demand, and in doing so, make use of the increased activity cap, improve performance, and expand capacity.
Establish and fund an independent national health workforce planning agency
The primary role of an independent national health workforce planning agency is to ensure the healthcare workforce meets the current and future healthcare needs of the population, through planning, co-ordination and policy advice. The agency would take into account factors such as population demographics, healthcare trends, technological advancements, and the changing nature of diseases to make informed decisions about workforce requirements.
The AMA is calling for the establishment and funding of an independent national health workforce planning agency to collate, analyse, and utilise health workforce data to inform evidence-based policies and strategies, enabling us to proactively and efficiently adapt to changing healthcare demands and ensure all Australians have access to high-quality healthcare. It should also use this data to produce evidence-based national supply and demand projections for various health professions based on a range of alternative planning scenarios. This will ensure Australia has a health workforce — with the right skills and in the right locations — to meet community needs and demand. Given the focus on the medical workforce with the National Medical Workforce Strategy 2021–2031, priority should be given to medical workforce planning in the first instance.
For more information and proposals for an improved public hospital system, see the AMA’s Clear the Logjam campaign
https://www.ama.com.au/clear-the-hospital-logjam