Getting the most bang for our hospital bucks

It sounds like a great idea: Public hospitals can save almost $1 billion by closing the gap the between the least efficient and most efficient hospitals. And the solution seems relatively straightforward.
 
In 2011, all state and territory governments agreed to implement a national system of activity-based hospital funding in return for additional federal health funding. The new system is gradually being rolled out across the country. When fully up and running, hospitals, where possible, will be paid for the services they deliver based on uniform cost weights specific to each type of service across the public hospital system nationally. In theory, this will oblige hospital managers to improve operational and financial performance.
 
However, this approach has a number of drawbacks.
 
In public hospitals in all jurisdictions, the terms and conditions of employment for the clinical workforce (including salaried doctors, nurses, and allied health) are determined by state-wide, union negotiated industrial agreements. These highly-centralised and inflexible arrangements entrench outdated work practices (especially strict nurse-to-patient ratios) and have major implications for the productivity of public hospitals.
 
Costing for activity-based funding is generally taken to be synonymous with an 'efficient price'. This is a misnomer. Activity-based funding, by averaging the cost of public hospital services, will implicitly underwrite existing inefficiencies embedded in the system.
 
The alternative approach to boosting efficiency is to create a contestable market for public hospital services. This would require:

• Devolving managerial and financial accountability for public hospitals to frontline managers, including authority to negotiate flexible, enterprise agreements with staff to overcome one-size-fits-all workplace rigidities and to introduce innovative ways of delivering cost-effective services. As labour is such a significant component in the production of health, its efficient management will have implications for the 'efficient price'; and
• Creating a purchasing-provider split, whereby state health departments would have the option of contracting out the delivery of publicly-funded hospital services to efficient hospitals, including for-profit and not-for private operators, provided they meet quality criteria. Outsourcing public hospital services to the private sector is happening in Western Australia and is generating better value for taxpayers' money.

Only through structural reform, and by exposing public hospitals to competitive pressures, will we discover the true efficient price of hospital care and get the most 'bang' possible for our health bucks.

Dr Jeremy Sammut is a Research Fellow at The Centre for Independent Studies.