P-word may be electoral poison but we must adapt

In the past decade, recurrent expenditure on the public hospital sector has risen from $23 billion to more than $40bn each year – an increase of more than 77 per cent in real terms.

Australia will face problems funding the cost of Medicare if spending on the nation's 736 public hospitals continues to grow more than twice as fast as national income, and unless productivity improvements reduce the quantity of public resources they consume.

Peter Costello's Commission of Audit recently found that, in the past five years alone, funding for Queensland's public hospitals increased by 43 per cent but the number of patients treated and operations performed only increased by 17 per cent.

The NSW Auditor-General also found that thousands more patients could be operated on in NSW public hospitals through better management and running theatres more efficiently.

Studies by the Productivity Commission have shown productivity to be higher in private hospitals.

The evidence strongly suggests that public hospitals are like other public-sector monopolies, and that inefficient delivery of public services should be addressed by outsourcing publicly funded hospital care to more efficient private operators.

However, the P-word — privatisation — is considered electoral poison and political considerations make politicians reluctant to undertake necessary reforms.

These problems have been sidestepped in Britain, and a politically viable pathway to reform found, by creating a quasi market-based, not-for-profit hospital governance model.

National Health Service hospitals in England are run by statutory corporations known as Foundation Trusts. Each trust is independently managed by a board of directors and chief executive responsible for managing the hospital's budget and overseeing all operational matters.

Because trusts have the right to borrow and retain surpluses, genuine accountability for hospital finances creates incentives for more efficient management.

Adapting the trust model to the Australian health system would address the major factors that impede public hospital performance.

In all jurisdictions, public hospitals are run as branch offices of state health departments and are micro-managed by departmental bureaucrats.

The Rudd-Gillard national health reforms were meant to devolve responsibility for hospital management and finances to local health districts to reduce waste and red tape. However, state health departments continue to act as system managers and remain highly involved in frontline management because financial risk for budget overruns continues to be carried by state treasuries.

Highly bureaucratic and centralised management includes statewide, union-negotiated industrial agreements, which entrench poor work practices (such as strict nurse-patient ratios and demarcation of clinical roles) that are inimical to efficient delivery of quality hospital care.

Establishing trust-style public hospitals would fix these problems by replacing the existing command-and-control public monopoly model of public hospital care with a purchaser-provider split. Instead of acting as both funder and provider of hospital services, health departments would negotiate service agreements and contracts with trusts and be able to direct custom to better-performing hospitals.

The new administrative structure would also mimic the key factors that international studies show account for superior hospital management and performance across and inside countries. The 2010 McKinsey Management in Healthcare report found that these factors included competitive environments, managerial autonomy, and non-state ownership.

The McKinsey study also found that privately owned hospitals (including not-for-profits) performed better than those owned by the state because they were free from public-sector restrictions on employment and resource management.

Trusts would therefore need to have the authority to negotiate flexible enterprise agreements with staff, overcome one-size-fits-all workplace rigidities and introduce innovative ways of delivering cost-effective services.

In England, hospital trusts have only achieved modest overall-cost reductions, a result attributed to market-based reforms failing to go far enough to increase competition and stimulate the entry of private providers.

This suggests that broader micro-economic reforms are needed to create a more competitive and contestable market for public hospital care, through selective privatisations of public hospital facilities.

Contracting out full managerial responsibility and financial risk for some public hospitals to private operators would spur trust hospitals to maximise their performance by imitating the best-practice, businesslike methods of for-profit competitors.

Public hospitals are the most costly single component of public health services, and something clearly needs to be done to contain their cost and provide the community with more services for less health funding.

Enabling state governments to buy more services from more efficient hospitals will enhance policymakers' ability to control ever-escalating health expenditure and will improve the long-term sustainability of the health system in an ageing Australia.

Peter Phelan is professor emeritus of pediatrics at the University of Melbourne and a former board member of the Royal Children's Hospital and Cabrini Health. Jeremy Sammut is a research fellow at the Centre for Independent Studies. Their new report, Overcoming Governance and Cost Challenges for Australia's Public Hospitals, is due to be released today.