Solving the looming crisis facing health system

Devolution of public hospital management to the local level has been a policy goal articulated for many years by state and federal politicians. Regrettably, in practice, this has not been achieved despite periodic and repeated redesigns of governance arrangement.

The recent Rudd-Gillard government's national health reforms have placed Local Health and Hospital Districts (LHHDs) in charge of hospitals in designated regions under the nominal control of state government-appointed boards of directors. However, state health departments continue to function as 'system managers' with high levels of involvement in the operational affairs of hospitals because the financial risk for the operating budgets of public hospitals continues to be carried by state treasuries.

The 'command and control' public monopoly model of hospital governance and service delivery features a centralised, productivity-killing setting of policies. These include state-wide, union-negotiated industrial agreements (especially for nurses), which entrench poor work practices and are inimical to cost-effective management and efficient delivery of quality hospital care.

Alternative governance arrangements for public hospitals can address existing management problems and also mimic the key factors that international studies show account for better management and superior hospital performance.

The Foundation Trust hospital management and service provision model was introduced into the National Health Service (NHS) in England by the Blair Labor government.

Foundation Trusts combine true managerial independence with genuine financial accountability. Trust hospital boards of directors and CEOs are responsible for managing the hospital's budget, setting the employment terms and conditions of staff, and overseeing all other operational matters. Trusts have the right to borrow funds based on the hospital's capacity to repay out of earnings, and can retain and reinvest surpluses.

Adapting the Trust model to the Australian health system would also address major barriers to higher productivity by giving Trust hospital managers the authority to negotiate enterprise agreements with staff that take local conditions and financial realities into account. Workplace flexibility will eliminate restrictive and inappropriate 'one size fits all' industrial agreements, and facilitate the implementation of innovative ways of delivering cost-effective services – a process encouraged by the incentives created by financial accountability.

Over the last decade, expenditure on public hospitals has grown at nearly three times the rate of growth in national income. An ageing Australia will face problems funding its public hospital and other publicly funded health services if cost increases continue at current rates, and unless productivity improvements reduce the quantity of public resources consumed by public hospitals.

Improving the performance of public hospitals by placing them under the control of Trust-style boards of management – especially if 'corporatisation' is complemented by a broader microeconomic reform agenda encompassing competitive pricing and selective privatisations – would help control the escalating health expenditure and substantially contribute to the long-term sustainability of the health system.

Dr Jeremy Sammut is a Research Fellow at The Centre for Independent Studies. His report, with Professor Peter Phelan, Overcoming Governance and Cost Challenges for Australia's Public Hospitals was released on the 14 October 2013.