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The missing billion? Revisions to health funding not unprecedented

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FEBRUARY 1, 2013

The missing billion? Revisions to health funding not unprecedented Part of Australian health policy folklore is the claims and counter claims about health financing that endure between State and Commonwealth governments as well as between Government and Opposition. Perhaps the most famous example was the claim in 2003-04 by the then Opposition that Tony Abbott ‘ripped one billion from public hospitals’, which still persists today.

The release of the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO) at the end of last year reignited the debate about health funding. MYEFO notes that payments to the States for National Health Reform (NHR) funding differ from what was projected in the 2012-13 Budget. This is due to changes in the population estimates as a result of the 2011 Census and moderation to the Australian Institute of Health and Welfare (AIHW) health price index that reflect changes in medical inflation rates. Significant falls (up to 20 per cent, attributed to the high Australian dollar) in the price of medical and surgical equipment contributed to this. The difference between what was anticipated in the May Budget and MYEFO is around $1.5 billion over four years, as shown below.

MYEFO notes that the States will receive increased NHR funding in 2012-13 of $716.3 million compared with 2011-12 and that NHR funding is expected to grow at an average of 8.2 per cent across the forward estimates (p. 74). This reflects the Commonwealth’s commitment to provide $16.4 billion of additional funding over 2014-15 to 2019-20 (p. 74).

Clauses A32 and A33 of the NHR Agreement set out the transition arrangements for 2012-13 and 2013-14. In both instances, the funding will be equivalent to the previous National Healthcare Special Purpose Payment (SPP). Indexation will be the same as the former National Healthcare SPP growth factor, as outlined in the Intergovernmental Agreement, Schedule D, clause D24. The growth factor is a product of:

• a health specific cost index (a five year average of the AIHW health price index) • the growth in population estimates weighted for hospital utilisation and • a technology factor (the Productivity Commission derived index for technology growth)

Further recalculations in 2013-14 are likely as the Commonwealth’s contribution to public hospital services (a component of NHR funding) will be recalculated according to public hospital activity (clause A33, c). Planned Commonwealth expenditure is outlined in the Budget papers. Any changes are reported in MYEFO with actual expenditure then recorded in the Final Budget Outcome for the relevant year.

Recalculations have happened before. In the 2003-04 Budget, the Howard Government revised down the forward estimates for public hospital expenditure by $918 million. The variation was explained as the result of a ‘greater proportion of public hospital services provided to non-admitted patients and a reduction in public hospital usage beyond growth resulting from demographic change’, partly attributed to greater use of private hospitals as a result of changes to private health insurance (p. 107).

Population changes were also cited as part of the reason for the revised figures in 2013-13 MYEFO. The ABS updated the Australian population estimates based on the 2011 Census, as previous estimates were too high (around 300 000 people).

Although the transition arrangements and indexation formula were agreed in the NHR Agreement, some States, notably Victoria and Queensland, are blaming the Commonwealth for cutting health funding. The reduction in funding from the Commonwealth is in addition to previous health budget cuts instituted by these Governments (see here and here). The Commonwealth was also criticised for making these cuts mid year, without consultation, and after most States had already set their health budgets.

The most recent controversy over health financing highlights that the ‘blame game’ is far from over. As has been noted previously it is unlikely to be resolved in the absence of structural reform or while there is more than one funding body. The practice of revising forward estimates is likely to continue as Governments update projected expenditure according to more accurate information (such as population estimates) or changes to policy.

Some of the debate about funding public hospitals may be diffused in 2014-15 when the Commonwealth’s contribution to public hospitals will be funded on an activity basis. Under this arrangement, a formal forecast of the Commonwealth’s contribution will be published before the start of the financial year (see clause A36 of the NHR Agreement). States will also be able request informal estimates of the Commonwealth’s contribution if estimates about service volumes are provided (see clause A37). But the underlying issues remain - demand for hospital services is increasing and expenditure on hospitals is projected to be around 80 per cent of the health budget by 2033. Unless there is a greater emphasis on primary care and prevention, predictions that there will never be enough hospital funding will persist.

Posted by Rebecca de Boer at 3:05 PM Email ThisBlogThis!Share to TwitterShare to Facebook Labels: Commonwealth-State financial relations, health financing