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Hospitals Efficiency and Administration - Report of Commission of Inquiry, dated 29 December 1980 - Volume 2 - Supplement

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Australian Government Publishing Service Canberra 1981

© Commonwealth of Australia 1981

ISBN for complete set of three volumes 0 642 05940 3 ISBN for th is volume 0 642 05937 3

Printed by C. J. Thompson, Commonwealth Government Printer, Canberra























( ill)









28 THE AGED 613





2A Australian Hospital U tilisation and Cost S ta tis tic s, 1971 to 1979. 647

2B Section 96 Grants 693

2C Private Hospital S ta tis tic s 733


Because of time constraint for the presentation of the Report imposed in the Letters Patent, th is Volume is not in a form as refined as the Commission otherwise would have arranged. Detailed editing and normal proof reading have not been possible.

For the purpose of the Report, 'S tates' wherever used indicates 'States and T e rrito rie s'.

( i v )


In the Interim Report health expenditures expressed as a percentage of gross domestic product were shown to have grown from 5.4 per cent to 7.9 per cent in the period 1968-69 to 1978-79, th at is by 46 per cent. This increase reflected an increasing demand on the community's resources. While

in recent years there has been a falling off in the rates of growth of domestic product as well as health expenditure, during the ten years health costs have clearly outstripped the growth in gross domestic product.

The Interim Report identified several factors which contributed to the increase in health costs in the 1970s. These included:

. labour costs including increases in salaries and wages, improvements in working conditions, increases in training, salary 'catch up' and equal pay decisions of the 1970s; . the move to more skilled classification and specialisation of

workers; . the introduction of new technology; . increase in population and the aging of the population; . increasing numbers of doctors;

. inflation; and

. increase in the intensity of care.

Australia is not alone in attempting to deal with the problem of rising health costs. Overseas experience indicates that in a ll industrialised Western societies there is a good deal of public concern at the rising costs of health care and many of the factors liste d above are under review.

The United States, with its p lu ra listic health financing system, faces a proportionately greater health b ill than Australia (9.1 per cent of GNP for 1978). In many Western European countries insurance covers most health costs, yet there, too, to ta l health costs are rising relativ e to other


sectors of the economy. Neither a particular method of financing nor a particu lar method of payment for medical services in these countries can be held to be the only cause of cost increases. Both must be associated with cost increases. If finance from whatever source was not so readily available

then the number of services would probably f a ll, th e ir prices would be reduced or some combination of the two would occur. Similarly, the method of payment can fa c ilita te or restrain u tilisa tio n and costs such as fee-for-service payments, compared to health maintenance organisations in the United States.

As Australia progressively becomes richer i t is therefore to be expected that more resources w ill be spent on health. Sim ilarly, the recent slowdown in the rate of national growth has been asociated with a reduction in health care expenditure as evidenced by the reduction in the proportion of health costs to GDP.

Labour Costs

Labour levels and improvements in conditions of s ta f f are most readily iden tified as being associated with hospital and health services cost increases. Table shows that civilian employment in the health industry rose by 54 per cent in the period 1971 to 1979.

Table 1: Civilian Health Industry Employees

As at June (000's)

1971 246.7

1972 267.8

1973 284.0

1974 305.0

1975 325.0

1976 344.3

1977 362.0

1978 374.0

1979 380.8

Note: Does not include self employed Source: Civilian Employees Australia June 1966 to June 1979 ABS Catalogue 6214.0 Canberra.


In addition to increases in numbers, the workforce experienced substantial improvements in the level of remuneration because of equal pay and catch-up provisions for nurses. Conditions of service also improved, with greater training opportunities and increased annual leave provisions. A

Victorian study shows that from 1969 to 1979 changes in penalties, conditions, overtime and allowances have substantially altered the cost structure of hospital employees. Whereas in 1969 these contributed about

six per cent on top of award wages, by 1979 the contribution was 26 per cent (Tatchell 3238). A Western Australian study gives similar results (Schapper and Hobbs, 1979). Labour costs in public hospitals accounted for 66.A per cent of to ta l gross operating costs in 1968-69. They had grown to 70.9 per cent in 1978-79 (Interim Report, 25). This shows that rises in health expenditure are being associated with an increase in the share going to the growing health workforce.

Australia-wide data is inadequate to permit a dissection of the increase in labour costs to identify price and quantity effects. Clearly, increased labour costs have been a major component of the increased expenditures. Over-award payments and overtime also appear to have significance in

increasing labour costs, although they seem to be under control in some States.

Responses to the Commission's survey of a sample of acute public hospitals mentioned a number of improved conditions and allowances, including work value increases awarded by arbitration authorities, recreation leave loading payment of 17.5 per cent, four weeks annual recreation leave, five

days additional recreation leave for s ta ff rostered for Sunday work, maternity leave, payments of re stric tiv e allowances to resident medical s ta ff, radiographers and pathology s ta ff, e lig ib ility for long service leave

a fte r 10 years in lieu of 15 years, higher penalty payments for s h ift work, and more generous education provisions.

Often the improved conditions had the effect of reducing productive labour hours worked by health services s ta ff and these reductions, of course, equate to price increases. The Australian Hospitals Association in its submission said: 'Hospitals have assumed an increasing financial burden relating to practical experience and teaching programs for a wide range of


students' (210, 8). The submission goes on: 'This phenomenon has impinged upon health care costs in that most students in the health field require practical training in hospitals. In th is regard they must be accommodated,

supervised, and in the case of nursing, paid by hospitals during their student years. Unfortunately, the true cost of the educational component of hospital costs has never been determined and lie s in the operating expenses of hospitals. The education process described has also been used by the

various health professions, and others, to achieve high levels of remuneration on the principle that i f a profession can upgrade its academic level i t has the right to pursue higher salary levels in recognition of the new academic statu s. This gives rise to competition to maintain relative salary status by upgrading educational standards. Thus, there is a leap frogging effect and a general liftin g of salary le v e ls.'

Increased training time is one of the causes to which greater s ta ff numbers has been attributed. The Commission's own survey of a sample of recognised acute public hospitals indicated both that the s ta ff to patient ra tio increased in the period 1968-69 to 1978-79 and th at i t also increased as did hospital size.

The Queensland Department of Health provided a table showing the growth in s ta ff for each occupied bed in the various States over the years 1976-77 to 1978-79 together with the percentage increase. Extracts from th is table show that Queensland had a lower s ta ff for each occupied bed at 1977 and again at 1979, but the percentage of growth in that period was greater than

in other States. The Queensland Department assumes that th is is because i t held s ta ff down in e arlier years to a ratio well below other States. Staff for each occupied bed is a factor in health costs, although

the Commission recognises that changing intensity of treatment must be taken into account.


Table 2: Staff Per Occupied Bed


1976-77 2.81 3.49 3.22 3.95 3.59 3.01

1978-79 2.98 N/A 3.33 3.67 3.61 3.12

% growth

between 1977-79

6.10 N/A 3.40 -7.10 .60 3.70

Source: S.711, 12.7


The growth in the labour force has been associated with the introduction of new and sophisticated technology, which brings with i t a demand for sp ecialist s ta f f. The Commonwealth Department of Health pointed out th at:

'The greatest increases in staffing occurred in the more highly skilled and highly paid categories, particularly medical practitioners and technical s ta ff. In combination with increases in salaries and wages these rises in staffing levels and the shift towards more highly

skilled occupations have clearly raised costs considerably'. (S.700 Part 1,59 )

The submission went on:

'New technology has created a need for specialised technical scie n tific and medical s ta f f to research, introduce, operate and maintain the equipment and to interpret re s u lts.' (S 700 Part 3, 76)

Discussing the increases in specialisation, the Australian Hospital Association in its submission pointed out that 'I t has brought with i t a significant increase in the cost of hospital serv ices... primarily costs involved in the direct employment

of these specialists, who demand access in turn to specialists nursing s k ills , and the allocation of resident medical staff for both service needs and training purposes' (S210, 8).


The Association continued:

'Prior to World War 2 there was but a handful of medical specialties at both the c lin ical and technical levels, and few paramedical professions. Cardiology, plastic surgery, thoracic and cardiovascular surgery, endocrinology, gastroenterology, nephrology, neurology, neurosurgery, rheumatology, vascular surgery, urology and other specialties have a ll emerged since the 1940s and the great majority arrived in the 1950s. Likewise, the investigational specialists of biochemistry, haematology, microbiology and nuclear medicine, borne of medical and scien tific technology, have s p lit off from general laboratory fa c ilitie s . Before the War the paramedical group consisted of l i t t l e more than pharmacy, physiotherapy and medical social work. Since then they have been joined by such professions as occupational therapy, speech therapy, clin ical photography, biomedical engineering, psychology, orthoptics, orthotics and prosthetic technology.1 (5210, 8)

On th is same topic the Commonwealth Department of Health's submission said,

'The major consequences of specialisation for hospitals are that: Larger numbers of health manpower in different occupational categories are involved in patient management decisions and increasing numbers of procedures and te sts are provided.

This pattern must increase c o s ts .' (Submission 700, Part 3, 76.)

The degree of specialisation that has occurred in the health sector brings with i t an increasing in d iv isib ility of labour. The marginal returns to patients from at least some of the specialisation that is occurring would be at best minimal. Moreover the sp ecialist care being provided can be very expensive indeed.


Medical Manpower

Increasing numbers of doctors are also associated with cost increases, particularly in the Australian environment, which is a mixture of private and public delivery systems.

Increasing to ta l doctor numbers are associated with cost increases, as are the number of sp ecialists to general practitioners. On the basis of overseas studies, Australian estimates have revealed a significant increase in the number of surgical procedures as the number of surgeons in the

population rise . In Western A ustralia, surgical procedures increased by 17.6 per cent per thousand for males and 21.4 per cent per thousand for females between 1972 and 1977, while the number of surgeons per unit of population rose by about 60 per cent (Opit and Hobbs). In addition to

increases in doctor numbers, the 1970s saw a substantial increase in the schedule of medical fees approved by government and authorised by the Australian Medical Association.

The Interim Report detailed the payments by public hospitals to visiting medical officers as a contributory factor to the increase in costs. $85.7 million was provided in 1978-79 for services which had not been charged for before 1975-76 (Interim Report 25).

In the Commonwealth Department of Health's submission, i t was pointed out that 'In conjunction with the over-supply and maldistribution of manpower, fee-for-service contains incentives which contribute to cost escalation in the health care s e c to r.' While the Department does indicate

that 'the supply of doctors in Australia has grown substantially in recent years (from 1.2 doctors for each thousand population in 1966 to 1.6 in 1976)', and also shows that 'in apparent response to this situation medical service u tilisa tio n rates have also increased dramatically (from 3.9 services

per capita in 1968 to 5.5 in 1976)' (Submission 700, Part 1, 71) the submission only implies that fee-for-service as such was a factor contributing to cost escalation.


The Queensland Department of Health in its submission was more assertive. I t said,

'I t is undeniable that Queensland provides a public hospital service to its population at a cost which is less than that in any other ju risdiction in th is nation. W e believe th is has been done without jeopardising standards of care. I t is our conviction that th is has been a d irect resu lt of a coherent group of administrative and policy decisions which have been developed over the lif e of our hospital

serv ice .'

These decisions include 'The use of sessional, rather than fee-for-service payment for visiting specialist s ta f f of h o sp ita ls.'

On balance, the figures available suggest there are incentives in fee-for-service payment which encourage high levels of u tilis a tio n , and u tilisa tio n of costly forms of treatment, and that these levels may as a result be higher than would otherwise be the case.

New F acilities

A number of new hospitals with greater capacity and requiring more in absolute terms to operate and maintain have been b u ilt during the la st decade. New teaching hospitals have been established in a number of States and existing fa c ilitie s in many old hospitals have been upgraded and expanded. A general tendency exists in the health sector for in stitu tio n s to continue operating for some related purpose even after they are replaced.

Some have been given new roles, such as medical rehabilitation, or aged care centres, but overall, the increase in the fa c ilitie s has not been well planned and has led to further cost increases.

New Technology

The procedure for purchasing and operating much of the new equipment varies from State to S tate, but as a general rule:

'The decisions to purchase new technology for hospitals or to create new service units are rarely based on cost benefit calc u la tio n s.' (Cox, 1977)


Unlike other enterprises, new technology in health has not led to productivity and cost improvements, rather the reverse. Duplication of such technology, or over-provision compounds the cost problem. Some advances have l i t t l e influence on the natural course of disease even though in itia lly

promising great things for p atients. Some undoubtedly are creating demand pressures, professional and financial incentives for doctors to u tilis e the new f a c ilitie s which also increases costs.

The submission of the Commonwealth Department of Health said, 'This wasteful and uncoordinated proliferation of technological devices encourages a "shot gun" approach to diagnosis and treatment: patients may be bombarded by a variety of procedures virtually

irrespective of th e ir appropriateness and despite the duplication of device functions, marginal health improvement benefits and high c o st'.

The submission went on, ' I t is apparent th at the expansion of medical technology is responsible for much of the current escalation of hospital and medical costs. In the United States, for example, 50 per cent of the increase in hospital costs over recent years has been attributed (directly and indirectly) to technological advances. The very sketchy Australian evidence also suggests th at a significant proportion of cost escalation

is associated with the proliferation of technological services' (S700, Part 1, 62-63).

The Department also said ' A large proportion of health costs can be directly or indirectly attributed to technology. This is because new technology has created a need

for specialised technical, sc ie n tific and medical staff to research, introduce, operate and maintain the equipment and to interpret re su lts' (S700,Part 3, 76).

The Australian Hospitals' Association in its submission said: 'Advances in medical technology have permitted the introduction of many sophisticated procedures for resuscitation, sustenance of lif e , improvement of condition, or diagnosis. The equipment required is not


only expensive to purchase but is also expensive to maintain and must be operated by increasingly skilled and highly paid s ta ff. In addition, Australian hospitals are particularly susceptible to imported inflation as a significant proportion of highly specialised equipment is manufactured overseas' (7).

The Commision draws attention to a statement by the Commonwealth Department of Health:

'Despite the unavailability of comprehensive s ta tis tic a l information, i t is apparent that the expansion of medical technology is responsible for much of the current escalation of hospital and medical costs. While much of th is cost escalation may ultimately by ju stified by the benefits of technology, there is no doubt that a more rationale restrained approach to technological development would constribute to both a reduced rate of cost increase and improved patient management.

(Submission 700, Part 1, 63)

Non-Labour Inputs


About 25 per cent of hospital expenditure in 1976-77 were for goods and services supplied from outside the hospital. The prices of these goods, in to ta l, has approximated the increase in the C.P.I. - Accordingly they have received less attention than labour costs which have been shown to have a much greater growth rate. Nonetheless, non-labour inputs are a significant component of costs and th eir quantity can have an impact on cost movements.

The following details were taken from Abelson 1978.

1 0

Table 3: Non-Labour Inputs in Sydney Inner Region Hospitals

1968-69 1974-75 $ million $ million Change in Total

Increased Inputs Per Patient (a)

% %

Food 2.4 4.1 72 -5

Drugs 2.2 5.0 127 +18

Medical and Surgical Supplies 1.4 4.1 193 +52

Fuel, Light and Power 0.7 1.5 105 +6

Domestic Charges 1.1 3.6 227 +69

Special Services 1.1 2.7 145 +27

Renewals, Maintenance Repairs 1.2 3.4 183 +47

Administration expenses 1.5 4.8 220 +66

Total: 11.6 29.2 152 +32

Note:(a) Percentage Increase in Inputs per patient = percentage change in total costs CPI increase x percentage increase in number of


For food, the special price index for food was substituted for the CPI. Sources: Hospital Annual Returns.

Australian Bureau of S ta tis tic s This example of quantity increases indicates a need for management controls to be exercised wherever possible. Data on individual hospitals, as recorded in Annual Reports indicates th at the quantity factor may s t i l l be a

significant part of non-labour costs.


Increased U tilisation

I t is widely recognised that the in stitu tio n al sector represents a major share of Australian health expenditure and that hospitals in turn are the largest element of that share. The Commonwealth Department of Health in its submission said

1 Institu tio n al services account for nearly 60 per cent of the to ta l. Hospital services are the largest single item of expenditure, accounting for 48 per cent of to ta l expenditure in 1977-78'.

The Department also said that 'Hospitals [are] absorbing a steadily increasing proportion of the budget' (Submission 700 Part I, 39, 5).

Similarly, the Australian Hospitals' Association said in its submission 'In stitu tio n a l expenditure comprises approximately 57 per cent of to ta l health expenditure. Public hospitals lie within th is in stitu tio n a l group and themselves account for approximately 34 per cent of to ta l Health expenditure' (S210, 6).

In reviewing the movements in expenditures over the past decade the Commission sought to determine the output associated with the increased expenditure. Basically, the analysis was to ascertain whether the increase in real resources, as distinct from changes due to price variations, was providing more extensive treatment for the same percentage of the population or whether a greater proportion of people was being treated.

I t was noted that the Unit of Clinical Epidemiology, Department of Medicine, University of Western Australia, had developed a hospital price index based specifically on hospital data to show the e ffe ct of price movements in the hospital sector. (See Schapper, 1980.)

The index developed for each State and for Australia is a t Table 4. Its comparability to other indices is at Table 5. The index comprises a hospital labour price index calculated from data on the number of hours worked and the corresponding cost an hour of each labour classification. The Consumer Price

Index was used as an index for the non-labour component of hospital costs.


Table 5 illu s tra te s a significant variation between the hospital price index and other commonly used deflators. The hospital price index more accurately re fle c ts the impact of equal pay for women in an industry that is predominantly female (compared to 36 per cent in the civilian workforce). I t

also discounts for the increased payments awarded to student nurses in the early 1970s. The Commission has experienced some difficulty in interpreting the data which is available. The hospital price index provides a more

accurate indication of movements in real resources as distin ct from movements in money prices.

The hospital price index has accordingly been used as a deflator on the only complete and consistently compiled data set on hospital u tilisa tio n and costs, the Hospitals ana Allied Services Council tables (HASAC, Uniform Statements of Cost, Source of Funds of Hospitals and Nursing Homes and Government Assistance to Allied Services in Australia, Uniform Costing

Committee Issues 1970-71 to 1976-77, 1975-76 and 1976-77 unpublished).

The Unit of C linical Epidemiology, University of Western Australia, also assembled data for 1977-78 and 1978-79 using HASAC guidelines for use by the Commission. The U nit's resultant tables are at Appendix 2 .A.


Table 4: Hospital Price Indices Generalised Labour and Non-Labour Components


1970-71 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

1971-72 118.6 119.0 118.4 117.8 117.9 118.4 117.6 117.3 118.9 118.6

1972-73 133.9 133.9 133.4 131.8 131.8 133.2 133.1 130.2 133.5 133.4

1973-74 161.6 161.8 160.6 158.4 159.0 159.8 159.1 155.7 161.2 160.8

1974-75 206.7 205.9 206.2 201.8 201.9 208.2 200.6 196.9 205.7 205.3

1975-76 259.3 256.8 250.7 247.6 254.4 257.8 256.6 243.0 256.4 255.8

1976-77 289.1 289.1 289.4 282.0 284.5 287.2 288.9 276.0 292.5 288.0

1977-78 319.2 312.7 318.0 311.8 311.7 315.8 318.3 313.7 320.7 315.9

1978-79 341.4 336.1 337.9 334.0 334.2 337.5 339.8 323.6 343.2 338.0

Table 5: Alternative Price Deflators




1970-71 100.0 100.0 100.0 100.0

1971-72 119.3 106.8 114.0 109.9

1972-73 134.3 113.3 124.7 119.8

1973-74 162.0 127.9 146.2 139.3

1974-75 208.4 149.3 189.1 175.3

1975-76 258.7 168.7 220.1 200.3

1976-77 289.9 191.9 241.7 225.2

1977-78 319.4 210.3 260.6 247.4

1978-79 341.8 229.2 276.3 266.6

Sources: Appendix 2A Interim Report Australian Bureau of S ta tis tic s Australian National Accounts, 1966-67, Tables 43,44; 1976-77


The tables indicate th a t real resources for each patient for Australia have risen by only three per cent from 1979-71 to 1978-79 in recognised hospitals. Resources for bed-day have increased by 39 per cent, indicating a greater intensity of treatment while occupied bed-days for each 1000

population have declined between 1970-71 and 1978-79 from 1367 to 1296.

Admissions per capita during that period rose from 142 to 165 per thousand and outpatients occasions of service per 1000 population went up from 934 to 1653. Admissions per capita to teaching hospitals increased by 40 per cent, to non-teaching hospitals by four per cent.

In real terms per capita expenditures increased (1970-71 to 1978-79) in teaching hospitals by 45 per cent. The corresponding figure for non-teaching hospitals was 21 per cent.

Increased expenditures have been associated with a relatively permanent trend in hospital u tilis a tio n for admissions per thousand population and the expenditures have been increasing particularly in teaching hospitals. Table 6 shows that in 1978-79 50 out of the 759 public hospitals were consuming

49.5 per cent of hospital expenditures.

The Commission is aware of evidence which suggests that in some areas at le ast, higher u tilis a tio n rates yields zero or marginal benefits. The Commission in examining health cost increases notes the following statement from the Merrison Report, 1979.

' . . . we should sound two notes of caution. The firs t is that spending more on the National Health Service w ill not make us proportionately healthier or liv e proportionately longer, though i t may improve the comfort and quality of lif e of patients or the pay and conditions of s ta f f. The other is that whatever the expenditure on health care, demand is lik ely to rise to meet and exceed i t . To believe

one can satisfy the demand for health care is illusory, and that is something a ll of us, patients and providers’alike must accept in our thinking about the National Health Service.1


Table 6: Proportions of Public Hospital Expenditure in Teaching and Non-Teaching Hospitals 1976-77



No. of teaching Hospitals 10 12 9 6 5 2 50

Proportion of Expenditure in Teaching Hospitals 34.2 51.8 56.2 71.9 69.3 55.7 49.5

No. of Non­ teaching Hospitals 234 142 135 73 91 20 709

Proportion of Expenditures in Non­ Teaching Hospitals 65.8 48.2 43.8 28.1 30.7 44.3 50.5

Sources: HASAC - Uniform statements of cost, source of funds of hospital and nursing homes, and government assistance to allied services in Australia 1976-77 (unpublished).

Tasmanian Director-General of Health Services Annual Report 1976-77.

Capital Territory Health Commission Annual Report 1976-77. Repatriation Commission Annual Report 1976-77.

Note:(a) Includes Repatriation, Australian Capital Territory and Northern Territory.


Other Factors Increasing Costs

Responses to the Commission's survey of a sample of acute public hospitals mentioned greater patient expectations in respect of services provided as being a factor behind cost escalations. In addition, higher social standards for food and accommodation was given as the reason for

increased use of disposable items in hospitals as in the community generally.

Absence of p a tie n ts' out-of-pocket payments were thought to be a factor in increased health spending. In i t s submission, the Commonwealth Department of Health suggested th at 'most persons w ill either be treated in hospitals free of charge or recoup (or have the hospital recoup) the charges from the hospital insurance funds. This situation is conducive to high u tilis a tio n of hospital fa c ilitie s and services by patients' (Part 2, 76), but the

department does not put forward conclusive evidence to indicate th a t cost escalation has occurred as a re su lt.

The av ailab ility of beds may also affect costs. In i t s submission the Commonwealth Department of Health said 'empty beds are costly to maintain and unproductive. Moreover, the provision of hospital beds is a major factor determining the level of usage of inpatient fa c ilitie s by the medical

profession. I t has been recognised that more beds generate more services and extra costs' (Part 1, 58).

Pursuing another angle on the 'supply' cause the Commonwealth Department of Health in its submission said, 'The expansion of private sector involvement in health care, especially in the hospital fie ld , has contributed to increased health costs in recent y e ars,' and pointed out th a t, 'Between

1970 and 1978... private hospital bed supply increased by over 45 per cent (Part 1, 67).

The Annual Report of the Director-General of Health 1979-80 shows in Table 83 that public hospital beds are showing a modest decline but that decline is more than offset by the increase in private hospital beds.

The Commonwealth Department of Health submission also recognised competition between hospitals (both public and private) and the extent of hospital autonomy as having been factors behind cost increases.


'Many large public hospitals share identical catchment areas and provide competing services and f a c i l i t i e s .'

The submission continues:

'Duplicate fa c ilitie s not only generate demand for more services, but commit hospitals and training in stitu tio n s to high levels of manpower, especially skilled sp ec ia lists. The end result of competition and duplication is to add to the labour costs of public hospitals, which represent well over 70 per cent of gross operating costs. The ability of hospitals in the past to make autonomous decisions concerning the purchase and in stallatio n of equipment without due regard to the existence of similar fa c ilitie s in the same geographic region has contributed to th is wasteful over provision of f a c ilitie s ' (Part I, 58).

Clearly the expansion of individual hospitals has contributed to increased costs. In response to the Commission's survey of a sample of acute public hospitals, a number of hospitals pointed out th at a significant share of cost escalation in their in stitu tio n between the years 1968-69 and 1978-79 was attributable to the provision of new services at that hospital. For example, many referred to the introduction of a new sp ecialities and a number also referred to community health and rehabilitation a c tiv itie s. A variety of other enhancements were mentioned such as the introduction of home dialysis programs, greater provision of appliances, prostheses and dentures and such support services as improved medical records. Many of these additional services provided were, of course, needed for the growing population of particular areas.

Population Factors

Here, as overseas, the rising population has naturally consumed more health resources in absolute terms. The Interim Report calculated A ustralia's population increase between 1969 and 1979 at 17 per cent and commented on the change in the proportion of the aged, for i t is axiomatic that the aged w ill consume more health resources than the young. Not only are Australians living longer, but relatively more are reaching old age.


The Commonwealth Department of Health's Submission said, 'Certain age and sex groups consume more medical services than others, particularly the very young, the aged and women of child bearing age.' I t goes on, 'there is l i t t l e doubt that growth of the aged population has contributed to increases in the rate of use of medical se rv ic e s .' (Part 1, 47).

Table 7: Estimated Population Aged 65 Years and Over

Number (000)

Per cent of Population

1973 1143.3 8.55

1974 1172.4 8.62

1975 1200.1 8.72

1976 1236.1 8.88

1977 1272.7 9.04

1978 1314.1 9.22

Source: Australian Bureau of S ta tis tic s , October 1979

Detailed data on u tilis a tio n of health services by the aged is not available although i t is known th a t in New South Wales 58 per cent of a ll hospital beds are ocupied by patients 65 and over, that is , less than 11 per cent of the population use about 60 per cent of the hospital

fa c ilitie s . I t seems likely th a t older patients use services to a similar extent in other States.


On funding mechanisms, the Board of Management of Prince Henry's Hospital in its Submission said, 'The use of annual maintenance fund allocations, particularly with delayed advice of the level of funds, is a major cause of inefficiency since the management cannot plan ahead with confidence'. The Board put the commonly held view that, 'there is no

incentive for e ffic ie n t operation, as funding tends to be based largely on the previous year’s expenditure so th at cost reductions result in further funds' restric tio n s whereas over expenditure has tended to engender additional allocations' (9).


'Many large public hospitals share identical catchment areas and provide competing services and f a c ilitie s .1

The submission continues:

'Duplicate fa c ilitie s not only generate demand for more services, but commit hospitals and training in stitu tio n s to high levels of manpower, especially skilled sp ecialists. The end result of competition and duplication is to add to the labour costs of public hospitals, which represent well over 70 per cent of gross operating costs. The ability of hospitals in the past to make autonomous decisions concerning the purchase and in stallatio n of equipment without due regard to the existence of similar fa c ilitie s in the same geographic region has contributed to th is wasteful over provision of f a c ilitie s ' (Part I, 58).

Clearly the expansion of individual hospitals has contributed to increased costs. In response to the Commission's survey of a sample of acute public hospitals, a number of hospitals pointed out th at a significant share of cost escalation in th eir institu tio n between the years 1968-69 and 1978-79 was attributable to the provision of new services at that hospital. For example, many referred to the introduction of a new sp ec ia litie s and a number also referred to community health and rehabilitation a c tiv itie s . A variety of other enhancements were mentioned such as the introduction of home dialysis programs, greater provision of appliances, prostheses and dentures and such support services as improved medical records. Many of these additional services provided were, of course, needed for the growing population of particular areas.

Population Factors

Here, as overseas, the rising population has naturally consumed more health resources in absolute terms. The Interim Report calculated A ustralia's population increase between 1969 and 1979 at 17 per cent and commented on the change in the proportion of the aged, for i t is axiomatic that the aged will consume more health resources than the young. Not only are Australians living longer, but relatively more are reaching old age.


The Commonwealth Department of Health's Submission said, 'Certain age and sex groups consume more medical services than others, particularly the very young, the aged and women of child bearing age.' I t goes on, 'there is l i t t l e doubt that growth of the aged population has contributed to increases

in the rate of use of medical serv ices.' (Part 1, 47).

Table 7: Estimated Population Aged 65 Years and Over

Number Per cent of

(000) Population

1973 1143.3 8.55

1974 1172.4 8.62

1975 1200.1 8.72

1976 1236.1 8.88

1977 1272.7 9.04

1978 1314.1 9.22

Source: Australian Bureau of S ta tis tic s , October 1979

Detailed data on u tilis a tio n of health services by the aged is not available although i t is known that in New South Wales 58 per cent of a ll hospital beds are ocupied by patients 65 and over, that is , less than 11 per cent of the population use about 60 per cent of the hospital

f a c ilitie s . I t seems likely th at older patients use services to a similar extent in other States.


On funding mechanisms, the Board of Management of Prince Henry's Hospital in its Submission said, 'The use of annual maintenance fund allocations, particularly with delayed advice of the level of funds, is a major cause of inefficiency since the management cannot plan ahead with

confidence'. The Board put the commonly held view that, 'there is no incentive for e ffic ie n t operation, as funding tends to be based largely on the previous year's expenditure so th a t cost reductions resu lt in further funds' restrictio n s whereas over expenditure has tended to engender

additional allocations' (9).

The paucity of cost data was seen by many as contributing to over spending. The Commonwealth Department of Health in its submission said, 'there is clearly a need for hospital administrations to be accountable both to the community and to the health authorities in terms of performance against set standards. The budgetary control process is an integral part of th is process. The present budgetary processes, particularly where they

involve a rubber stamping of estimates, have not rewarded efficiency and have not assisted in promoting cost awareness1 (Part 1,7)

Despite the widespread concern about inadequate cost data, on a number of occasions, including in response to the Commission's survey of a sample of acute public hospitals, the Commission was told that the increasing numbers and complexity of returns required by State health authorities had contributed to the increased costs of administration of hospitals. I t was evident that the value of many of these returns was not apparent to those charged with the responsibility of submitting them.

Inappropriate treatment and accommodation were frequently put before the Commission as contributing to costs. In its submission, the Commonwealth Department of Health said, 'Hospital treatment is most expensive relative to various alternative health and medical services' (Part 1, 69). I t continues that this is 'particularly pertinent to the care of the aged and the chronically i l l . Many who are currently being cared for in hospital could,

if fa c ilitie s were available, be accommodated in appropriately equipped nursing homes. Similarly many aged persons currently accommodated in nursing homes could be cared for at home, i f adequate support f a c ilitie s were available ... Medical rehabilitation services . . . are virtually non existent outside metropolitan areas.'

Other factors that were brought to the attention of the Commission were lifesty le and environment. The Commonwealth Department of Health's submission stated that, 'personal health habits play a c ritic a l role in the development of many

serious diseases and injuries from violence and motor vehicle accidents. The most pressing health problems today are related to excessive smoking, drinking, inappropriate diet, over use of medications and inability to cope with the daily stresses and tensions of lif e , a ll of which, with the possible exception of d ie t, appear to be becoming

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more prevalent. Evidence is also increasing of the links between i l l health and the influence of the physical, socio-economic and family environments - such factors as low income, employment sta tu s, a ir, water and noise pollution, inadequate housing, the ever growing volume of synthetic chemical wastes and in d u strial by products' (Part 1, 51).

The submission continued 'I t is known that accidents represent on average a constant 11 per cent of a ll hospital admissions. They are either the most common or second most common cause of admission . . . Similarly, food-borne

diseases are a significant source of hospitalisation in Australia (Part 3, 136).

In an attempt to quantify the effect on costs of accidents, the Department's submission said 'Accidents, many of which are clearly preventable, are known to comprise a major cause of hospital admissions, and a reduction of even 10 per cent would save an estimated 1 per cent of bed


The submission said

'N utrition has been id en tified and proven to be a v ita l environmental factor affecting human development and longevity. Surveys have shown the existence of major nutritio n al problems that resu lt in growth d e fic its , iron deficiency anaemia, obesity and its related

diseases, and dental caries. In 1977 the United States Senate Committee on Nutrition and Human Needs pointed out that 6 of the 10 leading causes of death in that country are related to diet. These are heart disease, stroke and hypertension, cancer, diabetes, arteriosclerosis and cirrhosis of the liv e r.

'In A ustralia, these diseases account for the majority of admission to hospitals and related in s titu tio n s . They also account for a significant number of consultations with medical practitioners outside in stitu tio n s ' (Part 3, 138).


The attitudes of individuals and of health service people too were shown to have been factors in health spending. The Commonwealth submission said, 'In the final analysis the individual cannot be exempted from responsibility in relation to the demands made on hospitals and other health

services. The strategies of health education, health promotion and s e lf help have a ll had th e ir successes and failures; however, there is l i t t l e doubt that properly directed they can influence not only the well being of the

individual but also future demands on services. Hoospitals are well placed to capitalise on such stra te g ie s. For example, f a c ilitie s for obtaining family planning advice should be available at a l l hospitals. The basic requirement is an attitu d in a l change by s ta ff rath er than additional resources.1

The submission of the Australian Medical Association said:

'In the post-war-period, the provision of a high level of health care has been paramount importance. This objective has been successfully achieved. At the same time, the cost efficiency of delivery methods has received low p rio rity ' ( i i ) .


There is no additional evidence available which warrants changes being made to the conclusions of the Interim Report. There are definite factors, which are covered in th is Report and in the Interim Report, which caused the increases in costs, the fa llin g value of money being a major factor. Substantially increased expenditure on health services in the 1975-76 period

undoubtedly contributed to the increased cost of living in other sectors as well as in health and th is i s now built in to the economy.

The Commission has trie d to break down some of the to tal costs, as shown in the tables in the Interim Report, to components, and arrive at a component cost increase. A lack of data and restriction o f time prevented th is from being achieved.

Table 14 of the Interim Report is repeated to show the increase between 1968-69 and 1978-79 in 1978-79 value dollars deflated back to the 1968-69 dollar value for public h o sp ita ls. This shows th a t in 1968-69 dollar value the cost of public hospitals increased by more than $429 000 000. Some of

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th is increase is accounted for by increased u tilisa tio n , some of that caused by the general increase in population in Australia. The estimated total population in Australia at 30 June 1979 was 14 421 916 and the actual figure at 30 June 1969 was 12 263 014 (Australian Bureau of S tatistics) an increase

of 2 158 982. The bed-days in public hospitals increased from 15.895 million in 1968-69 to 17.796 million in 1978-79, an increase of 1.901 million bed-days.

In the ten years from 1968-69 to 1978-79 there was an increase in expenditure in recognised public hospitals of $2297.6 million. The 1978-79 to ta l hospital expenditure of $2664.4 million included an amount of $1868.3 million for in fla tio n . The increase in hospital expenditure over the

ten years at 1968-69 dollar value is $429.3 million or 117 per cent. These very large increases were a reason which caused governments to appoint this Commission.

Interim Report Table 14: Growth in Current Expenditures on Public Hospitals, Actual and Deflated, 1968-69 to 1978-79

Current Expend­ iture Annual


Expend­ iture Per Person

Deflated (a) Current Expenditure

Deflated (a) Annual Increase (Real)

Deflated (a) Per Person Expenditure

1968-69 366.8 - 30.20 366.8 - 30.20

1969-70 416.4 13.5 33.60 389.5 6.2 31.40

1970-71 507.2 21.8 41.10 431.3 10.7 34.10

1971-72 614.4 21.1 47.00 460.9 6.9 35.30

1972-73 719.2 17.1 54.20 487.3 5.7 36.70

1973-74 910.9 26.7 67.50 529.6 8.7 39.30

1974-75 1307.9(b) 43.6 95.50 588.6 11.1 43.00

1975-76(b) 1741.9 33.2 125.80 666.6 13.3 48.10

1976-77 2122.7 21.9(b) 151.70 726.5 9.0(b) 51.90

1977-78 2442,7 15.1 172.50 775.7 6.8 54.80

1978-79 2664.4 9.1 185.90 796.1. 2.6 55.50

Source: Commonwealth Department of Health Notes: (a) Deflated by the I.P.D., see Appendix J Interim Report (b) Estimates


Because of changes in accounting procedures, the time series up to 1974-75 is not s tric tly comparable to the period 1975-76 onwards. In addition, tax concessions were available for insurance contributions prior to 1975. These deductions were a cost to the Government but were not counted as part of health expenditures. From 1975 tax deductions on premiums no longer applied. Estimates of the value of the subsidy were $287 million in 1973-74 and $416 million in 1974-75 (Dr. R.B. Scotton). However, these were large increases in the years 1974-75 and 1975-76. These were controlled to a degree in 1976-77 but more fully in the two following years by the action taken by the Commonwealth Government deliberately to control the amount of

funds i t made available to States.

Many hospital administrators, including hospital board members who have the responsibility to conduct hospitals and who must have been aware of the increases, took l i t t l e positive action to exercise control. The State health authorities did not take action u n til they were forced to by the control action of the Commonwealth. This lack of control fa cilitated the cost increases.

The data is not available which would permit the Commission to undertake a quantitative analysis of a ll the components of the real increase in health expenditures over the past decade. The components are so interwoven, i t may be impossible to separate the individual factors.

I t is , of course, true that most of the cost increases in the health sector have been centred on in stitu tio n s, particularly hospitals. Between 1973 and 1976 when the greatest rates of increases were occurring, the health sector was realigning female and male wage rates. Because of the femininity of the hospital work force, which is up to 90 per cent compared to 36 per cent in the general civilian workforce, hospitals were particularly affected.

Increases in s ta ff numbers and the specialisation, much of i t associated with new technology, are affecting the hospital sector.


The 1975-76 cost-sharing agreements between the Commonwealth and the States offered the hospital sector substantial protection against inflation and largely overcame the problem of financing the increases in salaries. The role of health a u th o ritie s and hospital managers was made much easier by the

a v ailab ility of the additional money.

Expenditure figures for 1978-79, 1979-80 and estimates for 1980-81, in real terms, indicate th a t controls are now being implemented with some success on the costs of providing health care in Australia.





O bjective' is defined as 'something to which e ffo rt is directed, an aim or end of action, g o a l.' 'Effectiveness' is defined as 'the power to bring about a desired r e s u lt.'

A summary of some of the information obtained by the Commission on the setting of objectives follows. The Commission believes that th is information reveals that there has in the past been a reluctance on the part of governments and health au th o rities to establish precise objectives and a greater reluctance to assess whether such objectives as have been set are in

fact being achieved.


The Constitution of the Commonwealth of Australia makes some reference to objectives in an indirect and conditional way. In Section 96:

'During a period of ten years a fte r the establishment of the Commonwealth and thereafter u n til Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as Parliament thinks f i t . '

In Section 51:

'The Commonwealth sh all, subject to th is Constitution, have power to make laws for peace, order and good government of the Commonwealth with respect to:

(XXIIIA) The provision of maternity allowances, widows' pensions, child endowment, pharmaceutical, sickness and hospital benefits, medical and dental services, but not so as to authorise any form of c iv il conscription, benefits to students and family allowances.'


These clauses set out the machinery whereby the Commonwealth has the power to grant financial assistance to the States under Section 96 and Section 51. Section 51 gives the Commonwealth powers to make laws covering pharmaceutical, sickness and hospital benefits and medical and dental services.

The Commonwealth, within i ts powers under the Constitution, has passed two main Acts affecting health services, the National Health Act 1953, as amended, and the Health Insurance Act 1973, as amended.

Under the powers contained in Section 30 of the Health Insurance Act, 'A ustralia may enter into an agreement with a State for the provision of hospital services by the State to eligible persons.1 There is a provision that any agreement shall be substantially in accordance with the Heads of Agreement which are set out as schedule 2 of the principal Act and because of th is significance they are set out in fu ll hereunder.


1. The agreement is to relate to a specified period but may provide for the extension of that period. 2. The agreement is to l i s t the hospitals in the State that are to be

recognised hospitals for the purposes of the agreement but may provide for the making of alterations to the l i s t .

3(1) The agreement may provide for the whole or a part of the costs or receipts of authorities or in stitu tio n s liste d in the agreement, being authorities or in stitu tio n s providing services related to the conduct of recognised hospitals, to be taken into account in

ascertaining the operating payments or operating receipts of recognised hospitals and the net operating costs of recognised hospitals. (2) The agreement may provide for the making of alterations to the l i s t of authorities or institu tio n s contained in the agreement in accordance with sub paragraph (1) of this paragraph and for the variation of the extent to which costs or receipts of any authority or

in stitu tio n are to be taken into account in accordance with that sub paragraph. 4. Subject to provisions made in accordance with paragraph 5, the Commonwealth is to pay to the State amounts equal in to ta l to:

(a) fifty per centum of the net operating costs, as defined by the agreement, in respect of a ll recognised hospitals in the State in respect of the period to which the agreement relates; or (b) the to tal of the amounts paid by the State from i t s own resources

towards meeting those costs, whichever is the less. 5. A committee, to be provided for by the agreement: (a) is to formulate, in respect of each of specified periods included in

the period to which the agreement re la tes, a budget relating to a ll


recognised hospitals in the State and setting out estimates of the operating payments and operating receipts, as defined by the agreement, in respect of those hospitals in the period to which the budget relates; (b) is to review, as provided by the agreement, budgets so formulated

and, where appropriate, formulate variations of any such budget; and (c) is to submit budgets so formulated, and any such variations, for approval in accordance with the agreement, and the agreement may make provision for limiting the obligation of the Commonwealth referred to in paragraph 4 in respect of a period by reference to a budget in respect of that period approved in accordance with the agreement and any variation of that budget so approved, but, i f the agreement makes such a provision, i t may authorise the Minister to approve further payments under the provision made in accordance with paragraph 4 where he is sa tisfie d th at circumstances ju stify those

payments. 6. The State is to endeavour to ensure that a ll elig ib le persons in the State are able to obtain, a t a recognised hospital in the State, care and treatment in accordance with the agreement.

7. Subject to paragraph 7A, an e lig ib le person, other than a hospital insured person, is to be e n title d to receive care and treatment as a hospital patient in a recognised hospital free of charge and the agreement may extend such entitlem ent to a ll or any hospital insured

persons. 7A. Where an elig ib le person referred to in paragraph 7 is a nursing home type patient of a recognised hospital, he is to be required to make a patient contribution, calculated in accordance with the agreement, in

respect of his care and treatment for each day as an in patient in the hospital. 8. Subject to paragraph 9, an e lig ib le person, other than a hospital

insured person, is to be e n title d to receive, free of charge, out patient services provided by a recognised hospital. 9. The agreement may provide th a t entitlement to out patient services: (a) in the case of particu lar services, is to be, or may be, restricted

to persons who are able to satisfy a means te s t; and (b) in the case of particu lar services, is to be, or may be, subject to charges. 10. The agreement may provide th a t the supply of a ll or any out patient services to hospital insured persons is , subject to any provision made

in accordance with paragraph 9, to be free of charge or is to be subject to charges. 11. Notwithstanding the foregoing paragraphs, the agreement may permit, either generally or as specified in the agreement, the making, otherwise

than in accordance with the foregoing paragraphs, of charges in respect of the provision of care and treatment of an eligible person is or may be entitled to, or receives, compensation, damages or other benefits in respect of that inju ry , illn e s s or disease.

12. Subject to the foregoing paragraphs, the agreement may make provision for and in relatio n to the making of charges in respect of care and treatment provided to eligible persons by recognised hospitals.


In Schedule 2 of the Health Insurance Act are objectives of the Commonwealth which can only be altered by Parliament. Under Section 30 of the Health Insurance Act there is limited scope for departing from the objectives set out in Schedule 2 but the right to a lte r the Health Insurance Act lie s with Parliament.

The Commonwealth has made agreements with the States in accordance with the provisions of the Heads of Agreement. The agreements provide for the establishment of State standing committees which are dependent on objectives agreed between the Commonwealth and State members of the committees aimed at achieving operating economies in recognised hospitals and central services consistent with maintaining or achieving an acceptably high standard of health care.

Reference has been made to objectives in the submission to th is Commission by the Commonwealth Department of Health:

'The objectives of the to tal system, and of each of i t s components, need to be understood and evaluated. No service is an island and a ll need to work as closely together as possible; such a strategy will of necessity involve bureaucratic adjustment, delegations of some responsibilities and the challenging of the insularity of others, and could be encouraged by adopting, where possible, the rationing of

funding sources and support programs.1 (Part 1, 6.)

The same submission amplifies th is as follows:

'There appears to be no set of unambiguous objectives to guide health planners and administrators. Although components of the health delivery system each have fairly distinct roles (hospitals to tre a t the acutely i l l , general practitioners to be the f ir s t point of contact, and

so on), there is l i t t l e discussion on more precise goals which the system should be seeking to achieve for the community. 'With no clear measurable objectives i t is d iffic u lt to assess whether the system is structured efficiently or effectively, whether i t is providing too l i t t l e or too much health care or whether the community is benefiting greatly or not at a ll.

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'The task of settin g objectives is obviously d iffic u lt, but should nonetheless be undertaken. They must be measurable and attainable so that proper evaluation of the health care system can be undertaken.

They must relate to the effectiveness, efficiency and equity of the system. When such objectives are adopted i t w ill be possible to demonstrate more easily whether the resources directed to health care are being used in the best way.' (Part 1, 74)

The Commonwealth submission mentioned further matters concerning objectives in relation to hospitals:

'In order to determine objectives, the philosophy and aims of a hospital should be clearly stated in terms that can be effectively communicated to c lie n ts, patients and a ll other representatives of the health care team.

Objectives should be precisely stated in a manner that allows continuous assessment of the degree to which the objectives are being met.

'Appropriate methods for assessing objectives would be: quality assurance programs, peer review through hospital accreditation programs, and nursing a u d its .' (Part 3, 104)

Dealing with the State health authorities, the Commonwealth Department of Health submission referred to State objectives as follows:

'State governments are now aware of the need to plan and evaluate health services, and of the fact th at th is process presupposes the existence of practical, measurable objectives for the health care delivery system. All States aim to provide an equitable regional

distribution of hospital f a c i l i t i e s , fostering patient access to a wide range of services. Hospital efficiency, effectiveness and quality assurance programs are being researched, implemented and reviewed. Community health services have been developed (under the Community

Health Program) in response to the need for greater emphasis on preventive and primary health care serv ices.' (Part 3, 57)


Representatives of the Commonwealth Department of Health gave evidence before the Commission at open hearings in Canberra on 21 May 1980, when in the opening address to the Commission i t was said:

'The Commonwealth role in hospital financing is largely based on considerations of maintaining adequate access to hospital care and, i f I may put i t th is way, in terstate equity of provision, that is , no large differences in ratios of provisional use. These are against the Commonwealth's objectives to ensure that a ll Australians have the opportunity to enjoy good health and, to assist in th is objective, to have reasonable access to health care services and f a c i l i t i e s .'

(Transcript, 1450.)

Questioned, the witness gave more views on objectives:

Question: 'Some States have said to us directly that they regard the setting of national guidelines as a Commonwealth responsibility. Do you see that as your responsibility?' Answer: 'We do see th is, and we have said in

our statement that the setting of objectives and guidelines is one of the major roles of the Department. I must say that you must accept i t against the background of governmental and political considerations.' (Transcript, 1469-1470.)

Community Health Program

The Commonwealth has over the past few years initiated several special projects, one of which was the Community Health Program. The publication 'Community Health Project Summary' issued by the Commonwealth Department of Health and the Hospitals and Health Services Commission in March 1976, said the Community Health Program had as its objective the

'provision of high quality, readily accessible, coordinated and efficien t health and health related welfare services at local, regional, State and national le v e ls .'


The submission of the Commonwealth Department of Health stated:

'The main objectives s e t for the program included the following:

. To provide community health services in areas where there were no existing health services or where existing health services were inadequate.

. To provide community based services which place an emphasis on factors that had been neglected in the past, such as prevention, early detection and treatment of illn e s s , and rehabilitation.

. To establish additional community health services as an alternative to more costly in s titu tio n a l care, where the alternative is practicable and appropriate.' (Submission, Part I I I , 6.)

The Commission has been told frequently that these objectives are not being met and th a t S tates and other organisations have developed their own type of program. Moray, Williams and Maloney (1980) pointed out the need for more evaluation.

In his submission Dr Everingham Μ. P ., who was Minister for Health in the Government which se t up the Community Health Program, said:

'My hope and expectation was th at community and eventually a ll State and community health centre services would be coordinated on a regional basis with participation of the three levels of Government.' (Submission 740, 2)

Nursing Homes

The submission of the Commonwealth Department of Health (Submission 700, Part 2) shows that the Commonwealth Government provides funds to private nursing homes and to non-profit nursing homes conducted by religious and charitable organisations, under the authority of Commonwealth legislation -

the National Health Act and the Nursing Homes Assistance Act 1974. These Acts specify the nature of Commonwealth control over growth, admissions, fees, and the percentage of pensions paid to nursing homes by patients

(Submission 700, 146-147).


The Nursing Homes Assistance Act applies only to non-profit organisations. As the Commonwealth Department of Health explained:

'In the place of Commonwealth benefits such homes are eligible to have th e ir approved operating d e fic its, and the cost of replacement of certain items of equipment, met by the Commonwealth Government.' (Submission 700, Part II, 151.)

Non-profit organisations can apply as well for approval under the Aged or Disabled Persons Homes Act 1954-1976, for assistance with capital works.

Both these Acts vest control for approval in the Department of Social Security. So far as funding of operating costs and other financial assistance is concerned, however, the Department of Health administers arrangements, or in the case of repatriation beneficiaries, the Department of Veterans' Affairs.

Hospital Benefits Reinsurance Account

The submission of the Commonwealth Department of Health (Part 2, 100) shows that the machinery for establishing and maintaining a reinsurance account by a ll registered hospital benefit organisations as a condition of registration is detailed in the National Health Act. In addition, the Commonwealth Department of Health issues circulars which set out arrangements and administrative procedures (Submission 700, Appendix 1). The requirements of the Act and the circulars set out the objectives which require that an account is established and that directed amounts are paid into the account to be used as set out in the Act. This is an objective controlled by the

Commonwealth Government for a specific purpose.

Medical and Hospital Insurance Benefits

The objectives of these benefits are set out in the National Health Act, and are therefore controlled by the Commonwealth Government.



The National Health Act 1953, and the Handicapped Persons' Assistance Act 1974, lays down conditions under which assistance may be given by the Commonwealth to approved handicapped persons' homes, and here again certain conditions are laid down.

Domiciliary Nursing Care

Provision is made for Commonwealth assistance subject to the satisfaction of the Permanent Head of the Department, again with the right of review by the Minister.

States and T erritories

Each of the State parliaments has passed Acts for the purpose of providing for the administration of hospitals and health services. Each of the State Acts appears to be a completely individual State document and the State governments determine objectives and pass legislation to provide the

machinery for carrying out the objectives. Each State or Territory vests control of the public sector of the health service in a Minister and has varying authority over some services.

Northern Territory

With self government for the Northern Territory from 1 January 1979, the Northern Territory Department of Health became responsible for the provision of hospital and health services authorised through Northern Territory health services legislation.

Australian Capital Territory

Hospital and health services in the Australian Capital Territory are provided under the Capital Territory Health Commission Ordinance, under the legislative control of the Commonwealth Parliament, with certain powers belonging to the Australian Capital Territory Legislative Council.


New South Wales

The New South Wales Health Commission Act 1972 provides for the constitution of the Health Commission of New South Wales with certain powers. Section 4 .(2)(c) of that Act says:

'The Commission shall in the exercise and performance of i t s powers, authorities, duties and functions . . . be subject to the control and

direction of the M inister.1

Section 18 of the Act which sets out the powers, auth o rities, duties and functions of the Commission states:

'For the purpose of promoting, protecting, developing, maintaining and improving the health and well being of the people of New South Wales to the maximum extent possible having regard to the needs of and resources available of the State, the Commission shall have and may exercise ana perform the following powers, authorities, duties and functions . . . 1

South Australia

The South Australian Health Commission Act 1976 in Section 3 sets out the objectives of the Act as to achieve rationalisation and coordination of the health service and to allow for establishment and continuation of hospitals and health centres, integration of mental health services,

provision of medical diagnostic services, establishment of regional authorities with certain powers, participation of voluntary organisations, and provision of health care upon scientific and human principles.

The Act provides for the appointment of a Commission with certain powers, but again Section 15 of the Act states:

'In the exercise of i t s functions, the Commission shall be subject to the general control and direction of the M inister.'

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Health services in Queensland are administered under the Queensland Hospitals' Act 1936-1979, with control by the Department of Health and others mentioned in the Act. Certain powers are given to individuals. The Act gives the Minister wide powers, which means that the Government determines objectives.

Western Australia

In Western A ustralia health administration is controlled according to the provisions of the Health Act 1911-1973. Clause 7 of the Act states:

'The general adm inistration of th is Act shall be under the control of a Minister of the Crown. The Minister of aforesaid shall be styled the Minister of Public Health . . . '

Sub-section 9 (1) of the Act says:

'(1) The Governor shall from time to time appoint, for the due administration of th is Act, and subject to the control of the Minister, a duly qualified medical practitioner to be a Commissioner of Public Health . . . '


In V ictoria, health services are administered by the Health Commission Act, 1977. Section 6 s ta te s:

'Subject to directions of the Minister, the functions of the Commission are . . . '

Sub-section 7 (3) states:

'The Commission sh a ll, in the performance of its functions and the exercise of i t s powers have regard: (a) to the particular needs of the community in the several regions of


3 7

(b) in assessing those needs, to the experience and advice of persons providing health services in those regions; (c) to the extent to which opportunities can be given for voluntary participation by the community in the provisions of particular

health services in those regions.'

Section 7 (3) of the Act defines the objectives of the Commission and i t is clear from Section 6 that the machinery for determining those objectives is vested in the Minister.

The Health Commission of Victoria issued the monograph 'Guidelines for the Estimation of Need for Hospital Services in 1979' which sets out the objectives of the Government.

The document sets out guidelines for hospital services, general concepts used in formulating guidelines, and reasoning and evidence used to formulate guidelines for individual services.

In the forword, Dr Trevaks, the Chairman of the Commission, states:

'The Health Commission of Victoria sees as one of i t s more urgent responsibilities the development of a coordinated policy of hospital planning which includes both the public and private sectors. The recent amendments to the Health Act, 1958, contained in the Health Commission Act, 1977, require the Commission to take into account the needs of the

locality and the services planned or already operating in the area, before approving registration of a private hospital. The Commission also has the responsibility, previously vested in the Hospitals and Charities Commission, for coordinating hospital services in the public sector.

'An integral part of th is planning policy is the formulation of a comprehensive set of principles for the provision of hospital services both publicly and privately operated. As a f ir s t step towards developing these, the Commission has prepared the following guidelines

for the estimation of need for hospital services. They are the ones used a t present by the Commission in deciding on applications for the provision of acute hospital services.


'The d e ta ils of these guidelines may require revision in the light of experience and changing practice. Many specialties and super-specialties have particular requirements. These are not included in the document but w ill be established in consultation with the hospital industry, the learned colleges and other professional bodies.1


Hospital and health matters in Tasmania are controlled by the Hospitals' Act 1918. Section 5(1) of th a t Act states:

'The Minister is hereby charged with the administration of th is A ct.1

Section 6(1) sets out these objectives:

' I t shall be the duty of the Minister to direct some officer, subject to the provision of th is Act:

(a) to investigate and make inquiry as to the hospital accommodation necessary to meet the needs of the sick or injured persons resident in Tasmania;

(b) to recommend in respect of each financial year the basis on which hospitals should be subsidised, and the amount of the subsidy in each case, and to what purpose the subsidy should be applied; (c) generally th at the provisions of th is Act are carried o u t.'

Again, the Act sets out objectives in Tasmania and the Act is under the control of the Minister.

The Commission is aware th a t the State health authorities by and large have set broadly based objectives which have been publicly stated, albeit in

non-measurable terms.

The New South Wales Health Commission has, for example, established its own objectives for i t s regions th is way:

'The New South Wales Health Commission is larger than most industrial organisations in A ustralia. To administer i t properly on a centralised basis would be d iffic u lt, thus there is considerable


delegation of responsibility and authority of decision making to the Regions. The Central Office is responsible for four functions only: 1. the formation of policy 2. the setting of standards 3. the determination of budgets, and 4. an inspectorial role.

'All other Commission functions are administered on a regional basis by thirteen Regional Directors. There are four metropolitan regions, two near metropolitan and seven country regions.

'Experience has shown that often Commission policy or standards may be unsuitable for a particular region, because of regional variations. One such variable is the age structure of the population of a region.' (Paper based on a lecture delivered at ANZAAS Congress, Auckland, 26 January 1979, 20)

Objectives such as these are indicate in general terms that there is machinery for developing objectives in the States. Certainly, there is evidence that some of these objectives may not yet have been achieved. For example, we have been told that in New South Wales successful delegation of authority from the central office to the region has not occurred in a ll instances, but i t is recognised th at achieving objectives often takes considerable time. Thus, while i t is apparent that objectives can be set, i t

is regrettable that in most instances they appear in a form which cannot be easily assessed.

Some State authorities in th e ir submission to the Commission gave d etails of their objectives.

The South Australian Health Commission (submission 719) referred to the problems in establishing objectives thus:

Ά wide range of problems need to be solved bepore a comprehensive definition of objectives, policies and resource allocation methods can be agreed. These problem areas include matters relating to performance measurement, organisational fragmentation, varying levels of accountability, and the balance between central control of policy and resource allocation and the managerial freedom of h o sp ita ls.' (5.)


'The f i r s t problem is of a technical nature. Service objectives cannot be defined with great precision because measures of community morbidity and the efficacy of care are too d ifficu lt to devise. The standard of services, th e ir objectives and quality are usually described

by using standard measures of provision - eg. 4.5 acute beds per 1000 population. There is considerable difference of opinion on the standards which should apply and variations on a national and international level do l i t t l e to influence provision in any one a re a.'


South Australia also included a broad objective:

1 In practice, policy objectives are defined by describing services provided and the measures of provision for each service, usually beds. The definition of objectives for the care of the aged in in stitu tio n s is rela tiv e ly sophisticated. It is a discrete service,

the objectives of which can be derived from the standards of nursing and professional care, costs and charges, and the decision to lim it nursing home bed provision to 50 per 1000 aged 65 and over. On the other hand, policy on the provision of acute services will at best aim to prevent

unnecessary d u p lic a tio n .' (36)

Hospitals and Associated In stitu tio n s

Many professional bodies, hospitals and organisations made some reference to objectives in th e ir submissions to the Commission. Many complained of the lack of objectives set by government. The Report will refer to some of these submissions, almost a ll of them pointing out that

there is a lack of direction from the health authorities on the setting of objectives.


The Commission did not receive one submission from hospitals in Queensland. In order to obtain some evidence the Commission called to open hearings representatives of a number of Queensland hospitals. Queensland is unique among the States in th at the senior administrative officer of each recognised hospital in Queensland is employed by the Queensland Department of


Health - other employees are employed by the hospital board - whereas employees of recognised hospitals in other States are members of the hospital s ta ff. For th is reason the Commission called as witnesses representing Queensland hospitals, s ta ff who were employed by the hospital - usually the chief medical officer.

In evidence as a private citizen, a Queensland doctor said:

11 feel that one of the problems with hospitals, certainly in Queensland, is that there is no defined policy. Hospital boards do not have defined policies, certainly not a documented policy. I think without a policy they really do lack a great deal of authority. I feel the whole service could be strengthened considerably i f each board formulated a set policy and documented that policy and made i t known. This would allow a better system of control to be introduced and also allow long term planning and objectives to be set out by the board.

'The Department of Health in Queensland, from a ll we have heard, has a much tighter control, or appears to have a much tighter control, over hospital expenditure than in other States. That is , the central authority has this much tighter control.'

Austin Hospital, Victoria, commenting on its development plan, which has been prepared for many years ahead, says (submission 453):

'The effectiveness of the plan is , however, questionable in the absence of publicly stated long term objectives by Government and the health authorities and the decreasing autonomy residing in the hands of hospital boards.'

The Australian Psychological Society, (submission 241):

'Hospitals, like many other institutions in our society, tend to develop a corporate tunnel vision which makes i t d iffic u lt for them to plan th e ir services within the wider perspective of the requirements of the community they serve.'

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Kurri Kurri D is tric t Hospital, New South Wales (submission 418):

'Guidelines should surely be set up from a central State requiring individual h o spitals to administer th e ir hospital and most facets of community health care within th e ir own sphere of o p eratio n .1

Mullumbimby and D is tric t War Memorial Hospital, New South Wales (submission 425):

'The board is charged with doing i t s best to determine the health needs of the community i t serves, then to determine the p rio ritie s within the lim its of available funds, fa c ilitie s and personnel and then to see that the provisions of the best available fa c ility for the delivery of c lin ic a l and preventive medicine.'

Queen Victoria Medical Centre, V ictoria, (submission 438):

'The Health Commission rarely takes the in itia tiv e in providing instructions with information of these long term proposals for the direction of health services, and consequently enormous cost is incurred through planning for development programs which will be either deferred

or re je c te d .'

Prince Henry's H ospital, Melbourne, Victoria, (submission 450):

'There is currently no comprehensive plan or clear policy in Victoria on ra tio n a lisa tio n of services and hospital development, and therefore a logical and economic cap ital development program is not possible. Uncertainty as to the long term objectives results in

relatively uncontrolled development of services and in general allocation of resources. The medical organisation cannot be effectively arranged unless the role of the hospital is well satisfied and understood and there are many different opinions on united structure

and development of medical s e rv ic e s .'

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Royal Adelaide Hospital, South Australia, (submission 481)

'Until 1959, being the only major public general hospital in the State, there was l i t t l e problem in regard to deciding upon the h o sp ital's objectives. Since the establishment of the Queen Elizabeth Hospital, Modbury, and Flinders Medical Centre, some rationalisation of objectives has appeared to be undetected. To this end, Royal Adelaide

Hospital submitted to the South Australian Health Commission (SAHC) in February 1979 proposed philosophy and objectives for the hospital. The SAHC has not responded to the proposed philosophy and o b jectiv es.'

Launceston General Hospital, Tasmania, (submission 500):

'There shall be legislative uniformity between the States and the Commonwealth in respect of the requirement that each hospital operates in accordance with a specifically defined role subject to a regular review system.'

The witness from the Launceston General Hospital was asked to amplify th is statement and he replied (Transcript, 2148):

'While working as medical superintendent in New South Wales I was a member of the working party that the Health Commission of New South Wales established which examined particularly the role of country hospitals. An attempt was made by that working party to define levels

of services and service matrix as i t were.'

Scottsdale Public Hospital, Tasmania, (submission 504):

'I t is submitted that there are no clearly understood objectives in the wider sense and i t therefore follows that performance cannot be satisfacto rily measured. 'Such objectives as exist are primarily politically/financially and u tilis e measures which are either incomplete or unrelated.'

Victorian Hospitals' Association, (Transcript, 1235):


'No system w ill work unless the people in that system know exactly what i t is they are supposed to be doing.'

The witness was asked i f he was suggesting that in many hospitals there were no defined roles and objectives. He replied:

'More importantly, I would suggest that the Commonwealth and State governments themselves are not sure what the roles and objectives are. I think th at they are less clear than the hospitals are, to be quite honest. The hospitals have th e ir own roles within the lim it of the vacuum in which they have been working over the years. With the advent of the Health Commission of V ictoria we think that vacuum might be

fille d , but in the past there has been a vacuum and I think hospitals have been very good a t defining th e ir roles. However, their roles have not always been compatible with what the State or Government thought th e ir role was. Neither the State nor Commonwealth governments defined

th eir roles. I think th a t is what we are really talking about.1

A senior representative of a major hospital in evidence contended that the central health authority in terfered too much with day-to-day management. The witness said the central health authorities should establish objectives based on government policy and th e re after allow the institutions to operate

within them.

Regulations under State Acts

All States have issued regulations covering recognised hospitals. These regulations are not uniform between States. They cover a wide scope of hospital transactions, from election of hospital boards, qualificatins for employment, control of employees, control of visiting medical practitioners,

appointment of committees, charges for services, or prohibition to make charges. These regulations a ll a rise from provisions of the State Acts and are therefore controlled by the State Governments.

Private Hospitals

In addition to the regulations covering State recognised hospitals, most States have issued regulations concerning State control over private


hospitals. They cover such as buildings, structural improvements, provisions for licensing, qualifications of a chief nurse, size and usage of available space, and requirements of operating theatres.

While private hospitals are subject to certain control by State laws or regulations, proprietors are free to conduct their hospitals in accordance with objectives which they themselves may set.

At the open hearings held in Sydney on 8 July 1980, representatives of the Private Hospitals Association were asked i f the owner or body which runs the hospital can make the decision to expand the private hospital. The reply was:

'In that regard there are different regulations from State to State and to the best of my knowledge I would only like to speak for Queensland where there is a coordination committee which controls i t . 1 (Transcript, 3207)

Other witnesses said:

'In Victoria, the legislation is now such that the Health Commission has the overriding authority to authorise any increase in private hospitals. So that is well and truly under the control of the Health Commission.' (Transcript, 3207)

'This has been the case in New South Wales. I t f ir s t started some years ago. For about four years there was no possibility to build one extra ward in a New South Wales private hospital without approval. No approval has been given for some two years.' (Transcript, 3207)

Evidence from the Private Hospitals and Nursing Homes' Association of Australia, Queensland Branch (Transcript, 1715):

'Queensland private hospitals maintain they are cost effective in providing the citizens of Queensland with an alternative choice to the free public system, at a lower episode of illness cost, thus making a significant contribution in reducing the to ta l Australian care expenses.'

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'Private enterprise, I claim, under the system is being kept down as a matter of fa c t, deliberately or otherwise, to this extent, that under the system there is a certain degree of control exercised by the Government and I would say that i t is a shame when only a certain amount of control is exercised. You either have no control or no interference

in the private enterprise system, or you have to ta l control, but when you get p a rtia l control, you get a sort of chaos and unfortunately that is what the whole system of nursing home funding is about to enter

into, i f i t has not entered into i t already.1


The Commonwealth Constitution (Section 96) sets out power whereby the Commonwealth provides financial assistance to the States, and (Section 51 - XXIIIA) allows the Commonwealth to make payments to provide for pharmaceutical items, sickness and hospital benefits and medical and dental services. The main Acts are the National Health Act and the Health Insurance Act. The Health Insurance Act provides for the Commonwealth to make

agreements with the States re la tin g to health matters.

Many Departments of State, as well as the Department of Health, become involved to varying degrees in settin g the objectives of health care. The main ones are Prime Minister and Cabinet, Treasury, Finance, Social Security and Veterans' A ffairs.

A m ultiplicity of advisory committees, drawing on expertise from the community as well as government bodies, are involved as well as those established to advise the Minister for Health. Parliament also takes a close in te re st in health through i t s committees.

All these play a part, but the responsibility for determining national objectives rests with the Government.

I t can therefore be said th a t for the Commonwealth, the machinery for determining objectives is in the hands of the Parliament, which means i t is under the control of the Government, which receives advice from many and varied sources, including i t s own departments. This also applies to those

services over which the Commonwealth maintains sole control under the

National Health Act.


The States, by separate State Acts, control a ll recognised State hospitals and determine objectives in these hospitals. The boards of hospitals and the management have limited power, and a ll th eir actions can be controlled by Ministers through th eir Health Commissions or Departments.

Psychiatric hospitals are controlled by separate State Acts. Private hospitals have some control placed on them by Commonwealth and State Acts.

A general conclusion is that the machinery for determining objectives in the health field is controlled by Commonwealth, State and Territory governments. The States and Territories control the hospitals and most related services within th eir boundaries and the Commonwealth provides part of the finance.

The-cost sharing agreements entered into between the Commonwealth and the States provide for the Commonwealth to pay to the State 50 per cent of the agreed net operating costs of a ll recognised hospitals, or a sim ilar amount paid by the State from its own resources, whichever is the less.

There are provisions in the agreements which, to a certain extent, control the amount the Commonwealth pays, and the States have certain resp onsibilities. I t does seem that under the agreements the Commonwealth can reduce its 50 per cent share, by taking a firm stand not to agree to a ll budgets. This action in 1978-79 hastened a decision in New South Wales, made e a rlie r, to close some public hospital beds. The Commonwealth, by stating an objective, can force a State to follow i f that State is to get Commonwealth finance.

The main liaison between Governments is the meetings of the Health M inisters' Conferences, set up by a clause in the cost sharing agreements, consisting of the Commonwealth and State Ministers. The purpose of the State Standing Committee consisting of senior representatives of the Commonwealth

and individual States is to make recommendations on funds required each year, and in doing this aim:

'a t achieving an acceptably high standard of health care; and, having regard to such recommendations made by the Hospital and Allied Services Advisory Council or by a National Standing Committee established within th at Council . . .'


The agreements provided th at the Commonwealth and the individual States agreed that the then Hospital and Allied Services Advisory Council, or a national standing committee within th a t Council, should consider broad policy issues related to Commonwealth and State examination of hospital expenditure,

and be requested to make recommendations to achieve better efficiency and ration alisatio n of hospital services. The agreements provide that these recommendations should be referred to the Ministers for consideration with a view to approval. The Commonwealth and State Ministers meet regularly to consider and deal with recommendations.

In May 1980 at the Health M inisters' Conference, the advisory council and its committees were abolished and replaced by the Standing Committee of the Health M inister's Conference . This Committee consists of the Permanent Heads of each health authority plus one other person from each. Its f ir s t meeting was held on 24 October 1980 in Melbourne.

As w ill be seen by reference to e a rlie r examples of objectives, the Commonwealth and the States have varying objectives, and they include:

NSW promoting, protecting, developing, maintaining and improving the health and well being of the people . . .

SA ensuring the provision of health services for the benefit of the people . . .

VIC having regard to the p a rtic u la r needs of the community.

TAS investigating and making inquiry as to the hospital accommodation necessary to meet the needs of the sick and injured.

QLD promoting positive health . . . early and effective re fe rra l.

W A . . . providing the most economical health service possible, consistent with need . . . a suitable hospital or nursing post

. . . an a erial service . . .

ACT . . . an emphasis placed on evaluation


NT providing hospital and health services . . , appropriate public health standards . . . health care of the Aboriginals.

In varying degrees these objectives conform with the words of our Letters Patent which say:

. the desire of the Commonwealth, the States and the Northern Territory that the high quality of care provided by such hospitals, in stitu tio n s and services be maintained.'

Turning to evidence about the effectiveness of the machinery for determining objectives, i t is clear th a t there is general acceptance that the machinery is ineffective. Neither the Commonwealth nor the States has set clear, measurable objectives.

In accepting that the machinery for determining objectives is not effective, i t is necessary to look a t the options that are available to the Commission. Only a few witnesses and submissions suggested options.

At the open hearings a Commissioner asked a Commonwealth Department of Health witness whether he saw, as some States have suggested, the setting of national guidelines as a Commonwealth responsibility. The reply was that his Department believed the setting of objectives and guidelines was one of the major roles of the Department (Transcript, 1469-70).

The South Australian Health Commission put forward the view that:

Ά central health agency must stand between Governments and those providing services and attempt to define service objectives for a State at the same time as recognising professional and public constraints and expectations.' (South Australian Health Commission submission, 36.)

Summary of Conclusions

The Commission is not convinced that in view of the large cost increases over past years the departments have taken an active enough part in advising governments of the need to set objectives as a means to improve efficiency


and to constrain co sts. In addition, hospital boards and administrators do not appear to have taken action to restrain costs, rather they have been concerned mainly to spend money allocated to them irrespective of need. The Commission in i t s v is its to hospitals noted only a few administrators who

were concerned to spend only according to need.

The machinery ex ists for Governments to set objectives and to make policy decisions accordingly, but the facts show that the machinery has not been used effectiv ely .

However, i t must be noted th at the Commonwealth Government took action to reduce the flow of Commonwealth funds into the health system over the past three years by re s tric tin g the ra te of increase of funds.

There are a ll so rts of d ifferen t and unsatisfactory ways in which unsatisfactory objectives are se t throughout Australia at the present time. The system of settin g objectives needs to be sharpened.

General Considerations

Governments, both Commonwealth, State and Territory, are the guardians of the public funds, and must be the final authority to determine objectives.

The Commonwealth Government has a major responsibility to manage the economy of the country. I t must therefore maintain control over a ll Commonwealth expenditure and determine the allocation of funds between the various needs.

The States, Northern Territory and the Commonwealth in the Australian Capital Territory have a responsibility for administering public hospitals and some part of the associated or related institutions and services. As the administrators they have a major responsibility to see that those services

are conducted effic ie n tly to provide high standard health care and to control expenditure.

The objectives established by governments should be determined so as to cover these re sp o n sib ilities and to set the whole pattern for the provision of health care services in A ustralia.


In the Interim Report, the Commission said i t would not fa il to face up to changes that are necessary and practicable, being aware that sharp changes would not be welcomed by anyone. After studying the health service for 16 months, the Commission believes that there are many aspects of i t that are unsatisfactory and that unless these are corrected the steep rise in costs

will continue. The Commonwealth Minister for Health has stated:

'Health costs have to be controlled; i f they are not controlled, they w ill break us. What we need to have and what we seek to achieve is a health care system which provides adequate care for a ll Australians - high quality health care at a cost that this community can afford, not pie in the sky esoteric arrangements which would in the long term break the Australian economy and, I believe, bring about a diminution in the standards of medical service available in A ustralia.1 (Hansard, 16 September 1980, 1303)

The weight of evidence put before th is Commission suggests th at the Commonwealth should set national objectives. The principal overall objectives of both Commonwealth, State and Territory Governments should be to provide a range of health services that are appropriate to need, accessible in both the physical and financial senses, and of high quality, but at the same time efficient in terms of resource u tilisa tio n . This Commission believes that there should be no other common objectives.

This Commission does not believe that the problems in the health care field can be removed by the Commonwealth and States endeavouring to formulate national objectives only. The Commonwealth has the responsibility of providing some funds and being satisfied that adequate health care is provided to a ll Australians. The States have the responsibility of administering hospital and other services and providing additional funds, and as such must encourage the efficiency of the system for the benefit of

themselves as well as for the users. For th is reason separate objectives must be laid down by Commonwealth and State and Territory governments to cover the two differing roles.


The Commonwealth objectives which th is Commission is recommending, hereunder, are aimed a t clearly showing what the Commonwealth might agree to, so that a ll other governments and those in the health field will be aware of that which the Commonwealth intends to do and under what conditions. The objectives w ill also make i t clear th a t the Commonwealth acknowledges the

resp o n sib ilities of the States and the Northern Territory to conduct a ll health care in s titu tio n s and services with the exception of nursing homes.


The Commission RECOMMENDS th a t:

. the Commonwealth should se t i t s objectives in the health field clearly showing what i t intends to do, and on what conditions.

Those objectives w ill include such of the recommendations of this Commission which are accepted by the Commonwealth Government; . the States and T e rrito rie s, knowing the objectives of the Commonwealth, should set th e ir objectives on the same basis;

. i t be accepted by a ll governments that objectives be continually brought up to date;

. i t be the responsibility of a ll governments to make sure that objectives are being met.

If these recommendations are accepted, taking the example of fund granting, the Commonwealth in making grants to States and Territories should stipulate precisely what i t expects the recipient to achieve in the future. Sim ilarly, the S tates and T e rrito rie s, in making grants to hospitals or

associated in s titu tio n s or services should make similar stipulations. At the end of each twelve months the extent to which each recipient has achieved the laid-down objective should be evaluated. Further grants would depend on the

outcome of th a t evaluation.






Policy is defined as a d efin ite course or method of action selected from among alternatives and in the lig h t of given conditions to guide and determine future decisions.

A body must have power or authority in order to make policy.

Governments have th is power as do boards and management committees, whether of hospitals or associated and related services. Independent associations or professional and trade organisations of health workers also have separate power to make policy for th e ir members.


Cabinet meetings and Cabinet committees are basic to the process of policy formation, providing a confidential forum in which the Minister for Health's views can be debated in the light of other government p rio ritie s.

Several parliamentary committees prepare reports and conduct inquiries which have an impact on health policy. They are the Senate Standing Committee on Social Welfare, the Senate Estimates Committee which considers proposed expenditures in health and other departments, the Government

Members' Health and Welfare Committee, on which both Houses are represented, the Joint Committee of Public Accounts, which has health matters referred to i t , for example the matter of overpayment to re ta il pharmacists; and the House of Representatives Standing Committee on Expenditure.

The Commonwealth Department of Health has indicated th at, as well as its major role in implementing government policy and administering Commonwealth leg islatio n , i t plays a role as advisor to the Minister for Health on health policy. Other departments are also involved. For example, one o ffic ia l said


'From a Commonwealth point of view, as well as there being a health policy there is also an education policy and there is also a manpower policy . . . the health perspective may not necessarily coincide with the education perspective.1 (Transcript, 1503.)

Another senior o ffic ia l indicated that advice is based on:

Ά health reason for doing things, not a financial reason. W e pay medical benefits so people w ill have access to doctors in times of need, otherwise they might not have access to doctors.' (Transcript, 1502.)

Coordination between Health and other departments The Social Welfare Policy Secretariat is within the Department of Social Security, but is responsible to the Permanent Heads Committee on Social Welfare, made up of the permanent heads of the Departments of Prime Minister and Cabinet, Social Security, Finance, and Health. This Committee in turn works to the Social Welfare Policy Committee, a Cabinet committee. The S ecretariat, which has access to Ministers on this Committee as well as to the Permanent Heads Committee, replaced the Hospitals and Health Services Commission but retained the Chairman of the Commission, Dr S. Sax, as head of the new Secretariat.

Joint Commonwealth and State Machinery The Australian Health Ministers' Conference meets every two years.

The present Commonwealth State Cost-Sharing Agreements provide for the establishment of State Standing Committees to make certain decisions, or in the event of disagreement, to have them referred to the Ministers for decision.

The National Standing Committee (Hospitals Agreement), which reports to Health Ministers, was established in 1977 and comprises the senior health o fficia ls of a ll States and Territories and senior officers from the Commonwealth. Its chief role is to consider broad policy related to joint Commonwealth and State examination of hospital expenditure, particularly hospital efficiency and cost containment, and to try to achieve suitable solutions to these problems. (Commonwealth Department of Health Submission, Part 2, 36.)


Other advisory committees to the Minister for Health can have an indirect impact on health policy development for specific expenditure. Each meets regularly. They include:

. The National Health and Medical Research Council, assisted by some 50 committees and sub-committees, advises on a ll matters of public health le g islatio n and administration, as well as on medical research and expenditure for medical research. I t has

representatives from the Commonwealth and State health authorities and also from the Australian Medical Association, Royal colleges, the nurses, the Dental Association, Australian Federation of Consumer Organisations and two 'eminent lay persons'.

. The Health Insurance Advisory Committee, which advises on the operation of health insurance arrangements and related matters and includes department o ffic ia ls , representatives of health insurance organisations, and a single State health authority representative.

. The Pharmaceutical Benefits Advisory Committee which advises on listin g s for the Pharmaceutical Benefits Scheme and any other matters about the scheme referred to i t by the Minister. This Committee includes members of the medical profession, a pharmacist,

and the o ffic ia l in charge of the Pharmaceutical Benefits Branch of the Therapeutics Division. There are nine members.

. The Medical Benefits Advisory Committee, which has five members, four from the medical profession and the fifth a senior o ffic ia l from the Medical Benefits Division.

. The National Tuberculosis Advisory Council.


The Minister for Health also receives non-department advice which has an impact on policy. The National Health Services Advisory Committee was established in 1977, and meets about twice a year. This committee has sixteen members, including representatives from the major health professional

associations - Australian Medical Association, Australian Hospital Association, Royal Australian Nursing Federation, Australian College of Health Service Administrators, the Royal colleges, te rtia ry education in stitu tio n s, National Standing Committees of Nursing Homes and Private

Hospitals, Australian Council of Social Service, Australian Council of Trade Unions, Australian Council of Salaried and Professional Associations. Its



functions include inquiries on any health matter, subject to prior approval by the Minister, expressing opinions to the Minister or the Department of Health on matters referred by either, and recommending studies of topics related to health policy issues.

Other departments with an interest in health policy include Prime Minister and Cabinet, welfare division; Treasury, policy division; Foreign Investment Review Board; Finance, general expenditure division, social security division; Defence, medical services for the three armed services; Veterans' A ffairs, inpatient and outpatient treatment services; Social Security, hostel accommodation, domiciliary services; Employment and Youth Affairs, manpower policy and programs division.


Each State government, which has the final decision on administering hospitals and other health services in its State, has a series of parliamentary committees and inter-department committees, as well as special divisions within the Department of Health or Health Commission, to advise on policy. There are also other permanent or ad hoc Committees in the States of people outside parliament or the health departments or commissions. The annual reports of State health departments or commissions give particulars of these bodies, a ll of which are advisory to the Health Minister or to the health department or commission.

Each of the State health authorities except Western Australia has a division, branch or section whose task includes advice on policy. They are:

NSW - Policy review committee and policy review coordinator responsible to the Health Commission.

VIC - Planning and research division responsible to the Health Commission.

QLD - Planning and research division responsible to the Under-Secretary.

SA - Planning department responsible to one of the Health Commissioners, but changes planned.

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TAS - Planning and research unit.

ACT - Research planning and evaluation section.

NT - Planning and research section and health s ta tis tic s section.


Many of the submissions made to the Commission have commented on the lack of policy laid down by the State health authorities and have referred to policies with which they disagree. Some mentioned the d ifficulty of implementing these p o licies. The Royal Australian Nursing Federation

referred to the lack of sense of direction in the Australian health service (Submission 280) and suggested that goals and objectives need to be set by government to allow policies to be determined for the planning and coordination of the health system, for the health workers, and to make

evaluation possible.

The submission of the Australian Medical Association (Submission 245) conceded th a t ultimate power and responsibility must lie with government, but suggested State health authorities should be more concerned with policy making and coordination. To get the best results the authorities should

consult with hospital boards and receive advice from expert advisory boards, whose members do not include health authority officers.

A series of reports to government over the past few years have dealt with issues of public administration and in some the question of machinery for policy formation has been explicitly raised.

One of them, the Royal Commission on Australian Government Administration (Coombs, 1976) endorsed the four basic themes emphasised by the task force i t established to examine coordination in welfare and health. All four themes took ratio n alisatio n as a key' term. Coombs expressed the

view that these fa u lts , ju s tify a major e ffo rt to rationalise welfare policies and th e ir adm inistration' which could come about only slowly. (328.)


The Royal Commission did not endorse ' for the foreseeable fu tu re1 the view of the task force that i t would be desirable to have a single 'g ia n t' Health and Welfare Commission to cover the Commonwealth's re s p o n sib ilitie s.

The Royal Commission did, however, support the idea of a single Ministry for Social Welfare, with policy and coordination re sp o n sib ilitie s, supported by a consultative council of heads of departments, outside experts and a Bureau of Social Policy. Departments to be involved were Health, Social Security, and Aboriginal Affairs and the then departments of Environment, Housing and Community Development, and Repatriation.

Since then the establishment of the Social Welfare Policy Secretariat, referred to e a rlie r, can be seen as an attempt to get broader-based policy advice on health welfare, while the establishment of the Committee of O fficials on Medical Manpower recognised the problems of reconciling

different views on a specific matter of health policy at an inter-department level.

The Commission is aware that most State bodies have conducted detailed internal and some major reviews of the health system, some of them since this Commission was appointed. Several of these reports commented on the quality of advice to State governments and a variety of suggestions to improve th is

have been made. This Commission's inquiries have led i t to conclude that:

. There is a lack of clear objectives for health policy formulation.

I f th is problem could be resolved the effectiveness of policy formation might be more readily judged.

. There is a lack of information, rather than a lack of machinery, on which to base policy, partly because of the d iffic u ltie s in measuring with any accuracy what the policies are designed to achieve. In p articu lar, analysis of the re la tiv e costs and benefits of policy decisions is not apparently well developed in the health area, making advice on policy options for one type of health expenditure as against another highly subjective. Even less well developed is machinery for analysis on which to base policy decisions on relative value from allocations for health services, as against non-health services such as education or housing which may have an impact on health.


. Machinery to provide advice on those aspects of health policy which involve Commonwealth and State governments, mainly at present recognised hospitals, receives most attention but managerial and economic analysis could apparently be improved.

Arising out of these inferences certain options are before th is Commission:

Option 1. Should there be policy cooperation and overview at Commonwealth level? The Commission believes a review of policy is desirable. Such a review could come from: An upgrading of the role of the Social Welfare Policy Secretariat to

encompass a regular review of health matters in addition to i t s other functions.

The joint Parliamentary Committee of Public Accounts has suggested the establishment within 12 months of a Bureau of Health Economics independent of the Commonwealth Department of Health. An improvement in the quality of economic advice available to the

Minister for Health through his department. An improvement in the capacity of the Government's review departments to provide economic analysis of health policies, primarily the Departments of Prime Minister and Cabinet and Finance.

This Commission RECOM M ENDS the establishment of a Bureau of Health Economics as proposed by the Commonwealth Parliamentary Joint Committee of Public Accounts in i t s 182nd Report presented in Parliament on 17 September, 1979. I t considers that such a bureau away from the

Department of Health would be of great value to the Minister of Health as an independent advisory body on economic matters. The bureau would undoubtedly seek advice from the department but would examine such advice independently and compare i t with advice from other sources.

The bureau could be given some authority to enable i t to work in association with the States, possibly through the conditions of the Commonwealth funding arrangements, to try to identify internal and external causes of efficiency in hospitals and other in stitu tio n s. The

States should be encouraged to use the fa c ility , which could be


established away from Canberra i f necessary. In addition, the bureau could possibly become the centre for the health cost information system proposed elsewhere in th is report for hospitals and related in stitu tio n s.

Option 2. Should there be policy cooperation and overview of policies at Commonwealth and State level? The Commission does not consider th a t there should be. The Commonwealth has certain responsibilities and the States others. The Commonwealth should make its overview of policies known to the States so they can determine th eir policies knowing what the Commonwealth is doing. It has been suggested that a small independent se c re ta ria t should be

formed to develop policies through the newly-established Standing Committee on Health, based on the Australian Health Commissioners' meetings or through the National Standing Committees of the Cost-Sharing Agreements. The Commission does not support these options.

Option 3. Policy review for recognised hospitals. In setting th eir policies the States will determine policy principles for recognised hospitals. Hospitals within guidelines should be encouraged to se t policies and review them and submit suggestions for change to the au th o rities.

In the States, the departmental process and advisory structures already referred to may have some impact on policy for recognised hospitals.

In three States with health commissions, former hospitals departments have been integrated into an overall framework. All three have general health services advisory committees or councils. In New South Wales, there is a well developed regional structure, and the regions have some policy making power, as well as a role of advising on head office policy. The South Australian Health Commission indicated i ts views:

1 It can be said at least, that there is now established the machinery at State level for setting objectives, policies and resource allocation freed from the day to day pressuring of administering services.1 (Submission 719, 34)

The Tasmanian Department of Health Services indicated its support for the concept of a unified health authority. I t is not clear i f th is is

related to questions of effectiveness of policy formation or more likely to


questions of the effectiveness of policy implementation. Recommendation ( f) of its submission suggested they meant both.

'The machinery for policy making [should be] strengthened and the formulation of policy become[s] more rational, planned and coherent, instead of piecemeal, contradictory and incremental.1 (Submission, 66 -6 8 . )

Some submissions were scathing about the policy making machinery for hospitals. Dr Broe, Australian Geriatrics Society, said:

'There is l i t t l e or no effective machinery. Policy is s t i l l largely determined by an interplay of politics and s e lf-in te re st at a hospital and regional level on the one hand and at a State or Federal p o litic a l level on the o th e r.' (Submission 261, 3.)

The Royal Australian College of Physicians (Submission 232, 8) had a similar view.

The Royal Australian Nursing Federation fe lt that existing structures and machinery for consultation with the nursing profession were ineffective and that the States should:

'Be encouraged to decentralise decision making within the health service to fa c ilita te links between responsibility, authority and accountability a t a ll le v e ls .' (Submission 280, 5.)

Some themes appear to be consistent among those who feel that the machinery is ineffective. Doctors including professors, s ta ff sp ecialists and private p ractitioners, nurses, and allied health professionals, as well as those who work in hospitals but are not 'health manpower' such as food

service managers, o rth o tists and medical physicists, complained about lack of consultation. Often they complained that resulting policy decisions were ill-informed and for th is reason did not work out efficien tly or cheaply.

There were complaints about the political nature of decision making. This view was common to large associations as well as to individuals: 'Because funding for health care is a p o litic a l matter many

disadvantaged people with no p o litic a l voice do not have th eir needs met as well as the more powerful lobby groups . . . Those bodies with the


most financial reward to be gained should not be the ones to have the most influence over decisions which affect a ll citizens and taxpayers.' (Submission 895, 6.)

While th is point is superficially a ttra ctiv e, politician s are at least accountable to the electorate. Health care providers are not.

Another theme that emerged was that policy decisions for hospitals are not supported by cost comparisons. Many submissions deal with the inadequacy of cost information. This question of linking cost and performance data and using i t as an input to policy development presents an option for th is


Another complaint about ineffective machinery concerned the constraint upon the a b ility of governments effectively to formulate policies occasionally the relative autonomy of many of the recognised hospitals and service providers. For the health authorities th is is a major drawback. As the South Australian Health Commission expressed i t :

Ά central health agency must stand between Governments and those providing services and attempt to define service objectives for a State; at the same time as recognising professional and public constraints and expectations' (Submission 719, 36.)

The Commission indicated that a powerful constraint on overall coordination is :

'I ts lack of authority over non-incorporated bodies for standards, policies and objectives and its in ab ility to exercise control over the supply of runds, many of which will flow directly to the provider or consumer of the serv ice.' (370.)

The Tasmanian Department of Health Services had sim ilar views:

'The government . . . does not have the necessary le g islativ e power to rationalise the services of either public or private medical establishments' (Submission 714, 63.)


Policy Within Hospitals

The board is the internal policy-making body of a hospital, but not a ll public hospitals have boards. Boards normally have a number of standing committees. They receive advice on policy from two sources, the senior executive officers and the medical s ta ff advisory committees. In those hospitals where there is no board the central health authority is the sole policy-making body.

The Medical Superintendent of a large Brisbane hospital described the process of policy formation in the Queensland system as:

'Policies are laid down by the central health a u th o rity .1

Speaking of the role of the three executive o fficers, (medical superintendent, nursing director and manager) he said the strongest of the three tended to be the spokesman for the three, and he saw the establishment of advisory committees to the board as 'one very big step forward'.

In discussing how policies may be changed, for example, with a new specialty group being established:

'We would take i t through the department; and the manager on behalf of the board would write to the health department.1 (Transcript, 16040)

In some parts of Australia boards of separate hospitals have either been amalgamated or the administration of a ll services in an area have been brought under a single area board. In th is case the area board has the possibility of forming policy and implementing i t beyond the doors of the major hospital in the area.

Where there is a board, the policy making function is constrained by the powers of the central health authority, which in turn is constrained by the policy making power of the Federal and State governments. These constraints are not merely 'on paper' because governments have major control of hospital

financial policy. Thus, the boards' power to formulate policy on the allocation of resources is constrained:


'by the lo g istics of staffing and power structure by an in s titu tio n .1 (South Australian Health Commission submission, 37.)

Nevertheless, the board:

'can make policies on a wide range of operational areas as a framework within which day to day decisions can be made with a minimum of delay.' (Swinden, 1976.)

Swinden said the effectiveness of policy making by boards depends on both the quality of the key managers and the selection process for boards.

Other themes raised in submissions or at the hearings are the effectiveness of the advisory role, or consultative mechanisms of boards and the quality of information on which policy decisions are based.

The Doctors' Reform Society provided information on the background of board members in major Victorian teaching hospitals to support i t s view that boards were unrepresentative of the interests of the wider community:

'In many respects the existing boards are b etter seen in my view as the p o litical wing of the hospital . . . ensuring th at the ho sp ital's needs as an in stitu tio n are being met in the p o litic a l stru c tu re s.' (Transcript, 1220.)

Working in a different environment, a Queensland hospital administrator said: 'I t is always a matter of some conjecture as to how board members arrive on the board . . . the Government Gazette is anxiously scanned by

everybody at the end of the three years to see who you are going to get on the board next time . . . It is a terrib ly anonymous sort of

process.' (Transcript, 1690.)

There was a suggestion from the Public Medical O fficers' Association of New South Wales for: 'devolution of power from the centralised Health Commission to the restructured local hospital board, with removal of the interposed

regional adm inistration.' (Submission 354, supplementary submission, 2)


The views of hospital adm inistrators and those who work in hospitals have been compared with those of the central health authorities. Each from his own perspective seems to feel th at policy making would be easier i f only the powers of the other parties were more clearly defined.

For policy making in those hospitals without boards, again there were varying views. The Public Medical O fficers' Association, for example, considered that there were:

' fewer problems . . . in a fif th schedule hospital' (a psychiatric or rehabilitation hospital in New South Wales which has no board) because i t works through 'normal public service channels . . . we do not have to fight the executive channel within the h o sp ita l.' (Transcript, 250).

Even so, the process is hardly simple. The Association described i t thus:

'The superintendent . . . has the opportunity to represent i t to the region which represents i t to the Health Commission which represents i t to the Public Service Board where the decision is made.' (Transcript, 250.)

Private Hospitals

The National Standing Committee of Private Hospitals represents 261 private hospitals, with 16 454 beds, in each State and the Australian Capital Territory (Transcript, 3199). The Committee asks members for information to a ssist in developing i t s p olicies. The Committee has representation in

Canberra on the National Health Advisory Council.

In each State there are special associations of private hospitals. For example, the associations in Victoria representing the interests of the private hospitals are the Private Hospitals and Nursing Homes Association, Victorian Bush Nursing Association and Private Geriatric Hospitals'

Association of Victoria. The Community Hospitals' Association represents the views of community hospitals, private not-for-profit hospitals. Queensland has a Private Hospitals and Nursing Homes Association. An Australian Catholic Health Care Association has been formed to represent the views of

the Catholic hospitals, private and public.


In evidence, a senior Commonwealth o ffic ia l said that:

'Private organisations . . . are subject only to such rules as the State governments think appropriate. 1 (Transcript, 1494)

and another said:

Ί do not see controls coming into the private hospital sector in Australia at the present tim e'. (Transcript, p. 1497)

The Foreign Investment Review Board is , however, indirectly involved in that i t approves applications for entry of foreign investment capital, including that from hospital proprietors or companies.

At State level, most of the States (New South Wales, Victoria, South Australia, Tasmania and Queensland) take note of private hospital growth and services. In New South Wales, Queensland and Western A ustralia, s ta tis tic s on hospital morbidity are obtained from private as well as public hospitals.

In Victoria, the recent publication 'Guidelines for Estimation of Need for Hospital Services' indicated interest in private as well as public hospital u tilisa tio n .

Policy for Community Health

Commonwealth and State departments and authorities have had a role in the determination of policy for community health.

In June 1973 the then interim committee of the Hospitals and Health Services Commission issued i t s f ir s t report Ά Community Health Program for A u stra lia', which recommended the introduction of a national community health services program. The recommendations were adopted by the Government and implementation of the program commenced in the same year, with the cooperation and involvement of a ll States (Commonwealth Department of Health Submission, Part 3, 5).

'In terms of administrative arrangements, the Commonwealth is regarded as having responsibility for broad policy issues, program appraisals and financial monitoring. The State authorities are regarded as having immediate responsibility for conduct of services or . . . the oversight of those serv ices.' (9)


Ά number of commissions, task forces, etc. have been or are concerned with reviewing and evaluating community health policies. These are liste d as:

. Hospital and Health Services Commission, Review of the Community Health Program.

. Sub-Committee of Government Members' Health and Welfare Committee, May 1977.

. Report of the Review of Post-Arrival Programs and Services for Migrants (Galbally, 1978) which led to the adoption of the ethnic health workers sub-program.

. Task Force on Coordination in Health and Welfare, f i r s t report (Bailey, 1976).

. Committee on Care of the Aged and Infirm (Holmes, 1977).

. Commonwealth Department of Health review of evaluation studies of community health projects.

. Commonwealth State Standing Committees which review p o lic ie s .1 (17-18) 'The Management Services Division administers a number of programs including the Home Nursing Subsidy Scheme and the Paramedical Services Scheme, both of which serve to support community health services and

reduce demand for in stitu tio n a l c a re .' (174-176)

The Department of Social Security administers the Home Care subsidy under the States Grants (Home Care) Act and the Delivery Meals subsidy under the Delivered Meals Subsidy Act.

State machinery which administers community health services, and which advises on policy on community health, includes:

. Division of community health, Health Commission of New South Wales, (annual report 1978-79).

. Hospitals division (community health program); public health division (Aboriginal health, health education, polio, home help, a llied health professionals); mental health services division (community mental health c lin ic s); maternal and child health branch,

school medical service; Victorian Health Commission (annual report 1978-79, 21-31).


. Divisions of community medicine, psychiatric services, maternal and child health, Queensland Department of Health (Submission 711, 5.1).

. Health services department's management group, South Australian Health Commission (annual report 1978-79, 26).

. Community and child health services branch, Western Australia Department of Public Health (annual report 1977, 53-102). Community psychiatry division and child psychiatry division, Western Australia Mental Health Services (annual report 1974-75, 39-40).

. Community health, g eriatrics, and d is tr ic t medical service; division of public health, and school dental service, Tasmanian Department of Health Services (annual report 1977-78, 15-22).

. Special health services branch and mental health branch, Capital Territory Health Commission (Annual Report 1978-79, 22-30).

. Northern Territory Department of Health (annual report 1978-79).

Provider agencies and associations of providers may express views on community health policy, and thus may influence the determination of policy, for example:

. Kensington Community Health Centre (Submission 577), West Heidelberg Community Health and Welfare Centre (Submission 578), and the Community Health Working Group (Submission 367) were in favour of autonomous community health services.

. Hornsby and Ku-ring-gai Hospital (Submission 423) and Gosford D istrict Hospital (Submission 405) were in favour of hospital controlled community health services.


The main debate in evidence to the Commission was whether autonomous community health services or hospital controlled community health services were more effective for determining policy within services. Many of those involved directly in the provision of community health services argued for

autonomy while many hospitals pressed strongly for control by the hospitals

Proponents of both points of view argue the advantages of relevance to the area being served, credibility in the community, fle x ib ility in policy,


Three points of view are:

■Planning can be based on the real needs of the community and not upon outsiders' ideas imposed because they f i t tid ily into some overall p lan .' (West Heidelberg Community Health and Welfare Centre, Submission 578, Appendix, 5-6)

■The reason I favour hospitals [controlling community health services] is , I believe, the overwhelming proportion of resources now reside in hospitals and we have, in fact, diverted some of these resources.' (Hornsby and Ku-ring-gai Hospital, Transcript, 175.)

'The issues raised a ll point to the importance of the links between in stitu tio n al and community care. Quite apart from conflicting objectives, p rio ritie s and financial in terests, there is a genuine concern that i f community services are organised by hospitals they w ill,

in any system, take second place to in stitu tio n al requirements. As things stand, the services are being incorporated in th eir own right so that they can develop in a responsive way to needs as they see them and have control over th e ir own funds.' (South Australian Health Commission

719, 96).

Domiciliary Nursing

The Sydney Home Nursing Service (Submission 428) discussed a number of constraints on the effectiveness of policy determination in domiciliary nursing. The service said there are fragmented funding arrangements: Community Health Program and Home Nursing Subsidy Act, government-imposed

s ta ff ceilings under the Act, government-imposed hospital cost constraint, and lim its on new nursing home beds, which creates increased demand for home nursing.

Rehabilitation .

Policy advice includes the preparation of reports by Commonwealth and State governments. Several reports have dealt with questions relevant to policy for rehabilitation and/or g eriatrics. Some have come from independent

g r e a t e r r e s p o n s i v e n e s s t o e d u c a t i o n a l and p r e v e n t i v e p ro g ra m s, c o s t s a v i n g s

th rou gh v o lu n t e e r w o rk , and a b i l i t y t o r a i s e s p e c i a l fu n d s in t h e com m u n ity.


sources, some from within government departments. The policy and planning division of the Commonwealth Department of Health prepared a report on Rehabilitation in Health Services with the cooperation of the Department of Veterans' Affairs.

The Australian Council for the Rehabilitation of the Disabled is a national body representing 189 major organisations. I t described its e lf as a provider of expert advice to the Commonwealth Government.

The Australian College of Rehabilitation Medicine, formed in February 1980, has policies on training and education standards for i t s members and can contribute to policy making through its membership of Australian Medical Association.

According to the Royal Perth (Rehabilitation) Hospital (a branch of the Royal Perth Hospital) a State Rehabilitation Service exists in Western Australia. Many other bodies such as universities, colleges of advanced education, central health authorities and teaching hospitals have an effect on rehabilitation either to increase allocations for rehabilitation or to maintain the present status.

The Australian Council of Rehabilitation of the Disabled did not believe the machinery is effective. It stated:

Ά national policy on rehabilitation does not e x is t.' (Submission 321)

The Council urged the Commonwealth Government to form a policy on rehabilitation fa c ilitie s and services in Australia, with chairs of rehabilitation and departments of rehabilitation medicine in teaching hospitals, and a requirement that teaching hospitals have a policy that

includes rehabilitation and specialised c lin ic s.

In short, inadequate services were seen as the resu lt of lack of policy on rehabilitation.


Repatriation Hospitals

The Repatriation Commission is the policy making body for Repatriation hospitals, 'in accordance with the policies of the Government of the day.1 (Submission 701, 36)

The Department of Veterans' Affairs, 'has as one of its prime responsibilities ordering p rio ritie s among demands.' Branch offices have some delegated authority.

In forming policy, the government looks to repatriation beneficiaries.

As the department said in evidence the:

Έχ-service organisation is as effective a pressure group as you w ill get anywhere. They are very active as they should be. They have very good liaison with Government and they have very good liaison with us . . . There are formal channels of communication. They meet with the

Government once a year and informally frequently. They meet with us a ll the tim e.' (Transcript, 1577.)

In discussing a particular policy, that of opening repatriation hospitals to community patients, o fficials gave evidence on how policies are formed in the department:

'I t was prompted by several considerations, one of which was the restrictio n on the c lin ic a l type of patient that we were admitting and also, in some instances, where we had particular persons, s k ills , equipment or something else that provided a unique service . . . the

trigger was the making available to the community the resources of anything that was unique in that particular community. ' (Transcript, 1579-80.)

Repatriation hospitals do not have boards and a ll s ta ff are employed under one Act. There are medical and other advisory committees. Regular meetings take place between hospital administrators and branch office s ta ff. There are a variety of arrangements for liaison with State health authority

o fficia ls.



In general, the department is s a tisfie d with its machinery for policy making. A representative of the Medical Advisory Committee to one Repatriation General Hospital in evidence said:

Ί would like to see perhaps an increase in autonomy with the veteran hospital . . . we do feel on occasion that things get lo st and do not get through to people who can see th e ir importance or needs c e n tra lly .1 (Transcript, 2547.)

In the submission from th is committee, a further suggestion was:

'Where and when practical, the State Director of Medical Services for Veterans' Affairs and the hospital medical administrator should be united and hospital based.' (Submission 250, 4.)

The Committee fe lt i t would be desirable to:

'have a channel directly to medical planners so that they can assess our needs directly without other people being involved. Perhaps that may even go to Canberra, so that Canberra would administer directly in respect of our hospital because we feel in that way they can directly

assess our problems and say yes or no appropriately.' (Transcript, 2547.)

As for the separateness with which policy for repatriation hospitals is formed, the department said:

'We have a specific charter to cater for v eterans.'

Perhaps not surprisingly at least one State health authority fe lt differently: 'The insularity and autonomy of the Repatriation Hospital, Heidelberg, is a significant barrier to effective planning either with a view to containing or expanding serv ice s.' (Submission 722, 88)

Psychiatric Hospitals

In-patient psychiatric services are provided in three types of in stitutions:


. psychiatric wards in recognised hospitals; . separate State run psychiatric and mental hospitals; and . private psychiatric hospitals.

The Commonwealth's policy machinery is involved in each of these, but in different ways.

Psychiatric wards in recognised hospitals are currently financed through the cost-sharing agreements. This involves the usual Commonwealth and State machinery, and the National and State Standing Committees. In addition, insurance patients in these wards are eligible for hospital and medical

benefits. Thus, the usual insurance policy machinery is involved.

Separate State run psychiatric hospitals are neither cost shared, nor are insured patients e lig ib le for insurance benefits. These exclusions date back to the exclusion of psychiatric hospitals from the National Health Act. However, the Commonwealth is involved indirectly in financial policy towards

psychiatric hospitals through the Department of Social Security which pays pensions to most patients in psychiatric hospitals. Since November 1980, psychiatric patients are elig ib le for pensions on the same basis as a ll other people. This change has removed one element of discrimination against

psychiatric patients which was previously built into the machinery. In most States the pension is paid to the patient, and the hospital claims a maintenance fee from th is . In Victoria and Tasmania, however, some hospitals are defined as benevolent homes under the Social Services Act. This allows

pensions to be paid directly to the psychiatric hopitals, with two-thirds going to the in stitu tio n as a maintenance fee, and one-third going to the patient.

The Commonwealth is involved in private psychiatric hospitals through the payment of the private hospital bed-day subsidy. The branch concerned is the Hospitals and Nursing Homes Branch of the Commonwealth Department of Health. .

The Department of Veterans' Affairs has a policy of paying the States for psychiatric services provided to repatriation beneficiaries, whether in recognised or State hospitals.


In addition, the Mental Health section of Aboroginal Health Branch of the Commonwealth Department of Health considers Aboriginal mental health policy.

The States are involved directly in providing and financing the State psychiatric hospitals, in cost sharing and regulating recognised hospitals, and in regulating private psychiatric hospitals. The main policy machinery is the health authority or mental health authority in each State. Diverse departmental arrangements apply in each State. In New South Wales, psychiatric services are controlled by regional offices of the Health Commission without interposing boards. In the Victorian Health Commission, the Mental Health Division is one of five main divisions.

The Queensland Department of Health has a Division of Psychiatric Services, a Division of Yough, Welfare and Guidance, and the Intellectual Handicap Services Branch. In South Australia, the Mental Health Services section of the South Australian Health Commission has control of State psychiatric in stitu tio n s, and community based psychiatric services. In Western Australia, the mental Health Service is separate, and reports

separately to the Minister for Health. In Tasmania, the Mental Health Services Commission also reports separately to the Minister.

There is provision for mental health services in the Capital Territory Health Commission and the Northern Territory Department of Health.

Because State psychiatric hospitals are administered directly by the State health or mental health authorities, they do not h boards to determine policy at the service level. They are staffed by public servants, and the health authority deals with the Public Service Board on issues of

administrative and industrial policy.

In some States, psychiatric units in general hospitals are administered by the hospital board which has responsibility for service level policy (e.g. Queensland, South Australia, New South Wales). In others (e.g. V ictoria), psychiatric units are administered by the mental health division or authority.



On b e h a l f o f p a t i e n t s , t h e r e i s an A s s o c i a t i o n o f R e l a t i v e s and F r ie n d s

o f t h e M e n ta lly 111 ( S . 3 6 2 ) . O th er g r o u p s a r e a s s o c i a t e d w it h p a r t i c u l a r

h o s p i t a l s , f o r e x a m p le , R yd alm ere H o s p it a l in New S o u th W ales ( S . 3 6 9 ) .

The main problem with th is policy machinery is that i t maintains the distinction between physically or psychiatrically i l l , and discriminates between the services provided for each group. This discrimination occurs in funding, insurance, administration and fa c ility provision. The

discrimination in pension e lig ib ility has recently been removed.

Several State health authorities have critic ised the low priority accorded psychiatric services, and especially those services provided in psychiatric in stitu tio n s . This is seen to be due in part to the machinery which funds psychiatric services on a different basis from other health

services. That is , there is no joint Commonwealth-State financial arrangement.

According to evidence, the policy issue of extending Commonwealth-State financial arrangements to parts of psychiatric hospitals has been discussed informally between the Commonwealth and the States, but has not been raised formally at the State Standing Committees. In addition, the policy of no

real growth in recognised hospital financing is seen as a b arrier to the transfer of inpatient psychiatric services from the separate State in stitutions to the general hospitals.

The capital funding machinery has proved inadequate for maintaining and replacing the large, old, inappropriately located in stitu tio n s which were designed for custodial purposes, with smaller, more appropriate in stitu tio n s with an orientation to active treatment and rehabilitation.

An equally important criticism mentioned in many submissions is th at the insurance machinery applies to those psychiatric patients cared for in recognised or private hospitals, or by private practitioners outside in stitu tio n s, but not to patients cared for in State psychiatric hospitals.


The administrative machinery discriminates against psychiatric services in that psychiatric hospitals lack boards to act as advocates for the services and their patients.

Furthermore, u n til recently, the machinery did not distinguish between short-term psychiatric care, extended care, and mental retardation (or in tellectual handicap). Some States have plans to separate the policy, funding and administration of these three types of service.

In summary, the machinery is ineffective in that i t is unable to overcome the discrimination between physically and psychiatrically i l l patients. To overcome th is requires changes to funding, insurance, administrative and service provision policy machinery.

Nursing Homes

Several reports have advised at Commonwealth and State level on nursing homes policy development. These have not been on nursing homes policy alone, but rather on the government's overall involvement in the care of the aged. Two examples are the Report of the Committee on the Care of the Aged and

Infirm (Holmes, 1979) and in South Australia, the Report of the Committee on Accommodation, Domiciliary Care and Medical Rehabilitation for the Elderly (1978).

The Commonwealth Department of Health Nursing Homes Section is responsible for administering policy and advising the M inister. Policy can be differentiated for the three types of nursing homes, two of which - the private-for-profit and private charitable or religious nursing homes - can be approved for Commonwealth Health Department financing, while the th ird , the State owned in stitu tio n s, are not eligible for Commonwealth health financing.

The State run in stitu tio n s, some of which have a very old origin as Homes for the D estitute, usually also have hostel accommodation and are eligible for some purposes for finance from the Department of Social Security.

The pensions policy of the Commonwealth Government clearly influences policy in a ll three categories of nursing home, since most of the patients


are eligible for pensions. There is a policy on the minimum patient contribution to cost of accommodation which is based on a fixed proportion (87.5 per cent) of the pension, plus any supplementary allowance. The patient contribution and other aspects of Commonwealth policy for these nursing homes, are reviewed annually by the Department of Health.

The machinery for administering the nursing home sector is something of a maze, the key to which is the legislation which gives various financial powers to the Commonwealth, This machinery includes:

. The parts of the relevant legislation which give various financial powers to the Commonwealth (for example, the National Health Act 1953) in respect of different categories of nursing home.

. The Nursing Homes section of the Hospitals, Insurance and Nursing Homes Division, Commonwealth Department of Health.

. The National Standing Committee of Nursing Homes, the national body representing private proprietors, which is represented on the National Health Services Advisory Committee. This does not preclude access to the Minister separate from the Committee.

. The Participating Nursing Homes Advisory Committee, established in 1977, with members from the National Standing Committee and Commonwealth health o fficials. ( 'P articipating1 means approved under the National Health Act for payment of nursing home b e n e fits.) . Other consultative committees represent interests of participating

private nursing homes in consideration of Government policy. The Working Party on Fees Justification Procedures meets regularly.

. Commonwealth-State Coordinating Committees on Nursing Homes approve accommodation in private profit and not-for-profit nursing homes.

In most States, g e ria tric services divisions within the central health authorities are responsible for the State-run g eriatric services, whether in nursing homes or other accommodation, and they also provide a service to the Commonwealth Department of Health processing pursing home applications to

build or extend. This is part of their cooperation with the Commonwealth through the jo int committees on nursing home accommodation. They also administer the sections of State Acts which given them public health and hygiene supervisory powers for a ll types of services including those for the

7 9

elderly, for example, Special Accommodation Houses in Victoria. These divisions have a role in planning for the State services.

There are a number of State associations of nursing home owners, for example the Private Hospitals and Nursing Homes Associations of Victoria and Queensland, and the Private Geriatric Hospitals Association of Victoria.


Criticisms of effectiveness came from a ll parties involved. Most of the criticism related to the objections interested parties have to policies, but may re fle c t the ineffectiveness of the profusion of machinery to produce effective policy.

The private nursing homes were vocal in th eir criticism of present Government policy and by implication, the impact of Commonwealth and State Government actions on policy formation within th e ir in stitu tio n s. The Private G eriatric Hospitals Association of Victoria said:

'More proprietors realise they are in an open market situation and now have to look c ritic a lly at their business. Standards force proprietors to borrow a t rates up to 16 per c e n t.' (Opening statement to the Commission, 1980, 3.)

'The complexities of the fee control system especially in relation to larger nursing homes made managerial fees a n e ce ssity .' (6.)

The Association said overlapping policies of Commonwealth and State Departments wasted time; and 'delaying ta c tic s ' of insurance funds caused financial uncertainty.

The nursing homes section of the Private Hospitals and Nursing Homes Association of Queensland commented that differing policies on standards in neighbouring States altered the financial position of neighbouring nursing homes.

On the other hand, i t was striking to observe how effective the Commonwealth financial machinery had been in shaping the nature of the available services for the aged with its predominance of nursing homes.


This state of a ffa irs was c ritic is e d widely by the experts in g e ria tric care from whom the Commission heard. (See for example Dr Bruce Ford, Submission 448).

State g e riatric in stitu tio n s were also c ritic a l of the impact on them of Government actions and of the way in which those decisions were made. Thus the Bundoora G eriatric Complex complained:

'The Commonwealth have a fa ir amount of money for nursing beds in certain areas in th is State. That is their rig h t, but when we have to go along to the State for money for our elderly folk they seem to have their hands tie d behind th e ir back.1 (Transcript, 1140.)

Although most States have organised their departments around a broad framework for g e ria tric care, rather than specific to particular types of geriatric care the effectiveness of this was questioned, again by implication rather than e x p lic itly . For example, the inference can perhaps be made from some of the following comments:

'The co n flict that arises between decisions made at Government levels, Commission, hospital board and sta ff levels, have frequently led to a loss of direction in preventing illness in the aged as the principal o b je c tiv e .' (Victorian Geriatric Medical O fficers' Association, Submission 255, 1.)

The Association f e lt that:

' A b e tte r defined administrative process whereby decisions can be limited to one or two bodies would greatly define the aims and objectives of g e ria tric c a re .'

The Association said th at the Victorian geriatric hospitals (and th is may well be so in other States) are 'not related one to another as well as being isolated from acute hospitals and nursing homes.'

Another important criticism can be inferred from the evidence about the difficulty with which the existing powers of government, and the existing numbers of workers in g e ria tric services, can monitor conditions for elderly people not in nursing homes. There are, for example, the privately owned special accommodation houses in Victoria, in some of which, confidential evidence indicated, conditions could only be described as disgraceful.


The health a u th o rities' perspective is also very c r itic a l of the existing policies and to some extent of the structures. The Queensland Department of Health concentrated on the deficiencies resulting from the independent policy-making function of the universities, which have resulted

in a lack of emphasis on geriatrics within medicine and on psychogeriatrics within psychiatry.

The Victorian and South Australian Health Commissions and the Queensland Health Department were c ritic a l of the guidelines used to review approvals for nursing home accommodation. Perhaps the effectiveness of the Commonwealth State Coordinating Committees on Nursing Home Accommodation can be questioned, i f they have not proved a suitable forum for influencing Commonwealth policy in th is crucial aspect of planning ta rg e ts.

A further perspective emerges from some of those workers in the field who have put into effect policies for service provision at the grass roots. Notably, there is cooperation, i t appears, emerging between teaching hospitals and geriatricians, and g e ria tric assessment teams are beginning to have an impact on service provision, even within the in efficien t climate of government policy. It could be made very much easier, is the cry from these


The effectiveness of reports to government as a mechanism for policy formation has been questioned especially by experts in th is fie ld . The fate of the many inquiries was discussed and the pressure to re s is t change, especially i f i t involves reorganisation of departmental boundaries, was highlighted. They surely should not be taken ligh tly yet, on another view, the evidence of activity at the service level, in the 'r ig h t1 directions, may be in part a measure of the success of these reports in changing the climate of opinion.

In summary, nursing homes illu s tra te the a b ility of a maze of financial and administrative machinery to 'clog up' or obstruct the process of policy development.


Machinery for determining policy on research

Commonwealth policy on medical research is determined by Ministers on the advice of the National Health and Medical Research Council, which makes grants for medical research and training, including grants to researchers in hospitals and university medical departments in hospitals.

Advice to the Minister on health services research and evaluation is given by the Policy and Planning Division of the Commonwealth Department of Health, with i t s Research and Planning Branches No. 1 and No. 2. The extent of involvement in policy development, as opposed to policy implementation,

presumably depends on the extent to which the Minister seeks advice. Branch No. 2 administers the Health Services Planning and Research Program and the Health Program Grants and advises on the e lig ib ility of applications for grants on the advice of the Research and Development Grants Advisory Committee which is formed of department representatives and other experts.

Branch No. 1 a ss is ts in the preparation of reports, such as that of the Committee of O fficials on Medical Manpower Supply, the Nursing Manpower Survey, Publication on Health Expenditure in Australia and the discussion paper on R ationalisation.

Principal funding bodies, government and private, which support research are:

National Health and Medical Research Council, New South Wales Family Medicine Program, National Heart Foundation, State Cancer Council, Clive and Vera Ramaciotti Foundation, Postgraduate Medical Foundation of the

University of Sydney, A rthritis and Rheumatism Council, Australian A rthritis and Rheumatism Foundation, Commonwealth Department of Health, Department of Health, Education and Welfare, United States of America, Asthma Foundation of New South Wales, Australian Kidney Foundation,

Ludwig Foundation, Jennie Trust, Life Offices Association, Pharmaceutical and other industrial companies, hospital-based research support, Children's Medical Research Foundation, Foundation '4 1 ', 'B ill Walsh' Cancer Fund, hospital endowments and private bequests.

8 3

The Divisions of Planning and Research in the State health authorities presumably determine th e ir action on research, including fundings of outside research, subject to the normal policy making processes of State governments.


The Department of Aboriginal Affairs has the major responsibility at Commonwealth level for the in te re sts of the Aboriginal people, including the provision of financial assistance for health purposes, made available through grants to State health authorities and Aboriginal health service organisations. The Aboriginal Health Branch within the Commonwealth

Department of Health plays an advisory role to the Department of Aboriginal Affairs.

A House of Representatives Standing Committee conducts inquiries from time to time into matters affecting Aboriginal people, most recently in 1979, and there has been a Task Force of Commonwealth o fficia ls looking at the effectiveness of programs.

The submission of the Commonwealth Department of Health Part 3, 132-3, referred to problems:

'Unless the direct impact on health of housing, water supplies, waste disposal, the problems of alcohol, faulty nutrition, lack of employment, and indeed the whole spectrum of socio-economic deprivation is fully realised, no meaningful consideration of Aboriginal health is possible.

Where communities have no viable economic basis, lack adequate housing and sanitation, and have had their traditional lif e style disrupted, the inevitable resu lt is a lowering of community standards to a level quite unacceptable to any Australian concept of health and human dignity. I t is therefore reiterated that progress in upgrading the health of Aboriginals can be achieved only i f these environmental and

social needs are given the fu ll and urgent attention which is required.1

The submission stated that th is position remains equally valid in 1979.


The Commonwealth makes funds available with the intent of lif tin g health standards among a ll Aboriginals at least to the level in the community in general, with emphasis on lowering infant mortality, improving the nutrition of children, eliminating growth retardation, controlling specific diseases

and giving access to water and waste disposal fa c ilitie s .

Each of the States, with the exception of Tasmania, has a special section within its health authority for handling Aboriginal matters. A Commonwealth and State Conference on Aboriginal Health is held from time to time. It is noted that the la te s t conference was attended by some Aborigines.

Two Aboriginal organisations exist in the Northern Territory:

. the Aboriginal Development Foundation, founded in 1969, which in evidence at the open hearings in Darwin stressed its basic aim was to improve the life s ty le of people living in fringe camps and to obtain leases of land for permanent development (Transcript, 1963.) . the Central Australian Aboriginal Congress also in evidence in

Darwin stated th a t i t :

'was set up in 1973 by Aboriginal people who were concerned that a ll aspects such as, for example, health, welfare, a ll the needs th a t were not met as far as Aboriginals were concerned.1 (Transcript, 1899.)


The policy of the Commonwealth is similar to the views of the two main Aboriginal associations in the Northern Territory, to improve the health of Aboriginals. In further evidence the associations mentioned the problems of fulfillm ent. The Development Foundation spoke of i t s desire gradually to

change the Aboriginals' way of lif e to that of other Australian people, while the Congress in Alice Springs was concerned that improvements in health care were not won at the expense of keeping Aboriginal customs in force.




Specific Purpose Grants

The Commcnwealth Government is empowered under Section 96 of the Constitution to make specific purpose payments to the States 'on such terms and conditions as the Parliament sees f i t ' (Constitution Act 1900). Such payments have been made for the provision and maintenance of health services

since 1949-50, when the Commonwealth began providing grants for the control of tuberculosis.

Relatively minor, amounts were provided to the States u n til the 1970s, when the level and extent of Commonwealth assistance for health was increased. Payments to the States for health purposes increased from $18.8 million in 1969-70, through $107.7 million in 1974-5, to $1218.2 million in


This Chapter outlines specific purpose grants, for health purposes, from the Commonwealth to the States over the period 1974-75 to 1979-80. It should be noted th a t 'health purposes' are defined here according to the classification adopted in Commonwealth Budget Paper No. 7 ( ' Payments to or

For the S tates---- ') . The health vote payments are then grouped together in the appended tab les, with 'o th er' containing payments by the Department of Health for the control of encephalitis, high risk quarantine and for the disposal of ships' garbage. The 'Other Votes' group include payments

administered by the Department of Aboriginal Affairs concerning Aboriginal health and three programs from the Department of Social Security vote, two under the States Grants (Home Care) Act and payments under the States Grants (Paramedical Services) Act 1969. ·

All States received an increase in Commonwealth assistance for health purposes, broadly defined, during 1974-75 to 1979-80. Payments increased from an average of $8.37 per person in 1974-75 to an average of $97.32 (e s t.)


per person in 1980-81 (Appendix 2B). The major increase occurred in 1975-76 with the commencement of payments under the in itia l hospital cost-sharing agreements.

The original hospital cost-sharing agreements of 1 July 1975 were amended on 1 October 1976 to remove an element of open-endedness inherent in the original agreements. The agreements now provide for:

. $16 daily bed payments for private hospitals; . the Commonwealth Government is to meet 50 per cent of approved net operating costs of State hospital systems expressed in aggregate budgets jo in tly formulated and approved; . A State Standing Committee, comprising Commonwealth and State

o ffic ia ls, for each State, to formulate aggregate budgets of hospital system operating costs (and variations i f necessary during the year) and to submit these budgets for approval by the Commonwealth and State Health Ministers. These committees examine and make recommendations to Ministers on budget performance and on levels of recommended charges in public hospitals. A more detailed analysis of the Committees is a t a la te r part of th is Chapter. Accommodation charges in public hospitals for private patients were doubled from the date of commencement of the agreements (from $20 to $40 for shared accommodation and from $30 to

$60 for private accommodation). These amounts increased to $50 and $75 respectively from 1 June 1979. An amount of $25 per day is chargeable for treatment by doctors engaged by the hospital, where insured patients have elected not to be treated by a private doctor; . A National Standing Committee of Commonwealth and State o ffic ia ls

has been established to consider broad policy issues related to joint Commonwealth and State examinations of hospital expenditure.

. Provision was also made in the 1979 changes for longer term patients in hospitals who no longer require acute hospital treatment to be reclassified as nursing home type patients and to be required to contribute towards th e ir care and accommodation in the same way as patients in nursing homes.

There are significant differences in per person 'h ea lth ' allocations between the States. Victoria and Queensland received relatively small to ta l


per person allocations (e st.) in 1980-81, $86.41 and $86.72 respectively and Western Australia received the largest, $126.85 (Appendix 28). These differences are almost entirely attributable to the per person cost of maintaining the S tates' recognised hospitals.

The following table illu s tra te s the cost differences between Queensland and Western Australia for the year 1978-79. Since aged persons u tilis e services, the Commission is unable to reconcile these figures with expected patterns of behaviour:

Table 1 Cost Differences, 1978-79


Occupied Bed days per 1000 population 1978-79 a ll hospitals 1167 1298

Patients treated per 1000 population 210 243

Expenditures Per person 159 204

Cost per Occupied Bed Day 127 157

Cost per p atient treated 708 843

^Population Aged 75 and over as percentage of population 1977-78 3.47% 2.74%

Population 65 - 74 years 6.30% 5.46%

Source: . See Appendix 2A

. Population figures from the

Victorian Health Commission, submission to Grants Commission.


Commonwealth State Cost-Sharing Agreements

Section 30 of the Health Insurance Act 1973, authorised the Commonwealth to enter into agreements with State governments for the provisions of hospital services. Under the agreements the States provide for standard ward

treatment in public hospitals without means te s t while the Commonwealth meets 50 per cent of the net operating costs of public hospitals in the States, based on agreed budgets. Agreements with four of the States (New South Wales, Victoria, Queensland and Western Australia) ended on 30 June 1980, and have been extended yearly pending receipt of th is Report. The agreements for South Australia and Tasmania are in force u n til 30 June 1985.

Payment for the recurrent costs of State public hospitals amounted to an estimated $1266.6 million in 1980-81 and accounts for over 90 per cent of a ll specific purpose Commonwealth assistance to the States for health. The significance of th is source of finance in the States can be illu s tra te d by

reference to the Victorian figures for 1979-80. In that year the Commonwealth hospitals cost-sharing grants comprised 18 per cent of a ll Commonwealth grants to Victoria. The agreements also provide the equivalent of 21 per cent of net State taxation receipts for Victoria from a l l sources.

(Health Commission of Victoria submission, 108.)

Other States are treated in a sim ilar manner. The Agreements provide that any gains which accrue to a State as a result of payments made by the Commonwealth under the Agreements 'w ill not be offset by the Commonwealth against General Resources.1

Machinery for Allocating Hospital Cost-Sharing Moneys

Under the Cost-Sharing Agreements there is a further provision that the amount payable to a State may be limited to the amount paid by the State from i t s own resources towards meeting the net operating costs of such recognised hospitals and central services, whichever is the less.

Whichever amount is due, however, is subject to the approval of the respective State and Commonwealth Ministers for Health. In e ffect, both the

State and the Commonwealth have power to reject the budget proposals of each other. 90

The Agreements provide for the establishment of State Standing Committees of representatives of the Commonwealth and of the State. The number of representatives is agreed to by the Health Ministers and nominations are made by the senior officer of the Commonwealth and State health authorities. The proceedings of the Committees are agreed to by the

representatives and in event of a failure to agree on an issue the matter is determined by the Ministers .

The main functions of the Committee as set out in the Agreements are to:

. formulate and recommend to Ministers budgets for recognised hospitals and central services; . to review budgets so formulated and where appropriate to recommend to the Ministers revised budgets;

. undertake such other functions as the Ministers may direct.

The Agreements provide that in carrying out i t s functions a State Committee sh all endeavour to apply principles aimed at achieving operating economies in recognised hospitals and central services, consistent with maintaining an acceptably high standard of health care .

The Standing Committees meet twice each year, during March-April and October-November, to review and recommend a budget for both the present and following financial year at the March-April meeting and the present and past financial year a t the October-November meeting.

In 1977 a National Standing Committee (Hospital Agreements) was formed. If comprises the senior health oficers of a ll States and T erritories and senior officers from the Commonwealth. Its chief role is to consider broad policy issues related to jo in t Commonwealth and State examination of hospital

expenditure, p articularly hospital efficiency and cost containment, and to try to achieve solutions to problems in these areas. Since its inception the Committee has examined many significant issues concerning hospitals and related services. Two current issues are: ·

. Overservicing of hospital patients by doctors. The National Standing Committee has resolved that States should study th is problem in th e ir own hospitals and the Commonwealth is cooperating


with the South Australian Health Commission in monitoring fee for service payments in South Australian recognised hospitals. As the resu lt of the Committee's consideration of th is problem, a ll States have indicated that they are trying to introduce some form of control mechanisms for monitoring the levels of servicing by doctors or to introduce procedures to overcome problems.

Guidelines for the establishment of the need for hospitals and other services. All States have indicated th at there is a need for the establishment of guidelines for the estimation of the need for hospital and nursing home services. The Commonwealth was considering possible national guidelines, and Victoria is considering guidelines for that State. The review of national guidelines for nursing home bed provision is being examined by a working party consisting of representatives from the Australian

Capital Territory, New South Wales, Western Australia and the Commonwealth. The final report of the working party w ill be considered by the National Standing Committee at i t s next meeting scheduled for April 1981.

These two issues indicate th at the National Standing Committee sees i t s role as providing a forum under which broad issues relating to hospitals and other health in stitu tio n s can be discussed in the context of hospitals cost sharing arrangements.

The National Standing Committee does not require a ll States to be working towards a single goal, but i t provides the mechanism for understanding across Australia the approaches taken in different States, the reason for them and for States to learn from approaches adopted in other States. An example of th is is the work being done to attempt rationalisation of the various fee sharing arrangements

between sp ecialists providing private practice services in hospitals and the hospitals themselves, where hospital f a c ilitie s are used to provide these private services. The National Standing Committee provides the link between matters of importance which are raised both a t State and national level for the hospital cost-sharing arrangements, and the mechanisms by which those issues and possible solutions are discussed by the Health Ministers. The National Standing Committee has a central role in the coordination and consultative processes which are an integral part of the hospital


cost-sharing arrangements. As well, i t has developed as a communications and discussions forum for health financing with particular relevance for insurance and other programs under the Health Insurance Act and the National Health Act.

This analysis shows th at the machinery for allocating hospital finances under the cost sharing agreements is the parliaments of the Commonwealth and the State operating through committees of senior Commonwealth and State o fficials. The potential of such arrangements in setting objectives, in

laying down and pursuing policy, and in allocating finances to achieve those objectives should not be under estimated. The consulative machinery should be retained and include consultation on health insurance.

The Agreements stip u la te that the States shall endeavour to ensure that care and treatment provided by recognised hospitals shall be available to a ll eligible persons who wish to receive them. This ensures access for a ll people to comprehensive hospital care, including medical treatment, provided

free of charge in standard beds of public hospitals. In addition, there is to be no means te s t and outpatient services were to be free. This free outpatient provision has been amended and charges for insured outpatients are now applied in New South Wales, Victoria, South Australia, Tasmania and the

Australian Capital Territory.

The Agreements also provide that remuneration for medical services to hospital patients in recognised hospitals shall be salaried, sessional or contract. Provision is also made for 'private p atient' status by those who wish i t . The Agreements set the relevant hospital charges a day for private

patients, a t present $75 for a bed in a single room a t the request of the patient and $50 for any other bed.


Effectiveness of Resources Allocation Machinery

Taking a broad perspective, the South Australian Health Commssion in i t s submission made the general observation th a t there are two sets of objectives in the health field :

. Service, to provide services to match community needs, and

. Financial, to match flow of money and resources needed to provide services.

Since funds are now provided directly and indirectly for the same service to both providers and patients i t is unlikely th a t both objectives can be met (South Australian Health Commission submission, 113). The submission illu s tra te s the complexity of the health system with funds being

provided by and from multiple sources.

The submission, in identifying complexity of funding as an impediment to objective setting, suggests that a proper design for funding arrangements would be:

1 dependent on resolving not only the respective roles of Federal and State Governments, but also the objectives of Governments in providing services and finances for heath care. In the absence of a clear understanding on that issue i t is not possible to propose firm solutions

to the technical problems of collection and redistribution of finance to achieve greater effectiveness and efficiency in the provision of health care serv ices'. (117.)

A general comment of the Royal Commission on the National Health Service (Merrison) was:

'We had no difficu lty in believing the proposition put to us by one medical witness th at "we can easily spend the whole of the gross national product". Such is the capacity of the health sector to consume resources.1 (333)


Efficiency of Cost-Sharing

The re la tiv e position of the low cost States is accentuated when there are 'a b itra ry ' or across the board cuts to hospital funds. The Queensland Department of Health in i t s submission demonstrated th a t because budgets are prepared by escalating a base year figure of the actual expenditure during

the previous year, by various cost producing factors, a State which s ta r ts off from a low base can never improve its position rela tiv e to other States. This becomes especially evident i f some arbitrary percentage increase is applied in the level of funds allocated from one budget to the next. The

Queensland Department of Health submission provides the following table on per person net operating costs to illu s tra te th is point, based on funding arrangements adopted in 1978-79 and 1977-78. The range has moved from $114.84 to $177.78 to $127.95 to $189.00, the difference has moved from $62.94 to


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Table 2 Operating Costs

1977-78 1978-79

$ $

New South Wales 140.32 156.70

Victoria 118.43 134.76

Queensland 114.84 127.95

South Australia 158.61 166.11

Western Australia 177.78 189.00

Tasmania 150.57 165.92

Source: Queensland Department of Health Submission, 22.4)

The Tasmanian submission also recognises the p o ssib ility of an inherent bias towards inefficiency. It states:

'The allocation in budgets tend to be tied to actual expenditure in the previous year. Such a system encourages spending and fa ils to recognise the e fficien t h o sp ita l.1 (30)

The Australian Medical Association in its submission to the Commission comments that the present cost-sharing machinery is such th at 1 there is not one Government authority to which the responsibility for to ta l expenditure can be a ttrib u te d '.

It could lead also to a State government viewing hospital expenditure a t the margin as 50 cent dollars, which the Commission sees as most detrimental to efficiency. The Australian Medical Association suggests as a solution that hospital funding be absorbed into general revenue grants . This could lead to greater efficiency, but not necessarily so.


The Commission certainly recognises th at, since the States have constitutional powers for the provision of health care, a case can be made for the provision of general purpose funds for the States to d istrib u te as they wish. General revenue funds are provided to the States by way of subventions to th e ir budgets in the financing of th e ir recurrent

expenditures. They are not subject to any conditions on the purposes for which they may be spent. They are completely untied.

The Commission's view is that the existence of some form of identified funding for health services has come to be generally accepted as a means of ensuring th at a high standard of health care is available across State boundaries for the Australian population. Rather than simply altering the method of funding, governments, the community and those employed in the

health sector are looking to measures that w ill show the best returns on a given outlay.

The Commission has considered the present arrangements for funding hospitals and believes that continuation of the existing arrangements with such d isp arities between States' costs does l i t t l e to encourage the higher cost States to lim it th e ir expenditure, and could be an incentive for lower

cost States to increase th e ir operating costs. It is important that such a potential distortion towards inefficiency be removed.

Other Specific Purpose Grants

In addition to the Hospital Cost Sharing Agreements the Commonwealth makes specific purpose Grants for the program shown in the attachment. The largest of these grants is made for the Community Health Program. This program and the School Dental Scheme, which is funded on sim ilar lines are

discussed in d etail to enable consideration of the proposition that funds for such programs should be included in a block - funded health grant.

Community Health Program

The Community Health Program was established in 1973-74 and administered by the Commonwealth Department of Health. It is intended to a ssist in the capital and current financing of community health services in specific areas, for specific aspects of care such as prevention, rehabilitation e t c ., to


improve coordination of services, or to provide services as an alternative to in stitu tio n a l care. Payment is made to State, Territory or local government and to non-government organisations providing services nationally or in the States. Total expenditure for the 1980-81 budget is estimated a t $67.5 million. The funding of th is program varies by broad category; for services in the States and the Northern Territory block grants are made on dollar for dollar for capital and current costs (budget estimates allow $55.0 million in 1980-81 and 721 projects). Also on a dollar for dollar basis, capital payments are made for women's refuges and health care planning and research. Funds for operating costs of women's refuges (at present 96 refuges with combined capital/operating provision of $3.8 million in 1980-81 budget) and for programs relating to inmigrants and flowing from the Galbally report

(ie. Review of Post-Arrival Programs and Services for Migrants: 1980-81 budget figures $1.3 million) are shared with the States $3 for $1. As well as these shared expenditures, grants are made for projects with a national application and for planning and research, and these are estimated in 1980-81 to be $6.75 million and $0.9 million respectively.

Allocation of finance for th is program was originally a function of the then Hospitals and Health Services Commission. The Community Health Branch, Health Services Division, Commonwealth Department of Health, now is responsible for overseeing the program. States receive annual block grants pre-paid monthly, according to quarterly forward estimates of expenditure,

for jo in t programs, and separate block grants for each of the special sub-programs, women's refuges, ethnic health workers, and health service interpreters and translators. These programs are administered by the State health authorities apart from women's refuges in five States (New South Wales, Victoria, Queensland, South Australia and Tasmania) which are administered by the State welfare au th o rities.

For national and general State community health projects there has recently been a policy of virtually no real growth. This has meant th at the machinery for allocating finance has been directed towards examining any proposed changes within the State block grants and any State proposals for

new services, for which the Commonwealth share must come from savings within the block grant. The providers of a proposed new service, in the case of national programs the provider organisation; in the case of State or local services, the State authority either on i t s own behalf or on behalf of the


provider group, approaches the Commonwealth Department of Health and a fte r examination and costing the proposal i s passed to the Minister. Broad policy issues are discussed a t the twice yearly meeting of the Commonwealth State Standing Committee looking a t Hospital Cost-Sharing Agreements. E ssentially, the Commonwealth controls the level of finance for the community health program. As an example of th is , the Commission has often been referred to the unilateral nature of the reduction in the Commonwealth's share of funding

from 100 to 90 to 75 to 50 per cent of current costs (100 to 75 to 50 per cent of capital) for State general grants and the reduction of growth to 'maintenance of existing service lev els' for national and general State programs.

There is a program of evaluation called Community Health Evaluation Scoring System (CHESS) th a t concentrates on evaluating the management efficiency of C.H.P. projects not th e ir purpose. This evaluation scheme has been running for two years and was reviewed at the November Standing

Committee on Hospital Cost-Sharing Agreements.

Commonwealth control over community health program projects has been much c ritic is e d . There has been criticism of frequent and arbitrary funding changes and of the allowance made for year to year increases to maintain services. The Commission has noted the disagreement over in flatio n allowance

between State and Federal au th o rities following the Health Ministers Conference of 1979. The Queensland Health Department Submission to th is Inquiry puts forward the S ta te s' view when i t says, in section 22.2:

'The program is not covered by legislation and th is , together with the numerous changes in the level of State funds which are required to be allocated to the program, r e s tr ic ts the level of fixed commitment by the State to i t s expansion and development. I t also severly re s tr ic ts

any long term planning of any such scheme. The Commonwealth seems to apply no fixed policy from one financial year to the next to the level of Commonwealth funds which w ill be provided to the Program.

Commonwealth allocations are generally not.known u n til during July or even u n til a fte r the Commonwealth budget has been brought down in la te August. This creates d iffic u ltie s in determining the level of

expenditure which the State can afford to allocate from i t s own resources even in the short term '.


School Dental Services

This is a preventive program designed to give a ll primary school children free dental treatment. Costs are shared equally between the Commonwealth and the States and the Northern Territory and, as with other schemes, delivery of care is the responsibility of the States within broad policy guidelines laid down by the Commonwealth Minister of Health under advice from the Australian Dental Services Advisory Council. At June 1980,

2678 persons were employed and nine dental therapist training schools and 573 school clin ics were operating, with 72 c lin ic s under development.

Commonwealth funds provided in the 1980-81 Budget amounted to $23.3 million. Until 1975-76 the Commonwealth met the f u ll capital and operating costs of training fa c ilitie s for dental therapists as well as the fu ll capital costs and 75 per cent of operating costs of school dental c lin ic s. Like the arrangements for community health, the Commonwealth contribution has been scaled down to 50 per cent.

The effectiveness or efficiency of these programs has not been evaluated. The programs involving substantial expenditures should have clear objectives and be covered by leg islatio n . In th is way these programs can be assessed relative to other programs.

Special Grants

Apart from specific purpose grants the Commonwealth also makes special grants to the States on the recommendation of the Commonwealth Grants Commission.

Under the Commonwealth Grants Commission Act, 1973 the Commission is required to inquire into and report upon:

• any application made by a State or the Northern Territory for financial assistance for the purpose of making i t possible for the State (or the Northern Territory) by reasonable e ffo rt, to function at a standard not appreciably below the standard of other States, . any other matters related to Commonwealth financial assistance to

the States which may be referred to i t by the Government,


. any matters relating to the financing of works and services provided in respect of the Australian Capital Territory which may be referred to i t by the Government.

Queensland has been the only claimant State in recent years. A recommendation from the Grants Commission is in two parts, an advance payment based on an assessment need and an adjustment or completion payment a t the end of the year. In making recommendations the Grants Commission makes a

detailed comparison between the financial position of Queensland and th at of a standard State based on the experience of New South Wales and Victoria. In 1979-80 Queensland received special grants to tallin g $12.4 million (1980-81 Budget Paper, No. 7, 25).

The 44th Report of the Commonwealth Grants Commission d etails how the Commission viewed the fact that Queensland receives less per capita, than other States from the cost-sharing agreements. Briefly, i t decided that the deficiency of the per person grant received by Queensland should be treated

as adding to the assessed needs of the State for the purpose of determining the overall response by the Grants Commission. What th is means in effect is that Queensland's position as the low per person cost State is not necessarily a l l that i t seems.


Per person grants under the cost-sharing arrangements since 1975-76 have been as follows:

Table 3 Specific purpose payments for recurrent Cost of Public Hospitals from the Commonwealth to the States (per person $)



1975-76(a) 64.75 61.50 48.99 73.51 83.53 76.32 64.18

1976-77(a) 47.51 39.82 39.04 54.69 63.11 46.24 46.06

1977-78 69.55 60.15 58.97 79.22 91.24 76.73 68.33

1978-79 76.09 65.84 63.88 80.80 95.00 79.85 73.59

1979-80 85.65 71.67 70.54 87.92 101.93 90.69 81.28

Source: Commonwealth Department of Health: Response to request at Public Hearing 21 May 1980 Note: Does not include adjustment for $215.6 million which appeared in 1975-76 accounts but represented

expenditures incurred in 1976-77

Commonwealth Payments to Local Government

Before 1973, no Commonwealth assistance was provided specifically for local authorities which were constituted and functioned under State laws. There were, however and there continues to be, a number of Commonwealth programs under which local authorities are among the bodies elig ib le for assistance either directly or through the States.

These programs are summarised in the Appendix onSection 96 grants.

The Aged or Disabled Persons Homes and the Aged Persons Hostels Programs are seen to have considerable value by certain State and community members who have approached the Commission. The Commissioners had the opportunity of v isiting several organisations which received th e ir funding under th is

program. These homes and hostels offer significantly lower cost services than acute hospitals or nursing homes.

1 0 2

The Commonwealth machinery for providing finance under these programs, and for the handicapped under the Handicapped Persons Assistance Program and for Meals on Wheels, is vested in the Department of Social Security.

Machinery for Allocating Non-Hospital Finances

It is important to consider not only whether the cost-sharing agreements are being operated effectiv ely , but also whether the machinery for distributing finance for hospitals was fa c ilita tin g or inhibiting the broad objective of the governments so often expressed to the Commission - to promote non-institutional care as a substitute for hospital care so people can be cared for in the community, and to keep costs down.

An analysis has been presented showing per person expenditure on hospitals and other specific purpose grants since 1974-75 (Appendix 2B). Out of a per person grant in 1980-81 of $97.32, $88.23 is for recurrent costs of public hospitals. Thus, 90.66 per cent of Commonwealth grants to the States

for health under Section 96 is for hospitals. In 1976-77 the f ir s t fu ll year of cost sharing, i t was 78.35 per cent. Hospitals therefore are now consuming over one sixth more of Commonwealth payments to the States.

Alternatively, 15 per cent less of Commonwealth funds is available for non-institutional expenditure such as community health and the school dental scheme. This concentration of resources on hospital is repeated in the State


Nursing Homes

The Commonwealth Government has been providing assistance for the care of nursing home patients since 1963. Since 1977, following on recommendations contained in the 'Report of the Committee on Care of the Aged and the Infirm' the arrangements have been:-

(a) a basic benefit, which is payable by the Commonwealth Government in respect of a ll qualified nursing home patients other than those patients who are members of a registered hospital benefits organisation.

1 0 3

(b) an extensive care benefit, $6 a day, in addition to the Basic Benefits in respect of patients who need 'extensive care' as defined in the National Health Act. As is the case with basic benefits, the extensive care benefit is payable by the Commonwealth in respect of qualified patients who are not insured.

The Reinsurance Account arrangements were amended on 1 October 1977 so that a ll nursing home benefits payable by organisations out of the standard hospital benefits table could be debited to the Reinsurance Account.

The basic benefit is reviewed annually and varies from State to State.

A formula is used so that benefits plus the statutory minimum patient contribution covers the fees charged in 70 per cent of beds in non-government nursing homes. From 6 November 1980, basic benefits range from $117.95 in

Queensland to $187.60 in Victoria. The extensive care benefit remains at $42 per week.

Deficit Financed Nursing Homes

Non-profit nursing homes which are conducted by religious and charitable organisations are elig ib le to have approved operating d e fic its and the replacement of certain items of equipment met by the Commonwealth Government under the Nursing Homes Assistance Act, 1974.

Organisations receiving th is form of assistance enter into an agreement with the Commonwealth. They submit th e ir budgets for approval and receive monthly advances. An adjustment is made at the end of the year. Patients in deficit-financed homes make a payment of seven-eighths of th e ir pension, plus

any supplementary benefit. Insured patients are charged an additional amount equal to the insurance home benefit.

Provision is also made under the NUrsing Homes Assistance Act for the provision of some medical and paramedical services, and for the operation of a visiting day care fa c ility (medical, nursing, physiotherapy, occupational therapy, speech therapy, chiropody and some dental treatment). Patients may also be provided with meals and transport to and from the day care centre.

1 0 4

Conclusions and Recommendations

Governments, whether Commonwealth, State or Territory, are the guardians of public funds and in allocating funds for health services have a major responsibility to see th at they are conducted efficiently to provide a high standard of health care and to control expenditure. The Commission believes

that the Commonwealth should clearly state its objectives in the health fie ld indicating what i t intends to do and on what conditions. The Commonwealth should not normally in terfere in the internal proceedings of the States and Territories in th e ir provision of health services. Health services should be

based on needs and the States and Territories themselves are the best judges of what th e ir needs are. Nevertheless, States and Territories must take note of the objectives of the Commonwealth in the provision of funds for health

services and ensure e ffic ie n t use of health care funds. Moreover, States and Territories w ill be accountable to the Commonwealth for the way in which funds are used.

The problems, inefficiencies, disincentives and restrictio n s associated with the existing Cost-Sharing Agreements and fragmented funding for other health services should be avoided or at least minimised in any future funding arrangements. It is recognised that to achieve th is , changes cannot be made

immediately to a ll areas of health services and to a ll funding arrangements.

Accordingly, the Commission RECOM M ENDS that:

1. The present forms of cost-sharing health services should be discontinued and replaced by a method of formula funding.

2. Commonwealth grants to States be provided in the form of a block grant for health to include a ll present Commonwealth grants to the States and T erritories for health, and to include an element for acute psychiatric hospitals, State government nursing homes and

deficit-financed nursing homes. The estimated additional cost to the Commonwealth is about $10 million in the base year.

3. The block grants to be on a population base (per capita) formula adjusted for each State and Territory for age/sex of population and Aboriginals. Other factors could also be incorporated in the


formula such as a hospital size index or a standard mortality ra tio . But the Commission believes the formula should be simple and easy to understand and in itia lly should not include these other factors.

4. The grants be adjusted annually u n til such time as real costs of services and needs are established.. The basis of adjustment will be determined by the Commonwealth on information then available but in such a way as to encourage the States to quickly improve th e ir

health systems and determine measures of cost and need. The Commonwealth to provide additional funds for th is specific purpose as necessary.

5. In the f i r s t year the grants be based on the actual amounts paid during the previous year adjusted for each State and Territory, together with the amount estimated as being required for additional services included.

6. The grants be adjusted for changes in revenue.

7. The formula-based grants run in itia lly u n til sound minimum cost c rite ria are established to enable a system based on needs to be introduced or u n til June 1985, which ever is the e a rlie r. The grants then be renewed for further five-year periods as adjusted or be replaced by a preferred system. Earlier change may be in stitu te d should a needs-based system be developed before June 1985.

8. The grants not be tied to any specific health purpose, but be subject to the States agreeing to meet prescribed conditions as set out hereafter.

9. The Commonwealth continue to provide (a) the private hospital bed-day subsidy in itia lly and to review th is half-yearly and with reduction in cost to the tax payer in mind (b) nursing home benefits

1 0 6

10. The Commonwealth Grants Commission be the appeal mechanism for the States and T erritories seeking additional assistance to that given by the formula.

11. The Commonwealth fund additional services and projects by s .96 grants as i t thinks f i t , preferably in agreement with the S tate(s) or T e rrito ry (ie s).

12. South Australia and Tasmania separately be able to agree to the new arrangements or continue with the existing Cost-Sharing Agreements and special grants u n til June 1985.

13. Governments appoint a working party to refine the formula and consider implementation aspects with a timetable such that agreements can be reached and the new arrangements introduced as early as possible.

14. The consultative machinery that presently exists between the Commonwealth and the States be retained and include consultation on Health insurance.

Implementation Aspects

The Commission recognises the benefits of the proposal to include psychiatric hospitals and nursing homes in the arrangements, but understands that the Commonwealth may need to leave some or a ll of them outside the new arrangements in the f i r s t instance in order to get the formula arrangements

implemented. Eligible veterans may also be included la te r i f th is is desired.

While the Commonwealth may leg islate immediately in general terms to enable the introduction of a formula approach to funding, i t may be necessary for the existing agreements and grants to be continued u n til further d etails have been worked out.

The Commission recognises th at in doing annual adjustments to the block grants provided by the formula there could be some convergence on a per capita basis which w ill reduce the extent of differences between the States.


While th is may lead to greater equalisation of expenditure throughout Australia than a t present, the Commission is not convinced that a ll States need to spend the same amount of money per capita. The Commission is of the view that funds should be provided only on a genuine needs basis, once these can be determined, together with the costs associated with servicing those needs.

Conditions of Formula Funding (refer Recommendation 8)

1. There should be no increase in the to ta l number of beds provided in each State or Territory during the in itia l funding period, i.e . June 1985. Bed numbers should remain a t existing approved levels incorporating private, public and Veterans' Affairs. This number includes those presently approved and in construction. The condition is not meant to prevent closure of beds and opening of new beds aimed at providing better f a c ilitie s or a better distribution of fa c ilitie s according to need.

2. Assurance of:

(i) guaranteed access for a ll patients;

(ii) free treatment for e lig ib le pensioners and elig ib le veterans ( ii i) special arrangements for disadvantaged patients as determined;

3. Public hospitals charges to be determined by the Commonwealth in consultation with the States and i f necessary on a d ifferen tial basis according to geographical location or fa c ilitie s statu s.

4. The States to cooperate in the development of a system for the determination of true costs in a manner outlined elswhere in th is Report.

5. Specified information to be supplied to the Commonwealth as required for:

(i) determining true costs and needs; (ii) revising formula; ( iii) monitoring standards and ensuring quality of care.


6. Non-hospital services, for example community health, dental services, to be provided to a t least an agreed share of funds.

7. Such other conditions as the Commonwealth deems appropriate.



State resp o n sib ilities, as spelt out in the legislation under which State health authorities operate, lie in the provision of a comprehensive and accessible system of health services, the rationalisation and coordination of health services, and the monitoring and evaluation of policies and services.

The States are also responsible for the provision of assistance to other agencies, identification of needs, promotion of research, promotion of education of health workers, and the dissemination of information to the community.

The role of the States d iffers from that of the Commonwealth:

'E ssentially, the Commonwealth is concerned with ensuring access to, and promoting the equitable allocation and efficien t management of health services across Australia as a whole. The States retain the principal responsibility for the provision of services and for th eir coordination'

(Commonwealth Department of Health Submission, 700 Part 1, 15).

Evaluation of the effectiveness of fund allocation at State level must recognise these d istin c t roles. More specifically, i t must examine the allocation process in terms of

. the priority accorded to health in relation to the other services which make demands on the State budget - education, law and order, public transport and so on; . the priority accorded to the different types of health services

falling within the ambit of the State health authority; and . the basis for the geographical distribution of funds.

Machinery for allocating funds can be judged as effective to the extent that i t allows implementation of State and State health authority policies, fu lfils broader health objectives and ensures reasonable equity in regional allocation.

I l l

Funding of State Health Services

Funds for health services within the States come from the Commonwealth, the State Government, local authorities and the private sector (health insurance, individual patient payments and private, including 'c h a rita b le ', investment).

A summary of the source of funds for health services, in terms of the Commonwealth's classification of health expenditure is shown in Appendix I.

The most obvious fact to emerge is that the only services funded solely by the State are State psychiatric hospitals and associated services (except for pharmaceuticals), State nursing homes, some public health services such as regulation, inspection, ambulance services (except for inpatient transfer costs met from approved budgets of recognised hospitals), assistance to some independent organisations such as Anti-Cancer Foundation, Mothers and Babies Health Association, and some pathology laboratories, such as the In stitu te of Medical and Veterinary Science in South Australia.

Any evaluation of State machinery for resource allocation must take account of the extensive financial involvement of the Commonwealth. The introduction of the cost-sharing agreements, for example, had the effect of causing the States to reduce their own expenditure on recognised hospitals, not by diverting funds to other, non-hospital services, but by handing their share to the Commonwealth and reducing net State expenditure on health services. The dominance of the hospital sector was increased and has been maintained ever since.

Machinery Determining State Health Budget

The control of a ll monies at State level - from both State and Commonwealth sources - lie s with State parliaments, which thus determine State funding patterns. The administrative machinery for allocating available funds lie s with State treasuries.

As at the Commonwealth level, there is competition at State level between different departments for a larger slice of the State budget. The final amount allocated for health is influenced partly by negotiations with the


Commonwealth for specific purpose grants involving matching State funds and partly by the State health a u th o ritie s' capacity to negotiate with State treasury for untied funds from State resources.

Negotiation between State treasuries and State health authorities is crucial to determining the amount allocated to health for the State. The Queensland Department of Health noted that:

'I f [ it ] were able ........... to increase Commonwealth input into the State finances, i t would not necessarily follow . . . that the additional financial input would find its way into the hospital tru s t fund. It would find its way into the State Treasury before any increase in the expenditure of the hospital sector' (Transcript, 1847).

This is one reason why the Commonwealth uses specific purpose grants, such as hospitals cost- sharing, to attain its ends.

Some general points concerning th is aspect of the machinery can be made:

. The involvement of State treasuries in the budget process begins early in the calender year, when the S tate's case for funding under the Cost-Sharing Agreement is prepared for the Commonwealth State Standing Committee. Im plicitly, that bid will have the support of the State treasury, because in essence i t is committing its e lf to

match the funds approved.

. In June, State health authorities submit the budget for a ll services falling within th e ir ju risd ictio n , whether cost shared or not, to State treasuries for the determination of the State allocation to health. This departmental budget is prepared on the basis of bids

from hospitals and other services and within the framework of the financial policies of State health authorities.

'I t is a matter for State treasuries and treasurers how much money the State gets from the Commonwealth Government and in what form is not something th at the Health Commissions get involved i n . ' (Transcript, 987).

. The States can use th e ir own funds to meet the cost of services which the Commonwealth chooses not to fund.

'Under the existing system States are able to proceed with th eir own


policies and plans regardless of the attitude of the Commonwealth and regardless of whether these policies are based on p o litic a l or sound management principles. States can decide to use their own resources to fund projects on a lOOper cent basis, which means th at the hospitals system is not really subject to overall c o n tro ls.1

(Tasmanian Department of Health submission, 50) In practice, th is rarely happens. In fact, the extensive involvement of the Commonwealth means th a t, in the end, budgets are determined within funds made available by the Commonwealth Government. Thus, the Commonwealth State machinery is of crucial importance in determining the S tate's financial allocation.

. Although health services may be one of the areas taken into account in determining disability by the Commonwealth Grants Commission, there is no tie on any funds accruing to the States from th is source and therefore no assurance that moneys received w ill be expended for the purposes deemed to ju stify th e ir provision. At present Queensland is the only claimant State.

Because of their shared resp o n sib ilities, increasing per capita expenditure on health is of concern to both levels of government and to individuals principally because of the impact upon other areas of expenditure:

1 These increases in costs are of considerable concern to the Commonwealth Government, State health authorities and the general public, largely because continued escalation reduces the funds available for expenditure on other necessary goods and services' (Commonwealth Department of Health submission, Part I , 37)

Machinery Determining Types of Health Services

Questions on the allocation between different types of health services are normally put in terms of determining p rio ritie s between in stitu tio n al and non-institutional services. State health authorities argue the desirability of diverting funds where possible from in stitu tio n a l services to some non-institutional services, mainly because of th e ir b elief that this w ill provide cheaper alternatives to health care. For example:


'In line with one of the principal thrusts of the Bright Report the South Australian Health Commission has, from its inception, undertaken to give priority to community health over institu tio n al services. I t has done so on the grounds th at the health of the community is a function of environmental, social and genetic factors and is not a reflection of the

amount of money spent on acute, somatic medicine. This policy has influenced the approach taken to solving the problems of cost reduction; the community health services, funded and provided by the Commission, have not been cut in real terms and some modest development funds have been provided'. (South Australian Health Commission submission, 94)

In practice, however, decisions on which services w ill be funded are substantially governed by existing patterns and p rio ritie s in health expenditure. A closer examination reveals that:

. the in stitu tio n a l sector dominates State outlays on health. In 1977-78, 87per cent of State (and local) Government expenditure on health was spent on the institutional sector (Interim Report, 20); . there are differences between States in the amounts allocated to

particular services by the Commonwealth (Table I); . there is no available information to determine the extent to which such differences are a reflection of considered State health p rio ritie s , p o litic a l prejudice, inertia or in itia tiv e in the use of

Commonwealth funds; . i t is not possible to provide comparative figures on the nature of the health vote across the States and T erritories. The main impediment is that accounting procedures re fle c t different

administrative re sp o n sib ilitie s. State health authorities for example, are responsible for the provision of physical and mental health services in New South Wales, South Australia, Queensland, Australian Capital Territory and Victoria, whereas there is a

separate mental health authority in Western Australia and Tasmania.





Hospitals 46.7 50.4 48.1 56.0 57.9 52.3 40.3 33.5 40.5 49.1

Nursing homes 12.0(b) 11.4 11.4 13.1(c) 12.0 13.5 (c) (b) 16.5 11.7

Other in stitu tio n al 0.5 0.2 0.6 0.6 0.8 0.6 8.2 0.8 - 0.7

Total Institutional 59.3 65.2 60.4 69.6 70.7 65.9 48.5 45.3 56.9 61.4

Total Non- Institutional Services 40.0 34.0 35.7 27.2 26.2 30.0 28.8 14.0 27.9 33.1

'Other' 0.7 0.8 3.9 3.2 3.1 4.1 22.7 51.7 15.2 5.5

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Notes: (a) Unallocated, i.e . the expenditure of these funds relates to Australia as a whole, or cannot be separately allocated by States. (b) ACT expenditure included in NSW .

(c) NT expenditure included in SA. (d) Includes Department of Health central office administrative expenses.

Source: Australian Health Expenditure: 1974 - 75 to 1977 - 78 an analysis.

Table 1 Allocation of Commonwealth Funds Between Different Sectors of Current Expenditure, by State, 1977-78

The following features of the internal structure of State health authorities give some indication of where responsibilities for or involvement in determining the allocation of funds to one type of health service as opposed to another may l ie :

There is a separate finance division or its equivalent in each State. 'The primary objective of the finance division is to provide a ll divisions of the Health Commission with a complete financial and accounting s e rv ic e .1 (Victorian Health Commission Annual Report

1978-79, 12).

Distinct structures ex ist in some States to give coordinated financial advice to the State health authority on allocation to different health services. For example, in South Australia, a budget review committee with membership from planning, administration and

finance and health services departments was formed 'to make recommendations to the Executive and the Commission in regard to the annual operating budget allocations for South A ustralia's health services; to develop necessary budget processes;

to monitor actual expenditures against budgets, and to make recommendations concerning necessary re-allocations during the course of a year' (South Australian Health Commission Annual report, 1978-79). This committee originally provided a forum for review of

the overall Health Commission budget p rio ritie s. Later, i t became concerned with the allocation of funds to such as individual hospitals and community health centres. However, the actual review of requests and monitoring of

budgetary performance remained the responsibility of the Finance Division. The committee has not met since June, 1980. Another example is the Finance Committee of the Capital Territory Health Commission which advises on financial policy, conducts budget reviews

and so on.

I t should be stressed that because divisions or committees must operate within the policies of the State health au th o ritie s, i t is d iffic u lt to separate the machinery for the allocation of funds to different types of health services from that for the determination of



. The a b ility or in te re st of the States in altering th e ir pattern of

allocation is affected by Commonwealth funding. State psychiatric hospitals, for example, receive no Commonwealth funds and consequently rely upon the State health authority to recognise their changing needs.

Allocations between Geographical Areas

I t is the responsibility of State health authorities to ensure the appropriate distribution of health services throughout the State. For histo rical and economic reasons, th is has not been achieved in any State as is demonstrated by bed to population ra tio s between geographical areas.

Inequities are manifest in the uneven geographical distribution of financial resources by both State and Commonwealth governments, which cannot fully be explained by differences in the characteristics of the population and the pattern of service provision (see Table 2). The high per capita grants in the

inner metropolitan areas of Sydney, Melbourne and Perth, for example, are explained by the concentration of high cost teaching hospitals. The comparative scarcity of resources in fringe areas of c itie s , for example, the Northern and Southern Regions of Adelaide, re fle c t rapidly changing population distribution.

In some States, a policy of regional planning has, among its aims, that of addressing th is situation. At present, th is policy is being implemented by:



Government Financial Subsidy to Public Hospitals per Head of Population by Region in New South Wales

Inner 347

Northern 129

Southern 144

Western 67

Metropolitan 144

Hunter 143

Illawarra 93

New England 134

Orange and Far Western 180

Central Western 157

Riverina 129

South Eastern 134

Murray 142

North Coast 142

Country 136


Source: New South Wales Health Commission Annual Report 1978-79.

Regional offices (New South Wales only) Regional planning guidelines which are being used as a basis for distribution of such as beds and equipment Data collection and collation regionally

Various advisory bodies at regional level which are principally concerned with ensuring that policies match financial allocation. Such bodies do not actually distribute funds.

The New South Wales Health Commission is further advanced with regionalisation than other States and has for some time been working on a regional allocation formula which is designed


1(i) to highlight and reduce d isp arities between different health regions of the State in terms of equitable opportunity for access to health care for people a t equal risk; and

(ii) to evolve a more objective method for future allocations of health service resources that take into consideration population growths, movements and changing needs.' (New South Wales Health Commission Formula for Regional Allocation of Maintenance Funds, July, 1979)

I t should be stressed that the regional funding formula does not determine the size of the State vote to health but attempts to ensure that once the money gets to the States i t is distributed as equitably as possible. The use and validity of th is method of fund allocation becomes important in the context of changes to the method of fund distribution from the Commonwealth to the States, particularly i f there are to be changes to the responsibility and fle x ib ility given to the States.

The New South Wales Health Commission has elaborated upon th is formula approach and suggested 'an alternative method for the assessment of relative needs of the S tates' - and hence a method for fund allocation to particular services. (Submission to the Commonwealth Grants Commission: Review of the Tax Sharing R elativities; New South Wales Health Commission, 32)

The Health Commission of Victoria, at present deliberating on the establishment of regions has noted that i t can mean the delineation of geographic areas for planning and allocating resources or the dispersion of administrative functions and the delegation of authority. The advantages and disadvantages of the la tte r aspect are considered in Part II I , Chapter 3.

The Commission considers that geographical areas are the most logical and valid basis on which to assess relative need and to plan and allocate the distribution of appropriate resources. In some States, administration in regions is neither appropriate (Tasmania) nor considered desirable (Victoria).

Nevertheless, area resource allocation can take account of these differences. The particular basis for the allocation, the size of the area on which i t is based, and the administration of such a system are matters which


can be determined in the lig h t of circumstances of the individual State. The important principle is that a ll health services, not ju st hospital services, for people within the given area be considered in determining the relative


Effectiveness of Machinery for Allocating Finance

The preceeding discussion has illu strated that the allocation of money at State level to health, to different types of health services and to different geographical areas involves:

. Commonwealth State machinery . State machinery - State health authority treasury relationships and internal State health authority organisation.

Some of the machinery exists or is under development to fu lf il the general objectives of the State health authorities, in p articular, those concerning ratio n alisatio n , accessibility, identification of needs, and provision of services within available resources. That is , the establishment of machinery for fund allocation does not serve financial objectives alone, but rather such machinery serves an administrative function in assisting the achievement of general health objectives. As noted in Wilenski, 1977:

Often policy ju s t happens as the result of a general trend in the exercise of adm inistrative discretion1. (14)

Evaluation of the effectiveness of machinery requires an assessment of its capacity to achieve objectives. The Commission concludes that existing machinery is ineffective because i t does not achieve proper coordination of services, i t does not ensure that services are comprehensive, i t does not

ensure that p rio ritie s are correctly accorded, and i t does not provide a basis for the determination of needs.

State Health Authority - Treasury machinery

In theory, the negotiations which take place should lead to the logical development of each S ta te 's p rio rity for health and for particular health


services. This does not appear to occur. Indeed, much of the evidence indicates that the major constraint on each States allocation to health is the dependence of the States upon tied Commonwealth monies.

One authoritative review of a State administration stated:

'I t is important to note th at the Treasury sees i t s budgeting activity as already being concerned primarily with th is translation of government p rio ritie s into expenditure and revenue programs. However, existing budgetary processes, in my view, have remained essentially the same for many years and are designed (as originally intended) primarily to fa c ilita te accounting control and financial management. They are thus often i l l suited for newer purposes.' (Wilenski, 25)

Internal State Health Authority Organisation

State health a u th o rities' organisation is influential in determining resource allocation to different types of services. I t appears that the allocation and consequent monitoring of funds to individual in stitu tio n s and services is chiefly the responsibility of finance divisions or th e ir equivalent which meet the objective of providing accounting services, but are not generally concerned with overall State health objectives. However, i t is disturbing to th is Commission:

. that the quality of information sought by State health authorities and supplied by hospitals and other services is not of a standard to ensure that funds are being used efficien tly ; . that the separation of a finance division from other areas of

management or planning, means that fu ll use is not made of information or data generated. For example, during discussions with one State health authority, i t appeared that poor communication between divisions had been a factor in the failure to realise the

fu ll potential of newly developed hospital information systems; . that although there may be some forum (machinery) for communicating p rio ritie s, i t has l i t t l e effect on the allocation of funds. For

example, health services advisory committees (or equivalents) are established under Health Commission Acts in New South Wales, South Australia and Victoria, but they have no direct role in decisions on money allocation or its distribution;


. that the reliance of the State on Commonwealth monies means that its own financial objectives and p rio ritie s can only be met within the lim its of available Commonwealth resources. A good example is the attempt to increase the allocation of funds to State psychiatric hospitals.

I t should be noted that the only State using regions in any way to apportion funds to public hospitals is New South Wales and those regions have a limited role in the d irect allocation of funds. Evidence before the Commission shows that what they can do without central office permission is

limited to building programs up to $1 million. Any hospital request for budget line by line variation feeds up from the region to the central State office to the Commonwealth.

The regional system works under constraints in fu lfillin g the objectives of the Health Commission. Although the result is that th is machinery may not not be fully effective in allocating funds, there are benefits of the regional system in the other areas of policy formulation and the setting of objectives

which cannot be ignored and which have immeasurable impact on fund allocation. The New South Wales Health Commission indicated in open hearing that:

'We expect the regions to use initiativ e to identify an area which is under provided, and then to redeploy resources in what is under provided, and then to redeploy resources in what we call s ta ff interchange, where they wind down a service and wind up another service. (New South Wales

Health Commission Transcript, 2294).

Options for Change

The Commission believes that under existing arrangements the most significant constraint on State health authorities' a b ility effectively to allocate funds to health, between different types of health services and to different areas, is the extensive involvement of the Commonwealth, not only in

providing the money but also in regulating the way in which i t is spent. Separating the S tates' financial responsibility from managerial responsibility to the extent which has occurred is not conducive to a well run service. The division of responsibility between


Commonwealth and State must be c la rifie d . The S tates' responsibility for allocation of finance for the services they administer must be strengthened.

The Commission RECOM M ENDS accordingly.

In addition, steps should be taken to ensure that:

. current and future p rio ritie s for different types of health services are determined more appropriately by the States, as the body responsible for service delivery; . services and access to them are appropriately distributed throughout

the State by each State.

The determination of p rio rities requires a policy and planning input.

The realisation of those p rio ritie s requires financial input. The Commission RECOM M ENDS that State health authorities review their organisation structure with a view to ensuring that the functions of planning and policy are more closely coordinated with those of financial allocation and management. This may be achieved by the creation of jo in t internal committees, by a broadening of the responsibilities of one division or another, or perhaps by an amalgamation of divisions.

The Commission also RECOM M ENDS th at, with assistance from the Commonwealth, the States should place high prio rity on the refinement of data collection from health service units and on techniques of evaluation so that the p o ssib ilities of effective alternatives to in stitu tio n a l care can be promoted both at Commonwealth level and to the hospitals within each State.



Appendix I Health Expenditure Classiflactions Funding Basis:

Type of Service:

1. Institutional Services

(a) Recognised hospitals

(b) Private hospitals

(c) Other hospitals . repatriation

. mental

. other

(d) Nursing homes . State

. d e fic it financed . other - private

Fund/Commonwealth benefits.

(e) Ambulance Services

- 50:50 State/Commonwealth. Patient fees - direct; health funds, general insurance.

- $16 a bed day Commonwealth. Patient Fees - direct and health funds.

- Commonwealth patient fees - direct and health funds. - State. Patient fees.

- State. Patient fees.

- State. Patient fees.

Fund/Commonwealth benefits. - Commonwealth. Patient fees. - Patient fees.

- State. Contributions. Fee for services.

(f) Other services (Not elsewhere included)

(g) Health insurance administration (in stitu tio n al services)

2. Non-Institutional Services

(a) Medical services . public

. private

- Commonwealth

- Commonwealth. State. Health funds.

- State. Patient fees - direct

and health funds - Commonwealth. Patients - directly and health funds.


SA0S:BD:JL/242B 15 DECEMBER 1980

(b) Dental services . public

- school dental.

- 50:50 Commonwealth and State

. private

health funds.

- Patients - directly and

(c) Other professional services - Patients - directly and

health funds.

(d) Community health services . community health program

. Aboriginal health . domiciliary care Patient fees.

- 50:50 Commonwealth and State. Patient fees. - Commonwealth - 50:50 Commonwealth and State.

. nursing

. maternal and child care . other

Patient fees.

- Commonwealth and State. Patient fees. - State. Patient Fees.

- Commonweatlh and State.

(e) Pharmaceuticals . prescribed - benefits paid . other

. non-prescribed

- Commonwealth. Patients. - Patients - direct and health


- Patients.

(f) Aids and appliances - Patients - direct and health


(g) Health insurance administration (non-institutional)

3. Public Health Services

- Commonwealth. State. Health funds.

(a) Environmental - State. Local government.

(b) Education and Promotion - State. Commonwealth (drugs).

(c) Regulatory - State. Local government.


4. Administration (Not elsewhere included) - Commonwealth. State

5. Health Research Private grants.

= Total Health Services

- Commonwealth. State.



Individuals directly pay for health care services in several ways - by paying for services which governments do not subsidise, by paying premiums for medical and hospital insurance, by patient contributions towards subsidised services, by paying premiums for motor vehicle third party

insurance and public lia b ility insurance, and by supporting charitable services such as St John Ambulance and charitable nursing homes.

Business funds services through motor vehicle third party insurance, workers' compensation insurance, public lia b ility insurance, by charitable donations, and by support of health research.

Investors, whether suppliers of services or financiers or individuals, support health services through funding or providing private hospitals and nursing homes, and funding doctors in private practice.

All these private sector sources of funds provided 40.1 per-cent of current operating health expenditure in 1977-78 (Interim Report, Table 9). The effectiveness of the machinery which mobilises these funds is therefore of great importance to governments, which meet remaining costs, to private

sector suppliers whose economic well being or even survival is dependent on th e ir continued flow, to voluntary health insurance funds for the same reason, and to the rather more than 60 per cent of Australians who elect to insure for hospital and/or medical services.

In th is Chapter the Commission examines this machinery, some of the relationships between Government funding, health insurance, private and patient contributions, and the objectives of the various p arties. In doing so a number of aspects which are covered elsewhere in th is report are not

covered in th is Chapter, for example, the relationship between health insurance and u tilis a tio n , the effect on costs of changing arrangements for the health insurance system, and d etails of government support for health services in the form of subsidies for private sector services.


Sources and Levels of Expenditure

Health insurance is now the most important vehicle for private sector funding of health services. Of the 40.1 per cent of the to ta l expenditure provided by the private sector in 1977-78, insurance accounted for a l i t t l e more than half (20.8 percent) (Interim Report, Table 9), and i t s share has

been rising. In 1974-75 i t provided only 14.8 percent. Individuals' direct payments for health care services as a proportion of the to ta l have tended to fa ll. In 1977-78, they provided 16.3 per cent of the to ta l, compared with 21.2 per cent in 1974-75. Other private sources - mainly general insurance

companies - provided 2.7 per cent in 1974-75 and 3 per cent in 1978-79.

Total private sector contribution thus increased from 38.6 per cent of the to ta l to 40.1 per cent over the four year period.

Governments clearly would welcome a continuation of th is trend because i t would be a re lie f from th e ir own budgetary problems in meeting the remaining cost, evidence of a s e lf-re lia n t population, and support for private sector service provision in a mixed economy.

It is therefore surprising that much of the support which Government once provided to the insured has been phased out over the past decade. The main changes have been the abolition of means te s t for access to free treatment as inpatient or outpatient in public hospitals, the extension of e lig ib ility for Commonwealth medical benefits to the whole population, whereas previously these were available only to the insured, and the exclusion of insurance contributions from e lig ib ility as a tax deduction or

rebate, while retaining e lig ib ility for rebate of actual net medical and hospital expenses.

On the other hand, Government has continued the $16 occupied bed day subsidy to private hospitals, making access to these less expensive for those with appropriate hospital insurance.

At 30 June 1979, there were 69 medical insurance funds and 73 hospital insurance funds operated by registered organisations ( Interim Report on Operations of Registered Medical and Hospital Benefits Organisations, year

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ended 30 June 1979, 3). The conditions under which these funds operate are prescribed in the National Health Act, 1953. The eighth Annual Report to 30 June 1978,on Operations of the Registered Medical Hospitals Benefits Organizations, prepared in accordance with S.76A of that Act, shows that management and administrative costs for medical insurance funds amounted to

$83 million or 11.8 per cent of premium income, and for hospital funds to $52 million, or 8.7 per cent of premium income. Premium income for medical funds was $704 million and for hospital funds was $596 million. Claims experience

of funds diverged widely. In Western Australia hospital benefits claims absorbed 72.4 per cent of premium income, but in New South Wales and the Australian Capital Territory claims absorbed 90.6 per cent of income.

The Machinery

A variety of machinery ex ists to fa c ilita te private financing of medical services delivery. Much of i t is common to other forms of private sector activity, and c a lls for no comment in th is context.

The elements which d iffe r are:

. Commonwealth subsidies for new fa c ilitie s , for example, subsidies for construction of d e fic it funded nursing homes conducted by religious and charitable organisations.

. State assistance for fa c ilitie s , for example, guarantees- on loans raised for n o t-fo r-p ro fit private hospital construction.

. Commonwealth support for private activity, the private hospital occupied bed-day subsidy, the pharmaceutical benefits scheme, the medical benefits scheme.

. The health insurance arrangements.

Of these, the f i r s t two are of significance mainly because they enable the government concerned to influence the level of service provision in directions which they deem desirable with limited, or even no commitment of capital funds. ·

The third is d irect support to private sector operations. It lim its the need for expansion of public sector fa c ilitie s , and in the case of the bed day subsidy provides d ire c t support to insurance by narrowing the gap between the standard insurance covers ($50 or $75 a day) and the normal level of


private hospital patient charges. I t provides ready access to commercial pharmacies for approved prescriptions in the case of the pharmaceutical benefits scheme, and, under the medical benefit scheme, lim its the lia b ility of insurers, and hence reduces medical benefit fund contributions.

Voluntary health insurance is unquestionably the most important element in the machinery for enlisting private sector funding of health care. Its operations are governed by two major pieces of Commonwealth leg islatio n , the National Health Act, 1953, and the Health Insurance Act, 1973.

Both Acts have been significantly amended, but they give to the Minister for Health extensive powers in relation to the registration and operations of insurance funds. Some of the more important principles established are that open funds must offer membership to a ll - they cannot select good risks or

reject poor risks - and closed funds - th a t i s , funds whose membership is limited to a specified class of people, such as the employees of a single firm or the members of a trade union - must offer membership to a ll who qualify. All benefits become payable a fte r a two-month qualifying period, a ll medical funds must offer a basic medical benefit of 75 per cent of the scheduled fee with a maximum of $20 (above th is level, Commonwealth medical benefits are payable) and a ll hospital funds must offer a basic hospital benefit of $50 a day. Other important principles are th at while funds may offer alternative packages for both hospital and medical benefits, a ll

subscribers to a package are liable for the same premium - no distinction is permitted to take account of age, health s ta tu s, sex or other factors imparting risk, that contributions for ' fam ilies' - breadwinner and/or spouse and/or recognised dependents - are fixed a t twice the single rate, regardless of number of people covered, and contribution rates are subject to M inisterial approval.

The machinery for setting the schedule on which insurance payments are based is complex. The Medical Benefits Schedule to the Health Insurance Act lis ts services eligible to a ttra c t Commonwealth medical benefits, and the fees on which benefits are payable. So fa r as the services included are concerned, the review process involves the Medical Benefits Schedule Revision Committee, the Medical Benefits Advisory Committee and the Medical Benefits Division of the Commonwealth Department of Health. Variations to the schedule fees are in the hands of the Medical Fees Tribunal (Mr Justice


Ludeke). Payment of Commonwealth benefits through insurers (for both the insured and the uninsured) is the concern of the Commonwealth Department of Health's Medical Benefits Division (which c e rtifie s as to e lig ib ility ) and the Department's Management Services Division (which processes payment). The machinery en tails the payment of both fund and Commonwealth benefits by

health insurance funds.

In essence, medical insurance is an equalisation exercise. All members of a particular table with a particular fund pay the same premium i f they are single, double that premium i f they are married or have other recognised dependents. While individual tables within a fund may show a surplus or a

d eficit a fte r meeting claims and administrative costs, competitive elements tend to force funds to seek to break even on each table. Continued adverse experience overall w ill erode reserves, and may lead to the failure of a fund. But i f contributions are pitched to yield a large surplus, pressures

of competition, leading to membership loss, and the possibility of M inisterial intervention, should force premiums down.

All medical benefits funds must offer basic insurance. Many also offer 'gap' insurance, th at is , insurance at 100 per cent of scheduled fee. Some also offer additional cover for such items as dental services, paramedical services, and cover while overseas. Recently, primarily to meet competition

from commercial insurers, some funds have begun to offer lower levels of cover as well, directed mainly at the healthy young, and embracing such concepts as higher patient contribution and ' front end deductibles'.

Hospital insurance is generally more straightforward. All recognised funds offer a basic benefit of $50 a day, which covers shared accommodation for private patients in public hospitals. Most funds also offer a higher level benefit of $75 a day, which nominally covers the cost of private ward

accommodation in public hospitals. In practice, most public hospitals allocate accommodation in accordance with medical need rather than in relation to insurance status. The main objective of the higher level of insurance is to cover private hospital room charges and the extra charges

(theatre fees for example) levied in these hospitals. Some funds in some States offer tables with s t i l l higher benefit levels which reflect the ruling levels of private hospital charges in those S tates.


Public hospital charges are uniform throughout Australia. They are fixed a t the annual conference of Commonwealth and State health m inisters. Private hospital charges, like the fees of private medical practitioners, are not directly controlled. Although effective benefits offered are the same in a ll States for the two most common tables of hospital benefits funds, the contribution rates show considerable variation, reflecting differences in the

insured populations and differences in hospital u tilisa tio n patterns.

Hospital insurance also meets the cost of nursing home benefits for insured patients. These are met by the Commonwealth benefit for the uninsured, except in State and deficit-funded nursing homes. However, nursing home benefits paid from hospital benefits funds are debited to the Reinsurance Fund as are hospital benefits a fte r the f ir s t 35 days in any twelve month period. The machinery which determines the level of Commonwealth nursing home benefits, therefore, impacts the hospital insurance

funds to the extent that the Commonwealth contribution to the reinsurance fund (recently increased from $50 million annually to $125 million annually) fa lls short of the amounts actually debited to that fund. Agencies involved include the Commonwealth Department of Health's Insurance, Hospital and Nursing Homes Division, Nursing Home Fees Review Committees of Inquiry in each State, which hear appeals, and the Working Party on the Fees Justification Process.

Five major features of resource allocation through health insurance emerge. They are: . The distinction between hospital and medical insurance. People may select both, either or neither. The v iab ility of each has become

blurred in recent years, with reserves from one being used to bolster the other in times of severely adverse experience, in preference to premium increases.

. The role of the Commonwealth in supporting the funds and in controlling th e ir operations. Considerations of support are examined la te r. . The limited involvement of State governments.

. The significance of the Medical Benefits Schedule as a vehicle for implementing Commonwealth Government strateg ies, and for responding to pressures from health professionals for fees adjustment. (It should, however, be noted th at many practitioners set th e ir own fees

at levels above those provided in the schedules). 132

. The relationship between maximum benefits offered and fees charged by both doctors and private hospitals.

Financial Objectives

In evaluating the effectiveness of the machinery for mobilising private funds for the financing of health services, the objectives of the various parties must be considered - Commonwealth and State governments, medical and hospital benefits funds, p atien ts, and the providers of health services.

Except as providers of services through th eir ownership, operation, and deficit-funding of public hospitals, State governments are largely passive actors in th is play. They are concerned with the lim itation of th e ir financial lia b ility for cost-shared services, both in hospitals and in

community health. They are concerned with the absence of private sector support for the services for which they are wholly responsible: the psychiatric hospitals and the State-owned long-stay hospitals and nursing homes. They are involved in fixing the daily bed charge for insured patients

in public hospitals, and to th is extent they are concerned with the proportion of public hospital patients who are insured and contribute to hospital revenue, so lim iting the burden on State budgets.

But in th is arena, the lead has passed to the Commonwealth, and i t is the Commonwealth's objectives which are significant. These objectives have not been exp licitly stated , and may well appear to have been confused by the many administrative changes marked by the succeeding versions of Medibank.

Nevertheless, there is evidence of emerging objectives.

In very general terms, the Minister for Health's press statement of 24 May 1978, in which he announced the second round of changes to the Medibank scheme, defined the intentions lying behind changes which were essentially designed to restrain the rate of increase in health costs borne

by government. .

The Minister said the objectives were to encourage responsible use of one of the best health services in the world, ensure that overuse and abuse were reduced to a minimum, obtain the best value for the taxpayers' dollar spent on health care, and promote competition and innovation in private

health insurance.

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Subsequent changes to health insurance have attempted to retain this objective, while s t i l l aiming for 'universal protection against higher cost items of medical service' (M inisterial press statement, 24 May 1979).

The stated objective of the Commonwealth Medical Benefits schedule is :

'To provide financial assistance to eligible people who incur medical expenses as a result of the rendering of specified medical serv ices.' (Commonwealth Department of Health Submission, Part II, 3).

The machinery attempts to do th is by relating the benefits paid to the cost of services. Changes to the scheme, and the consequent changes to medical insurance, have reduced:

'the level of Government subsidy to individuals who are able to pay for medical c o s ts .' (M inisterial press statement, 24 May 1979).

By comparison, changes in hospital insurance arrangements in recent times have been minor, and have only reflected the change in charges for public hospital accommodation. Given the government's present welfare policy objective of free access to a ll uninsured persons to necessary care in public hospitals as inpatients or outpatients, the scope for adjustment is limited.

'The Commonwealth's involvement in health insurance by regulation of the operations of funds [aims to protect] the in terest of persons who elect to contribute to registered hospital and medical organisations.' (Commonwealth Department of Health Submission, Part II, 98)

In so doing, these people fu lf il another objective - they reduce dependence on government funding for health care services.

A third objective of the government in regulating health insurance and in designing the system has been to maintain the fabric of private health services, especially private hospitals.

For example, the Prime M inister's 1980 election policy speech included the following passage:

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'The Government is determined th at a ll Australians should have access to high quality care. It recognises the important part the private hospitals have in our health services. It is to ta lly committed to ensuring the v ia b ility and preservation of private hospitals, especially the non-profit component.1

Aims of the Funds

It is probably f a ir to assert th at the main aim of the funds now is to survive in an environment in which the burdens placed upon them have increased, while the major inducements to membership which formerly supported th e ir operations have been eroded by government policy changes over the past


From the 1950s, the Commonwealth gave strong support to the funds and th eir members by allowing tax deductibility of premiums, making Commonwealth medical benefits available only to those with medical insurance, and by providing Commonwealth hospital benefits to insured patients treated in

public or private hospitals. As well, the 'sp ecial' accounts were established to support the chronically i l l , the Commonwealth took fu ll responsibility for nursing home support, and subsidised public and private hospital charges.

The 1970s saw the erosion of much of th is . Contributions are no longer deductible or rebateable, medical benefits are available to a ll, free treatment in recognised hospitals is available to a l l , and funds must now offer a nursing home benefit as part of hospital insurance cover.

As a consequence, a ll that remains is support of the Reinsurance Fund, subsidies on public hospital treatment for the insured, private hospital bed-day subsidies, and ' freedom of choice' of supplier of services for those who insure.

So long as access to free services was seen as limited to those whose income was low, the funds could market th e ir services on the basis that prudent people should make provision for possible crippling expense.


Since 1975 when a free alternative became available to a ll, the funds have faced major d iffic u lty . They have l i t t l e to market - choice of supplier, access to private hospitals and the related a b ility to jump queues, and a vague feeling that there may be two levels of service in some public hospitals, with the insured doing b e tte r. Moreover, the insured almost always have a residue which they must pay, whether they are serviced in

recognised or private hospitals.

Yet some 61 per cent of a ll Australians are s t i l l covered by hospital and/or medical insurance, and only some 20 percent, including those classified as disadvantaged, have no cover under insurance, the pensioner medical benefits, or Veterans' Affairs provisions.

Objectives of Contributors

Contributors who choose to take out insurance may have a number of objectives. Among the more prominent are likely to be a desire to obtain treatment where and when they wish (including the use of private hospitals) and a desire to control th eir

outlays a t the time of service, and to minimise to ta l outlays.

There is conflict in these objectives, as is noted in the South Australian Health Commission submission (30). The f ir s t objective introduces the important element of the relationship between doctor (or provider) and patient, which is the privilege sought by those who take out both hospital and medical insurance.

There may be other objectives. The Commission has been told th at a major problem of insurers are the people who come into th e ir funds in expectation of major impending expense, incur th at expense, and then drop out. This is particularly true of people seeking major elective procedures.

The funds can set a waiting period of no more than two months, and are reluctant to apply other sanctions to new members. The Commission has also been told of deficit-funded nursing homes and country hospitals arranging for the payment of premiums for long stay patients in order to secure benefits and augment th e ir operating income. The funds claim that such people are uninsurable, but under current provisions they cannot exclude them from membership.


Objectives of Service Providers

The objectives of governments as the principal suppliers of funds and major direct providers have already been discussed.

Insurance provides the operating base for both private specialist medical practice and for the continued operation of private hospitals. In i t s absence, private sp ec ia list practice would almost certainly contract, to be replaced by increased

sessionally paid or modified fee-for-service practice in public hospitals, while the continued existence of private hospitals in th e ir present form would be placed in jeopardy. Certainly, the flow of private capital to th is

area would cease.

'The continuing v ia b ility of private hospitals in Australia is seen . . . as being inseparably linked to the viability of the health insurance industry. Unless patients are adequately insured, they cannot afford to use private h o sp ita ls.1 (National Standing Committee of Private

Hospitals Submission, 16)

Because i t removes the relationship between service delivery and payment, insurance unquestionably has an impact on fee level, on the location of service delivery, and on the income of private providers, whether they be practitioners or hospitals. It may also have an impact on u tilisa tio n , but th is is discussed elsewhere in th is Report.

Conflict of Objectives

Each of the constituencies in the health care field has its own objectives, explicit or im plicit. The aims of the providers - an adequate income, the best possible standards of care - may conflict with financial objectives - control of aggregate cost to governments, to funds, to

individuals; with welfare objectives - accessibility for a ll - and with administrative objectives, a simple, equitable system not subject to abuse.

'The dilemma of the insurance fund points a t the central d ifficu lty of determining objectives, policy and resource allocations in health care.


There is an inherent conflict between the objectives of cost control, the financial accessib ility of service to a ll, the freedom of the doctor to prescribe treatment, and the expectations of the public for the very best treatm ent.' (30)

Clearly such conflicts must create an environment which impacts the machinery for financial resource allocation, and which affects the flows of private sector money into health care provision.

Effectiveness of the Machinery

The Commission has received re lativ ely l i t t l e evidence impinging on the mechanisms for mobilising and directing private sector funds into health care. Even in relation to insurance, most evidence received relates to the way in which i t influences the source and volume of services, topics which

are considered elsewhere in th is Report.

But the Commission has identified a number of problems in the areas of medical insurance, hospital insurance (including the Reinsurance Fund) and the operation of the funds themselves which seem likely to inhibit achievement of major objectives even where these are not in conflict.

If the purpose of insurance is to mobilise private monies for health care, recent strategies must be deemed to have been relatively successful. Commonwealth outlays for medical benefits, which peaked a t $747 million in the f i r s t phase of Medibank (1975-76) had more than halved by 1977-78, when they were $295 million, and have since been relatively stable. This has been

achieved by shifting an increased burden to the funds and th e ir members.

There have been some costs. Insurance premiums have risen, and the Victorian Health Commission in i t s submission (127) spoke of the nexus between rising premiums and 'adverse selection1 - the tendency for the well

to drop out, which in turn leads to further premium increases and to further opting out - which in the ultimate may lead to a contraction in the flow of private monies through the insurance system.

But there are other causes for concern. The basis of the medical benefits scheme, and of medical insurance, is the Medical Benefits Schedule.


It has come under severe criticism , even from its sponsors. For example, in its submission, the Commonwealth Department of Health pointed out :

(1) In adjusting schedule fees, the Medical Fees Tribunal assumes that they were originally fixed in relation to cost, or to some concept of appropriate personal income of providers. This is not the case. The original fixing in 1970 was on the basis of a 'most common fe e ',

which would have reflected supply and demand situations, and the target incomes of providers a t that time. (Part 3-40).

(2) Schedule fees are related to private practice costs, and include allowances for the overhead charges incurred in private practice. They are not necessarily appropriate for services rendered by salaried sp ec ia lists in recognised hospitals. (Part II, 110).

Yet to a ll intents and purposes the schedule fees are the floor fees for most services provided to insured p atien ts, while many doctors follow Australian Medical Association recommendations and fix their fees at higher levels.

The inappropriateness of the Medical Benefits Schedule in relation to pathology services has received particular attention in recent years, notably in the Report of the Committee on Costs and Applications of Technology in Medical Practice (1978). Although the recommendations of the Pathology

Services Working Party led to a revised fee schedule (Commonwealth Department of Health Submission, Pt II, 117) the problem is s t i l l far from being solved.

'By v irtu ally fixing the fees, the medical benefits system has destroyed, for pathology, the benefits that are expected to flow to the consumer from competitive private enterprise'. (In stitu te of Medical and Veterinary Science Submission, 5).

An extremely important factor requiring attention regarding medical insurance is the effect on the States since, as the Victorian Health Commission points out, medical benefit conditions and fee levels affect the capacity of public hospitals to re c ru it s ta ff and the cost of employing

them. The Health Commission also say the level and coverage of medical (and pharmaceutical benefits) influence the demand for outpatient and emergency services (and the prescription of drugs). (Victorian Health Commission Submission, 119).


The submissions from State health authorities in New South Wales, Victoria, South Australia and Western Australia were particularly c ritic a l of the lack of State participation in decisions on insurance in general and on the Medical Benefits Schedule in p articular.

'Because of th e ir importance in affecting hospital u tilisa tio n and costs, the Commission, along with other State health authorities has sought a greater role in the setting of medical benefits through representation on the Medical Benefits Schedule Revision Committee.

This Committee comprises representatives of the Commonwealth Department of Health and the Australian Medical Association. The States request has not been granted.' (New South Wales Health Commission Submission, 12 ) .

In summary, i t seems th at although the Commonwealth's 'cost control' objectives may have been met, there has been an increasing cost born by the funds and th e ir contributors. The Medical Benefits Schedule and i ts associated machinery is not fully effective in ensuring that competition in private practice is promoted and that real 'value for money' is being obtained.

Medical Benefits and the Schedule of Fees

The government has maintained a preference for reimbursement of private medical practice on fee- for-service, limiting the costs of medical attention up to the schedule fee level except for a $5 'gap' in 1970, $10 in July 1976 and $20 in November 1978, with the refund available since 1975 whether the patient is insured or not.

The question of medical benefits was raised on numerous occasions with the Commission. The purpose and validity of Commonwealth Government payment for some procedures was the matter discussed most often. While most people expressed the view that private medical attention should be available to any individual seeking i t and prepared to pay, either by pooling resources into health insurance or making out- of-pocket payments, the use of Commonwealth Government funds for services which to many f a ll into the 'luxury' class, may not be seen as obtaining the best value for the public dollar. A number of submissions regard medical benefits as a prop for the private practice of


While to ta l medical benefits payments will exceed $1500 million in 1980-81, Commonwealth payments w ill amount to $681 million, made up as follows.

m e d ic in e , p a r t i c u l a r l y f o r s p e c i a l i s t s in v o l v e d in p r o c e d u r a l a s p e c t s . Some

f e l t t h a t a t l e a s t a p a r t o f t h e e x p e n d it u r e i s in a p p r o p r i a t e .



Medical Benefits $ million

General 316.0

Pensioner 314.0

Disadvantaged 51.0

TOTAL 681.0

Source: Commonwealth Appropriations for Health (Estimated Expenditure) 1980-81.

About 85 per cent of a ll private medical services are consultations by general practitioners, which since 1978 have not attracted a Commonwealth benefit except for pensioners and disadvantaged patients. These account for about 40 per cent of the to ta l medical benefit expenditure.

While medical benefit policy re sts with the government and the process of allocation of resources seems reasonably performed, policy advice from the Medical Benefits Advisory Committee to date is more concerned with determining the items to include on the schedule rather than the relevance of Commonwealth Government payments. By comparison, the Pharmaceutical Benefits Advisory Committee has introduced a number of changes to the schedule which have had the effect of using government funds in what is regarded as the most

appropriate manner.

Two other government committees are working in this field , the Medical Benefits Schedule Revision Committee and the Medical Benefits Review Committee which was established in 1978 to advise the government on reported 141

anomalies. The progress of both committees appears to be slow, for a number of important matters have been brought to the attention of th is Commission, some of which may be construed as condoning practices which may not be in the best in te re st of the individual patient in particular, or the community in general.

A number of proposals for change put to the Commission are reported.

Deletion of Items from the Schedule.

Certain scheduled items should be deleted, th at is , no medical benefits should be payable.

An example of public health measures is the serological te s t for syphilis. This was mentioned by the Institu te of Medical and Veterinary Science of South Australia and referred to in the recent report on Pathology Services in South Australia. The basis is that syphilis should be a notifiable disease carrying automatic follow up preventive management of contacts and persons at risk. The payment of a scheduled fee encourages the te st to be performed in private laboratories without a guarantee th at follow up w ill occur. The establishment by government of public health laboratories would seem to be good reason for re stric tin g te s ts of th is so rt. Performing them without charge to the individual patient would help to encourage detection of the disease. It is well known that anonymity is guaranteed to patients having te s ts of th is sort and th is course should be maintained. It

is not surprising th at a ll pathologists do not agree with th is proposal.

The Australian Paediatric Association in i ts submission and evidence to the Commission recommended th at the operation of circumcision should be deleted from the schedule as being unnecessary in almost a ll cases. In the rare event of i t being necessary for medical reasons, i t could be performed in a public in s titu tio n without fee. If requested for religious or other personal reasons by the patient or the parents, then i t should not a ttra c t a benefit.

For some conditions, payment should only be approved when certain prerequisites are satisfied . For example, the Australian Paediatric Association has strongly pressed the view that tonsillectomy in Australia is

frequently unnecessary and carries with i t considerable risk. The Association considered that only about five per cent of tonsillectomies presently performed were medically necessary. Given th is authoritative view, i t seems paradoxical th a t medical benefits are paid for each of the large number of tonsillectomies performed in Australia. A system should be developed to enable benefits to be paid for approved and appropriate operations of th is so rt, but not paid when the procedure is considered to be

unnecessary. One suggestion i s th a t for the operation to a ttra c t a benefit, a second opinion confirming the need for the operation should be obtained from an experienced approved otolaryngologist, specifically entrusted with

th is responsibility. Undoubtedly, some other procedures on the schedule also f a ll into th is category and would be known to the Commonwealth Department of Health.

A number of people have commented on the inadvisability of Commonwealth benefits being paid for the performance of cosmetic surgery procedures.

While argument has been raised th a t procedures such as augmentation mammaplasty, melanoplasty (face l i f t ) and hair transplant, among others, may on occasions have a medical indication, there have been much stronger views presented to the effect th a t the Commonwealth should not support these procedures directly by providing medical benefits.

The withdrawal of medical benefits for any procedure mentioned would not preclude the insured p atient from obtaining hospital benefits i f the procedure was performed in e ith er a recognised or a private hospital. If no medical benefit was payable, but medical indications for such a procedure

existed, i t would be appropriate for i t to be performed without medical fee in a public hospital.

D ifferential benefits

In organising the medical benefit payment for CT scanning, the Department of Health introduced for the f ir s t time differen tial fee rebates, with a lesser rebate for a te s t performed on CT scanning equipment in stalled in a public in stitu tio n than on one privately owned and run. The basis of

th is rebate d ifferen tia l was on the higher costs involved in the private secto r, particularly in relation to risk capital, but in addition, because CT scanners installed in public hospitals are already partly subsidised by the

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Commonwealth Government and a d iffe re n tia l fee w ill overcome the problem of double reimbursement. The d iffe re n tia l fees principle is one which may well be extended to a number of other services.

Two-level medical benefits might be suitable in other instances where Commonwealth money is involved in funding an in stitu tio n and the services i t provides. For example, i t has been suggested that surgical procedures performed in recognised public hospitals warrant a lesser fee for doctors

because of the support services which the hospital provides and for which a significant amount is already paid by the Commonwealth Government. An operation in a private hospital by a surgeon requires th at the surgeon

personally provide a high proportion of the back up and support services necessary for the proper management of the p atient, whereas in a public hospital th is can be largely taken over by the resident medical s ta ff and

specially trained nursing and ancillary s ta f f . Similar arguments have been presented which relate to other diagnostic and medical consulative services.

Consideration should therefore be given to the development of a new schedule of benefits providing fee rebates at a reduced rate for procedures performed on private patients within public in stitu tio n s. The amount of the Commonwealth contribution may depend to some degree on the extent of the

fa c ilitie s provided in the in stitu tio n .

Restriction of Benefits

Psychiatric consultations in some circumstances present a her/ily u tilise d service, with instances being reported in which psychiatrists undergoing training in psychoanalysis claim medical benefits for each consultation for themselves. The Commission believes th at th is is not an

acceptable practice and that a ceiling should be placed on the benefit paid each month for psychiatric consultations. Mechanisms can and should be established to deal with genuine cases of hardship which may arise by the

imposition of restrictio n s of th is sort.

Acupuncture is a relatively simple procedure th at takes l i t t l e operating time, but long consultations are often claimed. It has been pointed out that i t is possible for a doctor to consult other patients a fte r the acupuncture needles are inserted and there seems to be l i t t l e requirement for prolonged patient contact.

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'Encore' procedures include such as the removal of an appendix during an abdominal operation for another purpose. It is obvious th at the schedule fee is not always ju s tifie d for both procedures and that in these circumstances adjustments to the schedule are required.

Amalgamation of Benefits

The fee for the adm inistration of an anaesthetic may be supplemented by an additional fee for the insertion of an intravenous drip during the anaesthetic. The commonly expressed view, which may be an unjust one, is that fee income rather than medical necessity may influence the decision to

include the procedure. It would appear to be fa ir to anaesthetists that these separate procedures be amalgamated and a moiety included in the anaesthetic charge i ts e lf .

Manipulative and other procedures associated with childbirth are liste d separately on the schedule, with caesarian section attracting the highest fee. It has been suggested th a t th is is another instance in which the fee schedule influences the type of care provided, and the higher incidence of

caesarian section in women treated privately in Australia adds some weight to that argument. Opinions th at the delivery of a child should a ttra c t a single benefit, irrespective of whether i t is natural or not, are worthy of consideration.

Multiple Consultations in Hospitals

The practice of routinely v isitin g a number of patients in a hospital ward and then charging a consultation fee for each has been mentioned to the Commission by some doctors who regard i t as an improper practice, particularly when i t occurs frequently. Although some lim itation has already

been imposed on the practice, i t was suggested that the provision of a series of 'case' fees might be a preferable alternative.


The schedule of fees and medical benefit payments have been frequently discussed yy'bh the Commission. All the matters which have been raised have

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not been included in th is section. Rather i t is designed to give an indication of the importance of a review of the schedule.

The Commission RECOM M ENDS th at the terms of reference of the various advisory bodies be examined and th a t the schedule be reviewed in the dual in terests of cost constraint and patient care. Such review should be directed to the deletion of inappropriate items and the re stric tio n , reduction or amalgamation of benefits in suitable cases and the amalgamation of certain items.

Hospital Insurance

The modifications of Medibank arrangements in October 1976 and further changes in August 1978 have had a number of effects on the u tilisa tio n of hospital services. It should be pointed out, however, the availability of standard ward treatment and accommodation in recognised hospitals plus outpatient services free a t the point of service was retained from the original Medibank arrangements. What has changed is the way in which such costs are met by the public. (During Medibank I, jo in t Commonwealth/State

funding; under cost sharing arrangements Medibank II, health insurance or a health insurance levy; from 1 November 1978, levy abolished and costs for uninsured patients met by the Commonwealth and the S tates.)

The Commission has been told th a t the possibility of obtaining treatment in a public hospital at no direct charge (and the option for private patients to be treated in public hospitals) has placed the v iab ility of private hospital and of private health insurance funds in jeopardy (National Standing

Committee of Private Hospital, Voluntary Health Insurance Association of Australia tran scrip t).

For a ll private hospitals, the number of occupied bed days a thousand population dropped from 308 in 1977 to an estimated 289 in 1980 (Commonwealth Department of Health, unpublished data) indicating declining use of private hospital fa c ilitie s . To the extent that this has been a result of changes in health insurance, and not ju st a reflection of changed medical practice, the change must be seen by private hospitals as a defect in the machinery for generating 1 finance for health care purposes which would not otherwise be available' (Hospitals' Contribution Fund tran scrip t, 2481) that is , from


The Reinsurance Fund

g o v e r n m e n ts . The p ro b lem o f p r i v a t e h o s p i t a l s h a s b e e n com pounded by a

c o n t in u e d g r o w th i n p r i v a t e h o s p i t a l b ed n u m b ers, w h ich r o s e by 7 . 5 p e r c e n t

i n t h e y e a r t o June 1 9 8 0 .

The Reinsurance Fund is an attempt to compromise between the Government's welfare objectives (access for the needy), its financial objectives (restraining government expenditure) and those of the funds in attracting members at the same time as remaining financially viable. The

Government already has financial commitments to the aged and chronically i l l through payment of nursing home benefits and many other programs.

The dilemma lie s in the requirement placed upon registered funds by the Commonwealth th a t improper discrimination must not occur between contributors because of health, age or other prescribed reasons. As a re su lt, the Commonwealth now shares the lia b ility of so-called bad risks with the

registered funds by i t s contribution to the Reinsurance Account which has been increased to $125 million a year.

The effectiveness of th is arrangement has been questioned in a number of submissions and i t has been recommended to the Commission that the Commonwealth Government bear the responsibility for nursing home patients (and for long stay hospital patients) and that Reinsurance Account

arrangements be abolished:

'I t is strongly believed th a t the health care costs of the chronically sick should be borne by the community as a whole through Commonwealth benefits rather than being a cost to be borne by the private s e c to r.' (Voluntary Health Insurance Association of Australia

submission to the Hon. Ralph Hunt, Minister for Health, re the reinsurance account, August 1979, 80)

Tne Regulation of Funds ■

The conditions of registration for health insurance organisations (Part VI and VIA of the National Health Act), the regulations under the Medical Benefits Schedule and community rating has resulted in a number of anomalies.


The fund cannot control the rate or extent of service provision for which i t is financially responsible.

'I t must adjust its premiums to re fle c t claims experience or seek further kinds of Government su p p o rt.1 (South Australian Health Commission Submission, 28)

Commercial insurers are not subject to the same conditions and enjoy 'unfair advantages' when compared with conventional health benefit programs (National Standing Committee on Private Hospitals Submission, 2)

The present system discriminates against less resource intensive methods of patient care (Australian Association of Surgeons submission, 29). For example, the benefit paid for a one day admission is the same as for a fu ll day's accommodation and care (Commonwealth Department of Health submission,

Part II, 137; Medibank submission, 6) and no cover is provided for the cost of treatment in the home by nurse aides or other trained persons under the supervision of a registered nurse or for occupational therapy (Commonwealth Department of Health submission, Part II, 135).

Another anomaly is the short waiting time before e lig ib ility for benefits. 'We are even more concerned with adverse selection than the dropout of insurance, and the number of people who take out health insurance for

three or four months and drop out again is very high . . . [in Queensland] something like 50 per cent of people selected, knowing they were going to have surgery and then dropped o u t.' (Medibank Transcript, 1529-30)

This Chapter deals with the facts relating to resource allocation by health insurance, individuals and private investment. It is clear th at the machinery for th is is effective as changes have been made in the health insurance plans over the past few years and the machinery for making them has

proved to be e ffic ie n t.

However, the Commission does not agree th a t the changes have been beneficial, indeed they have done nothing to improve the efficiency of the health system.

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Insurance is an important part of the machinery for maintaining the mixed (public and private sector) provision of health care services. It may also be important as a factor in the level of service u tilis a tio n , although with the present av ailab ility of a free alternative (subject to some delays

in some areas for non-urgent elective services, and without choice of provider) th is is uncertain so far as the patient is concerned. For the medical provider i t is almost inevitable that the assurance of fee-for- service provided by insurance w ill tend to sh ift the marginal point at which medical or surgical intervention is seen as ju stifie d , but the extent of th is

sh ift w ill depend on the attitu d e s and ethics of the doctor, and is quite incapable of measurement.

It also impacts the level of charges with the medical benefits schedule setting a floor, but leaving the individual doctor to determine whether or not to seek a margin above th a t floor based on his assessment of his personal status within the profession. Some clinical s ta ff groups in some public

hospitals agree that the schedule fee shall be th e ir to ta l fee for private patients treated in th at hospital, but these doctors may charge d ifferential fees for th e ir practice outside th a t hospital - for example in private

hospitals. Others may have some regard for the level of insurance carried, arguing that there should always be a patient contribution, and that those with gap insurance should pay a margin over the schedule fee, while those with basic insurance are already making a contribution from th e ir own


Whatever approach is adopted, insurance provides a solid underpinning for private medical practice, wherever i t is conducted. It is also important in the determination of private hospital charges.

So far as the insured are concerned, i t provides:

Assurance of financial capacity to use private medical and hospital services when they are required; Assurance th at outlays a t the time of service w ill be within reasonable bounds;


Choice of doctor and hospital; A contractual relationship between doctor and patient.

Insurance is not intended to provide for chronic or catastrophic illn ess (despite the existence of an insured nursing heme b e n efit). It is therefore supported by Commonwealth Medical Benefits for heavy medical outlays, and by the reinsurance pooling arrangements with Commonwealth subsidy for long stay patients in hospitals and nursing homes.

Some 61 per cent of Australians (Australian Bureau of S ta tis tic s Survey, February 1980) consider the advantages of insurance to be such as to make i t worth th e ir while to hold some kind of cover with voluntary insurance organisations. Most of these carry both hospital and medical cover.

C riteria for Change

If i t is accepted th at the maintenance of a mixed economy in health service delivery is desirable with private sector f a c ilitie s , subsidised or not, co-existing with government funded f a c ilitie s , a mechanism for the funding of use of private sector fa c ilitie s is a pre-requisite. At one extreme, the funding of these fa c ilitie s could be wholly assumed by the government, at the other, the government could leave the funding of those services wholly to users, with insurance le f t to the private sector without government support or intervention.

Since the 1950s, the Commonwealth has provided support for hospital insurance through bed day subsidies for insured people which, u n til the advent of cost sharing, did not discriminate between private and public hospital fa c ilitie s , and for medical insurance through the provision of medical benefits (subsidies) to insured patients, a subvention which more

recently has become available to a ll regardless of insurance status provided they reg ister with an insurer for payment.

Neither of the extremes represents a practical resolution. A to ta l divorce of private and public practice, much on the lines of the British arrangements, was put to the Commission by Professor L. Opit of Monash University (5.833). He made no attempt to assess the structural consequences

of his proposals, but recognised that special arrangements would be needed


for primary care general p ractitioner services, and proposed a separate insurance arrangement to fund them.

It has not been suggested by any witness th at governments could, or should, withdraw from financial responsibility for health care. About the nearest approach was a suggestion from the Australian Medical Association (S.245) that the Commonwealth should cease to be directly involved in

hospital funding and should merely increase tax reimbursement to the States. Important reasons for the reluctance of any party to the Commission for seeking abandonment of the mixed structure include:

The disruptive impact of major structural change.

Recognition of the major role played by the government in funding services as they are now constituted.

The need to make provision for the chronically i l l , the aged and low income earners.

The very size of existing government support to private sector service provision.

The Commission has had placed before i t in submissions, in evidence and in private discussions a large number of proposals for amendment to the existing insurance arrangements which would, i t was contended, overcome the existing perceived defects. Proposals ranged from the evolutionary, or even

reactionary, to the radical.

In order to assess th e ir merit, some c rite ria are essential. Those which appear appropriate to the Commission in light of the foregoing include:

1. Access to necessary services should not be dependent on a b ility to pay.

2. Determination of medical necessity must lie with the clinicians concerned.

3. Where the user has the financial capacity, some contribution towards the to ta l cost should be made by him.

4. Arrangements for funding of services should not discourage necessary use of f a c ilitie s , but should not promote procedures or treatment of questionable benefit to the patient.

Means te st at point of service is not an acceptable basis for determining access to free services. 151

5 .

6. Arrangements should ensure the future v ia b ility of existing private hospitals and existing private medical practice which are a major component of Australian health care services.

7. Those wishing, or required, to pay should have available to them an insurance mechanism for funding services received and appropriate incentives to use i t .

8. Proposals should recognise th at users of services d iffe r in th e ir personal financial circumstances, and should endeavour to achieve equity.

Existing arrangements meet some of these c r ite r ia . They give access to necessary services to a ll. They leave c lin ic a l decisions to the clinician and the patient. There is no means te s t a t point of service. They provide a mechanism which permits, but does not guarantee, the continued v iab ility of private sector services. They give to those who wish to pay an appropriate mechanism for funding the services they receive. However, they do not force personal contribution where capacity to pay i s present nor do they

discriminate against marginal or sub-marginal use of fa c ilitie s . Nor are requirements of equity necessarily met.

One area of particular concern is the declining occupancy of private hospital fa c ilitie s . In 1977-78, 56.4 per cent of a ll hospital bed days related to 'p riv a te ', that is insured or otherwise paying, patients. Of these 'p riv ate' bed days, 37.2 per cent or 20.7 per cent of a ll bed days were in private hospitals, and 62.8 per cent or 35.7 per cent of a ll bed days, were accounted for by private patients in public hospitals. By 1979-80, private bed days in a ll hospitals had fallen to 53.3 per cent of the to ta l, and the proportion of those bed days in private hospitals had fallen to

35.5 per cent or 18.9 per cent of a ll bed days. With expansion of the number of private hospital beds occurring concurrently, occupancy ratio s in some private hospitals have fallen to levels which the Commission has been

informed render th e ir future uncertain.

Options for Change

1) Radical Change . Treat free services as benefits in kind for taxation purposes; . Personal resources payment, th a t is an 'excess' or front end deductible;


. No government financial support for private practice except for general practitioner services; . Hospital benefits for individuals rather than in stitu tio n s.

2) Reactionary Change (Putting the clock back) . Limitation of medical benefits to the insured; . Re-establishment of means te st; . Compulsory insurance income related for those who do not take

out voluntary insurance; . Elimination of 'gap' insurance, that is co-insurance; . Elimination of nursing home fund benefit; . Restoration of tax deductibility/ reb ateab ility ;

. Restoration of special funds; Elimination of reinsurance funds.

3) Evolutionary Change . Single package for hospital and medical insurance; . Sanctions against those who insure against known events and then drop out;

. Extension to acute psychiatric patients.

The objectives of a ll the proposals for change placed before the Commission have been to encourage as many people as possible to make provision for th e ir hospital and medical care through insurance, while retaining the voluntary character of insurance arrangements. The purpose of th is is to widen the insured community so as to avoid adverse selection and

consequent contribution escalation.

1. Radical Change

(a) Free services as tax benefit-in-kind. A possible scheme is :

. All services in public hospitals billed to the patient at notional rate for hospitals, for example $50 a day, a t the ruling approved charge. . Insurance or personal payment recovery credited to patient.

. Unrecovered amounts advised to Taxation Department and the patient, who is required to include the amount in his tax return as a 'benefit in kind1. 153

. If the tax payable because of the benefit in kind is more than 10 per cent greater than the tax which would otherwise have been payable, the extra tax in that year is limited to 10 percent.

. In subsequent years additional tax is payable on any outstandings at 10 per cent of calculated income tax on current income, u n til the amount is recovered, or u n til seven years have elapsed, when any remaining balance is written off.

. Expenses for the most recent year take precedence over expenses for e a rlie r years - that is extra payment in any year is applied to the most recent expenses, not to the e a rlie s t expenses. The purpose is to overcome the problem of large accumulations for chronic invalids

or frequent users of services with small taxable income.

An alternative scheme would provide for assessment of the to ta l benefit in kind as income in the year in which i t was received, subject to a 'catastrophe' lim it related to taxable income excluding the benefit in kind. This lim it could be set a t a low figure - say $100 - for taxable incomes

from other sources below $5000, rising in steps to a maximum of say $5000 for taxpayers whose marginal incomes a ttra c t the maximum ra te of tax.

This particular system meets a ll the c rite ria - i t is progressive in relation to income, i t establishes an income te s t, but not a t the point of service, i t forces a payment when the patient can afford to make one, i t eliminates the need for special provision for the aged, the disadvantaged and

low income earners, i t recognises the special problems of the sickly and the chronically i l l . It could be structured so as to encourage insurance i f th is were deemed desirable, by accepting the insurance benefit as being in fu ll settlement of the lia b ility while imposing higher 'benefit in kind' charges for the uninsured. It would certainly constrain marginal 'fre e ' services in public hospitals for those who could afford to contribute. This proposition is supported in principle by some submissions, including a Commonwealth member of Parliament (Submission 741).

The Commission believes such a proposal, i f confined to inpatient services in public hospitals, and treated as a 'personal' tax lia b ility (that is , i t is the individual who is liable, not the spouse or parent i f the

patient is a dependent) would be relatively simple to administer by both the hospitals and the taxation office, would generate fu ll and valuable data on


activity in public hospitals, and would provide some revenue to offset some of the costs which la te r proposals in relation to insurance would generate.

A very rough assessment indicates th a t revenue generated might approach $500 million i f a ll benefits were taxable income in the year of service delivery The impact of the spreading and writing off processes cannot be assessed but would ultimately lead to a yield of perhaps half th is amount a fte r a six year

phasing in period. The Commission has no basis to assess the impact of the second scheme on revenue, but i f the benefit is seen as personal to the recipient, the incentive to insure among those who can afford i t is effective, and the benefit in kind lim it for low income earners is suitably

low, i t is likely to be small. The proportion of insured patients in hospitals may rise sig n ifican tly , thus limiting governments' outgoings.

Extension to outpatient services would be feasible, but would enormously increase the administrative burden for hospitals and for the taxation office, and is not seen as a worthwhile exercise.

Any uninsured person could opt out of the taxation lia b ility by meeting the standard hospital bed day charge from his own resources.

Against th is, the Commission has been told that while these proposals, or various adaptations of them, could be made to work, implementation would create major problems for the Taxation Department, would c a ll into question the taxation status of a wide range of other benefits in kind which are

unrelated to income generation, such as education costs, and that the proposal is not a proper use of the taxation system. In particular, the absence of any positive relationship between health service provision and income is seen as a major shortcoming.

Even so, the Commission considers that in the longer term, a proposal of th is kind is an equitable way of funding a major proportion of public hospital services, especially i f these are ultimately to become free of charge at point of service to a ll users, another long term proposal which is

considered below.

(b) Personal Resources Payment


One method of discouraging frivolous u tilisa tio n of service is to establish a 'front-end deductible1, akin to the 'excess' on motor vehicle insurance claims. The proposal placed before the Commission entailed the following:

. Exclusion from Commonwealth and fund benefits (except free public hospital treatment) until such time as current year's expenditure reached a nominated threshhold - say $125 for an individual, $250 for a family.

. Incremental threshholds for those not insured with registered organisations. For a family say - $200 a year i f no medical insurance.

- $200 a year i f no hospital insurance. - $400 a year i f neither.

Half these amounts for individuals.

. Eligible expenses to include a ll health related expenses . hospital care at basic insurance rates.

. medical services at schedule ra te s.

. pharmaceuticals at cost.

. paramedical services at cost.

. aids and appliances including spectacles and hearing aids at cost.

. Individuals to establish through health insurance funds th e ir e lig ib ility for benefits by production of receipts for 'threshhold' qualifying expenses. . Health insurance premiums would not qualify.

. Registered health insurance funds would not be permitted to cover the personal resources payment.

. Health expenses incurred would cease to be rebateable for tax. . Special arrangements would be needed to exclude pensioners and those classified as disadvantaged from the personal resources payment. . Special hospital and medical account provisions to be reinstated to

replace the resinsurance account.

Introduction of th is scheme was assessed as being likely to save the Commonwealth some $65 million a year in benefit payments, and to reduce the cost of combined hospital and medical cover for a family by between $1 and $1.50 a week, assuming no impact on u tilis a tio n of services. These costs would f a ll on the individual users.


The main problems seen by the Commission in such a scheme are: . administrative complexity.

. the 'a l l or nothing' nature of the exemptions.

. the definition of the 'disadvantaged' in an in stitu tio n a l context.

. the continued av ailab ility of free alternative services to a ll for major expense. . the probable emergence of commercial insurance for the personal resources payment for selected risks and for other cover no longer

offered by registered insurance funds.

. the highly regressive nature of the personal resources payment, especially for those not deemed to be disadvantaged, but uninsured.

. problems in relation to qualification for pharmaceutical benefits, and to establishment of threshholds.

. the extensive public education required. This would imply a very long lead time for the introduction of such a scheme.

While the Commission believes that many of these d iffic u ltie s could be overcome and th a t workable arrangements could be evolved over time by such measures as excluding pharmaceutical benefit entitlements from the scheme and pharmaceutical outlays from the personal resources payments, by relating the personal resources payment in some way to income by transferring its

administration from insurers to taxation authorities, i t has d ifficu lty in seeing that the benefits to be attained in any way ju stify the complexity of the exercise. One reason for th is conclusion is th at once an individual enters the health care system, he has l i t t l e control over the costs which are

incurred by him, or on his behalf.

(c) Separation of the Public and Private Systems

Professor Opit put to the Commission a system which draws heavily on the B ritish model. Its essential features are:

. no fee for service practice in public .fa c ilitie s; . no patient charges for use of public fa c ilitie s ; . no government support for private hospitals and private medical services other than primary care services;

1 5 7

. a separate government supported insurance scheme for private general practitioner services. This could incorporate a general medical benefit, or might be limited to support for pensioners and the disadvantaged.

Professor Opit made no attempt to cost his proposals, and the Commission has been unable to do so. Given his assumption that perhaps some 30per cent to 40 per cent would continue to insure but would become e n title d to free treatment in public hospitals for catastrophe and that a ll service in public

fa c ilitie s would be by salaried doctors, whether fu ll or part time, there could be expected to be some impact on u tilis a tio n in both public and private hospitals. Doctors could be expected to tend to use private f a c ilitie s whenever possible for insured patients, and there could be increased u tilisa tio n of these fa c ilitie s . There would certainly be considerable

changes in the pattern of medical practice.

The Commission believes that such radical changes are unnecessary to achieve the objectives sought, and that the introduction of such a system would be disruptive, however beneficial i t might be in the long run. Even so, i t does believe th at some modest steps towards such a pattern might be contemplated, such as the elimination or reduction in the rights of private

practice of salaried medical officers, or a t le ast the elimination or reduction of insurance benefits in relation to such services. In the longer term, the exclusion of fee-for-service practice from public hospitals - the existing situation in Britain and New Zealand - could prove a potent force in controlling u tilis a tio n and cost, especially i f i t were supported by a tax benefit in kind scheme.

(d) A Revised Hospital Insurance Proposal

One proposal placed before the Commission was th a t the Commonwealth should cease to fund in stitu tio n s, but should instead provide benefits to individuals using those insitutions.

The proposal entailed:

. Medical services by salaried and v isitin g medical s ta ff to a ll patients in public hospitals to become items in the Medical Benefits Schedule. 158

. This provision to apply also to outpatient services.

. Pharmaceuticals provided in hospitals to be included in the pharmaceutical benefits schedule. . A hospital benefits schedule to be constructed to cover the costs not otherwise covered through medical and pharmaceutical benefits

schedules, recognising differing costs for differing classes of hospitals. . The Commonwealth Hospital Benefit for uninsured persons to be one half of the net cost for that class of hospital a fte r deducting

salaried doctor, outpatient and pharmaceutical costs. It is estimated th a t th is would reach about 35 per cent of gross operating costs.

. For insured persons, the Commonwealth would provide a f la t medical benefit of 25 per cent of scheduled fee covering a ll services rendered in hospital except for pharmaceuticals where the normal benefit would apply.

. Special arrangements for pensioners and the disadvantaged, with Commonwealth lia b ility limited to 85 per cent of both hospital and medical schedules for pensioners, and to 75 per cent for the disadvantaged.

This proposal was directed more towards shifting responsibility for hospital costs to the States than with insurance, but has an important bearing on insurance, and particularly for private hospitals, whose $16 a day bed subsidy would be absorbed in the 25 per cent of schedule fee hospital

benefit. Since the schedule fee would be fixed to absorb the Commonwealth's share of operating costs, which is likely to be of the order of $60 per day, there might be l i t t l e or no in itia l change, but there would be an in flation escalator, which is lik ely to be of considerable importance over time. It is

important, too, for the generation of data. If a ll services are to be individually or bulk billed to the Commonwealth for benefit payment, they must be recorded. A feature of th is proposal is th at i t enforces patient contribution on those deemed able to pay. ·


The four alternative radical insurance plans discussed in some d etail above serve to indicate ju st a few of the p o ssib ilities for major change


which could be developed by a working party with th is task specifically in mind. The Commission is attracted to the principle underlying the tax benefits-in-kind scheme because of i t s equity and because i t s a tis fie s the established desire th at everybody who can contribute to th e ir health care costs should do so. The Commission also recognises the administrative and

p o litic a l d iffic u ltie s inherent in such a scheme. However, th is principle may well be incorporated in other schemes as yet not designed. The Commission is not in a position to design such a scheme.

The Commission RECOM M ENDS that a working party be established by the government to devise for the future a new health insurance scheme which s a tisfie s the principles of equity, freedom of access, and payment by those who can afford i t , and promotes universal participation.

2. Reactionary Proposals

(a) Limitation of Medical Benefits to the Insured

Allied to the foregoing proposals for hospital cover, a proposal was placed before the Commission th at the previous practice of lim iting the payment of medical benefits to those who were insured should be rein stated , on a f la t rate covering a ll services. The rate suggested was 25 percent, which would en tail outlays approximately equal to those now being met - $300 million.

For the insured, th is should mean no change in premiums. It would provide an incentive to insurers to monitor 'large tic k e t1 items. It was proposed th at existing arrangements for funding the disadvantaged and pensioners remain unchanged, as would the right of free access to public hospitals for the uninsured. It would, however, throw the major burden of catastrophic or chronic illn ess among insured people on to the insured


The Commission believes that the proposal has m erit, in that i t creates a clear incentive to insure, whilst not depriving the uninsured of services. It also believes that i f th is practice were adopted, i t would be appropriate for the funds to offer a new table providing entitlement to Commonwealth benefits only. Premiums, net of administration charges, would be payable to


the Commonwealth. Persons taking out th is form of cover would not be regarded as 'insured persons' for taxation purposes.

(b) Reintroduction of Means Test

Because the Commission believes that those able to pay should do so, and th at they should be encouraged to do so through insurance, i t gave much consideration to the reintroduction of a means te s t for free access to both inpatient and outpatient services at public hospitals. In doing so, i t


. th at sickness often generates costs other than medical costs - for example, cost of the breadwinner's income for part or a ll of the term of incapacity; . th at hospital administrators who gave evidence to the Commission

were almost unanimous in th e ir opposition to such a proposal; . th at collection of debts has been a difficulty in the past.

It considered various proposals for formalising such a means te s t. It found major objections to a ll of them. Eventually i t concluded th at an informal income t e s t , without sanctions, was the best arrangement i t could put forward should charges be imposed for these patients.

(c) Compulsory Insurance

The arrangements from 1976 to 1978 effectively meant th at the whole population was insured, eith er through voluntary funds on a community rated basis or by the Commonwealth on an income related basis through a levy on income. Those who had no income were, of course, covered by the 'compulsory'

scheme, and so e n title d to Commonwealth benefits, including 'fre e ' treatment in public hospitals and the then f la t rate with maximum contribution benefits for private medical services.

The levy created adm inistrative problems for governments, for employers and for taxpayers. I t was seen by some as discriminating against low income earners. It was seen as regressive, because i t entailed a fla t rate tax on incomes to a nominated maximum. It was abandoned in 1978.


Yet in many ways the concept is a ttra c tiv e . It embodies the principle that those who can afford to contribute towards th e ir health care should do so, while providing a mechanism to cover those who are unable to do so. Its application is certain. It is governed by the equities of the general taxation system. It creates recognised entitlem ents. It preserves

confidentiality. Its demise is to be regretted.

But the d iffic u ltie s met in practice with the levy system make i t an inappropriate means for funding the health care needs of the uninsured, and its reinstatement is not to be contemplated so soon a fte r i t s removal.

The Commission has considered other means of establishing compulsory insurance at the basic level for a ll Australians, by providing mechanisms for those in genuine need to have a ll or part of th e ir premiums met by government. It is aware that provision for government funding of insurance premiums existed in the arrangements from 1970 to 1975, but th at i t evoked

l i t t l e response in a voluntary environment. The necessary investigations to establish entitlement would no doubt be costly and seen as an intrusion on individual's privacy. The Commission concludes th at th is does not represent an acceptable solution.

(d) 'Gap' Insurance

Gap insurance - th at is , insurance a t 100 per cent of schedule for medical costs, - was f i r s t permitted to provide a continued base for the operations of voluntary health insurance funds a t the time of introduction of the original Medibank scheme, when the funds ceased to be agents for the

payment of Commonwealth Medical Benefits.

It has been much critic ised by a number of parties giving evidence to the Commission, including the insurers and the Department of Health. Its impact lie s in two areas. F irst, for the insured at th is level, who must be assumed to be able to afford i t , gap insurance removes most or a ll of the payment at point of service, and therefore any disincentive to seeking service. Second, in lig h t of the Australian Medical Association's statement that doctors generally believe that there should be a charge at point of

service, i t underpins the practice of fixing charges above the schedule fee.


Figures at 31 March 1980 estimated that 8.4 million people, or 57.5 per cent of the population, had basic medical insurance. Of these 5.0 million, or 34.2 per cent of the population had gap cover (Table 96, Commonwealth Department of Health Report, 30 June 1980). An estimated 8.7 million, or 59.6 per cent of the population, had hospital insurance. Of

these, 4.6 million, or 31.3 per cent of the population, had cover a t rates above the basic level - usually the $75 a day 'private room' rate (Table 81, Commonwealth Department of Health Report, 30 June 1980). Thus, i t appears that rather more than half of those who choose to insure seek benefits a t the

higher rates.

Their motives for seeking higher rate hospital benefits are readily enough assessed - a wish to use private hospital f a c ilitie s i f they are required and possibly a lingering belief that higher insurance may secure them private accommodation in public hospitals. The Commission sees no

objection to th is cover, because hospital u tilisa tio n is determined not by hospitals, but by doctors.

In relatio n to higher medical cover, the situation is less clear. Some funds offer 'gap' (100% of medical costs cover) as a single cover, and ancillary benefits cover (dental, optometrical, physiotherapy, cover overseas and so on) as a separate supplementary table, but usually the supplementary cover is only available with the gap cover. Other funds offer only a single higher cover which embraces both gap and ancillary benefits. It is therefore not clear whether the cover for gap or the cover for an cillaries is the motivating factor. It is noteworthy that the ancillary cover normally leaves

a significant gap, or co-insurance element. In the Commission's view, an element of co-insurance is desirable where i t does not impose a severe burden on the insured. It RECOM M ENDS th at the registered funds cease offering cover at 100 per cent of schedule for medical benefits. The gap for any service

is , of course, lim ited to $20 by the operation of the Commonwealth Medical Benefits scheme, so such a provision should not create hardship. If Commonwealth Medical Benefits are moved to a fla t percentage, various arrangements which are considered la te r might be made to lim it the amount of co-insurance in relation to each service.

(e) The Nursing Home Fund Benefit


The provision of a fund benefit for nursing home patients recognises that not a ll residents in nursing homes are pensioners or disadvantaged, and that some may wish to contribute to th e ir upkeep by remaining within the insurance system. Because of the Commonwealth subsidy to the reinsurance fund, th is was not seen as disadvantaging the insured community. But the subsidy did not vary with benefits, and the payment of these benefits clearly affected hospital insurance premiums u n til th is year when the subsidy was increased. Moreover, insurance benefits are payable in circumstances where

Commonwealth nursing home benefits are not for patients in d e fic it funded nursing homes, in State nursing homes, and in public hospitals. The Commission has had evidence to the effect that in some instances these in stitu tio n s have arranged insurance for residents in order to secure


In the Commission's view, nursing home accommodation is , for most patients, permanent accommodation. An insurance fund is an inappropriate mechanism for supporting these patients and should not be continued. The Commission RECOM M ENDS that the fund nursing home benefit be discontinued, and that a ll insured patients in nursing homes be eligible for the Commonwealth benefit. Cost has been estimated at $75 million. This could be recovered by reducing the Commonwealth contribution to the reinsurance fund, or could be passed to theinsured in reduced contributions.

(f) Tax Deductability of Contributions

Prior to 1975-76, health insurance premiums and medical expenses were deductible from income in determining taxable income. Any recoveries from insurance were taken into account in determining the amount of the deduction.

In 1975-76, the regressive nature of th is arrangement was recognised and the expenditure became rebateable at the standard taxation rate rather than deductible a t the marginal rate.

The following year saw the introduction of the levy. Since i t would obviously be nonsense to allow a levy as a rebateable expense, the e lig ib ility of contributions for rebate was eliminated. However, recoveries from insurance continued to be offset against actual expenses in calculating the rebateable amount.


When the levy was withdrawn in 1978, the arrangements for the insured were not altered.

It has been put to the Commission th at the present arrangements are unfair to the quite small proportion of insured taxpayers who qualify for rebate, in that expenses incurred are rebateable while recoveries are o ffset against the rebateable to ta l, and actual expenses are rebateable.

The present situation is anomalous. Three resolutions are open:

1) discontinue the e lig ib ility of medical costs for taxation rebate, for a ll or for the uninsured; 2) cease deducting insurance recoveries from elig ib le expenses for rebate purposes;

3) reinstate the e lig ib ility for rebate for insurance contributions.

All would tend to create incentives to insure. The second and third would impact government revenue adversely to the benefit of a relatively small group of taxpayers - those whose rebateable expenses exceed the standard allowance of $1590. The discontinuance of rebateability would

improve revenue at the expense of th is group. Since th is group generally rests among the higher income groups, th is resolution is probably the least disruptive and the fa ire st to a ll.

The incentive to insure is the consequent reduction in net costs of medical treatment. For the insured at present, with rebates at 32.9 cents in the dollar, premiums met from pre-tax income, and insurance recoveries effectively taxed, a person paying $450 for basic insurance and e lig ib le for

rebate needs to recover $1000 in claims before showing a surplus on his insurance. Since insurance is community rated such a continuing situation would necessarily have a highly adverse impact on premiums. Removal of e lig ib ility would place those not elig ib le for rebate in the same position as

those now eligible for rebate - a simple recovery of contributions ju s tif ie s insurance. It is , of course, assumed th at recoveries through claims would not be subject to tax.

Since the Commission sees i t as desirable th a t as high a proportion of the community as possible be encouraged to insure, i t RECOM M ENDS that in

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relation to medical and hospital costs only, e lig ib ility for rebate be dependent on the carrying of insurance for these costs a t the basic level. Rebate for other items now qualifying - pharmaceuticals, paramedical treatment and other net out of pocket costs not subject to refund under basic insurance should continue to be available to a l l .

(g) Restoration of Special Accounts

Evidence before the Commission has stressed th at community rated insurance is not designed to cope with d isaster. Before the provision of free public hospital fa c ilitie s for a ll, insurance funds placed lim its on annual benefits payable from fund resources. When these lim its were reached, benefits at basic rates were provided by the Commonwealth, through the special accounts mechanism, - the medical special account and the hospital special account.

A proposal placed before the Commission embodies th is concept as an alternative to the present reinsurance fund arrangements, and aligned to the reintroduction of a f la t rate Commonwealth Medical Benefit.

Broad details were:

a) Commonwealth Medical Benefit payable a t a fixed percentage on a ll scheduled medical services. If provision for the disadvantaged and for qualifying pensioners a t existing rates continued, a 25 per cent rate could be supported by the existing allocation of approximately $300 million a year. A benefit a t 40 per cent would cost $500 million.

b) Medical special account is a Commonwealth reinsurance arrangement applying to basic fund benefits. The arrangement would become effective where fund benefits a t the basic rate reached a minimum threshhold over twelve months. If a Commonwealth Medical Benefit of 40 per cent applied to a ll services (that is , the health fund benefit was 35 percent) and the threshhold was set at $150 for a

family and $75 for individuals, annual cost would be $45 million.

This arrangement would permit reduction in contributions to basic funds - a range of 33 to 47 cents was suggested to the Commission.

The cost of 'gap' cover, i f i t is to continue, would be very much

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enhanced because the Commonwealth would no longer underwrite gaps in excess of $20. Such a development is not seen as deleterious by the Commission.

c) Sim ilarly, Hospital Special Account is a Commonwealth funded reinsurance arrangement applying to basic hospital fund benefits.

It was proposed th a t i t should apply to a ll hospital and nursing home benefits a fte r 35 days - the present qualifying period for the Reinsurance Trust Fund, which i t would replace. Cost would be about $200 million a year, le ss the $125 million at present paid to the

reinsurance fund. It is estimated that th is arrangement would permit a reduction of $1.30 a week in family basic rate insurance contributions. Impact on higher rate cover would be smaller because nursing home reclassification does not occur u n til 60 days. If, as

is proposed above, nursing home benefits cease to be payable by funds, further reduction in premiums would be possible. d) All premiums for special account patients would be payable to the appropriate special account.

These proposals e n tail a significant government financial commitment - of the order of $360 million a year. If they could a ttra c t an additional 15 per cent of the population to take out a t least basic medical and hospital insurance, they would generate additional contributions of the order of $200 million a year, and would leave only 5 per cent of the population without cover under voluntary health insurance, the Ftensioner Medical

Benefits scheme or war veterans' provisions.

One problem seen by the Commission is the size of the uninsured gap for major services - for example, a period in hospital involving major surgery could e n tail gross fees of $1000 or more at scheduled rates, leaving a patient contribution of at le a st $250. It may well be necessary to fix a

maximum patient contribution for each episode of hospitalisation related to the scheduled fee, or to establish special 'disadvantaged' provisions for insured patients to overcome th is problem where meeting the co-insurance requirement becomes burdensome.

In other respects, these proposals meet the c rite ria laid down except for the equity c rite rio n . They certainly improve the situation of the insured patient quite dramatically by reducing contribution rates for basic


insurance. The Commission believes them to merit serious attention but considers that the to ta l cost of the proposals is unacceptable in the existing context of cost constraint.

As long as the Commonwealth medical benefit continues to meet a ll schedule fee items in excess of $20 there is no additional need for medical catastrophic cover and therefore a medical special account is unnecessary at the present time.

The Commission considers that the present reinsurance arrangements to cover patients requiring prolonged hospitalisation are less than satisfactory and RECOM M ENDS the reproduction of the hospital special account.

(h) The Reinsurance Fund

I f the hospital special account is reintroduced, i t w ill replace the reinsurance fund. If not, the Commission believes the existing arrangements are unsatisfactory because they impose an open ended commitment on funds without a corresponding commitment by the Commonwealth which is the principal beneficiary of the funds operations, since payments met would otherwise fa ll on the Commonwealth in the form of nursing home benefits, or on the Commonwealth and the States in cost shared costs in public hospitals.

If the reinsurance fund arrangements are to continue the Commission RECOM M ENDS that t he Commonwealth should accept an obligation to fund a constant proportion of the d eficit rather than a fixed annual amount. The current Commonwealth contribution represents approximately 50 per cent of the d e fic it and th is would appear to be a reasonable proportion for the Commonwealth to bear.

If the fund benefit for nursing homes is abolished, and the reinsurance fund arrangements are to continue, the Commission considers that i t would be appropriate for the States also to contribute to th is fund, and RECOM M ENDS that the amounts required to be funded be s p lit equally between the Commonwealth, the States and funds.


3. Evolutionary Change

(a) Hospital and Medical Benefits Package

People may insure for hospital benefits at optional, basic or higher levels, and for medical insurance a t optional, basic or 'gap' levels. The only requirements placed on funds are that they must offer basic cover tables for both hospital and medical insurance, that optional tables (tables with

front end deductibles and/or lower refund rates) must conform to guidelines laid down by the M inister for Health, and that premiums must be approved.

Problems a rise where people have one form of cover but not the other - for example, those with hospital insurance who seek the services of th e ir own doctors in hospital and find they are liable for payment because they have no medical insurance, people with only medical insurance referred to private

hospitals by th e ir doctors to find that they are liable for the hospital b ill, or to'p u b lic hospitals where choice of doctor is dependent on hospital cover. The distin ctio n between the two forms of insurance is histo rical -hospital insurance antedates medical insurance by many years.

The problems a rise because of misunderstandings by patients and th e ir doctors and because the only evidence of what types of insurance is held is the membership book which may be produced on admission to hospital, but often is not, and is certainly not taken to the doctor's surgery a t the time of

consultation. Many insured persons are unaware of the cover they have because they are members of a family group, rather than contributors themselves, or because of changes in cover offered, which have been frequent over recent years, of which they have not informed themselves.

One resolution to th is problem lie s in the uniting of the two insurances. But many people are happy to be treated as public patients in hospital, but wish cover for medical services outside hospital, and are prepared to meet the cost of th is , but not hospital insurance. Conversely,

there are those who are prepared to accept personal lia b ility for medical charges to the extent th a t they are not covered by Commonwealth benefits, but seek access to private hospitals, or wish to be treated as private patients when they are in a public hospital.


The Commission's proposals are designed to provide substantive incentives for those who can afford to insure to do so. These benefits should be directed to those who have fu ll cover. The Commission concludes that the present distinction between hospital and medical insurance adds to the confusions of an already complex insurance arrangement and RECOM M ENDS th at premiums be structured to allow a discount for those who take both forms

of cover, with the object eventually of phasing out the single cover arrangements.

(b) Short Stay Members

One particular form of adverse selection is seen as a particular imposition on the insured community. Funds are required to set a waiting period of no more than two months for fu ll benefits as a condition of registration. They can no longer apply sanctions against pre-existing

illn esses. The effect of th is is that some people join funds in fu ll knowledge of major impending expense, retain membership u n til the expense has been incurred and claims paid, and then drop out.

The Commonwealth sees i t as important th at the short qualifying period and pre-existing illn e ss provisions remain as they are, because i t deems longer qualifying periods and exclusions as discrimination.

The Commission does, however, see a need for provisions which w ill eliminate what i t sees as improper use of the funds' f a c ilitie s . A number of proposals have been suggested to i t .

1. A front end premium loading for new members, rebateable against premiums due in subsequent years. For example: 1st year - premiums 120 per cent of normal rates

2nd year - premiums 110 per cent of normal rates

3rd year - premiums 100 per cent of normal rates

4th year - premiums 95 per cent of normal rates

subsequent years - premiums 90 per cent of normal rates


2. Payment of refunds by instalments - the second and subsequent instalments being dependent on continuous membership. For example: Claim $1000 on July 1 Payments: $250 1 July

$250 1 October $250 1 January $250 1 April

If a member resigns in February, the la s t instalment is forfeited.

3) Limitation of claims to a multiple of premiums paid during a qualifying period.

All these proposals have serious flaws.

The f i r s t is seen by the funds as creating a disincentive to entry and would certainly not deter a person expecting a significant stay in hospital for major surgery.

The second could create serious hardship for genuine new members, and would also create problems where the fund benefit is paid direct to the provider. If, for example, the $1000 claim represented a ten day stay in a public hospital costing $750 and medical fees incurred by the patient while

in hospital for which the fund benefit was $250, i t would be normal for the hospital to b i l l the fund d irectly for the accommodation charges, and for the medical providers to b ill the patient directly. The fund would pay the hospital and th at would be the end of the matter. The patient would either

pay the doctors' accounts and seek a refund, or would present the accounts to the fund which would provide cheques in favour of the provider. If payments were limited to one quarter of the amount due, the sanction would be against the providers, not against the insured. If the insured then dropped out of

the fund, recovery would be a matter for the providers, who might well have d ifficu lty in locating th e ir former patient.

Limitation of claims could also create discrimination i f , for example, a person only recently insured suffered traumatic accident. However, th is objection would not apply to many forms of elective surgery. The Commission RECOM M ENDS that waiting times for certain scheduled elective items, including maternity benefits, should be increased to five months.


(c) Psychiatric Hospital Care

One matter which has been brought to the Commission's attention from a number of sources is the anomalous situation of sufferers from acute mental illn e ss.

If they receive treatment from a psychiatrist in private practice, they are en titled to medical benefits. If they are treated in a recognised or a private hospital, they are entitled to both medical and hospital benefits, including Commonwealth benefits when these are applicable. But i f they are treated in a designated psychiatric in s titu tio n , there is no benefit from voluntary insurers or from the Commonwealth.

Such discrimination is redolent of an era which most people believe is long since past and could be overcome by the inclusion of treatment of acute psychiatric disorders in psychiatric hospitals in the schedule of hospital and medical benefits for insured persons. I t is recognised th at th is would

represent a transfer of cost from the States to the Commonwealth and to the insured community. The Commission is of the view that th is matter is a reflection on the quality of health care, and that action is necessary.

In its submission to the Commonwealth Grants Commission in December 1979, the New South Wales Health Commission estimated th a t daily average occupied beds in Australian psychiatric hospitals for acute patients, calculating figures for a ll other States on the basis of New South Wales

rates, were 3434. If acute psychiatric patients are representative of the Australian population, perhaps 60 per cent of these beds may be occupied by insured patients. One teaching hospital in New South Wales with an acute psychiatric unit has found that these patients are not representative of the community. For a ll services, some 46 per cent of patients are hospital

patients. In the psychiatric unit the ra tio is 72 per cent. However, i f these patients followed the typical pattern, annual cost to insurance funds of providing hospital benefit at $50 a day to these patients would be $37.6 million. Impact of th is on the single basic hospital insurance premium would be about $6.50 a year or 25 cents a week for the family premium. It is not possible to assess the impact on medical fund costs or Commonwealth medical benefits but i t is unlikely to be large.


Overseas Practices

Reference has already been made to B ritish arrangements, under which those who do not opt out are automatically entitled to free services of both medical p ractitio n ers and hospitals under the National Health Service. Those who do opt out retain access to free services, but normally consult doctors

in th e ir private capacity on a fee for service basis, and have access to private hospitals, or to designated private (paid) beds in public hospitals for in s titu tio n a l care. Insurance arrangements to meet those costs are available, notably through the B ritish United Provident Association. Within the National Health Service there is no fee for service practice.

Contracting doctors receive an annual capitation fee for primary care services. S p ecialists are salaried, but may have conditional rights of private practice.

The B ritish model is in d irect contrast to the Australian. Its essential emphasis is on the provision of free services for most of the population. Control over u tilis a tio n is achieved by budgetary lim itation, and by controls over entry to the medical profession. Its adoption would

involve massive restructuring. I t is not seen as offering a feasible resolution in the Australian context in the short term.

In many respects, the United States arrangements are more relevant. The main differences are th a t hospital revenue is dependent not on expenditure, but on a c tiv ity . All patients are billed for a ll services. These b ills may be met by the Federal Government through the Medicare (support for the aged)

or Medicaid (support for the disadvantaged) schemes, by insurers, such as Blue Cross, or by the patient himself. One interesting feature is that payment of health insurance premiums are a common fringe employment benefit in the United S tates, and th a t those not in employment or se lf employed may

have some d iffic u lty in arranging insurance, and are usually discriminated against in premium determination because of collection costs. The implications of funding hospitals on the basis of throughput are discussed elsewhere in th is report. In other respects, the Commission feels th at its

recommended arrangements are more relevant to and suitable for Australia than those adopted in the United States.

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One important American development which is now emerging in Australia, is the health maintenance organisation or prepaid health plan (l-W O or PHP). These are considered separately below.

Arrangements in Japan are of in te re st because the entire population has coverage for health insurance under one of six main schemes. Contributions are income related. There is usually a co-insurance payment for the insured, and almost invariably one for dependents. About 1 000 large commercial organisations sponsor societies for th e ir employees. Self-employed persons are covered under societies organised to cover members of a profession under the national health insurance scheme. This scheme also provides coverage for other uninsured through societies organised in lo c a litie s. There are two separate arrangements for pensioners - one for those in receipt of an employment related pension, and one for those receiving welfare pensions.

Both are non-contributory. All patients are billed for a ll services, regardless of the ultimate source of payment.

Because the Commission believes that both compulsory insurance and income related contribution are unacceptable in th is country, the former being seen as conscription and the la tte r as a form of taxation, the Japanese model has l i t t l e attraction to i t .

New Zealand developments are of in te re st for two reasons. The f i r s t is that health insurance is a recent a rriv a l in New Zealand, i t s real growth having occurred in the past ten years. I t emerged originally because of growing waiting lis ts for elective surgery in the free public hospitals, where no fee for service medicine is practiced. Its recent growth owes more to the rapidly growing gap between doctors' charges and the general medical benefit. About 30% of New Zealanders now have cover. Because treatment in public hospitals remains free to a ll, contribution rates remain low, at about $NZ120 a year for 80 per cent cover for private hospital and private doctor treatment. Cover is emerging as a recognised employee benefit. The absence of fee for service medicine and of charged private accommodation, in public hospitals is the main reason for the low premium rates. Ignoring exchange

rate differences, New Zealand doctors' charges are now comparable with those of th e ir Australian counterparts and private hospital charges not significantly lower when the higher Government subisidy rate is allowed for. The availability of insurance has unquestionably supported the existing charges levels.

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Prepaid Health Plans

Prepaid health plans f i r s t appeared in the United States as an alternative to normal health insurance. The basis of operation of these plans is th a t th e ir members pay a fixed sum for a ll medical and hospital services needed by themselves and th e ir dependents during the period of

cover. The organisations in turn contract with providers of most basic services to provide these to th e ir members. For services which the organisation and i t s contracted providers cannot cover, members are referred by those providers to suitable outside providers, who b ill not the patient,

but the organisation. There is usually a profit sharing arrangement between the organisation and the contracted providers, so th at these providers have a strong incentive to refer within the organisation wherever possible, to refer outside only when need is clearly established, and to admit patients to

hospital only i f they cannot be cared for a t home.

The United States experience has shown that members of these organisations generally receive fewer medical services, are less likely to be admitted to hospital and are subjected to fewer operations and other procedures than the general population. Despite th is there is no indication that th e ir health statu s, and th e ir morbidity patterns or th e ir life

expectancy d iffe rs from th at of the population using the more common methods of funding and providing for th e ir health care. This is because the concept gives to the contracted primary care physician a vested in te re st in

maintaining the health status of the patients on his panel, and in limiting th eir demands for services beyond his capabilities. In consequence, the term health maintenance organisation (hMO) has come to be applied to many of these organisations.

The Commission believes th a t in a mixed health service economy there is room for in itia tiv e of th is kind. In the United States, where these organisations originated more than 30 years ago, growth has been slow, although some have expanded to the point where they are able to contract a

wide range of sp ec ia list c lin ician s and diagnostic services in addition to th eir primary care services, and even to maintain and operate th e ir own hospitals. One problem there has been the high working capital costs for organising and setting up such schemes. Another is the need to have large

concentrations of population to provide a viable operating base. 175

Conclusion and Recommendations

The Commission has become convinced th at other schemes of insurance can be devised which w ill improve the existing voluntary system and which might take one of a number of forms. Some p o s sib ilitie s have been outlined. The Commission is attracted to the proposal th a t public hospital inpatient treatment be classified as a taxable benefit in kind, for i t presents a means of achieving equity and administrative economy, estblishes a contribution by those uninsured who are able to pay, while ensuring th at access to fu ll services is not denied to the needy.

In the short term, however, the Commission is concerned to make changes to the existing system which w ill encourage more people to insure. The steps are aimed a t reducing premiums and offering taxation and other concessions to insured persons only. The lim itation of Commonwealth medical benefits to the insured w ill create a major incentive to insure.

The Commission is aware of the potential for increased u tilisa tio n consequent on an increased rate of medical insurance and considers that the reintroduction of a payment at the point of service in non-institutional places may act as a disincentive to u tilis a tio n as well as possibly

influencing reduction or on sta b ility in medical fee levels.

The Commission therefore RECOM M ENDS th at

1. Payment of medical benefits be limited to the insured, the situation before 1975. A new medical only table, providing access to Commonwealth benefit, should be introduced at the same time.

2. Gap insurance for medical costs cease to be offered by registered health fund insurers. It sees no such problem in supplementary hospital insurance scales, and recommends that these be le f t in operation. The size of the gap should be no less than 15 percent.

3. Rebates of medical and hospital costs for tax purposes be restricted to those insured at the basic or higher levels.

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4. Hospital and medical benefits for short stay acute patients in psychiatric hospitals should become available in basic tables.

Inpatient Charges for the Uninsured

The Commission is conscious of the importance of not erecting too large a price barrier to the consumption of health services as th is could have the effect of lim iting the access of the chronically sick and the needy to essential care. The Commission is also aware of the increasing number of uninsured people in the community and of the increase in numbers seeking free hospital services. I t believes that some of these patients are capable of contributing directly towards the cost of their health care.

The intention of the Commission's recommendations on health insurance is to encourage th is group of patients to take out insurance. I f the strategy is successful, then i t w ill not be necessary to in stitu te charges for the uninsured. If i t is not successful, then governments may be required to

review the charging policy.

Inpatient Charges for the Insured

At present, recognised hospitals raise charges in accordance with accommodation sought and provided and the insurance status of the patient. This re fle c ts past practice when many hospitals had separate accommodation for private p atien ts, and an extra charge was raised for accommodation in a

single room. The general practice now is to allocate accommodation on the basis of medical need rather than of insurance status or willingness to pay.

Some submissions suggested that rather than fixed charges at two rates, charges should re la te more directly to the cost of the treatment provided: that is , d iffe re n tia l charges should be raised according to class of hospital. The Commission sees d ifficu lties in th is, because choice of

hospital is more usually made by the doctor than by the patient, and the most expensive hospitals tre a t a ll types of patient. An alternative arrangement might be for the hospital to raise charges related to the type of care provided, with the standard rate (at present $50 per day) applied to those

patients requiring the normal level of care available in a ll hospitals, and a higher rate for those with an appropriate insurance requiring a higher level of care. 177

Another proposal is that there be only one level of charge for a ll public hospital accommodation and that the provision of higher levels of insurance be tailored solely to the provision of cover for private hospital charges. Indeed, th is is the basis on which a number of funds already market their supplementary hospital cover.

A further possibility considered by the Commission is that the d ifferen tial between basic (shared accommodation) and supplementary (private accommodation) charges be broadened, leaving basic cover and recognised hospitals' basic charge for insured patients at the present level, but increasing the cover and charge for single accommodation to say $90 a day. Such an adjustment would have no impact on the basic level premium. I t would

icrease the cost of supplementary cover by perhaps 60 cents a week for a family, 30 cents a week for the single insured at th is level. Since cover at th is level is usually seen as related to a desire to have access to private hospital fa c ilitie s , i t is unlikely to impact the insured population to any great extent. If two fifth s of the insured patients in recognised hospitals continue to have cover at th is level and are accommodated and charged accordingly, average daily revenue from insured patients would rise to $66,

an increase of 10 per cent. A major purpose of th is proposal is to bring the level of private hospital insurance cover into line with the level of charges necessary to ensure the future v iab ility of not for p ro fit private hospitals.

Yet another proposal is that the basic level of charges for insured patients be related to the weighted average daily cost of a ll recognised hospitals in each state. The purpose of th is proposal is to create public awareness of the cost of d ifferen tia ls which exist between the States.

The Commission sees a ll of these proposals as being peripheral to the main issues and merely wishes to draw th eir attention to the concerned governments to take such action as they see f i t .

Outpatients and Emergency Cases

However, i t can see a number of advantages accruing from the adoption of a charge for a ll patients for non-urgent outpatient attendances, except for the holders of Pensioner Medical Benefit cards. I t sees such charges as a


form of copayment. More important, i t sees them as a means of directing patients towards general practitioners in the community who have the fa c ility to tre a t the disadvantaged as such, and away from the relatively costly outpatient services of recognised hospitals. The Commission RECOM M ENDS th is proposal for government consideration.

Ancillary Hospital Services

Another matter raised with the Commission is the introduction of charges in recognised hospitals for theatre services, prosthetics and other items that are normally the subject of separate charges in private hospitals and included in the cover for supplementary hospital insurance. If the funding of Australian recognised hospitals were on an output basis, there would be

some ground for the introduction of these charges and for their inclusion in basic hospital and insurance cover. While hospitals continue to be d eficit funded, the Commission can see no ju stificatio n for such charges, and RECOM M ENDS that these items continue to be excluded from basic hospital insurance benefits.

Charging Practices in State Psychiatric Hospitals

In a ll States, short-stay (acute) patients are not charged. For extended-care (chronic) patients, charging practices vary among the States. The simplest arrangements occur in Queensland and Western Australia where:

. patients receiving pensions pay a fixed proportion of the pension as a maintenance charge (87.5 per cent in Queensland, two-thirds in Western A ustralia), and keep the rest as pocket money;

. patients not receiving pensions are not charged, though the legislation does permit charging.

The proportion of the pension paid to the in stitu tio n is laid down by State regulation. By arrangement between the States and the Department of Social Security, the pensions are paid in bulk to the in stitu tio n .

In Victoria and Tasmania sim ilar arrangements apply except that the legal basis for the maintenance charge is the Commonwealth's Social Services


Act. H istorically, th is is because the State legislation did not permit charging pensioners. The proportion of the pension paid to the in stitu tio n is being changed from two-thirds to 87.5 per cent to make i t consistent with arrangements in nursing homes, and with the new arrangements for extended care patients in recognised hospitals.

Arrangements in South Australia are sim ilar to Queensland and Western Australia, except that non-pensioners may be charged a means and needs tested amount up to a maximum of $10 a day, and that pensioners pay 85 per cent of their pension towards their maintenance.

In New South Wales there has been recent adverse press publicity. The following facts about charging practices in New South Wales Psychiatric Hospitals have been ascertained:

1. Pensioners . up to two periods of 28 days of free treatment a year ( i.e . in

admission etc. wards); . thereafter, pay two-thirds of pension as maintenance fee; keep one-third in tru s t account; . in most cases, hospital receives pension on behalf of patient; . this is similar to other States.

2. Non-pensioners - Voluntary Patients . charged at a rate assesed as two-thirds of net income after commitments deducted. I t is understood that th is is assessed liberally; . collected by the hospital

3. Non-pensioners - Involuntary ("Temporary Committed") Patients . these patients are committed to hospital by a magistrate and their affairs are placed in the hands of a Protective Officer of the Supreme Court; . they are charged at a uniform rate gazetted for a ll hospitals

(currently $50.13 a day); . charges are not raised u n til a fte r discharge or death - hence problems of huge b ills taken from estates; . the Protective Officer (not the hospital) collects the money, and

has f ir s t rights to the estate. 180

4. Compensation Patients

. rare in psychiatric hospitals; . charges based on gazetted lis ts of hospital costs; . would be covered by Third Party insurance/Workers' Compensation.

Pension E lig ib ility

Since November, 1980, a ll patients in psychiatric hospitals (other than prisoners) are e lig ib le for Commonwealth age and invalid pensions on the same basis as a ll other people ( i.e . income te sted ). Before th is , e lig ib ility was based on the ward in wnich the patient was cared for: patients in mental

hospitals were deemed to be in the care of the State, and were not eligible for pensions, unless the ward in which the patient was cared for was excluded on the basis of the degree of freedom accorded to the patient, the prospects for reh ab ilitatio n or discharge, etc.

The change in pension e lig ib ility means both that more people are eligible for pensions and that the institutions receive more revenue. Some estimates of the additional revenue to State governments, based on numbers of patients involved are:

Victoria: $1.1 million extra in pension

payments a year.

$740 000 extra in maintenance charges (revenue)

Queensland: $100 000 extra revenue

South Australia:

Western Australia:


No effect (a ll wards eligible before November, 1980)

260 extra patients now eligible

$350 000 extra revenue



. The changed pension arrangements mean that one element of the discrimination between the psychiatrically i l l and the physically i l l has been removed.

. Charging practices for short-stay patients are analogous to "hospital" patients in recognised hospitals. However, patients cannot elect to be private patients and be charged accordingly, while funding of the psychiatric hospitals is en tirely by the State.

. The additional revenue from pension contributions will not necessarily improve the position of psychiatric hospitals, as i t goes into State revenue.

. Charging practices for extended care patients bear some relation to the arrangements for nursing home patients, and for extended care patients in recognised hospitals, in that a fixed proportion of the pension is paid towards the p a tie n ts's maintenance. However, no Commonwealth or insurance fund nursing home benefit is available, and the net operating cost is paid by the State, not by the Commonwealth (as in deficit-funded nursing homes) or jointly (as in recognised hospitals).


The changes which have taken place as of 1 November, 1980 put patients in psychiatric hospitals more or less on the same financial footing as th e ir counterparts with physical illn e s s. Some minor anomalies in charging practices, in some States, remain to be corrected.

It would seem a logical step to incorporate funding of State-run psychiatric hospitals in overall Commonwealth-State arrangements, as recommended elsewhere in this Report.

1 8 2


Proposal Cost Saving Premiums

to Government


No impact Would increase -

Premium: Would increase -

- single 60 cents a week 10 per cent? - family $1.20 a week Revenue: - single $15.6million - family $18.7million

Not determinable - Nil

say 3.3million units @ > 80 cents a week $137million

Say 3.3m. units ® Nil

60 cents a week = $93.6million

3 . (a) Re-establish hospitals and Special Accounts 4. Up by $125million a

year (Funds cont. to Reinsurance Account)

Reduction $125million Likely to increase = reduce single premium by 40 cents a week family premium by

80 cents a week




Increased by gap (up $130million)

Increased by $25 a day - say $90million


Proposal Cost Saving

to Government

Premiums Membership Co-payment

(b) Fund nursing home benefits abolished. Up by $75million a year

(c) Split cost of special Account between State and Commonwealth

States + $87.5million Commonwealth - $87.5million

5. Single Table Nil

6. Hospital benefits for acute psychiatric. Nil (unless special account


7. Extended waiting periods (say five months) More uninsured public patients

and higher cost (marginal)

8. Eliminate tax rebateability and medical and hospital costs for uninsured.

Marginally favourable

Reduction $75million = Likely to increase Nil 25 cents a week 50 cents a week

No impact Nil Nil

Nil (unless Depends on cost Nil

package created)

Cost say $35million Higher premiums Nil = + 12.5 cents a week adverse, single + 25 cents a week family

Nil, except for Adverse Nil

'h it and run' costs

Nil Favourable Nil


Health services, as the Commission has been told repeatedly, is a labour intensive industry. Salaries and wages constitute about 70 per cent of its to ta l costs. The machinery which determines the supply of health manpower and allocates th is most important resource is extremely complex and varies

according to occupations, but the number of agencies involved in manpower allocation is detrimental to the effectiveness of the machinery.

The health manpower machinery consists of the agencies which determine or influence the supply of health professionals and other workers, and those agencies which determine the demand for these people, that is the number of available positions. In the simplest terms, the supply is largely determined

by education and training authorities, while the demand is dependent on the positions available, as determined by government health authorities for the public sector and by individual entrepeneurs involved in private sector care.

The relationship between education authorities and government agencies is considered below. Important politically determined factors include the amount of money made available for training and for the provision of a large number of the positions in the fie ld . Industrial considerations reflecting pressure

by trade unions, informal associations and special interest groups also impinge. This Report would need to be lengthened considerably to do justice to a ll aspects of health manpower, which is considered in three major sections

. Present allocation of manpower . Education and training .

. Industrial relations

Present Allocation of Manpower

The Commonwealth Department of Health has estimated that in 1978 the workforce in the Australian health services, including fu ll and part time employees, totalled 223 635. 185

Table 1 : Australian Health Services Workforce

Occupational Category

No. Total %

Medical practitioners . gen. practitioners . specialists . other

10 610 8 590 6 610

25 810 11.6

Nurses (inc. students) . professional . nursing aides 112 600

31 800

144 400 64.6

Pharmacists 5 850 2.6

Physiotherapists 5 450 2.4

Dentists 5 400 2.4

Social workers 550 0.2

Other 36 175 16.2

T o t a l 223 635 100.0

Source: 'Handbook on Health Manpower' (Commonwealth Department of Health, 1980, 258).

The figures in Table 1 indicate the diversity of occupations involved, for perhaps the major change occurring in recent years in health manpower allocation has arisen from technological advances which have accelerated the division of labour. The hospital, in particular, has become the primary focus

for much workforce specialisation. The Queensland Department of Health commented:

'In the past th irty years, the professional health workforce has evolved from only about a dozen into some 100 functionally d istin ct professional occupational categories. The rate and extent of th is workforce fragmentation within the one industry is virtually unprecedented.' (Submission 711, 17.2.)

The complexity of th is workforce is highlighted by these s ta tis tic s submitted by Royal North Shore Hospital. Sydney:


. 850

. 3 963

. 34

. 24

. 23

. 50

. 10

. 18

beds s ta f f and 290 visiting medical officers in d u strial awards and agreements separate pieces of legislation specifically affecting hospitals

educational and professional organisations health insurance funds trade unions

organisations funding research projects

Evidence suggests th at further specialisation w ill not add to the efficiency of the health service, rather i t may serve only to increase its complexity. I t is apparent to the Commission that the appropriate health and education authorities should carefully consider the benefits likely to accrue

to the system before further specialisation takes place, in both medical and non-medical fie ld s. Obviously, the number and types of positions within the varying in stitu tio n s - public hospitals, private hospitals, nursing homes, community health centres, psychiatric hospitals, repatriation hospitals - w ill

f ir s t be affected by the machinery involved in establishing staffing levels. While there is l i t t l e evidence about the machinery for allocating overall manpower resources, some of the methods used to determine s ta ff levels in the public hospitals in the States and by the Department of Veterans' Affairs are


New South Wales

In New South Wales, each of the regions has responsibility for maintaining staffin g levels at the discretion of the Regional Director. A request for additional s ta f f goes to central office for consideration, but no group is responsible for the development, coordination or monitoring of

overall manpower policy. According to the Health Commission, the c rite ria used to set s ta f f establishments are:

'S taff establishments are assessed according to the individual needs and characteristics of the particular hospital. In fixing the s ta ff establishment figure regard is had to daily average, types of wards and patients, average length of stay and other performance s ta tis tic s ,

physical environment and the layout of buildings etc. Accordingly,


information indicating the number of beds on which establishments were approved would not necessarily be relevant even i f a v ailab le .' (Correspondence from the New South Wales Health Commission.)


The Health Commission of Victoria has a personnel division which is to establish a Manpower and Organisation Review Task Force. The Health Commission maintained in its evidence that effective control over hospital expenditure requires detailed monitoring of the s ta ff levels in each hospital and authority.

The control over hospital staffing has tightened since August 1977 when by Government direction s ta ff levels were frozen - subject to specific exemptions - at the levels in each hospital at that date. Information supplied by each hospital and data from computer pay records enable the level of staffing to be determined with acceptable accuracy. Increases to s ta ff levels are subject to Health Commission and State Treasury clearance, and i f approved are funded from the expansion component of the cost-sharing budget, with growth being re stric ted to savings occasioned by reductions in s ta ff during periods when no expansion funds are available.

The Health Commission monitors the approved s ta ff level from payroll records by comparing the actual payroll s ta ff numbers with approved levels in a fu ll year. The Commission is implementing a s ta ff establishment computer program to extract automatically the s ta ff on each hospital payroll and provide an up to date report of the average s ta ff paid by category for each hospital on the computer personnel/payroll system. Hospitals on manual payroll systems will provide the payroll data through off line processing.

South Australia

Determining s ta ff establishments is a Health Commission responsibility, u tilisin g the manpower review committee. This committee:

. makes recommendations on the establishment and monitoring of policies and processes dealing with manpower resources;


. makes recommendations concerning the s ta ff plans of incorporated health units; . reviews a l l requests to increase or vary staffing in health units funded through the Health Commission; . develops and oversees the Health Commission's own manpower budgets;


. makes recommendations concerning specific s ta ff development programmes and manpower planning studies.

The committee has been functioning for only twelve months and most of its a c tiv itie s have been concentrated on developing and overseeing the Commission's own staffin g needs. The committee intends, however, to establish staffing plans for a ll health units in the State.

Western Australia

In hospitals operated by the Department of Health and Medical Services, a ll s ta ff levels are set by the organisation and methods section in conjunction with the appropriate professional department and hospital s ta ff.

Standards based on workloads for a ll categories of s ta ff have been developed sp ecifically for Western Australian hospitals. These standards have been derived from studies by the Department of Health and Medical Services and private management consultancy groups. Provision is made for assessing s ta ff

needs when no standards e x is t.

Although metropolitan teaching hospitals are directed by boards of governors, they receive an operating subsidy from the Department. They do not necessarily accept and adopt medical division standards, but they use consultancy services, as these are made available to them without cost.

Control is exercised by the level of subsidy provided. Since the Government has belatedly frozen staffin g lev els, each new post, and transfers between posts, must be approved by the Department. Recruitment within approved establishments can be made a t w ill.



Establishments for a ll categories of s ta ff employed by State hospitals in Queensland are set by the Department of Health. Hospital boards are at liberty to submit applications for additional sta ff in any category or to vary s ta ff within establishments. Applications must include fu ll supporting d etails, such as reasons for the increase or variation, for example, new services, increased workload, patient s ta tis tic s , existing s h ift coverage of s ta ff, annual cost of the variation requested and ways in which the boards propose to meet the additional cost which may arise.

Applications are reviewed in the Department by officers with expertise in particular areas. For example, medical s ta ff establishments are assessed by the Director-General of Health and Medical Services, dental s ta ff by the Director of Dental Services and nursing s ta ff by the advisor in nursing in conjunction with the Hospital Inspectorial Branch. Following these assessments a decision is taken as to whether the request should be approved and the decision is conveyed to the hospital boards.


The approach of the Tasmanian Department of Health Services has been to consider how health manpower is being used, how i t could be better used given existing constraints, and how i t might be used in the long term. The approach is implemented by s ta ff establishment control, computerised and manual rostering, and detailed examination of individual sections and departments of hospitals and related institutions and services.

The aim is to improve efficiency and manage more effectively by consulting with hospital boards, unions and s ta ff. Reviews of s ta ff u tilisa tio n are continuous, but specific reviews are conducted when necessary, such as when requests for new sta ff are received.

Reviews can be carried out by a single officer from either the industrial or hospital section of the Department, by management consultants, or by specialist department advisers.


Management consultants are involved in the development of computerised and manual rostering techniques designed to ensure optimum use of s ta ff resources within lim its set by industrial awards and minimum levels of patient care. This has followed the handing down of an amending award in 1974 which dramatically changed previous industrial notions for

hospital s h ift workers in Tasmania. According to the Tasmanian Branch of the Hospital Employees' Federation the new rostering has enabled hospitals, as a by-product, to exercise greater control over s ta ff numbers and wages (submission 351). The Department of Health Services claims that savings in

excess of $1 million have been made and that budgeting is now possible to a degree hitherto unknown. However, not a ll s ta ff members were completely satisfied with the new arrangements as during the v is it to Hobart by the Commission nurses were seen to be demonstrating against the new rosters.

Australian Capital Territory

Overall staffin g levels are controlled by the Public Service Board, which sets annual s ta f f ceilin g ta rg e ts. The Board also controls the establishment of new positions. Three year forward staffing estimates are prepared for M inisterial, Public Service Board and Government approval. The Health Commission is required each month to report to the Board on actual levels

compared to s ta ff ceilin g s.

Department of Veterans' Affairs

The Department has well developed machinery for the allocation of manpower and sees manpower planning as part of the overall resources management function. A manpower planning cell operates at the Department's central office. The a c tiv itie s performed by this group include:

. monitoring or controlling manpower allocations and s ta ff ceiling levels; ·

. preparing forward staffin g and establishment submissions; . advising senior management of staffing allocations and s ta f f ceiling levels, manpower u tilis a tio n ; and . developing and administering the bulk establishments control scheme.


Staff ceilings have been applied by the Government continuously since 1964 to lim it employees in the public service. The planning unit recommends measures that should be taken to maintain approved s ta ff ceilings. The manpower c ell is responsible for an annual review of the Department's manpower budget, particularly in relation to determining staffing needs based on work programs and p rio ritie s. Forward staffing estimates are linked with forward

financial estimates to produce a to ta l resources planning approach which ensures there is an adequate match between staffing numbers and classificatio n s. Department officers indicated at the public hearings that while s ta ff numbers are not seen to be open ended, i f more s ta ff are required they must be effectively ju stifie d and based on carefully assessed needs, not established standards.

Effectiveness of the Machinery

For public hospitals, the machinery differs considerably between the States, ranging from centralised tight control in Queensland to the somewhat looser system in New South Wales. There is no systematic evidence on the effectiveness of th is machinery. South Australia presented some objectives as

to what the machinery should achieve. The Department of Veterans' Affairs outlined clear objectives and indicated that i t had been able to work within the ceilings by:

'. . . The review of departmental a c tiv itie s and, i f required, making recommendations for the redeployment of s ta ff between functions according to p r io r itie s .' (Submission 701, 18)

Tasmania went beyond the simple task of controlling numbers to take in the broader issue of likely future demand.

Because in the health industry there is no agreement on performance measures, i t is d iffic u lt to comment on the effectiveness of th is machinery. What is known is that there are considerable differences between the States in the provision and u tilisa tio n of hospitals and associated or related institu tio n s and services.


Table 2 Staff per Occupied Bed


1976- 77 1977- 78 1978- 79

2.81 3.02 2.98

3.49 3.54 N.A.

3.22 3.24 3.33

3.95 3.74 3.67

3.59 3.58 3.61

3.01 3.17 3.12

Source: Queensland Department of Health Submission 711, 12.7

For example, as shown in Table 2, the ratio of s ta ff for each occupied bed varies markedly between the States. It is notable that Queensland has the lowest ra tio and the most exp licit central control. Certainly, th is represents one important method of controlling costs. The argument has also been put th at control of to ta l numbers is not the primary purpose of the machinery.

On these v ariations, the Commonwealth Department of Health has suggested that:

'There is no general agreement in Australia over optimal staffing patterns, mixes and organisation in hospitals. For the most p art, these have developed on the basis of past local experience, and hence vary widely, even between hospitals of similar size and service mix. Wide

variation in staffing patterns suggests, however, that the productivity of health personnel has not been a major concern of hospital adm inistrators.' (Submission 700, Part I, 59.)

Nevertheless, control over the absolute number of positions available in hospitals is something th at the machinery in a ll States has in common, even though th is is more applicable for new positions than existing positions. The Commission has been told th a t no State regularly reviews a ll positions in a ll hospitals - many hospitals have never had their to ta l s ta ff establishments

reviewed. Control over new positions is normally much s tric te r.

State and Territory treasu ries are also involved in the allocation of hospital and health care s ta f f , for the number of positions ultimately available depends on the funds provided. Hospitals may have positions approved by the central health authority and then find that there is no money

available to f i l l the positions. In New South Wales and South A ustralia, the


machinery for allocating positions and providing money is separate and th is is also the case in other States. The Department of Veterans' Affairs recognises the need to link staffing and budgeting functions and stated in i t s submission (Submission 701) that:

'the forward s ta ff estimate [is ] linked with the forward financial estimates . . . in terms of a to ta l resources planning approach, which ensures that there is an adequate matching between staffing numbers and designations/ c la s s ific a tio n s.' (17)

The rationalisation program in New South Wales highlights the ultimate vulnerability of s ta f f numbers to the money available. When the money is withdrawn in substantial amounts i t is the number of people employed which is principally affected because of the labour intensity of the industry. The problems confronting the Community Health Program are further examples of the sensitivity of health services to the availab ility of funds.

Other Institutions

The availability of funds, and p ro fitab ility , are crucial in the private sector, but in addition factors such as the minimal standards set by the State authorities for approval and reg istratio n of in stitu tio n s and standards in industrial awards have an effect on s ta ff numbers.

Education and Training

The Commonwealth Department of Health submission states:

'Some attempts have been made to assess the appropriate level of supply and distribution of physical resources, both at the national level and for particular States, but the issue of human resources or manpower has received l i t t l e attention, even though some 70 per cent of the recurrent expenditure in hospitals is for staffing costs.

'No authority has assumed responsibility for determining the size and functional distribution of the health workforce or for individual health occupational categories. These responsibilities clearly re st with the education, employment and health sectors but there are no formal mechanisms within these sectors or between levels of government for


consultation on health service requirements in respect of manpower numbers, training curricula and practical experience.

'Despite the lack of research and agreement on optimal levels of provision, there is widespread acceptance of the existence of oversupply in most categories of health manpower in A ustralia.' (Submission 700, Part I, 102)

The lack of formal links between these interested sectors highlights the d ifficu lty of equating supply and demand. In i t s submission and appendices, the Australian Hospital Association (Submission 210) highlights the need for greater cooperation between education and health authorities in planning for

the number of trained people to be employed in the health services, and refers to the Report of the Committee of Inquiry into Education and Training (Williams, 1979).

In general, submissions from government authorities and medical and nursing organisations stated that the machinery for developing policies in this area had been far from effective. The absence of any national policies and any national machinery for devising and implementing such policies was


The Queensland Department of Health summarised th is situation th is way: 'The present separate funding and staffing of universities and the State health care system means that medical education is not a fully integral part of the health care system' (Submission 711, 20.1).

The Department continued:

'I f the university is to give undergraduates attitudes which are relevant to current health care needs in the community i t must be integrated into the provision of health care more directly than at present' (20.2). ■

Medical Manpower

Williams states:


'The attitude of the Committee on Medical Manpower (Karmel) was in accordance with the philosophy of the Martin Committee that i t is better to run the risks of oversupply than undersupply. The subsequent experience indicates that i t would have been wiser to have considered the policy implications of potential errors of estimate. On the basis of its own calculations i t would have been reasonable to recommend that provision be made for discrete increases spread over twelve to fifteen years or longer. That form of cascade planning would have given an opportunity to revise plans in the lig h t of changes in the variables and

in the relations between variables that are beyond the wit of man to predict with reasonable accuracy for more than short p eriods.1 (Vol. I, 673)

Planning on the cascade basis outlined in the Williams Report provides a sound basis for dealing at relatively short notice with the fluctuations in demand for medical manpower. An ongoing assessment would be far superior to the existing stop/go method. Education authorities have been slow to respond to changes in the numbers of practitioners available for the health service. The measures taken to increase medical manpower in Australia as recommended by the Report of the Committee on Medical Schools (Karmel) have been very successful and there is now evidence of oversupply as the numbers have already passed the target for 1991 set by Karmel (1 doctor : 543 people) and the target ratios of the State health authorities such as the Health Commission of New South Wales (1:640).

Williams recommended that:

'. . . the concept of imbalance between the supply of and the demand for highly trained manpower should be a matter for periodical inquiries whenever there is reason to believe that trad itio n al forms of organisation unduly re s tric t its use. The responsibility for in itia tin g

or organising these reviews should be assumed by the Tertiary Education Commission, and where necessary i t should arrange for in itia l research and policy studies by competent sch o lars.' (Vol. I, 703)

This Commission, however, is not aware that any action has been taken by the Tertiary Education Commission in response to th is recommendation, nor does i t consider that the Tertiary Education Commission is the correct body to


undertake such inquiries when medical manpower is being considered. The responsibility for action on th is type of review should be transferred to the Commonwealth Department of Health, for i t has a much wider responsibility for issues in th is area than some demand costs which are of no direct concern to the Tertiary Education Commission.

The Karmel Report may well have been relying on oversupply to produce the requisite numbers of practitioners in the areas of practice normally not attractiv e to doctors, for example, rehabiliation, g eriatrics and preventive medicine. C ertainly, the Karmel report stated concern about the distribution

of doctors, as evidenced from the following quote:

'. . . Investigation of the current supply of medical manpower suggests th a t in relation to current demand and currently accepted standards, there is no gross overall deficiency in medical manpower in A ustralia. There are, however, serious problems of distribution. In

some country regions and in certain parts of some metropolitan areas, there are clearly shortages of doctors . . . ' (4)

Undergraduate Provision

The numbers entering undergraduate training for the medical profession are formally determined by the universities. By comparison with other countries A ustralia's ra tio of medical undergraduates to population is high, although the ra tio of registered doctors to population is already high.

The trend shown in Table 3 is graphically illu stra te d on a State basis in the recent study by the South Australian Health Commission, Ά Review of Medical Manpower in South A ustralia'. This showed that of a ll the States, Western Australia has the lowest medical graduation rate at about eight in

100 000, Victoria and New South Wales are about 12 in 100 000 and South Australia has the highest rate of about twelve in 100 000. Even i f a reduction of quotas was to be made now, graduation rates until 1986 cannot be varied, except by varying standards of attainment necessary to enable

progression from year to year and for final graduation.


TABLE 3: Medical Graduates to Population

Country Population (millions) Graduates Schools graduating

Average no. per school

Graduates per 100,000 people

Australia 1980 (a)

14.5 1 350 8 168 9.3

Great Britain 1977 (b) 56.0 3 000 29 105 5.4

New Zealand 1977 (b)

3.1 200 2 100 6.5

U.S.A. 1977(b)

216.0 14 000 114 122 6.5

Sources: (a) Commission Estimate (b) General Review of Medical Manpower Problems in A ustralia by R.R. Andrew, October 1979.

In the paper cited above, Professor Andrew has commented further on the production of doctors by Australian medical schools by pointing out that among other things the decline in failure and a ttritio n rates will raise the number of domestically trained graduates to a steady state of about 1450 by 1984. This Commission estimates th a t this would increase the ra tio of graduates to population to about 10.3 to 100 000 by then, i t should be noted th a t in the United States of America moves have already been made reduce i t s medical school intake and i t w ill be producing new graduates at about the same rate as Britain within the next six years.

Studies in some States, for example, New South Wales and South A ustralia, have indicated that an immediate reduction in entry would reverse this trend and bring the numbers down to a desirable level by about 1996 in the absence of any increase from migration.


For example, a New South Wales study estimated that in 1983 there would be 493 graduates from th e ir three medical schools. Had the 1980 student intakes been adjusted to reduce the number of graduates in 1985 by 200 a year, i t was estimated that there would be practitioners in the ratio desired by New South Wales (1:640) by 1996, with much higher numbers of doctors before then,

provided no additions were made through medical migration to New South Wales (Martins and S ills , 1978, 15-20).

Two options to overcome the problem of oversupply of doctors are:

. reduction of student intakes Australia wide; and . more stringent registration.

Reducing the number of students to the level required to meet both national and State demands is , in the view of many individuals and organisations who gave evidence, a matter of major importance. I t was seen to be the most appropriate way of controlling any oversupply of doctors and

overcoming the detrimental and costly problems which could re su lt. The Commission is reminded of the opinion of Professor Alain Enthoven of Stanford University who said, in reviewing the lite ra tu re on the supplier-induced demand hypothesis that:

' I t [the evidence] exposes as naive the idea of reducing the cost of medical care by increasing the supply of physicians' (1980, 17).

The Commonwealth Department of Health has also argued that th is is important because an unnecessarily high level of supply of health manpower leads to unnecessary costs, leads to the provision of unnecessary and potentially harmful services, and represents a barrier to the rational

provision of services (Submission 700, Part II, 70).

I t is necessary to develop machinery capable of tailoring the supply annually, f ir s t gradually to take up any excess supply and then to produce enough graduates to meet the anticipated demand. All State governments have indicated th eir support for th is proposal, i t is apparent to the Commission

that no machinery exists for determining the supply of medical manpower and relating i t to the national demand. A number of diverse agencies at State and Commonwealth level apparently have no power to take appropriate action. The


machinery is ineffective on the grounds that 'what is everybody's responsibility is nobody's resp onsibility!'

Doctor supply can also be constrained by altering licensing regulations or reducing the number of pre-registration positions available. The States have already agreed to pre-requisite requirements which have effectively stopped the immigration of medical practitioners (Report of the Committee of O fficials, 1980).

I t is also possible for the States to reduce the number of intern positions within th eir hospital systems to a number which s a tis fie s th eir requirements. This would effectively lim it the number of doctors entering the medical profession but would involve discrimination against a particular group

of students to an undesirable extent, in that i t would prevent them completing the program after a minimum of five years undergraduate training. The Commission w ill not support a proposal of th is kind, nor does i t regard i t likely that the States would be prepared to introduce restric tio n s of th is so rt. Any reduction in intern positions should be tailored to reductions in medical school intakes.

The Commission therefore RECOM M ENDS that there be much closer liaison between education and health authorities in order to match the supply of and demand for medical manpower, both nationally and on a State basis.


All State governments have responded to the increasing supply of graduates during recent years by creating positions in hospitals so that pre-registration experience may be obtained. The number of intern posts has been tailored to match the supply of graduates to ensure th at a ll are able to obtain a post.

Many graduates who complete internships are now unable to find suitable positions in hospitals. For example, Professor Andrew points out that in 1979-80, Australia had one resident medical officer for every 2673 people, a 28 per cent more than indicated by the United States ratio of 1:3419

(Submission 853, public exhibit 126). Because of the way the Australian system is organised i t is s t i l l possible for newly registered doctors to

2 0 0

establish themselves in private medical practice without further training. Pre-requisites to establishing a practice are minimal and few communities object to an additional medical practitioner in th e ir area. But many experienced doctors believe that these recent graduates are not adequately

trained to offer service of the quality consistent with the normally high Australian standard. Some authorities believe that such doctors are those most in need of further training and least ready for unsupervised practice.

The Commission has discussed th is point with a number of witnesses, but neither the Royal Australian College of General Practitioners (Submission 242) nor the Victorian Academy for General Practice (Submission 389) is interested in changing its present training programs to meet the new need. They believe

the four year programs they provide should not be sacrificed . The Commission appreciates th is point of view but also RECOM M ENDS th a t an alternative shorter program not leading to Fellowship of the College should be added in the interests of the community and the

emerging graduates. The Commission's view is influenced by the recent changes in the United Kingdom where new legislation has been introduced which makes additional training obligatory before any doctor can assume the position as principal of a general practice, including the establishment of a new solo

practice (Appendix XX shows d e ta ils ).

The entry of a large number of minimally trained doctors as general practitioners into the Australian community in the near future could have an adverse affect on the provision of high quality care. The Commission believes that while the machinery exists to bring about registration restrictio n s

similar to those introduced in B ritain, the responsibility to take such action resides with the State medical registration boards.

Post Graduate Training

The Williams Report section on 'Post training experience in medicine' describes the complexity of the relations between teaching hospitals and medical schools in providing continuing and vocational medical education, the important place of the Royal colleges in specialty training, and th e ir dependence in part on universities for teaching and examinations. The

Australian Medical Association, in i ts submission, suggests that:

2 0 1

1 If the objectives of th is Inquiry are to be achieved, i t w ill be necessary for greater emphasis on cost control to be made in training undergone by medical and a llie d professions. The profession believes that such an awareness must begin at the undergraduate level, and be sustained at the post graduate levels.

'The output of sp ec ia lists is a function of two facto rs. The f ir s t is the number of positions available in public hospitals, which is affected by the State health au th o rities' policies on hospital s ta ff levels, while the second is the number of posts accredited for training by the specialist colleges.

'There is a need for agreement by government and the colleges on the number of hospital posts accredited for training in each particular specialty i f inefficiencies and wastage in the production of specialists are not to occur.

'However, i t appears that there are at present few formal procedures for ensuring that the supply of training posts is in balance with the demand for them.' (Submission 245, 21-22)

The submission of the Queensland Department of Health said:

'I f satisfactory training programs are to be in itia te d and maintained much closer liaison between the Colleges and government w ill be required. Methods w ill need to be devised to enable government to exercise much greater control over the u tilisa tio n of government funds

for post graduate medical education.' (21.1)

The Commission has received evidence from Royal colleges, post graduate foundations, hospital c lin ic al associations and teaching hospitals describing the educational programs they provide in terms of th e ir d esirab ility and effectiveness. While some bodies have presented evidence on the usefulness of manpower planning in determining the number of training positions, a t best these plans appear to be based on rather arbitrary assumptions, while the decisions tend to be separate

from comprehensive manpower plans. The Williams Committee commented on th is subject:

2 0 2

'After a review of the submissions the Committee came to the conclusion th at the current problems and the possible solutions were related so closely to the finance of the national health services, to the methods of paying general practitioners and sp ec ia lists, and to the

clin ic al role of university s ta ff in hospitals, that there is a need for a special inquiry with appropriate terms of reference.1 (415)

The Commission believes th a t there is a profound lack of effective machinery for organising a ll aspects of medical post graduate education. Accordingly, the Commission RECOM M ENDS that an independent task force be established to examine the whole question during 1981. The task force should

be composed of members appointed by the Standing Committee on Health. It should report through the Standing Committee on Health to the Health Ministers' Conference. Its terms of reference should include, in te r a lia :

. manpower implications of vocational training; . actual and required numbers of training posts in each State; . funding of post graduate training programs; . the service commitments of trainees; and

. length of training programs.

Management training for clinicians

The Royal College of Pathologists of Australia in its submission (Submission 233) recommended that pathologists should receive management training designed to improve the performance and sk ills of pathologists, many of whom are responsible for the work of quite large pathology units, with

large s ta ff establishments and high capital equipment turnover. The Commission agrees with th is proposal and RECOM M ENDS that a ll the Royal colleges producing specialists likely to be in charge of large departments should arrange suitable financial and personnel management training programs

for th eir fellows and members, thus adding to th e ir e lig ib ility for senior positions.

The Commission has noted both the complexity of the health system and the paucity of training in administration and financial management by doctors and other health professionals. At present the machinery for allocating medical administrative ta len t is extremely haphazard but i t might well be improved by


recent moves announced by the Australian Medical Association and the Royal Australian College of Medical Administrators. For example, twelve travelling fellowships, provided by the W.K. Kellogg Foundation, w ill be awarded by the Australian Medical Association over the next three years to help practising doctors gain knowledge of management techniques for raising standards of

patient care in hospitals.

Continuing Education

Many submissions stressed the importance of continuing education for clinicians. The Australian Medical Association and the post graduate foundations are heavily involved in such programs, u tilisin g the services of the universities and Royal colleges and societies. I t was interesting to note that while continuing education programs have been made mandatory in some countries, there has been no c all for th is in Australia. I t is appropriate that further evaluation of mandatory continuing education programs takes place to assess the benefits before significant financial commitments are made. Observation of the United States experience w ill be of undoubted benefit here.

Nursing Manpower

The machinery for allocating nursing manpower in Australia appears to be more clearly defined than i t actually is . Each State and Territory has established an educational nurses' board or council which is concerned with the quality of training received by nurses and th e ir su ita b ility for registration. In some States there is a separate nurses' registration board, but in the main the two functions are carried out by the one organisation which is usually responsible to the Minister for Health. The Commission has

been informed that in New South Wales a number of the functions of the Nurses' Registration Board are soon to be taken over by the Nurses' Education Board, which is responsible to the Minister for Education.

While these education bodies do not actually determine the numbers of nurses being trained, they may exert considerable influence on the supply of nurses and the number required to s ta f f in stitu tio n s. In particular, changes to the training programs for nurses have had a significant impact on the number of positions available in hospitals. In referring to the report of the

Committee on Nursing Manpower, the Victorian Health Commission submission stated that: 204

'The impact of the new curriculum [introduced in the early seventies] was studied by the Committee on Nursing Manpower, which in i ts report estimated th a t an additional 1110 nurses would be required to compensate for increased educational, ie. non-working, hours. The report considered

th is figure to be an underestimate as i t is based only on hours spent in tu to ria ls and supernumerary observation. Thus, an increase of well over 1000 nurses, some six per cent of the to ta l nursing complement, may be attributed to changes in train in g .' (Submission 722, 35)

Similarly, reg istratio n and educational agencies may influence the type of positions available by virtue of changes to regulations which determine the mix of trained s ta f f and s ta ff in training.

While responsibility for the provision of posts for nursing groups is largely vested in the State and Territory health authorities, the major weakness in the system lie s in the lack of consultation between these authorities and agencies such as the nurses' registration boards. The Report

of the Hospitals Consultative Committee (Ducker, 1980), commented on th is matter as i t applied to New South Wales this way:

'The Committee believes that there is a need to develop effective manpower planning throughout the health industry. There is also a need to coordinate manpower planning in the nursing field with the education of nurses. The current distribution of very diverse responsibility for

various aspects of nursing m ilitates against coordination in th is field . There exist numerous bodies often with parallel representation that have a hand in various aspects of nursing registration, education and adm inistration.' (96)

The Report of the Committee of Inquiry into Hospital and Health Services in Victoria (Syme/Townsend, 1975) in considering this same problem of coordination of supply and demand determining agencies recommended:

'The Nurses' Act be amended to require the Victorian Nursing Council in carrying out i ts function to consult with and have regard to the policies of the Health Commission.' (100)


This Commission has also been informed that legislation is being considered in other States to ensure th at the work of the two authorities is coordinated as much as possible, for a very important aspect of th e ir work is to see that nurses are not undersupplied because of poor planning. This means that the agencies should fully appreciate the great mobility of nurses, both within and out of the profession and throughout the world. The twenty per cent reduction in student nurse intakes in New South Wales in 1979 and subsequent shortages of trained s ta f f supports th is opinion.

If there is an oversupply of nurses then some unemployment w ill resu lt, as nurses, unlike doctors, have few opportunities for private practice as individual and fu ll time practitioners. The report of the Committee of Inquiry into Nurse Education and Training (Sax, 1978) stated:

'There is a notable lack of demographic data about trained nurses' (65)

In addition, the 1978 National Survey on Nursing Personnel was unable to estimate the requirements for nurses in Australia, which indicates that there is a need for an expert study on nursing manpower.

Basic Nurse Training

Aspects of the education and training of nurses have consistently been brought to the attention of the Commission in submissions, in evidence, during v isits to in stitu tio n s and in discussions. The major issue presented has emerged from the recommendations of the Sax Report. In p articular, discussion has centred on the relative advantages of hospital based and te rtia ry based methods of nurse training, given the decision to offer some basic training as three year diploma level courses in colleges of advanced education, with the

proviso that the approved programs have sufficient numbers to allow proper comparisons with hospital based schools of nursing.

Considerable disagreement over th is issue is apparent within the nursing profession with some deep division causing concern within the religious groups, even though the policy of the professional nursing organisations is to have a ll nurses trained in colleges. Many hospital administrators and doctors, as well as the Commonwealth and State Governments have expressed

views on th is.


The Sax Report recommended 2200 student nurse places as an appropriate target figure in te rtia ry based courses by 1985. By October 1980, 1100 were to be given te rtia ry training. Each State was to have at least one college based program with the recent announcement of the establishment of courses in

Queensland and Tasmania.

This Commission's view is that the recommendations of the Sax Report on general nurse training remain valid. By 1985 i t should be possible to evaluate the programs being conducted in colleges of advanced education and compare them with sim ilar programs in hospital based schools of nursing.

A number of submissions on the comparative costs of the two forms of training were received. The Nurses' Education Board of New South Wales (Submission 718) presented evidence to the effect that the basic training of nurses in colleges would be less expensive than hospital based training. That conclusion follows from a limited assessment of the comparative costs of nurse

education and is inconsistent with evidence presented to the Sax Committee.

In particular, i t does not appear to take into account a number of complex and far reaching cost considerations noted by the Sax Committee. For example, a sh ift from a hospital based to a tertiary based system of basic nurse training would mean that:

. The costs of nurse education would be born entirely by the Commonwealth Government under its education budget instead of being equally shared by the States and the Commonwealth under the terms of the Hospitals Cost-Sharing Agreements.

. The rostered duty time of student nurses would have to be taken over by other s ta f f.

. The number of nurse educators would have to be substantially increased.

. The private costs borne by student nurses as fu ll time students under the te rtia ry based system would be much greater than the private costs borne by hospital based nurses; for example, college based nurses would not receive a salary.

. The increased educational requirements for college based nurse training would lim it career opportunities for some as well as absorb many of the more academically able school leavers.


In assessing the social consequences of th is proposal, i t is therefore inappropriate simply to compare the average costs of training student nurses under these two schemes. The Commission is not convinced that there is a potential for reducing costs through a complete changeover to college based education programs even though considerable argument has been presented to th is end. Indeed, the evidence indicates that overall costs would probably rise with such a transfer of existing programs, even without taking into account such items as the relative d ifficulty of training nurses away from the large c itie s , or the potential effect for increasing salary rates consequent to the attainment of diploma status.

The question of whether the changeover would produce a significant increase in the quality of nursing care remains open. If the experiment with college based training is to produce its maximum potential, i t is essential th at a thorough evaluation be made of the performance of college graduates, with the graduates from the best hospital based programs.

Another aspect of the machinery which should be highlighted also involves a recommendation of the Sax Report, that:

' Commonwealth and State Education Ministers be approached to obtain agreement to:

(a) the principle that hospital based schools of nursing may seek accreditation of their awards at advanced education level; (b) accreditation of these awards becoming part of the responsibility of the State and Territory advanced education accrediting authorities;


(c) arrangements being made in each State and Territory to establish means by which course proposals can be presented to the accrediting authorities' (paragraph 10.38).

To the knowledge of the Commission, only one or two formal applications have been made by a school of nursing for accreditation of its basic nurse programs as UG2 level diplomas in applied science (nursing). The professional nursing organisations have argued against such a move on the grounds th at i t would establish single discipline educational institutions and would have to be restricted to the larger hospital based schools of nursing. However, i t seems to the Commission that this recommendation of the Sax Committee provides


an avenue by which many nurses could obtain a recognised basic educational qualification which would be under the supervision of the te rtia ry educational authorities. Whether the program was geographically situated for part of the time in a college or not would then not be a central issue. The establishment

of closer links between colleges of advanced education and hospital based schools of nursing would also improve the educational environment to the advantage of the hospital based student nurses.

In accordance with part (c) of the Sax Committee recommendation, therefore, the Commission RECOM M ENDS that each State and Territory Government should establish urgently the machinery to enable course proposals from schools of nursing to be presented to the accrediting authorities.

The other aspect of basic nurse training which needs consideration is how college based and hospital based courses will be evaluated and compared. As the Sax Report does not make th is clear, the Commission believes the organisation which is to carry out th is important work should be determined by

the health and education authorities of the States and Territories early, so the evaluation can be undertaken thoroughly and effectively. If th is is not done, the experiment of college based nurse training will not have generated its maximum p o te n tia l.

Special Nursing Educational Programs

Nurses obtain further training either by undertaking courses in colleges of advanced education or in service programs conducted within special u n its in larger hospitals. In general, they are under the control of the nursing education au th o rities of each State, and the machinery provision appears to be

clearcut and e ffe c tiv e , apart from the apparent lack of information of manpower requirements for each speciality.

Other Health Professionals ,

The education and training of some other health professionals needs to be considered, although the Commission received few submissions about them. Dentists, for example, study for five or six years at university, while occupational th e ra p ists, physiotherapists, social workers, and speech

therapists tvoically study for four years at universities or three years at colleges of advanced education. 209

Several issues associated with the education and training of these health professionals are important:

. Members of some of these professions cannot register in a ll States and T erritories. The accreditation of courses and the evaluation of overseas qualifications is often conducted by national associations or other governing bodies.

. Intakes into paramedical courses at colleges of advanced education are determined by the colleges at levels funded by the Tertiary Education Commission.

. The numbers of students and the degree of specialisation in paramedical education has increased substantially over the past decade. 1 There are no se t standards of s ta ff provision, nor would the Department [of Veterans' Affairs] wish to set them.'

(Transcript, 1569).

. Data about the numbers of graduates and post graduates is poor. In 1979, 9 830 of the to ta l 155 667 college of advanced education students (6.3 per cent) were paramedical students. Of these, more than two-thirds were women and the proportion of part time students was relatively high a t more than one-third. . The vast majority of these courses rely on close links with teaching

hospitals for clinical practice.

. Except for dentists, there are no widely used ratio s for present and future levels of provision for these health professionals. The Australian Dental Association has estimated that the active dental workforce in Australia w ill reach 7604 in 1991, from its 1976 level of 5006. Based on the Committee of O fficials' assumption that

A ustralia's population in 1991 w ill be seventeen million, th is w ill improve the dentist - population ratio from 1:2780 to 1:2236.

In making judgement on the above evidence i t appears to the Commission that the education authorities which control the supply of a ll health professions have not revealed great awareness of either present or future employment opportunities in determining the student intakes to the courses

they conduct. Nor is there evidence of concern about oversupply or undersupply.

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In its submission, the Australian Medical Association (Submission 245) pointed out that:

'Total enrolments in a ll paramedical courses increased by 73.2 per cent over the period 1974 to 1978. I t is apparent th at not only has the number of paramedical students increased at a rate greatly in excess of the growth in the number of medical students, but also that

there has been a rapid growth in differentiation and subspecialisation in the area of paramedical education.1 (24) 'An urgent review of the number of allied health professionals being trained is necessary with the aim of curtailing the size of the output of

graduates.' (34)

In view of these comments, manpower forecasting and planning relating to the need for other types of health professionals is also required.

More detailed information was provided on two other health professionals, pharmacists and hospital administrators.


Aspects of the supply of, and demand for, pharmacists were raised in an open hearing with Dr A.E. Polack, Director, School of Pharmacy, University of Tasmania. When asked i f there were enough pharmacists in Tasmania or i f there was any oversupply, he stated:

Ί think i t is about rig h t, 15 or 16 we put out per year which is

about the supply and demand situation. I am not aware of any unemployment among pharmacists and I am not aware of any substantial undersupply. Certainly manpower is something in which I believe in th is State we are about r i g h t .' (Transcript, 2049-50)

Dr Polack referred to the study, 'Pharmacy Manpower in Victoria 1990'undertaken by Harvey and Deeble of the Australian National University, published e a rlie r th is year. The Council of the Victorian College of Pharmacy had previously expressed i t s concern about the present and future employment

opportunities for people entering post secondary education to the Victorian State Post Secondary Education Committee. Included in its report was the statement that: 2 1 1

'I t is the b elief of the Council of th is College that i t is the

responsibility of every post secondary educational in stitu tio n re a listic a lly to assess the present and future career opportunities for i ts graduates. 1 (Harvey and Deeble, 1980, 1)

The Council of the Victorian College of Pharmacy underwrote the cost of the study undertaken at the Australian National University. In b rief, the study forecast an over-supply of about 10 per cent in the number of pharmacists seeking pharmacy employment by then, and proposed that i f a balance was to be obtained in 1990 i t was necessary to reduce the number of additions to the Victorian Pharmacy Register from 132 a year by about th irty a year in the mid term. The options for achieving th is reduction included the

lim itation of immigration, the lim itation of additions from in te rsta te , and reduction of the number of student entrants to the Victorian College of Pharmacy.

Hospital Administrators

The Commission believes that the quality of the administration of hospitals and health services is a key factor in determining the economic use of our health resources. The Australian Hospital Association, in its submission, argued that 'management qualities of high standard are important a t a ll levels of the health care system' (Submission 201, 1). The School of

Health Administration, University of New South Wales, devoted considerable attention to the education of health administrators in its submission (Submission 382) and during its public hearing said:

'The restructuring of Australian hospital services and the achievement of higher levels of efficiency w ill undoubtedly depend very much on the calibre of those persons who w ill have to implement these proposals. W e describe th is group as senior health services

executives.' (7) 'Health has become a major element in the larger system of social policy, the recipient of vast amounts of government funds and the focus of attention for many community and consumer groups.

'The administrative a c tiv itie s liste d above c all for the exercise of considerable s k ills in decision making, in negotiating, in inter-personal

2 1 2

relations and communications. Again some of these s k ills can only fully be developed by th e ir exercise in real life situations, though appropriate educational methods may fa c ilita te th eir acq u isitio n .1 (10)

The machinery for ensuring that would-be health administrators receive education and experience appropriate to the positions they will eventually hold leaves a great deal to be desired, particularly with respect to providing experience in lin e positions in the central health authority as well as in the

in stitutions of the States or T erritories. The main problem here is the variation in in d u strial awards and conditions which generally apply between the central service area and the in stitution. As a re su lt, transfer between the two systems is d iffic u lt and for line positions, almost impossible.

Queensland has been grappling with this problem for many years and there, a career path has evolved which enables hospital managers to be promoted from small hospitals to larger ones, to positions within the Department of Health and then either to top executive positions in major hospitals or the

Department. As a re s u lt, in Queensland the senior administrative positions are fille d by persons who generally have wide experience of the system, whether they are medically qualified or not. In most of the other States promotion is e ith er entirely within or outside the central health authority

and i t is only rarely th at transfers take place from one sector to the other at the midale management range. The Commission considers that steps should be taken to free up the promotion pathway in each State to enable promising administrators to obtain experience within both sectors.

The Commission was told that Western Australia is devising a system which w ill enable promising administrators to transfer more readily between the hospital and health authority.

The other aspect of th is important issue which requires effective machinery is the way in which appointments are made to the most senior positions, the chief executive officers of the major in stitu tio n s. The Commission is aware of guidelines recently issued by the Health Commission of

Victoria for the appointment of chief executive officers. Under Section 51 of the Victorian Hospitals and Charities Act, 1958, the Commission must consent to the appointment of the chief executive officer (however styled) of any subsidised in stitu tio n incorporated under the Act. The guidelines being used

2 1 3

by the Victorian Health Commission when considering recommendations made by boards of management include requirements for appropriate academic qualifications and experience for appointment to a level depending on the size of the in stitu tio n .

The Commission considers that these guidelines have much to commend them and should result in the selection of more appropriate senior administrative sta ff. The Commission RECOM M ENDS th at sim ilar provisions should be adopted by the other States and T erritories.

Other Health Manpower

A large number of occupational categories employed in the hospitals and health services sector are also employed in other sectors of the economy. The education and training of these groups, which include accountants, in terp reters, c lerica l s ta ff and

so on, are not unique to health services, although in many instances health service oriented training programs are provided for them, often in-service, to improve their performance.


The Commission draws th eir conclusions about the effectiveness of the machinery for dealing with manpower issues:

. Health manpower considerations should be an aspect of overall resources planning. The evidence reveals that some States and the Department of Veterans1 Affairs recognise th is and attempt to integrate the manpower machinery with the fin an cial, planning and industrial machinery.

. There should be a review by each State and Territory of the machinery used to set staffing levels and action to integrate th is machinery with other resource allocative sections, particularly those responsible for distributing funds. Staff increases should not be subject to the approval of a number of disparate sections.

. There are differences in staffing practices and patterns both between and within States. While these differences may not be wrong in themselves there appears to be no real understanding as to why they


exist. They appear to be historical rather than the re su lt of conscious implementation of policy.

The Commission RECOM M ENDS that each of the States undertakes a review of its manpower policies, particularly in regard to staffing levels. The method by which staffing levels are decided should be revised, programs for reviewing current s ta ff establishments undertaken and short and long term projections of

demand promoted. On completion, systems should be implemented to ensure that the information about each in stitu tio n is always current and available.

Industrial Relations

All professional and industrial associations and unions are concerned with maintaining and improving the conditions of their members, with a t the very least ensuring th at th e ir employment opportunities are not reduced. In their submissions, both the Hospital Employees' Federation of Australia

(Submission 350) and the Health and Research Employees' Association of Australia, New South Wales Branch (Submission 352), stressed th is point, expressing particular concern for the need to ensure that the low income workers in the system would not disadvantaged by a reduction in job opportunities or wages. The Commission was impressed by the responsible

nature of the evidence presented by a ll the unions and professional associations involved in th is Inquiry.

A number of submissions on industrial matters referred to the distortion in the use of manpower that has resulted from having more than one employer in many in stitu tio n s. For example, public service employees may be required to work side by side with employees of health commissions or hospital boards.

The variation in award conditions between them creates problems when one or other employee appears to have advantages. The Australian College of Health Service Administrators, New South Wales branch, in its submission (Submission 331) pointed to the importance of these differences, particularly when rationalisation of services is being attempted.

Other industrial matters which were brought to the attention of the Commission included those raised in the work of Schapper and Hobbs in Western Australia (Submission 840), Tatchell in Victoria (Submission 842) and Abelson in New South Wales (Submission 834) which showed that:


(i) The overall s k ill level mix of hospital employees has been increasing in the past decade (Hobbs and Schapper). (ii) Penalty and allowance payments have become a significant factor in to ta l wages paid to health service s ta ff and now amount to

26 per cent of award payments for a ll classificatio n s in comparison with six per cent a decade ago (Tatchell). Changes in award provisions for annual leave and study leave were mainly responsible for the larger increase in the average hourly cost of labour in hospitals compared with that for workers outside the health service.

( ii i) There is significant room within the system for substantial increases in productivity to offset increases in labour costs (Abelson).

Another industrial matter that is a problem in some of the States is the organisation of the employer groups and th eir capacity to give adequate consideration to award changes requested by unions and professional associations. While the industrial relations division of the Victorian

Hospitals' Association represents the employing bodies in that State with a reasonable degree of satisfaction to both the hospitals and the Victorian Health Commission (Submission 207), the Hospitals' Association of New South Wales (Submission 204) and the Australian College of Health Service Administrators, New South Wales branch, point out that the New South Wales Health Commission dominates award negotiations even though the Hospitals' Association is the employer representative on most of the wages tribunals.

If adequate negotiation is to be undertaken with a correct understanding of the industrial consequences of changes to awards, involvement of employers a t a number of levels is important. The machinery for dealing with requests to change awards is uneven and in some States appears to be ineffective. On the other hand, the nature of employee representation appears to be of a much more even standard throughout Australia. The Commission believes that the organisation of employer representatives in the health field should be

reviewed to enable the employer view to be presented in a better manner.



The history of health manpower forecasting in Australia is very poor and i t could therefore be said th a t the machinery involved has been ineffective.

At the heart of th is problem is extremely poor data and an apparent in ab ility or lack of desire by governments to influence some of the key determinants of the supply of and demand for various types of health manpower. However, these problems are not unique to A ustralia. The Department of Health and Social

Security in the United Kingdom has said:

'There i s an extensive practical lite ra tu re on manpower forecasting; in practice, however, there are few examples of successful long range forecasts of demand for trained manpower.1 ( 'Medical Manpower - the next twenty y e ars', 1978, 8)

The Commission considers that medical manpower planning is the c ritic a l issue, because of the special role of doctors in the delivery of health care services. Because of a lack of information by consumers, doctors often act as their agents and can thus influence the demand for th eir own services. In

addition, they are very important in the allocation of health care resources and in the generation of expenditure. They are also able to establish private practices i f employment is otherwise limited. The same situation does not so

easily apply in nursing or in other health professions, rather the only requirement from the health viewpoint is to ensure that there is no undersupply.

The Commonwealth Government must become involved in health manpower issues to ensure th a t some authority assumes responsibility for determining the size and functional distribution of the health workforce throughout Australia and to see th at greater coordination and cooperation between the

education and health sectors of government is achieved.



Machinery available to governments for determining and regulating the distribution of beds, equipment and services include legislative provisions and ju d ic ia l processes, the political decision making apparatus, organisational, adm inistrative and regulatory structures and consultative and

advisory mechanisms. Finally, there are financial arrangements and allocations.

The Legislative Machinery

Section 24 of the Health Insurance Act empowers the Commonwealth to approve hospitals subject to conditions set out by the Minister or his delegate. Upon receipt of an application for approval, the Department of Health inspects the premises to ensure that they are 'properly fitte d ,

furnished and staffed for th at purpose'. (Section 24(2)(b)). In the case of private hospitals, Commonwealth statutory powers are limited to approvals of institu tio n s and bed numbers for the purpose of e lig ib ility for the $16 daily bed subsidy.

The Commonwealth has no statutory power in relation to the location and licencing of private hospital beds. These matters are a State responsibility.

The major area of d irect Commonwealth control over the level and type of health care services is in the area of nursing home accommodation, a sector c ritic a lly dependent upon Commonwealth subsidy. Through a variety of consultative and leg islativ e machinery the Commonwealth can exercise controls on fees, admissions and increases in bed capacity.

The authority for the control of the growth of nursing home accommodation is Section 40 of the National Health Act 1953, which covers non-participating State nursing homes and participating nursing homes,


comprising private-for-profit and voluntary non-profit in stitu tio n s. The Commonwealth has the power to declare premises an 'approved nursing home' for Commonwealth benefits, and to control the number of new and additional beds.

The third main category, deficit-funded nursing homes, are approved under the Nursing Homes Assistance Act 1974, and comprise in stitu tio n s conducted by non-profit organisations such as religious and charitable groups.

In a ll cases the legislation provides for consultation between the Permanent Head of the Commonwealth Department of Health and the relevant State authority in considering proposals for approval of new or additional nursing home accommodation. Informal arrangements have existed in some States under which Commonwealth-State Co-Ordinating Committees on nursing home accommodation cosider applications for additional private hospital and nursing home f a c ilitie s . Implemenation of the recommendations of these committees is the responsibility of the State concerned. For the duration of th is Commission of Enquiry the Minister for Health has requested that approvals for additional private hospital accommodation should only be given in 'exceptional circumstances'. Some States have suggested that they do not posses the statutory authority to exercise effective growth control in th is area.

Legislation was amended in 1973 to encourage admissions to nursing homes on the basis of genuine need. The new Section 40AB provides for Commonwealth control over admissions to a nursing home. I t states that an application for admission to an approved nursing home must include a c ertific ate by a medical practitioner that the patient has a continuing need

for nursing care. Secion 40AC provides for the Minister to review the decision of the Permanent Head where application for admission has been refused.

The registration and licensing of public and private hospitals and of nursing homes is the preserve of State governments. State legislation requires the proprietor of a licenced hospital to apply for benefits under the Health Insurance Act. When conditions on fittin g out, furnishing and staffing are approved for the stated number of beds, construction of the hospital may s ta r t. Approval of nursing home beds through Section 40AA of

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the National Health Act is sim ilar. The Commonwealth is obliged to pay daily bed payments and supplementary daily bed payments to private hospitals and benefits and subsidies to nursing homes once these approvals have been given.

Health insurance funds pay medical, hospital and nursing home benefits to members who occupy approved beds in recognised or approved in stitu tio n s. This is another reason i t is essential that proprietors of these in stitu tio n s obtain government approvals.

Tables following give information on the number of public and private hospitals and nursing homes and beds approved at 30 June 1980.

Table 1 Approved Hospitals and Beds Under the Health Insurance Act

As At 1976 1977 1978 1979 1980

Approved hospitals Public 777 787 792 791 791

Private 339 336 332 335 339

Other (a) - 8 9 9 10

Total 1116 1131 1133 1135 1140

Beds in Public hospitals 69544 70390 71249 72213 71668

Private hospitals 17428 17997 18188 18778 19535

Other hospitals (a) - 3257 3412 3465 3469

Total 86972 91644 92849 94456 94672

Beds per 1000 population 6.3 6.5 6.5 6.6 6.5

Note:(a) Includes Veterans A ffairs hospitals and the Commonwealth hospital, Woomera South Australia for 1977 to 1980. In 1976 these hospitals were c lassified as public hospitals but only under the National Health Act. .

2 2 1

Table 2 Approved Hospitals and beds under the Health insurance Act 1980

(Number at 30 June)

NSW Vic Old SA W A Tas NT ACT Aust

Approved hospitals Public 249 165 137 81 126 23

Private 108 120 44 37 21 8

Other (a) 2 2 2 2 1 1

Total 359 287 183 120 148 32 6 5

Beds in Public hospitals 27540 14995 12056 6575 6525 2238 720 1019

Private hospitals 6263 5597 3332 2083 1694 516 - 50

Other hospitals(a) 1235 582 612 429 481 130 - -

Total 35038 21174 16000 9087 8700 2884 720 1069

Beds per 1000 population 6.9 5.5 7.2 7.0 6.9 6.9 6.1 4.7


71668 19535 3469



Source: Annual Report of the Director - General of Health, 1979-80, p. 240

T a b le 3 A pproved N u r sin g Homes and B eds

As at 1976 1977 1978 1979 1980

Approved nursing homes Deficit financed (a) 224 260 282 298 322

Government (b) 96 101 107 126 142

Other (c) 843 799 798 811 835

Total 1163 1160 1187 1235 1299

Beds D eficit financed 9739 11439 12435 13495 14649

Government 12908 13080 13615 14247 14790

Other 32931 31993 32432 33696 35850

Total 55578 56512 58482 61438 65289

Beds per 1000 population 4.0 4.0 4.1 4.3 4.5

Notes:(a) D eficit financed homes approved under the Nursing Homes Assistance Act for the payment of their approved operating d e fic its . Under th is Act the Commonwealth Government meets the approved operating d eficits of certain voluntary non-profit

nursing homes which enter into an agreement with the Government for th is purpose.

(b) Government homes approved under the National Health Act for the payment of nursing home benefits.

(c) Private p ro fit and voluntary non profit homes approved under the National Health Act for the payment of nursing home benefits. Source: Annual Report of the Director - General of Health, 1979-80, P.



(Number at 30 June)

NSW Vic Qld SA W A Tas NT ACT Aust

T a b le 4 A pproved N u r sin g Homes and B eds 1980

Approved nursing homes Deficit financed 116 50 56 48 24 27 1

Government 31 56 21 4 25 3 -

Other 342 223 100 81 72 16 -


2 142

1 835

Total 489 329 177 133 121 46 1

Beds Deficit financed 5602 2147 2741 2320 1084 730 25

Government 3388 4846 2638 1132 1788 724 -

Other 17539 6749 4861 2801 3242 587 -

Total 26529 13742 10240 6253 6114 2041 25

Beds per 1000 population 5.2 3.5 4.6 4.8 4.9 4.9 0.2

3 1299


274 14790 71 35850

342 65289

1.5 4.5

Source: Annual Report of the Director - General of Health, 1979-80, p. 244

The Department of Veterans' Affairs is responsible for the health treatment of former servicemen and women for d isa b ilitie s related to m ilitary service. The department is responsible for the supply of beds and equipment in repatriation hospitals. Because of a reduction in use by veterans the

repatriation hospitals have allowed non-veteran patients from the neighbourhood of the hospitals to use the fa c ilitie s .

In addition to its powers over various health care in stitu tio n s, the Commonwealth has certain direct powers over medical services, apart from the indirect influence over services and fa c ilitie s through Section 51 of the Constitution and health insurance legislation. For example under Part III of the National Health Act dealing with national health services, the Commonwealth is empowered to provide certain medical, teaching and research

services in re la tio n to maternal and child health and for the improvement of health or prevention of disease. The Commonwealth is also given responsibility for the provision of hearing aids and vaccines.


The Commission has been told that the States have considerable discretion about the level and distribution of beds and services.

(Transcript, 1467.) Much of the health fa c ilitie s in the States has developed in response to ad hoc in itia tiv e s taken by semi-independent boards of management, voluntary organisations and private entrepreneurs 'rath er than as a means of achieving explicit objectives about the appropriate size and configuration of the health care delivery system.' (Commonwealth Department

of Health, Submission, Part II I , 58).

Individual State legislation confers on State health authorities, subject to overall control by the Minister, substantial administrative and financial control th a t can influence directly and indirectly the location, size and type of services provided by public hospitals. This includes

control of beds and equipment.

Each State has legislation controlling the construction and operation of priv ate hospitals and nursing homes. These provisions generally relate to amenity and safety standards. By containing 'needs' c rite ria for registration, the legislation in New South Wales and Victoria is more

2 2 5

stringent than in the other States.These needs-based c rite ria allow the State health authority to reject an application for expansion of private hospital fa c ilitie s on planning grounds. However, no similar authority exists for any States to reject the acquisition of specific equipment or provision of particular services by established in stitu tio n s.

Significant differences therefore exist between the States in the objectives and scope of legislative control.

The Commission RECOM M ENDS that the States other than New South Wales and Victoria should strengthen legislation to allow the control of beds and equipment to be dependent on needs. 'Need' clauses should make incorporate the range of beds and equipment in public and private hospitals and nursing homes, as well as Repatriation hospitals.

Rationalisation of Beds

Under the Hospitals Cost-Sharing Agreements there is scope for the Commonwealth to re s tric t the number of beds i t will recognise for cost-sharing purposes. During the la st two years the Commonwealth has refused to cost-share additional beds and services. Consequently, new

fa c ilitie s in the States or new beds in an existing in stitu tio n have only been included for cost-sharing purposes when deletion of beds or services has achieved equivalent savings. This does not prevent the States from fully subsidising additional beds and services i f they wish.

The Commonwealth has thus attempted to use i t s 'power of the purse', particularly through the Hospitals Cost-Sharing Agreements, to a ttra c t State support for a number of service objectives, including:

. no real growth in health services in 1979-80 and 1980-81 (Budget Speech 1980-81, 93; Health Commission of New South Wales Submission, 16);

. 1100 occupied bed days in recognised hospitals for each 1000 population, roughly equivalent to 4.0 beds for each 1000 population at 75 per cent occupancy (Report on Rationalisation of Hospital F a c ilities and Services, 1979, 3; Commonwealth Department of Health

Submission, 94; Health Commission of Victoria Submission, 65-66). 226

There are no internationally accepted guidelines for the provision of services. In comparison to A ustralia's bed ratio of 6.5, the ra tio of acute beds for each 1000 people varies from 4.1 in England and Wales, 5.8 in Scotland and 4.0 in the United States (Report on Rationalisation, 1979, 4).

Even allowing for differences in types of beds included in these figures, and recognising that the level of hospital provision is influenced by the extent of alternative f a c ilitie s such as nursing homes, hostels, community and domiciliary services, these differences in acute bed provision make i t

impossible to base recommendations on international comparisons.

The 'Report on Hospitals in Australia' provides a similar example of the disparity in the provision of nursing home and hostel beds for the aged as illu stra te d in table 5.

All States, as well as a number of professional groups and associations, agree that any rationalisation of beds must consider a ll beds in the to ta l system. The system has beds in public hospitals, in private hospitals, in nursing homes and in fa c ilitie s provided by the Department of Veterans' Affairs. The Commission is aware of the beds in the Department of Defence hospitals, but has decided to exclude them from its deliberations.

To close beds in public hospitals and find additional beds being opened in private hospitals could defeat the objectives of any rationalisation program unless i t is done in a proper manner.

The Commission recognises the general consensus that there are too many hospital beds and that there is a maldistribution of those beds. Close monitoring of the provision of additional beds is essential i f costs are to be constrained, and prio rity should be given to using, wherever possible, those beds which adequately satisfy the needs of the patient, at least cost

to the to ta l system in overall money terms. Three sectors requiring particular atention in any bed rationalisation programs are the teaching hospitals, private hospitals and Veterans' Affairs hospitals.


Table 5 Nursing Home and Hostel Beds for the Aged, Selected Countries

Nursing Home Aged persons' Hostel beds per 1000 beds per 1000

Country aged 65 and over aged 65 and over Total

Australia 1973-74 50.2 17.8 68

Britain Actual 1965 10 16 26

Recommended 1976 17 22 39

USA 45 7 52

New Zealand (recommended) 14 31 45

Sweden 36 47 83

Source: Hospitals and Health Services Commission, A Report on Hospitals in Australia, A.G.P.S., 1974 p. 38, based on Australian Council of Social Service, 1972.

Equipment and Technology

In the health field , equipment is either c lin ically oriented or for non-clinical purposes. Such items are subject to the current $50 000 lim it if they are to be eligible for inclusion in the cost-sharing agreements and in addition are, at least in the case of public hospitals, usually subject to tendering and purchasisng procedures of State supply or tender boards.

Significant scope exists for rationalisation of hospital clin ic al equipment. Reference to medical technology is associated with the so called 'high technology super s p e c ia litie s ', particularly expensive equipment used for diagnostic or therapeutic purposes. 'Report on Hospitals in A ustralia' referred to the tendency for high technology fa c ilitie s to be located in the larger hospitals and for care to be sought from these hospitals (22).

At the same time, technological development has led to an explosive growth in special care units. General intensive care units are now located in most medium sized hospitals as well as the larger ones. In addition, other units include coronary care units, renal, neurosurgical, neonatal,

cardio-thoracic and burns units. All serve a useful purpose but are costly in terms of s ta ff numbers and occupancy rates. Criticism has also been made of the inappropriate use of these units because of poor patient selection.


To a larger extent, these units remain virtually unevaluated in regard to th ier effectiveness in salvaging c ritic a lly i l l patien ts, even though they consume enormous resources. One of the few studies undertaken in Australia to evaluate the outcome of patients admitted to a general intensive care unit was recently completed at a major teaching hospital. The study

showed that during 1978 of 696 admissions, 79 per cent survived to leave the intensive care u n it, 71 per cent survived to leave hospital and 64 per cent were alive six months a fte r admission. Of those who survived to leave the intensive care u n it, only 22 per cent were in good health (disab ility n il or mild) at the time, but of those who survived to leave hospital, 58 per cent were not in good health; of survivors at six months, 68 per cent were in good health. The actual cost of an intensive care unit bed was calculated to be

$323 a day and the comprehensive cost was estimated to be about $450 a day at a time when the average bed-day cost was $167. A cost-effectiveness index of about $3 500 a long term survivor was derived. (Cade, Clegg & Rennie, 1980)

The Commonwealth, the States and a number of professional organisations have expressed concern about the cost implications of the growth of medical technology, and the Commonwealth established the committee on Applications and Costs of Modern Technology in Medical Practice, which

reported in 1978. This Committee recommended that new technologies should be evaluated nationally and existing technologies should be rationalised by consultative advisory committees in each State, established to develop policy

guidelines. An expert national advisory panel to assess the optimal provision and u tilis a tio n of new technology and the development of an information system was also recommended. The panel could report to either the Medical Benefits Revision Committee or the National Standing Committee

(Hospital Agreements).

The Commonwealth has started to establish such a panel. In March 1980, the Minister for Health announced that the Government had decided to establish the National Health Technology Assessment Advisory Panel to evaluate and advise on the cost effectiveness of new and existing medical

technologies. The panel w ill comprise representatives of State health authorities, industry and medical practitioners, and members versed in health economics, evaluation, administration and engineering (M inister's speech to


Australian Medical Association Congress, 31 October 1980). Whether the panel is granted effective executive powers and w ill use those powers remains to be seen.

Meanwhile, the Commonwealth 'has the power of adjusting the medical benefits applied for various types of technology and i t has done th is with regard to the CT scan . . . th is is a process of setting benefits and deciding whether to admit to the medical benefits schedule only after assessment by the central body that the technology is effective and needed in A u stralia.'

(Transcript, Commonwealth Department of Health, 1498.)

An officer of the Health Commission of New South Wales gave evidence that one of the most effective means of rationalisation in recent years was the reduction in medical benefits for CT scanning (Transcript, Health Commission of N.S.W. 2301.)

Although assessment machinery has been proposed, rationalisation of technology and super-specialty services appears to be in its infancy. And while the medical benefits schedule could be a powerful instrument for limiting the u tilisa tio n of expensive technological services, its potential has not been fully exploited. Assessment of new technology and guidelines

for its in stallatio n and use have not been developed to an operational s ta te ; considerable authority in th is area remains in the hands of the States.


The Commission concludes that the machinery for determining resources in the form of beds and equipment available is not as effective as i t could be. Governments have started action to determine a desirable number of beds for each 1000 population and have set up or are setting up committees or teams to evaluate needs for beds and equipment. The hospital system has

grown haphazardly with new technology proliferating without proper evaluation. This unco-ordinated and unplanned growth was to some extent promoted by politicians. Time after time during the Commission's v is its to hospitals around Australia a query was raised as to why a certain hospital was located where i t was. In many cases the answer was that i t was put there

as the result of a p o litic a l decision. Machinery should be good enough to point out the consequences of p o litic a l decisions. 23C

Much has been written of the greater use of technology and of equipment being put into use before proper evaluation. The medical profession has the responsibility to show that man at a ll times has control of health technology.

The failure of the machinery to allocate beds and equipment in an efficien t manner needs to be overcome i f costs are to be constrained. Rationalisation is a part of the answer.



Distribution of Hospital F a c ilitie s

The Commission has reviewed a considerable amount of information dealing with the supply of hospital beds and other health services, some of which was documented in the Interim Report. Supply factors are important to the Commission's deliberations because of the extent of fixed costs in the

hospital sector and because of the relationship between the supply and use of hospital f a c ilitie s .

It has been stated th at:

'In comparison with the provision of oeds in many western countries, Australia has an oversupply of hospital beds' (Commonwealth Department of Health, Part I, 57).


Country Year Beds per 1000 Population

England 1975 9.0

Canada 1974 9.2

USSR 1975 11.8

Australia 1979 12.5

USA 1977 13.2 ·

Norway 1975 14.1

Finland 1975 15.1

Sweden 1975 15.2

Japan 1975 10.5

Source: Guidelines Related to Bed Ratios for Hospitals and Nursing Home Services: A Review C.D.H. Draft September 1980, 44

2 3 3

This bed supply is not distributed evenly between, or within, the States and T erritories. In examining trends a marginal decline in the overall public bed capacity can be observed over the decade, 1968-69 to 1978-79. However, th is masks considerable variations between the States. The hospital bed-to-population ratio in South A ustralia, for example, increased substantially, a lb eit from a low base. Apart from the Northern Territory where special circumstances apply, Queensland has the highest hospital bed ra tio . In 1978-79 only Victoria was below the guideline of about 4.0 public beds (1100 occupied bed days at 75 per cent occupancy) per 1 000 population recommended by the Committee of Commonwealth O fficials (Report on Rationalisation of Hospital F a c ilitie s and Services and on Proposed New Charges - a Discussion Paper, 1979, 3).


Approved beds per thousand population NSW VIC QLD SA W A TAS NT ACT AUST (at 30 June)

1969 5.31 3.99 6.70 3.97 5.53 5.70 7.75 4.82 5.06

1979 5.47 3.95 5.53 5.06 5.24 5.43 6.67 4.27 5.01

Source: Interim Report, June 1980, 38

Note: Private hospitals comprised a further 21 per

cent of bed capacity in 1978-79.

Caution must be exercised when comparing such figures because of the differences that exist in the organisation of health services between the States. The Health Commission of Victoria (S.722) points out that:


. larger numbers of acute psychiatric patients are treated in public hospitals in New South Wales and Queensland;

. there are fewer long-term nursing home-type patients in Victorian hospitals;

. bush nursing hospitals are used for nursing hcme-type patients. These are classifie d as private hospitals but a ttra c t a substantial subsidy (Submission, 5).

A sig n ifican t feature of the Australian public hospital system is the generous supply of beds in country areas compared to metropolitan areas (see Table 3). Because there are relatively fewer private hospital and nursing home beds in country areas, because of the limited market for th e ir

services, public hospitals must stand ready to accept a ll types of patients.



Metropolitan S ta tis tic a l Division 4.62 3.32 4.24 3.72 4.02 4.07

Remainder 7.47 5.79 7.17 9.50 8.80 6.23

of State

Source: Victorian Health Commission Submission, 3 A further dimension to the disparities in bed provision within States is the differences between country d is tric ts . In Victoria, data for 1977-78 indicates th a t the supply of public beds^ ranged from 3.3 per 1000 population in the Barwon region to 9.7 in Wimmera and Northern Mallee regions

(V.H.C., 4). In New South Wales the variation was between 3 0 beds per 1000 population in the Western Metropolitan Region to 10.5 in the Inner Metropolitan Region and 10.9 in the Orana and Far Western Region (Health Commission of New South Wales, Seventh annual report, 1978-79, 13).


The Health Commission of Victoria (Submission 722,) offers an explanation for th is situation:

'many of these differences, and the differences between metropolitan and country ratio s generally, can only be explained in terms of the strength of p o litic a l and community pressures which have affected both the in itia l allocation of hospital fa c ilitie s and the incapacity to adapt to subsequent population d e clin e.' (Submission, 4).

Of particular concern in some of the larger c itie s , especially Sydney and Melbourne, is the geographic imbalance in the distribution of beds between sub-metropolitan areas. Many existing hospitals were located close to the population catchments they were designed to serve at the time of th eir construction. Expansion generally took place on these inner urban site s,

reinforced, in the case of teaching hospitals, by university a ffilia tio n s and the development of complex specialist services. These developments were taking place at the same time as new population growth was being increasingly concentrated at the fringes of the urban area. The result has been a

relative abundance of hospital fa c ilitie s in the inner city areas with a relative scarcity of services in the growing fringe areas. The level of geographic access to services has deteriorated, with corresponding implications for transport costs (for consumers and providers) and quality of care.

An ad hoc approach to decision making and inadequate health services planning at the State level has produced a hospital system that is geographically over concentrated and of an inappropriate type.

The Rationale for Government Intervention

An important constraint upon the a b ility of the 'market' to adjust the supply of health services to meet needs is f i r s t the influence of professional groups and m inisterial prerogatives and the relative in fle x ib ility of large in stitu tio n s, such as teaching hospitals. Second, with third party insurers and governments underwriting a large proportion of

health care costs, consumers are 'anaesthetized' against the signals that, in other markets, would be conveyed by the pricing mechanism. Third, market


rationing usually impacts heaviest on the poor and disadvantaged. It has oeen argued that these areas of market failure establish a case for government intervention:

'As the marketplace is no longer effective as a rationing process, i t must be replaced by conscious planning or incentives or controls to change the behaviour of health professionals and the community' (Committee of O fficials, Report on Rationalisation of Hospital

F a c ilitie s and Services and on Proposed New Charges - A Discussion Paper, 1979, 2)

Efforts to improve equity in the distribution of services and to develop a range of services more appropriate to current and projected needs are of comparatively recent origin. Considerable obstacles are being encountered in the implementation of such rationalisation strategies which

stem largely from the in e rtia of such a complex system in which a large number of a rtic u la te professionals and groups have a vested in te re st. The most significant constraints upon change that are discussed in the following sections include:

. the power of po litician s and interest groups:

. inadequate management and planning capacity and data deficiencies in central health a u th o ritie s' and . financial b arriers.

Planning Inefficiencies

The planning objective of the State and Commonwealth should be to produce a d istrib u tio n of services and fa c ilitie s that w ill meet the needs of the community in terms of access and qua ity , but at the same time, maximise efficiency from the resources employed.

The criticism has been made that State health authorities and the Commonwealth have not adequately discharged their planning functions and that th is has affected the extent to which hospitals and related in stitu tio n s have been able to operate e ffic ie n tly .


The planning function should involve for both the State and Commonwealth the development of a data base, the formulation of policy goals, the setting of standards and guidelines for evaluating progress towards those goals and reviewing the implementation of those policies. The present

organisation of services presents d iffic u ltie s in discharging and coordinating these responsibilities.

'Within the health system there are five relatively undependent levels, Commonwealth, State Health Commission, Regions, Hospital Boards, Hospital Executive Staff, Health Care professionals. Each level tends to set i t s own goals and objectives and independently determines the allocation of resources under its control' (S. 239).

A necessary prerequisite for policy development is an explicit statement of objectives. The Commonwealth should be responsible for setting i t s own oojectives and monitoring th e ir achievement. The States should be charged with the development of detailed physical and financial health service plans. Providers and consumers of health services also have

oojectives that may conflict with those of governments. Conflict is inevitable. What is important is that a ll groups have access to the machinery for setting oojectives. To date i t has been the 'a rticu late powerful and a ttra c tiv e ' (Senate Standing Committee on Health and Welfare,

'Through a Glass Darkly', 1976, 6) who have been successful in having th e ir objectives met in the battle for resources.

Until recently l i t t l e consideration has been given to the objectives of patients. Some consumer associations are stressing resp o n sib ilitie s, rights and expectations of patients. In its submission the Australian Consumers' Association recommends th at the establishment of a 'consumer health council1, along the lines of that in Britain would have benefits for Doth providers and consumers. (Submission, 11).

Oojectives should be stated in a way which fa c ilita te s the ongoing process of evaluation and review so that necessary adjustments and changes in p rio ritie s can be readily made and implemented at the appropriate level. The current machinery for meeting these requirements is fragmented and needs to oe overhauled.


At the State and regional level, objectives w ill, of necessity, be of a more specific nature. These objectives are sometimes spelt out in State legislation and policy statements. All States and Territories have sim ilar general objectives which have been tailored to su it th e ir special needs -

needs which vary according to the type of their client population, distance, and economics of seals. These needs should obviously be reflected in any review of State and regional policies and p rio ritie s.

The Commission has been informed that State health authorities have not carried out to a su ffic ie n t extent the tasks of formulating policies and monitoring th e ir implementation and have concentrated too much on the detailed scrutiny of the day-to-day management of service delivery. Many

hospitals and professional oodies expressed the need for a State or National plan, within which hospitals would be able to operate with greater autonomy and fle x ib ility to plan th e ir future roles. Examples of such statements include:

'The lack of firm policy guidelines and an adequate forward plan means that many decisions must be made on an ad hoc basis at the centre1. (Prince Henry's Hospital, 2, 6).

' There appears to be no clear cut policies and guidelines from the New South Wales Health Commission. If they do exist they have not been made a v a ila b le '. (Public Medical Officers Association of N.S.W., 3).

Both quantitative measures and qualitative statements of principles should be incorporated in Commonwealth and State plans. For example, the Health Commission of Victoria has recently prepared guidelines for the provision of acute hospital services centred on a standard of 4.5 beds per

1000 population, to cover a ll acute hospital fa c ilitie s . These guidelines involve the categorisation of hospital services in accordance with levels of complexity, th a t is general, sp ecialist and super-specialist services. (Submission, 68)

The Health Commission of N.S.W. has been working to establish the definition of h o spitals' roles:


'the definition of roles w ill enable hospital services to be adjusted in a rational way over time to remove duplication of services, and ensure th at adequate standards and u tilisa tio n apply in each hospital carrying out specialty serv ices'. (Submission, 6)

The Commonwealth has recently published a monograph 'Guidelines Related to Bed Ratios for Hospitals and Nursing Home Services: A Review', (Draft September 1980). The stated purpose is to provide information and encourage discussion on th is approach to health planning and to ultimately publish a more definitive set of guidelines which could be applicable


If future decision making is to be on a rational rather than an ad hoc basis, the development of improved, comprehensive health services planning in each State is of fundamental importance. For planning to be effective at a State level, i t w ill be necessary to draw together a number of

functions wnich at the moment are carried out separately. For example, the separation of capital and recurrent budgeting, staffing establishments, planning and finance w ill a ll need to be removed i f the a c tiv itie s of State health authorities are to be coordinated. In particular, th is Commission sees a need for:

. plans to be developed on the basis of an assessment of health status and service needs within the constraint of resources to be made available.

. these service needs to be identified according to specific clien t groups, for example the aged and in tellectu ally handicapped.

. plans to be expressed in both physical and financial terms and incorporate a dissection of present and projected capital and current expenditures by purpose and patient group. Staffing levels by program category and purpose should also be identified.

. plans to be b u ilt up at the regional level in States where th is is

appropriate, following input from service providers who should be involved in a ll stages of the planning process.


. plans to establish a blueprint for the future development of hospitals and health services at a regional and State level.

The role of the Commonwealth should be supportive, that is ,

- to a s s is t in data collection and dissemination

- to provide advice on guidelines (as mentioned above) and

- to assess the cost effectiveness of service provision in areas where i t has a specific responsibility (eg. new technology elig ib le for payment of medical b en efits).

Planning and R ationalisation Strategies

In response to budgetary pressures, The Commonwealth in mid-1979 decided to implement a funding policy based on no real growth in health services.

Government controls to constrain costs can be applied at the point of supply or at the point of demand. Fundamental to any rationalisation strategy is an assessment of the extent to which existing capacity is appropriate to needs or 'desired' capacity.

The question of what is a desirable level of health services provision is one on which there is l i t t l e agreement, either in Australia or throughout the world. Health services planning is a relatively new discipline in which methodologies are s t i l l being developed and refined.

Ideally, planning should begin with an analysis of morbidity mortality and service u tilis a tio n patterns and then proceed to match resources to th is level and d istrib u tio n of needs. An important precondition is that comprehensive, up-to-date morbidity s ta tis tic s be available. This is

necessary i f health au thorities are to be aware of the use that is being made of existing services, the extent of current needs and the effect of changes in provision levels and other policies on health status. While some States have made considerable progress in th is area, more work needs to be done to develop and refine th is data base, in particular to develop timely national data.


A Report on Hospitals in Australia (1974) stated th at 'reference has already been made to the need to greatly improve f a c ilitie s for the collection of morbidity data and management information. Without information in both of these areas i t w ill be impossible to make rapid progress towards developing a decision making system which w ill be responsive and responsible.'

In addition to development of quantitative measures of need and planning targ ets, the Merrison Committee in England suggested that qualitative indices were also important.

'Resource and mortality or morbidity s ta tis tic s do not reveal many of the more specific concerns of p atients, such as waiting times for orthopaedic outpatient appointments, or for sane other forms of surgery, or anxieties about the availability of adequate services or fa c ilitie s for the management of illn ess in the old and infirm. W e consider some of these concerns la te r in th is report. Nor do s ta tis tic s re fle c t the many intangible qualities which patients rightly expect from the health

service. Humanity, consideration and courtesy are important in any public service, but especially so in the health service -. (Merrison 1979)

Improving the information base w ill allow for more rational planning and decision making but will not be sufficient to guarantee such a resu lt. Improved information is merely one step further in overcoming some of the present problems in the distribution and use of health services.

Similarly, policies such as 'no g owth' and bed closures should only oe considered as short-term expedients and are no substitute for conscious long-term planning. The problems with no growth or s ta n d s till policies are that they f a il to differen tiate between the e ffic ie n t and inefficient

organisations and sometimes require severe service adjustments that could be avoided by more sophisticated and sensitive policies.

If any policy of rationalisation is to be effective i t will need to include strategies for influencing not only the supply of beds but also the provision of services and technology. A blanket policy of no growth in beds and services may only solidify the current position and may not adequately address the real problems of supply and use of super specialty services and the reallocation of resources away from the acute sector.

2 4 2

If supply and u tilis a tio n targets are to be effective they should be closely linked to funding arrangements but given the current divided financial and adm inistrative responsibilities between the Commonwealth and the States th is may not be achieveable. These divisions constitute

formidable barriers to the development of planning guidelines and the implementation of ra tio n a lisatio n policies.

The Commission believes that while greater uniformity of both service provision and u tilis a tio n levels between the States could reduce some avoidable in efficien cies, the realisation of complete uniformity is neither practicable nor desirable. Nevertheless, there is a strong case for the

Commonwealth and States to agree jo intly on minimum and maximum bounds, as a basis for resource allocation.

The reasons why the Commission does not favour a uniform bed population ra tio are set out clearly in the submission from the Queensland Department of Health. F irst the need for services is not uniformity distriouted amoung the population. Second the geographic distribution of

the population is not sim ilar in each State. Neither is the trade off oetween access costs and economies of scale for health f a c ilitie s sim ilar between communities. The department concludes that planning must involve tradeoffs. (Submission 13.6)

1 The objective in designing the configuration of a hospital system is

a. to sa tisfy c rite ria of accessibility (for patients)

b. to sa tisfy c r ite r ia of financial economy - i.e . a balance between

(i) economic of scale within fa c ilitie s ; and

( ii) patient trav el costs' (S. 711, Section 13 3 3)

What is important is that a hospital system which differs markedly from th at suggested by minimum cost c rite ria be ju stified in at least p o litic a l and social cost benefit terms.


1 At any point in time the supply of hospital resources may well be out of alignment with demand and actual u tilis a tio n '. (Department of Health, Queensland, 13.7).

Constraints on Planning

Improvements in the techniques of planning and the collection of data will only go part of the way to solving the problems of the present health system. A p o litic a l commitment to rationalisation goals and th e ir implementation is c ritic a l to th e ir success but is not always forthcoming.

Tne barriers to the implementation of rationalisation policies can be formidable, as exemplified by the recent experience of New South Wales, Queensland and Tasmania.

In order to comply with the Commonwealth's funding guideline of 'no real growth in health services', the Health Commission of New South Wales took action during 1979-80 to close 1 900 staffed beds in recognised hospitals. New South Wales is the only State with a p a rtia lly decentralised administrative stru c tu re ' a central office and 13 regional offices In the

Health Commission's view th is regional structure was c r itic a l to the rapid implementation of the hospital bed rationalisation program (Submission 6).

This rationalisation exercise was not without i t s problems, however. In January 1980- a Hospitals Consultative Committee was set up by the New South Wales Premier in response to trade union representations concerning the implementation of the program and, in p articular, the closure

of Eastern Suburos Hospital. The "Ducker Report" was c ritic a l of the lack of consultation about decisions that contributed to anxiety and a deterioration in the industrial relations climate. The committee recommended that a number

of consultative committees be established at central, regional and hospital level and that a task force be established to examine and determine the roles of particular hospitals. ('Hospitals Consultative Committee Report to Premier', June 1980, (iv) and (v )).

In Queensland the Department of Health believes that i ts centralised administration has fa c ilita ted implementation of controls over new developments, although i t has had less success in rationalisisng existing faults and services. The main obstacle to the implementation process is the


power of 'vested in te re sts; of individuals, in stitutions or communities'(Submission, 15.2). Consequently, the effectiveness of the department's effo rts range from 'p a rtia l success' in rationalising rural hospitals and metropolitan pathology services to 'considerable success' in a

number of super-specialty areas, such as cardio-pulmonary surgery and renal dialysis. The department concluded that:

'po licies to deal with established situations w ill, in general, evoke such reactions th a t the exercise of arbitrary power is needed to implement them '. (15.3)

To expedite further action in the area of super-specialty services, the department issued a 'Discussion Paper on Rationalisation of Medical Services in the Metropolitan Area of Brisbane' (1980). The department states in its submission th a t:

' our experience with the Discussion Paper suggests that encouragement of open (informal) debate may defuse what are often emotional is s u e s '. (15.4)

Tne Commission is advised th a t no action has been taken to implement the proposals contained in the Paper.

In a supplementary submission to the Commission, the Director-General of Health Services in Tasmania offered frank comments on the barriers that e x ist to the implementation of rational resource allocation policies. F irst, because of the incremental nature of the current budgetary

process, re stric tio n and rationalisation of existing health services 'f a lls far short of desired le v e ls .1 (4). Second, as in other States, the p o litical power of lobby groups and the attitudes and expectations of local communities constitute a significant constraint upon policy making and

implementation Tne Director-General comments op his department's recent experiences as follows:

'We have achieved a degree of rationality in the provision and distribution of our resources - through regionalisation of hospital services, ratio n alisatio n of some hospital services (eg. obstetrics and surgery in d is tr ic t hospitals), the d is tric t medical services, community


services (particularly home nursing services) and services provided by some voluntary agencies . . .

Unfortunately, though, in most other areas of health service provision, the achievements regarding rational resource allocation are more mediocre . . . because there are significant impediments, not the least

of which is the legacy of inappropriate past d ecisions.1 (5)

A major consideration when looking at ways to regulate supply and , use is the question of medical technology. The supply of technology is important Decause of i t s use in super specialty services particularly for diagnostic and therapeutic procedures. These are said to be high cost areas,

in terms of both capital and recurrent costs. State health authorities have the power through the regulation of capital funds and the approval of new units and services to control the in stallation of new equipment in public hospitals. Unfortunately p o litic a l and community pressures, through such means as fund raising appeals for special units, often override bureaucratic controls.

Mention has been made of the inefficiencies of the present planning and allocative processes for capital works. C ertificate of need legislation has oeen suggested as a way of overcoming some of these problems but th is has the potential for interposing another layer in what is already a slow cumbersome and uncoordinated review process. What may be more useful is oetter information and guidelines to influence the u tilisa tio n of technology

on the grounds of quality (minimum standards) rather than measures of inflexible control. These quality guidelines should be applicable to both the public and private sectors.

Conclusions and Recommendations

There is considerable scope for improving the planning functions at both Commonwealth and State level. State health authorities have the major responsibility in developing and implementing strategies to bring about a more rational use and distribution of services and f a c ilitie s . The

Commonwealth has a role in assisting and coordinating these a c tiv itie s.

Fundamental to the development of a more rational health system is

2 4 6

the resolution of the divided le g islativ e, financial and administrative authority between the States and the Commonwealth. Many of the present 'ineffeciencies' of the system flow from these divided responsibilities and overlapping ju risd ic tio n s.

A p o litic a l commitment to carrying out rationalisation objectives is required for the adm inistration to be effective and e ffic ie n t. The improvements necessary are as follows:

1. States should develop comprehensive health service plans which should outline the future development of a ll components of the health system (public and private) on a regional and State wide basis. These plans should be developed following widespread

consultation with providers and users.

2. Tne State and regional physical plans should incorporate a forward capital works program, disaggregated by function, purpose and/or target group.

3. Quantitative and qualitative guidelines and standards should be developed and linked to funding arrangements as a means of implementing the principles of the State services plan.

4. Comprehensive and timely morbidity data should be collected in each state covering both inpatients and outpatients in a ll in stitu tio n s. Consideration should be given for the Australian Bureau of S ta tis tic s carrying out an annual census on the use of in stitu tio n a l

beds in A ustralia.

5. State health authorities should take action to coordinate more closely the a c tiv itie s of th eir planning, finance and functional divisions. .

Financial Inefficiencies

Of particular concern a re :-

2 4 7

. the concentration of Commonwealth-State funding on hospitals at the expense of other faci itie s and services,

. the in sta b ility of Commonwealth funding appropriations,

. the complexity of program adm inistration· and

. the financial incentives to use high-cost rather than low-cost, and more appropriate modes of care and treatment.

Matters relating to the efficiency of Commonwealth actions in the areas of health insurance and financial assistance to private hospitals, repatriation hospitals and private nursing homes are considered in greater detail elsewhere.

Assignment of Government Financial Allocations

The proolems associated with shared financial responsibilities between levels of governments were highlighted in the South Australia Health Commission Submission. It states:

1 The rationale for the involvement of different levels of government is not c le a r, leads to adm inistrative complexities in program administration and may result in co n flictin g objectives.1 (40)

The resultant fragmentation of functions and responsibilities not only introduces a need for the coordination of expenditure decisions between and within governments, i t also contributes to inefficiencies and compounds the d iffic u ltie s of making governments accountable for th e ir performance.

C onstitutional, political and financial considerations a ll play a part in determining the allocation of respo n sib ilities among the various levels of government. The factors that may be relevant in deciding which level of government is best suited to discharge particular activ ites include:


. Relative responsiveness to those affected by the a c tiv itie s or decisions; . P o litica l and financial accountability for decisions taken; . Access to information sources;

. Administrative capacity; . The extent to which there are economies of scale in having one level of government undertake a particular activity; and . Ability to coordinate and integrate related services.

In Professor Russell Mathews' view:

'there is a strong case for suggesting that a c tiv itie s or decisions should be carried out by Governments closest to the people affected by the decisions. On th is c rite rio n , State and Local Government would have the main responsibility for decisions affecting resource allocation and

the provision of public goods and services, where the effects of those decisions are confined within state or local jurisdictional boundaries.' (Revenue sharing in Federal Systems 1980 8)

This view is essen tially in accord with that of the Commonwealth Department of Health which states:

'the States retain the principal responsibility for the provision of services and for th e ir coordination'. (Vol. I, 15).

It does not imply, however, th a t higher levels of government should not be involved in policy formulation and resource allocation, especially in areas of 'national concern’ . Rather, th is involvement should be largely confined

to addressing the external consequences of State decisions and of adjusting for the ' financial imbalances' that arise out of the allocation of expediture responsibilities and revenue raising capacities between levels of government. As the Department of Health states:

' Essentially the Commonwealth is concerned with ensuring access to and promoting the equitable allocation and efficien t management of health services across A u stra lia '. (Vol. I, p.15).


The major instrument available to the Commonwealth for achieving these objectives has been the use of specific purpose grants to the States.

By definition, specific purpose grants are conditional in that they must be spent on the purposes indicated. There may also be more detailed conditions on the expenditure side as well as revenue conditions. Specific purpose grants can be distinguished from block grants which are available for spending within broad functional categories, allowing the recipient government to allocate funds among d ifferen t programs or services of its own choosing.

The objectives of specific-purpose grants include:

. To ensure that government payments compensate for spillover effects of decisions made by other governments (e.g. sane payments under water resources programs); . To promote national, State or local goals or p rio ritie s

(eg. anti-T.B. campaigns).

. To provide financial support for existing programs of recipient governments (eg. the Hospital Cost-Sharing Arrangements); . To equalise the revenue raising and expenditure capacity of recipient governments (eg. schools grants which the Commonwealth

pays to the States to increase the aggregate level and reduce d isp arities in expenditures per student between and within S ta te s); and . To encourage research and innovation (eg. grants to State health planning agencies.

The chief response in Australia to the problem of developing appropriate machinery for determining the basis of specific-purpose grants has involved the establishment of statutory bodies by the Commonwealth. The f ir s t of these advisory agencies was the Commonwealth Grants Commission which was

established in 1933 to assess State claims for special financial assistance. In 1973, the Hospitals and Health Services Commission was established to assess the financial needs of hospitals and health services, and to recommend on grants required (Section 5, Hospitals and Health Services Commission Act,

1973).In 1978 the Hospitals and Health Services Commission was abolished and many of i t s functions transferred to the Department of Health and the Social


Welfare Policy Secretariat. This apparently led to the more effective integration of health into the government's budgetary and p o litic a l decision-making processes.

Impact of Cost-Sharing on State Expenditures

In his overview of inter-governmental financial relations, Professor Russell Mathews of the Australian National University states that:

'Specific purpose grants may have the effect of stimulating expenditures by recipient governments, of changing the pattern of expenditures or of encouraging revenue or expenditure su b stitu tio n .' (1980, 32)

The stimulation effect is usually sought by governments making the grants. If the spending p rio ritie s of the recipient government d iffer from those of the granting government, the former will attempt to reduce i t s own expenditures . If a State is already spending $100 on a service for which

the Commonwealth provides a grant of $50 in order to encourage its expansion the State may e ith e r increase i t s expenditure to $150 a fte r receipt of the grant or hold itsexpenditure a t $100 and transfer the $50 saved from its own funds to other uses.

Although earmarked for a specific purpose, payments under the Agreements were virtually equivalent to general revenue grants because the States were aole to substitute the payments for th e ir own funds in financing an expenditure program to which they were already committed. There are some

problems with comparability of the data during th is period because of changes in accounting and cost allocation practices in 1975-76. Some costs, such as administrative, purchasing and ambulance transport, previously borne outside the hospital budgets of the States were, for the f ir s t time, allocated to

hospitals. The Agreements provided th at any gains which accrued to a State would not be offset by a reduction in general revenue assistance.

Table 4 shows that the States responded to the additional $627 million received in Commonwealth payments for recognised hospitals in 1975-76 by reducing th e ir own expenditure. This reduction amounted to $270 million (assuming that State Hospital outlays would have otherwise increased by 18


per cent during 1975-76 the movement in the Implicit Price D eficit for Health, Social Security and Welfare). Moreover, there is no evidence to suggest that th is leakage of funds was into other areas of State health expenditure. Indeed, the States' to ta l expenditure on health declined in money terms in 1975-76 and by up to $260 million i f inflatio n is taken into account. A sim ilar conclusion is reached i f the movement in net State current health expenditure per capita which declined from $86 66 in 1974-75 to $82 00 in 1975-76 oefore increasing to $93.43 in 1976-77 is examined (Commonwealth Department of Health, June 1980 p.28). This would suggest that State funds have been diverted to non-health areas.



CATEGORY, AUSTRALIA, 1974-75 TO 1975-76 ($ million)

Commonwealth State & Local

1974/ 1975

1975/ 1976

1976/ 1977

1977/ 1978 1978-79 (Prelim)

1974/ 1975

1975/ 1976

1976/ 1977

1977/ 1978

Recognised hospitals 158 785


932 1039 1128 854 737 836 946

Other in s t­ itutional 302 408 469 543 566 222 272 315 351

Community Health 43 71 90 112 95 21 24 38 45

Other non- institutional 583 1104 891 731 926 13 14 20 36

Admin., preventive services, research 73 126 144 138 136 87 105 109 117

TOTAL EXPENDITURE 1159 2494 2526 2563 2851 1196 1151 1318 1496

Source: Commonwealth Department of Health, 'Australian Health Expenditure, 1974 75 to ] An A nalysis', June 1980 and private communication, 4 Dec. 1980.

(a) Adjusted for prepayment of $216 million in 1975-76 that related to 1976 77


Since 1974-75, Commonwealth expenditure has been increasingly directed towards recognised hospitals, while the composition of State expenditure has changed with a once-for-all decline in the 'hospital share' and a corresponding relative increase in expenditures on 'other in stitu tio n a l services', especially mental health, and non-institutional areas, such as community health services. Notwithstanding, in 1978-79 in stitu tio n a l services overall (mainly public hospitals and psychiatric in stitu tio n s) aosorbed 85 per cent of State health expenditures compared to 90 per cent in


When both levels of government are taken together, i t is clear that hospitals continue to dominate health outlays, with the hospital share increasing overall from 43 per cent in 1974-75 to 48 per cent in 1978-79 (See Table 5). In short, the hospital sector has shown considerable resiliance to government expenditure re stra in ts. Despite a decline in the rate of increase in Commonwealtn hospital outlays, in 1977-78 and 1978-79 the States maintained th e ir level of financial support at a level to allow modest real growth, after allowance is made for the movement in the Implicit Price Deflector (Health, Social Security and Welfare),



1974-75 1975-75 1976-77 1977-78 1978-79(e)

Commonwealth 13.6 31.5 36 9 40 5 39 6

State and Local 71.4 64.0 63 4 63.2 62.2

Total 43.0 41.8 46.0 48 9 48.0

Source: Commonwealth Department of Health (see Table 4)




Commonwealth State & Local Total Government

1975/ 1976/ 1977/ 1978/ 1975/ 1976/ 1977/ 1978/ 1975/ 1976/ 1977/ 1978/

1976 1977 1978 1979 1976 1977 1978 1979 1976 1977 1978 1979

Recognised Hospitals 396.8 18.7 11.5 8.4 -15.9 13.4 13.0 11.4 50.4 16.2

All Health Purposes 115.2 1.3 1.5 11.2 - 3.9 14.5 13.5 13.7 54.8 5.5

Source: Commonwealth Department of Health, (see Table 4)

More recent data indicates th at this in stitu tio n a l favouritism in Government health expenditures has continued, at least at the Commonwealth level. Despite a significant decline in Commonwealth capital expenditures, largely associated with termination of the Hospitals' Development Program in

1978-79, State public hospitals have continued to absorb an increasing proportion of specific purpose Commonwealth payments, excluding payments for medical and pharmaceutical services (See Table 7).


1976-77 1980-81

Public Hospitals 88.2 91.0

Community Health Program 6.0 4.3

School Dental Scheme 2.1 1.6

Blood Transfusion Service 0.4 0.6

Aboriginal Health 1.1 1.0

Home Care 0.6 0.9

Senior Citizens Centres 0.4 0.4

Other 1.2 0.2

TOTAL 100.0 100.0

Source: 1980-81 Budget Paper No. 7 and Chapter 3, Appendix XYZ

The percentage increases in Commonwealth allocations in respect of public hospitals, community health services, the school dental scheme and blood transfusion services are shown in Table 7, Commonwealth funding support for public hospitals has shown greater stab ility than that for

certain non-institutional services.




1976/ 1977 1977/ 1978

1978/ 1979 1979/ 1980

1980 1981

Public Hospitals 29 1 11.6 8.9 8 6 13 2

Community Health Services 30.7 4 2 -41.2 0 4 24 5

School Dental Program -7.1 5.7 -31.9 27 1 -0 7

Blood Transfusion Services 13.4 22.6 23 8 5 4 8 0

Source 1980 -81 Budget Pdper No 7

In summary, the in itia l response of the States to the financial gain provided by the hospital cost-sharing arrangements was to reduce th e ir own expenditure on health as a whole. Commonwealth funds replaced some State funds which were diverted into non-health areas of State budgets. The introduction of specific purpose funding arrangements for recognised hospitals had the effect of increasing hospitals' relativ e importance in governments' budgetary p rio ritie s. While there was some offsetting movement in State budgets - a small increase in the relative importance of non-hospital services - hospitals continued to dominate overall health expenditures by governments. Although consistent data

for years subsequent to 1977-78 are available only for Commonwealth budget outlays, i t appears that a large part of the burden of the adjustment to governments' expenditure re stra in t policies has been f e lt in the non-institutional areas of health expenditure.


The Distortion Effects of Commonwealth Funding Programs

Must State health au thorities have been c ritic a l of the separation of funding arrangements and the distortion of State p rio ritie s and limited scope for substitution between programs that this involves. The Health Commission of N.S.W. argues that:

' the separate provision of funds for recognised hospitals, community health, school dental services, aboriginal health e t c ., poses barriers to the allocation of funds to provide appropriate care as efficien tly as p o ssib le.' (13-14).

As a re su lt:

'care may be provided through one program because of the greater av ailab ility of funds for that program, rather than through a more appropriate and possibly cheaper program. (14)

The Health Commission of New South Wales also comments on the discrimination th a t e x ists against the community health program. F irst because of the lack of any specific Commonwealth legislation for these services.

1 there is no guarantee of funding beyond the end of a particular financial year. This inh ib its long term planning and development of an integrated health program.' (15)


'to encourage movement away from in stitutional care towards care in the community, i t is essential th a t funds be able to be moved from the hospital budget to the community health budget. This could best be achieved i f the two a c tiv itie s are part of the same program.' (15)

While the Commission recognises that the separation of funding programs by the Commonwealth may act as a constraint upon what States might view as a more rational and cost - effective allocation of financial resources. States


do have the capacity to devote additional funds to particular services. As the Tasmanian Health Services Department notes:

1 Under the existing system, States are able to proceed with th eir own policies and plans regardless of the attitude of the Commonwealth .

. States can decide to use th e ir own resources to fund projects on a 100 percent basis which means th a t the hospitals system is not really subject to overall c o n tro ls.1 (50)

In practice, th is rarely happens, although, South Australia for one, appears to have taken action to compensate for the decline in Commonwealth Community Health funding in recent years

'the community health services, funded and and provided by the Commission have not been cut in real terms and some modest development funds have been provided.' (South Australian Health Commission 94)

Staoility. Timing and Complexity of Commonwealth Funding

The lack of s ta b ility of Commonwealth appropriations was discussed previously in relation to the Community Health Program. There is no unanimity on th is issu e, however, in relation to the hospitals arrangements. The Australian Hospital Association accepts that the Cost-Sharing Agreements are:

'a worthwhile framework1

primarily because they guarantee the S ta te s:

'a predictable quantum of Commonwealth monies.' (Submission, 17)

State health authorities, in general, take a different view:

'Since late 1976 the Commonwealth has interpreted the conditions relating to 'agreed' costs in such a way as to enable i t to lim it its

contribution in an arbitrary and u n ilateral manner. The degree of

2 6 0

insecurity inherent in th is process strengthens the argument for a formula grant offering greater predictability in the medium term .' (Victorian Health Commission, 110)

The basis for arriving at Commonwealth hospital payments in 1979 80 and 1980-81; was aimed a t:

'maintaining the overall level of hospital services at th e ir 30 June 1979 le v e l.' (1980-81 Budget Speech, 93) However, the Health Commission of New South Wales argues that:

'No real growth in services is not a viable long run policy because of the projected ageing of the population.' (14)

The Health Commission also points to the failure of the machinery of the Hospital Cost-Sharing Agreements, through meetings of the State Standing Committee, to agree on a firm budget before the beginning of the financial year. This is ascribed partly to late policy changes made by the

Commonwealth (8)

The Queensland Department of Health is also c ritic a l of current Commonwealth expenditure re stra in ts:

'Possibly the worst aspect of arbitrary restrain ts is the in ab ility to develop altern ativ e and more effective health care delivery systems.

. Unless long term financial strategies are proposed for consideration concurrently with the imposed restrictio n , . . . such measures of expediency w ill solve few problems other than the cost containment and w ill have a sig n ifican t effect for only a short period.' (Submission,


It has been proposed that any future funding arrangements should incorporate an appropriate escalation factor (Victorian Health Commission 113 and Australian Hospital Association, 17, 18) and that States should be notified well in advance of any changes in Commonwealth policy and funding

levels (Health Commission of New South Wales, 16).


A related matter of concern, particularly to individual hospitals and th e ir associations, is the inefficiencies caused by the budget timetable laid down by the Commonwealth and the States:

'Under current arrangements hospitals do not learn of th e ir approved expenditure for budget purposes u n til almost one year a fte r they compile th eir budget.' (Australian Hospital Association, 27).

The Tasmanian Department of Health Services ascribes the excessive length of the budget cycle to:

'the advent of the Commonwealth Government into the hospitals budgeting and financial process.' (Submission, 29)

However, the Commonwealth has recently taken action to ensure that States are advised of th eir preliminary hospital allocations before the announcement of the Commonwealth budget in August. It appears that delays in bringing down State government budgets often announced in September or October and subsequent notification of final allocations to hospitals tend to be one of the major sources of delay.

Another area of concern to some State health authorities and professional bodies relates to the Commonwealth's insistence on item -by-item budgeting and cash accounting as part of the Hospital Cost Sharing Agreements.

Commonwealth appropriations under the Hospital Cost-Sharing Agreements are determined in the lig h t of itemised State estimates supplied in January and February each year and d etails of actual operating costs submitted each quarter. This detailed investigation and review of c o sts·

'has engendered Commonwealth-State Standing Committees, a considerable Federal bureaucracy and a great deal of unproductive a c tiv ity .' (Victorian Health Commission, 111-112).

The extent to which these administrative procedures add to inefficiencies at the service delivery level, however, is not quantifiable. Tnere is evidence to suggest that the Cost Sharing Agreements have not been accompanied by excessive administrative costs - the Commonwealth component has been estimated at $0 3 million - nor by excessively rigid conditions.


Notwithstanding, there has been some criticism of the extent of Commonwealth involvement in the S tates' financial management of the Community Health Program. The Health Commission of New South Wales has recommended that:

'the detailed supervision by the Commonwealth Government involving the approval of the program at each Community Health Centre and the s ta ff levels involved, should be replaced by overall control of community health budgets, sim ilar to that in the Hospital Cost Sharing

Agreements, with detailed planning being the responsibility of the S ta te s .' (Submission, 15-16).

This Commission supports such an approach.

It has been suggested that the distortions and inefficiencies created by the cash budgeting basis are attributable to Commonwealth action:

' The present cash system was implemented as a condition of the Commonwealth -State Cost Sharing Arrangements in 1975-76 but there is no in trin sic reason why a cost-sharing formula has to be related to cash as d istin c t from accrued o u tlays.1 (Victorian Health Commission, 53-54)

Inappropriate Use of Acute Hospitals

Commonwealth -State financing arrangements have had an effect on the type of care and treatment provided. The Commission considers that a major oojective of the health care system should be to provide care by the most appropriate and least costly method available. There is evidence to suggest,

however, that inappropriate use is being made of health care in stitu tio n s. Some of the major dimensions of th is problem are:

. non-acute care provided in acute hospitals especially for nursing home type and other chronic patients; . delays in discharge; and

. elective surgery carried out in acute public teaching hospitals which could be more economically performed elsewhere.


Referring to a 1971 study of Princess Alexandra Hospital, the Queensland Department of Health sta te s:

'The study distinguished two major groups of inappropriate users - those who though legitimately admitted were unnecessarily delayed in discharge. During the study period some 9 per cent of patients in medical wards fe ll into one or

other category. This proportion, however, would almost certainly be lower now ....... the major factor, age aside, in delayed discharges related to domestic or family circumstances.'

In 1977 the Health Commission of N.S.W. arrived at broadly similar conclusions for the Mater Hospital:

. 1 In the opinion of Resident Medical Officers and Ward S is te rs . approximately one in every ten hospital bed days was a 'delay day' which prolonged patients stays in hospital. Delays were equally divided into discharge delays and treatment delays.

. On average patients experienced a delay of 1.6 days ............

. Approximately 10 per cent of patients reviewed would, in the opinion of the s ta ff, have been managed at home with some degree of support. A further 8 per cent-9 per cent could have been managed at a nursing home". (The Mater Hospital Study Vol. I, p.p. 3 4 ) .

The situation of inappropriate use appears to have arisen to a large extent from inaction by Commonwealth-State health authorities as well as the presence of a number of financial disincentives, primarily: . lack of rationing of acute beds;

. lack of monitoring and assessment of types of patients admitted to acute hospitals, and . failure to adjust services in line with changing needs (e.g. for chronic rather than acute beds).

Many of the discharge delays have been attributed to the lack of community-based support services, especially in rural areas. It is largely for th is reason that the Queensland Department of Health, for example,

2 6 4

regards the use of parts of rural hospitals as de facto nursing homes as "a legitimate use of beds so far as the local community is concerned" (S.711 Section 16.4). Nevertheless, the Department is taking action to minimise such inappropriate use of acute fa c ilitie s :

'I t is our policy to aggregate such patients into a discrete unit within the hospital but clearly this is impractical with small numbers'; and

. 1 Because of inadequate assessment, i t is too easy to admit into a readily available bed a patient for whom more appropriate arrangements might be made. W e are hoping that our developing g e ria tric assessment service will in the future help to remedy t h i s ’ . (S.711, Section 16.4).

This action a t State level is being complemented by changes introduced by the Commonwealth to the Health Insurance Act and the National Health P e t in 1979. After 60 days of hospitalisation a long term nursing heme type patient w ill make a personal contribution towards his or her care and accommodation unless a doctor c e rtifie s that continued hospital treatment

is required. Health insurance organisations will pay a reduced benefit in respect of th e ir members in such circumstances, equal to the appropriate nursing home benefit in each State.

The hospital cost sharing agreements require amendment before these arrangements become e ffectiv e. By 30 June 1980 a ll States except South Australia and the Northern Territory had agreed to introduce the new arrangements (Director-General of Health, 1979-80, 114). However,

administrative arrangements for re-classification of nursing home type patients in private hospitals have not been finalised.

The financial b arriers to innovation in health care delivery are certainly important. In addition to more appropriate care of chronic patients, other examples of the alternatives to acute hospital care that could oe fa c ilita te d by financing mechanisms include:

. motel-type units for certain categories of patients and types of care and treatment, such as obstetrics and diagnostic work;


. use of fa c ilitie s available in the private sector, and

. day only and five day wards, associated with greater emphasis on day surgery units, and . pre-discharge units.

The Australian Association of Surgeons points out that current financing methods, based on the absence of a user charge, coupled with bed reimbursement/deficit financing of hospitals, often discriminates against these new types of organisation and f a c ilitie s .

'Patients are rewarded by zero prices i f they take advantage of high cost, resource-intensive fa c ilitie s ............. day-only fa c ilitie s ........

contain no beds to be reimbursed and receive no d e fic it finance to underwrite operating expenditures. With current financing methods, the patient has to pay more to use a less costly and more appropriate form of c a re .' (p.30).

Of particular significance is the incentive to admit a patient to hospital created by the in a b ility , under the cost sharing agreements, of practitioners to charge privately insured patients who receive treatment on an out-patients basis in recognised hospitals (Australian Medical Association, N.S.W. Branch, 46 and The Hospitals Contribution Fund, 4). Similarly, there is an incentive for hospital managements to carry out multiple admissions per bed per day. Even though many of these patients are receiving treatment without staying overnight, the hospitals are entitled to charge the full daily hospital fee for private patients. I t has been suggested that th is anomaly could be overcome by providing a day fa c ility insurance benefit to replace the hospital insurance benefit. H.C.F. recommends that procedures not requiring overnight stays should a ttra c t hospital charges and insurance benefits of less than the standard inpatient bed-day charge and suggested that th is should be at the rate of approximately 60 per cent (Submission, 6, 8).

Conclusions and Recommendations

In this section the Commission has reviewed a number of areas in which Commonwealth financial arrangements and administrative controls have impacted upon efficiency at the State and service provider levels. There is


Page 266a follows.

some evidence to suggest th at although the in itia l allocations under the Hospital Cost-Sharing Agreements supplemented State revenues, the earmarking of Commonwealth funds for specific services has created barriers to the integration of services and has resulted in administrative complexities. The

fle x ib ility of the States to allocate resources between services according to their own p rio ritie s and perceptions of need has been circumscribed somewhat by the financial prerogative of the Commonwealth. Of particular significance

has been the growing emphasis on hospitals in overall Commonwealth funding allocations at the expense of other less costly and, to varying degrees, substitutable health care services. The Commission favours an approach to

Commonwealth-State funding that gives the States both the incentive and fle x ib ility to maximise the level and range of health care services provided within a given commitment of resources.

Additional inefficiencies are generated by the uncertainty and in sta b ility of Commonwealth appropriations. Planning at the State and service provider levels could be facilitated i f the Commonwealth took the following action:

. maintained i ts current policy of advising States of their hospitals and other health services allocations before the s ta rt of the financial year; . considered providing indicative levels of future financial support

as part of a trie n n ia l system of funding (as proposed, for example, by the Australian Hospital Association, 1); and . met with hospital representatives before to the finalisation of its budget allocations (as proposed by the National Council of

Hospitals, 3).

Finally, the Commonwealth's insurance and hospital cost reimbursement mechanisms often create a barrier to innovation in health care delivery. Financial incentives often favour more expensive rather than equivalent, less expensive, modes of care.

Therefore, the Commission RECOM M ENDS that:

1. Any future Commonwealth-State funding arrangements concerned with cost-reimbursement should be managed on an accruals accounting basis rather than a cash basis; 266 a

2. Consideration be given to the introduction of a trien n ial basis for Commonwealth health funding;

3. The Commonwealth and States take steps to develop a program budgeting framework for the systematic presentation of proposed health expenditures, by function and purpose.

4. Commonwealth budget allocations for hospitals should continue to be advised to the States before the s ta r t of each financial year.

5. The Commonwealth to introduce an appropriate day only hospital benefit limited to recognised hospitals and approved private hospitals and that i t monitor the u tilisa tio n of day fa c ilitie s .

Liasion and Consultation Processes

The formulation of policy and implementation of plans cannot be discharged efficien tly at a State and Commonwealth level without proper processes of consultation and liaison between governments and between governments and those providing the services.

There has been criticism of the amount of liaison between the Commonwealth and the States and the effectiveness of that liaison. The strongest criticism has been aimed at unilateral decision making.

Linked with th is was criticism of the basis on which decisions are taken and lack of consultation at government-to-government level as well as government-to-provider level. The National Council of Hospitals expressed concern at the absence of an adequate mechanism for reflecting the views of providers at the hospital level, observing that decisions are often based on an information exchange at the State/Commonwealth level without the benefit of the views of those providers who w ill be implementing the decisions of

government (S.206, 3).

Most of the formal liaison at government level in recent years has taken place through meetings of Health Ministers, of the Hospitals and Allied Services Advisory Council, which has been disbanded, and through meetings of

266 b

the State and National Standing Committees established through the cost-sharing agreements. The infrequency of meetings associated with these groups may have a bearing on the time i t takes to have matters of common in terest to the Commonwealth and the States considered and decisions

reached. The Standing Committee of the Health Ministers' Conference w ill, in future, deal with matters referred to i t by the Conference. One way of ensuring that liaison with the States is maintained and improved would be to guarantee that State representatives are involved in the detailed considerations of matters being reviewed and in the preparation of documents

for consideration at Commonwealth Government level. This could be achieved by the establishment of a full-tim e secretariat to service the Standing Committee, with costs shared between the Commonwealth and the States and s ta ff seconded from State and Commonwealth governments.

Appeals for b etter communication and liaison by central health authorities came from many parts of the system: hospital boards, administrators, c lin ic ian s, and other special interest groups.

Clinicians saw the need for improved consultation between central authorities and those actually providing care i f new policies were to be soundly based and smoothly implemented. The introduction of centralised pathology services in metropolitan Sydney was given as an example of how poor communication and consultation resulted in a service where implementation was

less than perfect.

The Catholic Health Care Association stated that most organisational structures have been designed by central authorities without the benefit of local input at the planning stage. I t said the Commonwealth bureaucracy was clouded in obscurity and th at most Commonwealth contact occurs at a p o litic a l

level which, in the long run, is not constructive (S.209).

The New South Wales Association of Medical.Superintendents considered that many policy decisions are not satisfacto rily explained by the Health Commission and that these decisions often appear to 'fly in the face of reason'. (S.244)

The National Association of Medical Specialists said Commonwealth and State bureaucracies see communication as the devolution of instructions, that

266 c

there are virtually no procedures for providing responses or feedback from the operational levels to those who determine policy, and that there is a general lack of consultation with the medical profession by politicans and bureaucrats alike (S.239).

There were frequent complaints of isolation of the decision makers from the point of delivery of services. I t was suggested that a way of overcoming this problem would be to free up the flow of s ta ff between the central health authority and the hospital system. The Commission is aware that there are industrial barriers to this occurring in some States and that these matters are under investigation.

Another disturbing complaint made by hospitals are lengthy delays to replies to le tte rs and requests for advice. The regional structure in New South Wales does not appear to have speeded up the process of decision making. I t was stated that:

'for many years the hospital field has endured long delays in decision making at central authority and State and Federal government level. These delays in receiving decisions necessitate the making of an internal decision which is sometimes wasteful and expensive in retrospect after the final decision is known'. (S.964)

The Commission was told that in Queensland, by the time approval is given to purchase equipment i t is often twice the cost because of the time taken to receive an answer. Two years elapsed in one case. In another instance, a request was made in 1977 for a speech therapist but no reply was received u n til 1980 when the hospital was told that department advisors had

found that a second speech therapist was not required at that hospital. (Transcript, 1802)

While i t is recognised that some delays are inevitable, in itia tiv e and imagination can be s tifle d by the apparent indifference that the health authorities demonstrate in their everyday contact with health care organisations that are expected to operate efficien tly .

The lack of appropriate delegated authority to make decisions was raised on a number of occasions in submissions and public hearings, especially in

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New South Wales where the regional management structure is well-developed. Hospitals perceive that there is both a lack of adequate delegation to the Regional Directors from central o ffice, and a lack of adequate delegation to hospital administrations and boards from the regional office.

'In many instances i t is f e lt that sufficient authority is not delegated by the Commission, either to its Regional Offices or from its Regional Offices to the administration of hospitals, particularly the larger in s titu tio n s .1 (5.413)

Excessive centralisation of decision making can and does make the process unresponsive to changing needs, and can remove from hospitals the a b ility and incentive to manage services appropriately and e ffic ie n tly .

Ulverstone Hospital in Tasmania stated that over recent years there has been a marked increase in policy decisions initiated by the Department of Health Services which are then transmitted by policy circulars. As a re su lt, hospitals are over-regulated, and the d ifficu lties of management have been

accentuated. In the h o sp ita l's view, th is over-regulation from the centre severely infringes on the autonomy of the hospital board and its a b ility to manage i ts own a ffa irs (S.502).

Wimmera Base Hospital in Victoria stated that:

'more e ffic ie n t operation of hospitals can be achieved when the administration and control of the hospital is close to the point of service delivery, and th at a Board with defined control from the central authority is the best way of achieving th is. Control of day to day

a c tiv itie s by public service bodies and their regulations appear to be to ta lly incompatible with in itia tiv e , innovation and efficiency.' (S.465)

While many of the complaints made in the above submissions in themselves may not be typical nor general, and the health authorities' decisions may have good ju stific a tio n , what is important is that the reasons for particular decisions be communicated to the health care organisation.

The issue of delegation of authority was mentioned most frequently in regard to staffing issues. Many institutions saw the rigid control of

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staffing establishments contributing to inefficiencies. Rigid control of s ta ff numbers appears to be even more marked in institu tio n s whose s ta ff are employed under the various public service acts, with particular examples being provided from the Australian Capital Territory.

The Australian Hospital Association, Western Australia Branch, considered that control over staffing levels and grades is a most effective way for boards to carry out their managerial functions. The removal of its responsibility from the boards by the Medical Department has been, in their view, detrimental to managerial efficiency. (Transcript 2909-2923.)

The Australian Medical Association, New South Wales branch, said that rigid controls exerted by the Health Commission on non-medical s ta ff establishments m ilitates against inter-position transfers, thus impeding or preventing managerial responses to changes in needs (S.246).

The Parramatta Hospital, Westmead Centre, (S.413) said that the inab ility to adjust staffing levels in accordance with requirements is a major inhibiting factor to efficiency of operation.

Royal Prince Alfred Hospital was concerned about the effect on the enthusiasm of middle management from having to refer to the Health Commission for changes in classification of s ta ff, even i f such changes can be encompassed within the to ta l budget (Transcript, 2331)

Some of these matters in respect of staffing have been addrersed in the section on manpower. I t is important that a balance is struck between allowing hospitals the fle x ib ility to mobilise labour resources when required, and the desire on the part of health authorities to exercise effective control over what constitutes the major expenditure item in hospital expenditures.

The Victorian Health Commission made its position quite clear when i t stated:

'The Health Commission of Victoria believes that effective control over the wages and salary component requires detailed monitoring of the s ta ff levels in each hospital, and authority over establishments and numbers employed.1 (52)

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Other States generally support th is position.

The effectiveness of the consultative machinery at the Commonwealth and State level has been mentioned elsewhere. Criticisms have been made that consultative machinery becomes a vehicle for members to pursue th eir own vested professional and personal in te re sts. It has also been described as cumbersome, confused and non-representative. (Royal College of Pathologists of Australia, New South Wales State Committee, Submission, 8 .).

State health authorities have been accused of not providing consultative committees with policy direction, there is insufficient expertise to evaluate proposals, and health authorities are not sufficiently committed to the implementation of the findings. Reviews of consultative machinery has commenced in some States.

Conclusions and Recommendations

The present health system is a complex mixture of public, private and voluntarily provided services. Financial, administrative and legislative responsibilities are divided between the States, Commonwealth and individuals. R esponsibilities are neither clear-cut nor direct. Given th is

situation, i f policies are to re fle c t the needs of the community, current practices and have the commitment of those providing the services, the present processes for consultation and liaison at a ll levels will need to be

strengthened and improved. This w ill be required at a government-to-government level and government-to-service level.

Central health authorities must at a ll times guard against:

. decision making th at is too slow . decision making without adequate consultation with those who w ill be affected, . using people in decision making positions

who have too l i t t l e practical experience or understanding, . becoming increasingly re stric tiv e in the delegation of powers to make decisions.

To overcome some of these problems the Commission RECOM M ENDS that:

. Improved communication and consultation patterns between central authorities and service providers be developed. Each health authority should review i t s performance in the lig h t of criticism s which have been made and take steps to improve the present mechanisms for consultation.

. Existing consultative machinery be reviewed in order to consolidate technical and advisory committees into broader-based policy advisory committees and task groups, given clear policy direction and specific reporting times.

. The involvement of consumer representatives in consultative machinery be expanded.

. Urgent attention be given to solving problems preventing s ta ff rotation between central health authorities and hospitals and that organised programs of s ta ff rotation s ta rt as soon as possible. Consideration should be given to the inclusion of the Department of Health and private hospitals in these rotations.

. State Health Authorities review their administrative procedures in respect of setting s ta ff establishments and consider ways of allowing in stitu tio n s greater fle x ib ility in the use of s ta ff.


The regionalisation of health services is not a new concept but is seen as a way of overcoming, or minimising some of the problems referred to in the sections on finance, planning and consultation.

Each of the inquiries held by the various States into the organisation of their health services was asked to investigate the most appropriate admin­ istra tiv e structure to ensure the rationalisation of health services and the optimum distribution and use of resources. In each case, a regional system was recommended. The recommendations differed only in the d etail of how and when regional authorities were to be constituted.

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The term regionalisation is generally interpreted to mean the delineation of geographic areas for planning and allocating resources, the dispersion of administrative functions and the consequent delegation of authority closer to the work place.

The advantages that are claimed to result from a system of regionalisation described by Palmer include:

. The b etter allocation of specialist fa c ilitie s ;

. The definition of appropriate roles for individual hospitals, in stitu tio n s and providers, that is , to develop a hierachy of hospitals;

. Assisting the planning of health services to ensure they are accessible to and match the needs of the local population;

. Delegation of responsibility from the central office to the regions for the adm inistration, control and monitoring of health services;

. Better coordination of services and avoidance of costly duplication,

. Enaoling the community to have a stronger influence over the administration and provision of health services.

The most developed form of regionalisation in Australia is to be found in New South Wales.

The Health Commission in Victoria is s t i l l deliberating upon regionalisation ( 'Regionalisation of Health Services in V ictoria', a discussion paper, October 1980) and is committed‘to a move to regionalistion, but not u n til there has been lengthy consultation with the community. At this stage the Health Commission believes that there is no room in Victoria

for an additional adm inistrative layer between the central office and the service providers. The model i t favours emphasises representation rather than administrative devolution.

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South Australia is moving along similar lines to Victoria. Given the relatively small size of the population and its concentration in urban areas, there is l i t t l e to be gained from dividing the State into country and city regions for administrative purposes. I t is likely that future regions w ill include both country and city areas, in an attempt to develop and coordinate services that meet established community needs.

In New South Wales, regionalisation was introduced rapidly after the Health Commission was incorporated in early 1973, largely in accordance with the recommendations of the Starr Report. Some have said that th is occurred too rapidly, with insufficient time for planning and consultation.

The State was divided into 13 health regions to be controlled by regional directors, a ll of whom had been appointed by 1974. In 1976, the system was reviewed in the Report of the Task Force on Regionalisation and the Management Structure of the Health Commission of New South Wales. One of

its terms of reference was to report on the benefits and the costs of regionalisation.

While the Task Force Report did not quantify cost savings, i t was of the view that :

'While some improvements would obviously have been affected, (under the old system of divided and centralised administraiton) nowhere near as much would have been achieved as has been under regionalisation . . . The greater personal involvements of people in their health services has value in promoting social cohesiveness. Decisions are prompter and more re lev an t'.

Conflicting evidence has been put to the Commission on the operation of the regional structure in New South Wales. There are those who see i t as another layer in the bureaucracy, slowing decision making and adding to the costs of running the system.

Complaints have been made about the unnecessary duplication of s ta ff at the regional office level:

' for each hospital department a corresponding department is being b u ilt by the Health Commission. Lines of communication become fouled as these advisors deal directly with the heads of department by-passing the Board and the CEO.1 (S.407, Sutherland Hospital)

This is however about the inexperience and isolation of regional office sta ff:

'th is situation (insufficient authority) is aggravated by the isolation of the people responsible for the decisions from the actual point of delivery of health care services.' (S.413)

'Health Commission o fficers responsible for the development of policy decisions often display l i t t l e understanding of the hospital environment - or willingness to acquaint themselves.' (S.405)

Also mentioned is the lack of adequate delegation of authority to make decisions.

On the positive side many hospitals have been quick to emphasise the benefits of regionalisation:

'regionalisation is considered to be the best means by which more appropriate and responsible health services can be brought to the people of New South Wales.' (S.420, Hornsby Hospital)

' I w ill only re state the Hospital's support for the concept of Regionalisation and the confidence the Hospital has in its own Regional Office s ta ff. More recent developments involving the hospital in the coordination of the lower North Shore community health services is a

positive in itia tiv e by the Regional Office which the Hospital believes is an enlightened progressive move. Regionalisation from our perspective has aligned the Regional Office side of the Health Commission with the objectives shared by the Hospital. Our criticism has been directed a t the inter-relationship of the central Health Commission and i t s Regional Offices. The la tte r delegation is strongly

supported.' (5.409)

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'We believe that the major advantage of regionalisation is that the Health Commission s ta ff at Regional Office level now have a good working knowledge of the Region and th is greatly aids hospitals. Further the hospital is able to deal with the Regional Office s ta ff on a more personal basis with the knowledge that the Regional Office Staff understand some of the problems that are being faced by hospitals within the Region and can readily provide help where needed. Likewise, hospital s ta ff can appreciate some of the financial problems faced by the Regional Director and his s ta f f. Regional Office can also expediate communication channels which have in the past existed between the hospitals and the central authority. I t does however, disturb us when we find that after many hours of discussion and consultation between ourselves and Regional Office Staff concerning local health service matters, that the Regional Office has not been granted sufficient

delegation and have to refer the matter to a central body for decision making. In some instances, decisions are made by employees of the Health Commission who in our opinion, are not a ll familiar with the

local scene and in some cases, possess less management expertise than the Regional Office Staff or the hospital s t a f f . ' (S.425)

The Australian College of Health Service Administrators was of the view that regionalisation had achieved i t s objectives but that th is had been done at the expense of economy. The College has strong doubts whether four regions can be supported in the Sydney area.

This is a view shared by Professor Palmer, who considers that some of the problems which have been experienced with regionalisation are due to the failure to determine appropriate sizes for the regions and th is is particularly the case with the metropolitan regions. The College suggests

that there should only be two metropolitan regions rather than the present four; others have suggested that there should only be one.

The Health Commission at the public hearings indicated th at the current program of rationalistion could not have been implemented successfully without regionalisation.

The Report of the Task Force on Regionalisation and The Management Structure of the Health Commission of New South Wales stated that the regions

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generally have been able to exercise control over s ta ff establishments and to relate the numbers and categories of s ta ff more closely to the services being provided. Some of the evidence put before this Commission suggests that th is has been done at the expense of efficiency at the hospital level, i f indeed

i t has been done effectively. The report went on to point out that advantages of regionalisation had been the promotion of 'unattractive' services such as the treatment of alcoholism and drug addiction and g e ria tric care, as well as the planning and implementation of the community health program.

While i t is true that certain in itia tiv e s have been taken in some regions, the success or otherwise of regionalisation has rested in a large part on the a b ility and enthusiasm of the regional director and the s ta ff.

There is a danger that too much reliance on the s k ills of the regional directors and the concentration of power in th is position may work to weaken the regional structure in the longer-term. There is evidence of marked variation in the competence and performance of regional directors and th eir s ta ff. If the regional structure is to work effectively in its present form,

investment in human capital must be made now to prepare the regional directors of the future.

The Task Force Report emphasised the d ifficulty of identifying the economic benefits from regionalisation. For example, regionalisation appears to have had l i t t l e impact on the proliferation of super-speciality services. The economic benefits are d iffic u lt to quantity.

The role of the regions received comment in a number of submissions from hospitals in New South Wales. The New South Wales Branch of the Australian College of Health Services Administrators believes that the Regional Offices should not be d irect providers of health care and should act only as

coordinators and monitoring agencies. The College recommended that a ll direct health services, including community health services, should be placed under the coordinating responsibility of a Hospitals and Health Services Board.

A central recommendation of the Task Force in 1977 was that a ll services within a given area would be the responsibility of an area health board.

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After a lengthy debate and attempts to amalgamate hospital boards in country regions into area boards, the proposal as a mandatory measure was abandoned. The New South Wales Health Commission sees moves in th is direction being evolutionary rather than prescriptive.

State health authorities have a responsibility to ensure an equitable distribution of health services thoughout the State. For histo rical and economic reasons th is has not been achieved to date. Regional planning has attempted, inter a lia , to improve th is situation through such means as development of a regional allocation formula. The formula is designed.

'i to highlight and reduce d isp aritie s between different health regions of the State in terms of equitable opportunity for access to health care for people at equal risk; and

i i to evolve a more objective method for future allocations of health service resources that take into consideration population growths, movements and changing needs.' (New South Wales Health Commission Formula for Regional Allocation of Maintenance Funds, July, 1979)

I t should be stressed that the Regional Funding Formula does not, however, determine the size of the overall State allocation to health, but attempts to ensure that i t is distributed as equitably as possible. The potential of th is method of funding allocation assumes importance in the context of any changes to Commonwealth - State funding arrangements that give greater responsibility and fle x ib ility to the States.

As resource constraints continue, structural changes which have the potential to improve the efficiency of administration, planning and distribution of health services will become increasingly important. The concept of regionalisation is an attractive vehicle for assisting the achievement of these objectives.


The Commission RECOM M ENDS that:

. The current number of metropolitan regions in New South Wales should be reviewed 266 n

. Regional offices should not be involved in the direct provision of health services but should act as monitoring and coordinating agencies.

. Urgent attention be given to reviewing the current levels of delegation to regional directors with a view to reducing bottlenecks in the system.

. Organised programs of rotation of s ta ff between regional offices, hospitals and other in stitu tio n s be commenced as soon as practicable.

. Hospital and health service boards with responsibility for to ta l health services in a given area should be established.

Strategies to Influence U tilisation and Monitor Quality

Strategies to influence u tilisa tio n can be directed a t the point where services are delivered or by government action to control the supply of beds and services.

State health au thorities have a role in monitoring overall levels of u tilisa tio n and setting service provision guidelines to ensure not only the efficien t use of available resources but that minimium standards of quality are met. U tilisation review techniques are aimed at reducing the unnecessary use of services by tightening the c rite ria for admission to hospital and other in stitu tio n s and by eliminating unnecessary lengths of stay.

The desirab ility and effectiveness of the Commonwealth affecting u tilisa tio n through funding and health insurance arrangements has been discussed elsewhere in th is report.

The extent to which unnecessary stay in hospitals has contributed to the present high cost of services is unquantifiable. Cost savings from reducing unnecessary stays in hospitals may only be marginal in the short term. In the longer term to ta l costs may only be affected by the provision of less

costly alternatives to the present high cost institutional services. The benefits w ill accrue in terms of a reduced need for additional beds and changed community expectations about desirable forms of care.

The extent of cost savings achieved by reducing u tilisatio n 'has to be viewed with caution1 (Submission, 82). Most costs are generated in the early

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days of admission and (u tilisa tio n review) procedures tend to concentrate on longer lengths of stay.

'While concurrent (u tilization review) implementation probably leads to only a small and relatively b rief cost reduction, given the spiraling cost picture, th is must be viewed as a very positive accomplishment. However, u tilisa tio n review can be no more effective in increasing the efficien t use of health care resources than the system w ill allow. Its real potential w ill be realised fully only i f disincentives leading to the inefficient use of hospital resources are removed and positive incentives are created which w ill allow UR committees to direct patient care to appropriate and necessary levels. Specifically, these incentives include insurance and service programs to encourage good home care, nursing home care, and ambulatory alternatives to hospital c a re .'

(Gertman and Eagle, 1976).

The Role of the States

It is generally accepted that there is scope for reducing unncessary use of hospital resources and thus improving efficiency by processes of u tilisa tio n review. These processes focus on:

a. patient stay b. admission policies.

c. practices in the provision of diagnostic and therapeutic services

(a) Patient Stay

Reviews of patient stay and service practice are the responsibility of individual hospital managements. While some progress is being made towards coordinating information on such a c tiv itie s and providing some incentives for hospitals to become involved in such programs, the Commission believes that State health authorities need to become far more active in th is field.

There are of two major problems which state health authorities must overcome before they can effectively a ssist hospitals in these a c tiv itie s.

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F irst, morbidity data which compares length of stay for disease categories standardised for age and sex is necessary to allow in te r- and intra-hospital comparisons to be made. This would a ssist both individual hospitals to compare th e ir performance against that of th eir

peers and the State health authority to monitor the performance of hospitals.

The Commission is aware th a t a Relative Stay Index has been compiled by the New South Wales Health Commission. The South Australian Health Commission claims th at in lin e with the rationalisation document for controlling use, i t has given greater priority to the collection of

morbidity and hospital management data (Submission, 72). However, the use that is being made of such data by central and regional offices and hospitals is not clear. In a v is it to the United States of America

Commission s ta ff were impressed by the use made of this type of data by professional standards review organisations (PSROs).

U tilisation review and peer review procedures were in itia te d in the United States in 1965, when u tilis a tio n review became a prerequisite for participation in, and reimbursement under the Medicare program. By 1972 i t was found that u tilis a tio n review requirements were being

inadequately met by hospitals and the Professional Standards Review Act came into force, calling for the establishment of local panels of practicing physicians to implement programs financed under the Social

Security Act. PSROs were allowed to delegate the conduct of such review a c tiv itie s to an individual hospital (Peer Review and Cost Containment: An Appraisal, AHA Health Services, Monograph ISP/78).

Two major features of u tilis a tio n review procedure in the United States indicate the extent to which PSROs have led to the development of a better data base:

. most u tilis a tio n review today is a mandatory, not a voluntary activity; . u tilisa tio n review is no longer an autonomous, local hospital a ffa ir, but a process which increasingly, is formally supervised by

medical and government groups outside the hospital

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Nevertheless, the advantages of such a data base must be tempered by the suggestions in some of the US studies that the PSRO machinery is so cumbersome that its costs now outweigh i t s benefits.

The second problem to be overcome by State health authorities is that of management expertise and advice. Advisory services exist in fields such as catering, cleaning and pharmacy, which hospitals can avail themselves of (Tasmanian Department of Health Services Submission). However, management advice tends to be re stric ted to organisation and methods rather than to medico-administrative matters.

The Australian Medical Association and the Australian Hospital Association, by implication, suggest that one way of overcoming th is may be by a form of s ta ff rotation between the State health authority and hospitals:

'S taff in statutory authorities lack public hospital experience for a variety of reasons (mainly the d iffic u ltie s involved in transferring between the public service system and hospitals); consulting s ta ff are few in numbers and tend to specialise in specific areas (e.g. catering,

finance)'. (25)

(b) Admission Policies

It is at the point of access to services that probably the most crucial and far reaching decisions about u tilisa tio n are made.

Admission of a patient to a hospital involves a decision to admit to one hospital rather than another, to admit to a hospital rather than another in stitu tio n , (e.g. a nursing home) to admit for a particular procedure or program of services. The US experience with u tilisa tio n review programs has been criticised because i t cannot deal adequately with 'the major cause of inappropriate hospital u tilis a tio n , the admission and/or continued stay of patients who require post hospital extended care . . . ' (Gertman and Eagle, 1976).

The Commission believes that in the long term State health authorities can significantly a lte r the extent and pattern of u tilisa tio n of hospital services by promoting the delineation of

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hospitals' roles. Such a process is extremely complex and in tricately linked to funding arrangements, objectives and policies of a ll governments, the role of the private sector, rationalisation of technology, the development of data, s ta ff training and doctors'

referral patterns.

If a system of better use and control is to be effective, adequate support services must be made available, and better use of existing fa c ilitie s must be encouraged.

Some of the smaller hospitals with low occupancy, whether public or private, could be used to provide alternative types of accommodation and services (assessment, re h a b ilita tio n , outpatients e tc .).

The a v ailab ility of these alternative services may not by themselves cause a reduction in hospital stays, but they could be used to ju stify non-admission to higher cost beds.

This suggests th a t i f these support services were provided, there might be an increase in the assessments to be performed, either on patients seeking to enter in stitu tio n s or on patients who could leave.

In th is regard g e ria tric services in some States appear to be progressing more rapidly than the health system as a whole.

The a b ility of State health authorities to influence the provision of support services and altern ativ es to institutionalisation is presently re stric ted both by funding arrangements and their lack of control over the to ta l health system. The plethora providers of health

and welfare support services has led to lack of coordination and State authorities may also have reservations about of the ab ility of voluntary or private providers to implement policy decisions requiring the provision of adequate, altern ativ e services. Community health services,

for example, although subject to a measure of State control, may not be sufficiently coordinated with hospitals to enable effective discharge planning, as a follow up treatment.

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(c) Diagnostic and Therapeutic Practices

In the context of reducing unnecessary stay in hospitals, a review of diagnostic and therapeutic practices in hospitals may isolate instances where a stay has been unnecessarily long, where procedures used have delayed the stay or where admission has been inappropriate. Controls on diagnostic services are minimal and vary widely between hospitals.

Examples of such reviews include the study being conducted at Flinders Medical Centre on doctors' habits in ordering biochemistry te sts and the study to assess the impact of cancer treatment at Royal North Shore Hospital, and the Mater Hospital study in Sydney.

Studies such as these are normally prompted by a concern peculiar to particular hospitals. The State health authorities may only indirectly in itia te such reviews through such means as funding s ta ff required to conduct the research. In addition, these in itia tiv e s lie in the medical domain of hospital administration, where involvement by governments creates problems. The Queensland Department of Health notes that:

'I t is important that review mechanisms are developed from the clinical workface and not imposed as an administrative manoeuvre'.

( 18- 2 )

The Commission has expressed elsewhere i ts belief that financial and clin ical accountability need to be more closely aligned. I t regards review as one way of promoting th is alignment and supports the work being done by agencies such as the Peer Review Resource Centre. At this stage, i t is neither administratively possible, for reasons of data and management outlined above, or p o litic a lly desirable for States to impose

reviews of diagnostic and therapeutic practices on hospitals. Nevertheless, the Commission believes that State health authorities, could encourage hospitals to establish such review programs by

responding, where appropriate, to such requests and more importantly, by acting on the results of such research.


Conclusions and Recommendations

The Commission concludes th at the overall level of u tilisa tio n of hospital beds, services and f a c ilitie s will need to be reduced i f measures to control supply are to be effective. In addition, i t is concerned that the quality of care may well be effected by excessive levels of u tilis a tio n .

I t is possible for u tilis a tio n rates to be affected by action from the Commonwealth, such as linking funding to a defined u tilisa tio n rate.

However, the Commission adheres to the principle that rationalisation programs are most appropriately carried out by State health authorities. Consequently, i t considers th at State health authorities can assume direct and indirect responsibility for improving the use of services both within and between hospitals. I t has also concluded that the influence exerted by State health authorities should be regulatory and advisory rather than imposed by


The Commission RECOM M ENDS that State health authorities:

. Develop hospital morbidity collections to determine standards for patient length of stay on the line of the New South Wales relative stay index; . Establish a group or organisation similar in principle to the PSROs

operating in the United States. (The a c tiv itie s of the New York City organisation are suggested as a desirable model).

. This group would have the responsibility of organising the collection of morbidity data, coordinating the information and monitoring the performance of hospitals throughout the S tate.

. Ensuring th at the data be up-to-date and accurate and be distributed to hospitals in a way which will allow comparisons to be made; . Responding where appropriate to requests to in stitu te u tilisa tio n review programs in hospitals 1

. Liaising with professional bodies involved in u tilisa tio n review and promoting the concept among its members.

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Quality Control Review System

Consideration of the type and level of u tilis a tio n of services should be balanced against the important consideration of the quality of those services. Increasing attention has been placed on the need for a systematic means whereby the community can be assured that health services are medically necessary and are being provided in accordance with professional standards. The medical profession is aware of the challenge given by the Minister for Health in 1976 to establish 'systems of professional standards review designed to both assess the quality of and to seek ju stific a tio n for services rendered.1

There are a number of a ctiv itie s that occur within hospitals that aim to measure actively or assess the quality of medical care being rendered. Some a c tiv itie s have a heavy emphasis on measurement (u tilisa tio n review), others have a heavy emphasis on assessment and evaluation (clin ical review, peer review), some programs try to combine both assessment and evaluation

(c rite ria auditing).

Evidence before the Commission suggests that these types of programs within hospitals are s t i l l at an embryonic stage:

'Some hospitals (mainly teaching) have used forms of c lin ical review for many years. Such mechanisms are not widespread. Surveys reveal that even the most rudimentary measures of clin ic al performance are not used in the great majority of h o s p ita ls.' (Australian Council on Hospital Standards Submission.)

As this section is concerned with actions by governments the operation of these a c tiv itie s within in stitu tio n s has been covered elsewhere and will not be treated here. This section w ill examine in broad terms the scope for action by State health authorities over the quality of care delivered.

In New South Wales the Public Hospitals Act, 1929, as amended gives the Health Commission a clear responsibility for in itia tin g , promoting and fa c ilita tin g the achievement and maintenance of adequate standards of Ί . patient care within hospitals; and 2. services provided by h o sp ita ls.'


According to a New South Wales Health Commission internal document, the Act has required overhauling to enable the Commission to carry out it's responsibilities in respect of public hospitals. To exercise control over quality of care, specific responsibility and authority must be placed on hospital boards and a mechanism developed by which boards may be held accountable to the Commission. Legislation in other States generally contains similar re s p o n sib ilitie s. The f ir s t step in overhauling the Public Hospitals Act in New South Wales was the recession of Section 48 which took away the rights of access to public hospitals for medical practitioners and required an appointment to be made. The rationale for th is action was that the performance of a hospital and the quality of care delivered is dependent on the individual professionals employed. Therefore, the process of

appointment of the medical s ta f f is an important quality control issue.

'I t should also be noted th at the current measures are part of an overall framework being prepared by the Commission for the upgrading of hospital medical s ta ff organisation and quality of care standards. A systematic and generally uniform set of appointments procedures is the

f ir s t step towards the achievement of proper standards of medical s ta ff organisation and w ill be followed in the future by a complete revision of model By-Laws, the introduction of a system of delineation of clin ic al privileges, the development of systems for the qualitative monitoring of patient care and the establishment and extension of

evaluation and accreditation programs. The broad objective is to achieve a well defined, consistent and equitable system for the provision of medical services in Public Hospitals throughout the State with the general adoption of uniform policies within which fu ll account can be taken of local needs and circumstances. It is proposed that in a ll of these future developments wide consultation will take place with a ll elements involved in the provision and delivery of hospital services at both State and local level and in that context Boards are urged once

again to establish machinery for regular dialogue with medical s ta ff using the hospital so as to ensure the highest quality of care to the patient and the optimum use of resources'.

The appointments procedures are therefore seen as ju st one (albeit very important) component of a package to improve clin ical management and subsequently the quality of care being·provided.

2 6 6 w

By formalising the appointments procedure i t is possible for each hospital to attach certain obligations to the appointment of a doctor, for example:

. obligations in respect of patients on-call rosters, education commitments.

. conditions of clinical practice, delineation of privileges. . obligations in respect of service to committees of the medical s ta ff.

. involvement in quality assurance programs.

I t is the delineation of privileges issue which has received considerable attention in the submissions.

'Frequently medical s ta ff are not formally assessed prior to their hospital appointment and there is no check on the medical practitioners standards of competence or ethics of behaviour. No formal lim itation is placed on the scope of the individual c lin ic ia n 's practice. There is an urgent need in Australia for le g islativ e reform in th is area to provide medical practitioners with the necessary legal framework and support to establish such mechanisms. The roles of both specialists and GPs must be defined in d e tail. De facto delineation is in effect in h o sp itals.'

(Australian Council on Hospital Standards Submission.)

'Before appointment the education, training and experience of the medical practitioner should be examined by a credentials committee. Credentials committees should also advise on the delineation of privileges, the work and procedures a doctor is permitted to perform.'

(Australian College of Medical Administrators Submission.)

The Geelong Hospital states:

'for the hospital patients we are responsible for we very very carefully screen the medical appointments ___ we wonder i f that same sort of auditing ought to apply to private patients as well . . . . It

seems to us logical that i f we assure ourselves of the standard of medical care of the hospital patients, we should be able to do that for private p a tie n ts"... W e have a form of delineation (of privileges) but i t is very slight in the h o sp ita l.' (Transcript, 18.)

266 x

Inquiries made in New South Wales, Victoria and South Australia suggest that these States do not think th at requirements to introduce delineation of privileges should be done by leg islativ e means. I t is hoped that i t w ill be introduced voluntarily by hospitals. Legal problems may arise in th is field , as has been the case in New South Wales.

Hospital by-laws govern the operations of hospitals and provide the structural and procedural apparatus by which the hospitals objectives can be achieved. I t is through these by-laws that hospitals spell out the appointments process and any conditions attached to those appointments.

Future amendments to the Public Hospital Act in New South Wales w ill make i t necessary for a ll hospitals to have by-laws. Legislation is also to be introduced which w ill make i t necessary for hospitals to establish credentials committees which w ill enable privileges to be delineated.

Another two a c tiv itie s which should enable State health authorities to oversight the quality of care being delivered is the delineation of hospital rules and accreditation.

Submissions from State health authorities, individual hospitals and some professional bodies have stressed the importance of 'role definition' for hospitals. A most succinct definition of the concept of role definition was provided in a paper from the New South Wales Health Commission's Bureau of

Personal Health Services, which formed a working party in 1977 to consider th is issue.

'Hospital role delineation may be defined as a process by which the Health Commission, in conjunction with hospital boards, hospital administrators and health professionals, designates what general services should be provided and what general functions should be carried out by each hospital, within the context of a State and regional hospital network, and taking into account alternative forms of care and

existing health services, whether delivered through an in stitu tio n a l, non-institutional, public or private model.' (Towards the Delineation of Hospital Roles, Bureau of Personal Health Services.)

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There are a number of objectives of a program of hospital role delineation which include assisting in the review of quality of care. These are:

. a ssist in proper rationalisation of hospital services and encourage development of a 'network' of services so that resources may be shared between hospitals; . a ssist in the development of hospital standards and the review of

quality care; . assist hospital boards, s ta ff and the public in understanding the need for the even distribution of hospital services and their closer integration with community health services; . provide the framework through which competition between hospitals

can be reduced and forward planning at in stitu tio n a l based health services can proceed; . provide the context within which hospitals may review th eir staffing requirements and within which credentials committees may consider

and recommend the granting of c lin ic a l privileges to medical practitioners.

A document prepared for the Commission by the Royal Australian College of Medical Administrators, Defining Hospital Roles, made a cautionary note about the superficially attractive concept of defining a h o sp ital's role.

The College said th is is a complex task requiring a great deal of analysis for the development of a basis from which to work. The College said that a h o spital's role must be reviewed regularly to ensure that i t is appropriate to needs, technology and the ab ility of the community to fund i t s a c tiv itie s.

One of the objectives of the accreditation program of the Australian Council on Hospital Standards has been to ensure the quality of care delivered in hospitals is of adequate standard. Support of th is program may be a way for State health authorities to further monitor the quality of care being delivered in hospitals.


State health authorities have a responsibility to that ensure a high standard of care is delivered in hospitals. Their major responsibility in

2 6 6 z

this area is to provide the le g islativ e framework within which th is care can be monitored. Specific responsibility and authority must be placed on hospitals by which they may be held accountable to the State authority. This should not be construed as unnecessary interference on the part of the State health authority or the practice of medicine in the hospital.

The Commission RECOM M ENDS that:

. there be a formalised appointments system for the selection of medical s ta f f in a ll hospitals. This system should provide for a mechanism by which the board is advised on medical appointments, credentials of s ta f f are screened and conditions can be attached to appointments, for example the participation in review procedures.

. there should be routine assessment of performance of medical s ta ff in hospitals; . State health au thorities should undertake the delineation of hospital roles;

. legislation be enacted to give State health authorities responsibilities over the quality of care being delivered in private hospitals.

266 a a

P age 2 6 7 f o l l o w s .


The private sector is a term which, in the Australian context, covers a great many parts of the health care industry. Only one aspect is addressed in th is Chapter, although i t necessarily involves some consideration of other aspects.

Privately owned f a c ilitie s include:

(a) Private in stitu tio n s for provision of acute care

. private enterprise hospitals . private religious or charitable hospitals.

Both these types of in stitu tio n s receive financial support from public funds, both d irectly , through hospital bed-day subsidies, and indirectly, through payments of medical benefits for medical services rendered in such f a c ilitie s . In addition, the power of the Commonwealth in relation to the health insurance funds is relevant, in the setting of premiums and basic tables.

The impact of government actions on the efficiency of the operations of these fa c ilitie s and on the efficiency of the public-private mix of fa c ilitie s and th e ir u tilis a tio n , as well as the effect of the operations of these private fa c ilitie s on the efficiency of government-run f a c ilitie s , appear to be the topics of concern to the Commission in its search for ways to improve efficiency within the health care system. '

(b) Privately owned f a c ilitie s for provision of extended care.

. private enterprise nursing homes . private interprise assisted accommodation for the elderly (e.g.

Special Accommodation houses in Victoria) . religious or charitable accommodation for the elderly or disabled


including: . nursing homes . hostels or supported living units . independent living units . day centres

. hospices for the dying.

The private sector includes, however, much more than these. The Commission has also had many submissions dealing with private patients in public hospitals and i t will be necessary to discuss them in dealing with the issue of the impact of government actions on the relationship between private and public hospitals. Other issues raised in submissions, e.g. the private

provision of home mursing or paramedical services, or of pharmacy services, are not dealt with in th is chapter. Privately owned diagnostic services, an important aspect of service provision for private hospitals, are mentioned in this Chapter.

What the private sector does

In a ll, the private sector provides about 20 per cent of beds, 1.3 per 1000 at 30 June, 1980 (Recognised Public Hospitals were 4.9 per 1000). Private Hospitals "can be categorised into the following groups:

- major general care hospitals - regional general care hospitals - non-surgical or medical' hospitals - psychiatric hospitals - specialised hospitals" (S.214 p.6).

The majority of private hospitals are in the "regional general care" category, "commonly described as 'suburban su rg ic a l', usually ranging in size from 50 to 120 beds with some however in excess of that" (7). For example, among the 49 hospitals surveyed for the Victorian Private Hospitals and Nursing Homes Association in 1978-79, only 4 of the 32 private enterprise hospitals had more than 100 beds and, while 10 of the 17 religious and charitable hospitals had more than 100 beds, only 3 had more than 200 beds.


As is clearly illu stra te d in the hospital morbidity s ta tis tic s available to the Commission, either on a State-wide basis (Western Australia, Queensland and New South Wales) or for individual hospitals, which have provided information on types of operations performed, routine and non-urgent surgery dominates the work of most private hospitals.


Table 1A Most Common Operations for Males Private Hospitals N.S.W. 1978

Surgical Codes Principal Operation Separations

651 Ligation or Excision of Vas Deferens 3,516

233 Tonsillectomy and Adenoidectomy, (a). 3,212

411 Repair of Inguinal Hernia, (a). 2,704

804 Manipulation of Joint 2,432

913 Excision of Other Skin Growth 2,028

914 Excision of Other Lesion of Skin or Subcutaneous Tissue 1,896

661 Circumcision 1,764

912 Excision of Superficial Cyst 1,344

444 Appendicectomy. (b)_ 1,308

234 Other Tonsillectomy 1,132

493 Other Haemorrhoidectomy 1,104

608 Cystoscopy. . 1,004

820 Excision of Semilunar Cartilage of Knee 872

28 Spinal Puncture, (a ). 784

928 Removal of Nail 708

214 Other Operation on Nasal Septum 680

431 Gastric Intubation with Related Procedures 592

193 Myringotomy 584

235 Adenoidectomy with Tonsillectomy 560

252 Surgical Extraction of Tooth 536

Total Above 28,760

Total Principal Operations 49,132

Source: Health Commission of N.S W., Hospital Inpatient S ta tistic s, 1977, Table 31 Note: (a) Not elsewhere classified . (b) No other surgery.


Table IB Most Common Operations for Females Private Hospitals N.S.W. 1978

Surgical Codes Principal Operation Separations

704 Curettage of Uterus 12,132

684 Division and Ligation of Oviduct 3,768

689 Other Operations on Oviduct, (a). 3,284

708 Intra-Uterine Device 3,256

913 Excision of Other Skin Growth 3,236

233 Tonsillectomy and Adenoidectomy, (b). 2,932

742 Other Induction of Abortion 2,524

444 Appendicectomy, (a ) . 2,356

386 P lastic Operation on Breast 2,312

381 P artial Mastectomy 2,208

8104 Manipulation of Joint 2,104

696 Hysterectomy, (b). 2,084

914 Excision of Other Lesion of Skin or Subcutaneous Tissue 1,988

894 Stripping of Varicose Veins 1,764

234 Other Tonsillectomy 1,744

608 Cystoscopy, (b). 1,484

522 Cholecystectomy 1,380

252 Surgical Extraction of Tooth 1,064

220 P lastic Repair of Nose 1,052

937 P lastic Repair without Skin Graft 1,012

Total Above 53,684

Total Principal Operations 88,976

Source: As on Table 1A Note: (a) Not elsewhere c lassified (b) no other surgery


Even where complex surgery is done (e.g. coronary by-pass) th is s t i l l is done on straight forward cases because of the lack of back-up available. Simple gynaecological, urological and gastro-enterological surgery occupy the bulk of surgical admissions

From its survey of the diagnoses made in 50 per cent of private hospital separations between January and June 1978 in New South Wales, the New South Wales Health Commission found that the most common operations were minor gynaecological or urological procedures, namely, male and female surgical s te rilisa tio n , curettage of the uterus, and insertions of intra-uterine contraceptive devices. Hernia repairs in males and tonsillectomy in both

females and males, and minor incisions of skin lesions or cysts also predominated. ( A more extensive range of surgery is performed in some private hospitals. One such hospital (St Andrews. Melbourne) indicated an operating l i s t for the year which included major gastro-enterological surgery but here too, comments made indicated that selection of suitable (i.e . uncomplicated) cases is in general a factor in decisions to admit to a private hospital

Information published by the New South Wales Health Commission based on its morbidity collection from 50 per cent of separations in private hospitals between January and June, 1978 and a ll separations in public hospitals in the State for 1977 (Figure 2, p.96 of Hospital Inpatient S ta tistic s New South Wales 1977. Division of Health Services Research Report No.79/13) indicated

the following overall re la tiv itie s in broad categories of separations;

Category Public Private

Surgical 30% 49%

Medical 61% 48%

Obstetric 9% 3%

A similar illu stra tio n of the function of private hospitals is given by the Community Hospitals Association of Victoria a ll non-profit hospitals.


In 14 hospitals surveyed in both 1975 and 1979, the available beds were described as follows:

Community Hospitals (Victoria)

1979 1979

Total beds 1933 1962

Medical & Surgical 1544 1614

Infant 136 146

Midwifery 243 202

I t is possibly sig nificant that there were 41 midwifery beds by 1979 but 70 more medical and surgical and a very small increase (10 beds) in infant or paediatric beds.

Another way of describing the function served by the private hospitals is to look at the ages of patients treated.

Table 2 compares the percentage age composition in private and public hospitals for 1977-78. Private hospitals take a lighter load of babies and infants under five years and of the elderly than do the public hospitals. The proportion of elderly "hospital" patients is understandably high since so many elderly people are pensioners.


Table 2 Percentage Age Composition of Patients in Private and Public Hospitals, yearlended 30 June 1978

Age in Years Private Hospitals Public Hospitals

Private Hospital Patients Patients Total

5 5.2 9 6 9.6 9.6

5-14 9.1 9.8 8.3 9.1

15-34 37.6 38.3 31.2 34.8

35-49 20.9 16.6 12.5 14.6

50-64 15.2 15.4 15.7 15.6

65+ 12.0 10.4 22.7 16.4

Total 100.0 100.0 100.0 100.0

Source Derived from Health Insurance Commission Annual Report 1977-78, Table 24.1 Based on number of patients who separated from hospital during the year.

Note: Figures may not add due to rounding

There are only a few large private hospitals in Australia providing a fu ll range of specialty services These are run by religious or charitable in stitutions. One or two of these large hospitals have recently accepted a teaching role (in Western Australia and Victoria) for undergraduate medical students

Thus the structure and function of the private hospitals in Australia does not mirror that of the public hospitals. This point has been emphasised in a ll submissions, but the view on the future naturally d iffe rs , with some firmly convinced that private hospitals can do anything public hospitals can do given a chance and do i t better while others, pointing to recent growth in "suburban surgical" centres, express the view that the private hospitals will in the main - continue to deal with the most profitable, least

complicated aspects of hospital service provision.

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Beds, U tilisation and Bed Occupancy

Overall a t 30 June 1980. there were some 339 private hospitals in Australia, 108 in New South Wales. 120 in Victoria, 44 in Queensland 37 in South Australia, 21 in Western Australia 8 in Tasmania, none in the Northern Territory and 1 in the Australian Capital Territory

Table 3 provides information on the capacity and u tilisa tio n of the private hospitals in each State and in Australia as a whole (see also Table A in Appendix 20) I t can be seen that, although there is an overall sim ilarity in the size of the private hospital sector in each S ta te : New South Wales has the smallest sector whether measured in available beds, occupied bed days or

separations per thousand population. The share of to ta l hospital u tilisa tio n held by private hospitals is also smallest, in N.S.W. (See Table B Appendix 2C).

Table 3 Private Hospitals Capacity and U tilisation 1980

Beds per 000 pop (At 30 June 1980)

Bed Days per 000 pop (Year ended 30 June)

Separations per 000 pop (Year ended to June)

NSW & ACT 1 2 240 33

VIC 1.4 313 43

QLD 1.5 374 46

SA 1 6 317 53

W A 1.3 270 44

TAS 1.2 282 49


AUSTRALIA 1.34 289 41

Sources: Annual Report. Commonweatlh Director General of Health 1979 80. Commonwealth Department of Health.

Note December 1979 population estim ates.


On average, the private enterprise hospitals are very much smaller than the private not-for profit hospitals, which in turn are smaller than the public hospitals. (See Table C Appendix 2C).

The average bed capacity of private for profit hospitals shows considerable State variation. with Victoria South Australia and Tasmania being smaller than New South Wales or Queensland and West Australia intermediate.

The private not for-profit hospitals of a ll States except those in South Australia and the one hospital in the Australian Capital Territory have in general much higher average bed capacities than the private p ro fit hospitals.

(See Table D. Appendix 2C). 1


Table 4 documents the shape of the private hospital sector for the year 1977-78. Whereas in Australia overall the private enterprise and private non-profit hospitals are evenly d istributed, the distribution varies markedly in different States. For example New South Wales has mainly private enterprise hospitals whereas Queensland and Tasmania have mainly non profit hospitals j

ITrends in u tilisa tio n and occupancyjApprovals by the Commonwealth (with agreement from the State in respect of licensing approval) have resulted in a definite expansion of the private hospital sector since 1979. in all States except Tasmania and Western Australia (see Table A. Appendix 2C). Furthermore i t can be said that u tilisa tio n has fallen in the private hospital sector in Australia overall and in each State since 1979.Table 5 provides information on overall private hospital u tilisa tio n for selected earlier years Taken in conjunction with Table 3, th is indicates that capacity has been growing with no compensating rise in u tilisa tio n .Thus, i t could be said that private hospital productivity has not risen as expected. (Appendix 2C, Tables E to G. present th is information by S tate.)27 6

Table 4 Private Hospitals: Distribution of Private Hospitals and Beds, 1977 78


Hospitals 107 116 42 40 24 6 335

VNP 21 52 69 58 42% 67% 44%

FP 79 48 31 43 58% 33% 56%

Beds 5718 5263 3215 2059 1800 533 18,588

VNP 31 52 82 72% 66% 84% 55%

FP 69 48 18 28% 35% 16% 45%

Source. Health Commission Annual Report 1977 78 Table 16 (Does not include 8 private hospitals with 86 beds which did not forward inform ation.)

Notes VNP = Voluntary non profit FP = For p ro fit ACT private hospital (John James) not included. No private hospitals in NT


Table 5 Private Hospitals - Beds and U tilisation per 000 Population (a)


Beds per 000 pop. OBD per 000 pop. per 000 pop. (at 30 June) (Year ended 30 June) (Year ended 30 June)

1965 1 08 n/a n/a

1969 0.99 258 34 (b)

1976 1 25 319 (c) 41 (c)

1977 1.28 308 41

1978 1.28 302 42

1979 1.30 303 42

Sources: Commonwealth Department of Health including Public and Private Hospitals S ta tis tic a l Summaries (1965, 1969) Annual Reports Health Insurance Commission; (1976, 1977 1978)

Notes (a) Figures for 1976 onwards exclude ACT private hospital No private hospitals in ACT prior to 1970.

(b) Inpatients treated. Figures for 1976 onwards are for separations.

(c) Estimated annual rate

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Efficiency measures

The Department of Health has published figures for 1977-78 on to ta l outlays to the private hospital sector and the sources of finance. According to these in 1977-78 Australians spent $324 million in th is section, of which $48 million came from out of pocket payments by individuals receiving services $186 million from health insurance funds and $90 million from Commonwealth sources, including $71 million from payment of the $16 a day bed subsidy (under Section 33 of the Health Insurance Act, 1974) and some smaller amounts such as payments under Section 34 for care of public patients in some private hospitals

W e can calculate crude overall cost per occupied bed day and cost per separation for the private hospitals from the overall expenditure within this section, as summarised below

Total Total Total

Outlays Bed Days Separations

(000) (000)

$324m 4273.5 588.5

Cost per occupied bed day $75.8

Cost per separations $550.5

Sources Health Insurance Commission Annual Report 1977-78 Source Commonwealth Department of Health.

The question of comparative efficiency with the public sector is dealt with elsewhere. I t w ill be apparent from the. points already made about the size and type of work done in most private hospitals that no easy objective comparison can be made


Additional cost and performance data

The overall figures on operating costs can be supplemented by sample data from surveys conducted in Victoria, f ir s t a survey conducted by Victorian Chamber of Manufacturers for the Victorian Private Hospitals and Nursing Homes Association, and a second survey by the Community Hospitals Association of V ictoria. Information on operating costs per bed day has also been provided by some individual private hospitals or groups of private hospitals.

The survey of the operation of 49 private hospitals in V ictoria. for the financial year ended June 1979 (which covered 62.3 per cent of Victorian private hospitals) have the following summary performance measures.

Table 6 Selected Measures: Victorian Private Hospitals 1978 79

Religious or Charitaole (N=17)

Private Enterprise (N=32)

Operating cost per occupied bed day $101.81 $82.31

Occupancy 67 8% 65.8%

Beds 2.139 1,645

Average length of stay (days) 6.5 7.5

Admissions 80 ■ 887 52,607

Staff (equivalent fu ll time) 244.4 149.7

Daily Average 1450.7 1082.3

Salaries & Wages as % of gross operating expenditure 77.1% 63.7%

EFT Staff per Daily Average 1.68 1.38

Source- S.215 (Attachment)


Evidence from a group of Private=for=profit hospitals indicated a cost per bed day at about the same le v e ls.

The Community Hospitals Association of Victoria commissioned a survey of 16 of its members, a ll of which are non profit hospitals and from th is a similar picture emerges to th a t indicated for religious and charitable hospitals generally in the larger survey referred to e a rlie r. The cost per

in-patient bed day is calculated at June 1979 at $101.61 or $648.4 per patient treated. The occupancy given for that year was 68 per cent and the average length of stay 6 38 days. This hospital survey also gives the number of equivalent fu ll time s ta f f and the daily average making i t possible to calculate the s ta f f per daily average occupied bed of 2.51 for 14 community

hospitals in 1979. This figure is higher than that calculated for the survey of Victorian private religious hospitals given in Table 6. This may be because the community hospitals surveyed were larger, more "medical"

hospitals, or for other reasons. On the other hand, the figure of 2.51 is extraordinarily close to the 2.48 for the same financial year for the 18 public hospitals sized between 51 and 200 beds, which participated in the Commission's own survey in 1980. The Association has also provided the Commission with i t s most recent survey results in which the cost per

in- patient bed day for 1979 80 is given as $114 05.

Differences within the private hospitals

One further point arising from the evidence provided to the Commission is that the private hospitals are s t i l l far from being identical throughout Australia. The religious or charitable hospital clearly serves a rather different function from the private enterprise hospital Even among private

hospitals, there appears to be a deal of variation in accounting and management practices, as well as services provided record keeping and so on. Of 22 private hospitals which applied for accreditation by the Australian Council on Hospital Standards between 1975 and 1979, 10 have been accredited

and seven have failed accreditation.

Individual hospitals showed a wide range of occupancies in the survey done for the National Standing Committee of Private Hospitals (S.214, Attachment, Appendix 2(b)).


In an inter-firm comparison of 11 Victorian private hospitals i t was apparent that on most parameters, performance varied greatly. As with public hospitals, i t is always possible that th is is because of case-mix or other special features.

How far have inter firm comparisons been applied in th is sector?

The Commission has evidence th a t some recent arrivals in the private hospital scene and some large local operations certainly do make regular and timely comparison of the performance of the hospitals they own and that some associations have assisted members in obtaining such comparisons as a by product of their participation in survey a c tiv itie s

Comparisons of Efficiency

The picture of the private hospitals given in evidence by those who place a high value on the importance of private hospitals now and in the future is of a highly efficien t streamlined business like operation which is failing, because of government inaction to allow fa ir competition with public hospitals.

The arguments presented to us by such groups generally have taken the following form. F irst - some information is presented on the costs of service provision in private hospitals- second, these are compared favourably with the cost of operating public fa c ilitie s ' in some cases. an explanation of the differences is attempted· and fin ally , recommendations are made for government action to improve the market position of these ho sp itals.

The f ir s t section of th is paper presented facts which the Commission has obtained as to the cost structure and performance of private hospitals. This, indicated major differences between the present roles of the private and public sectors of service provision. On th is point, there is agreement between private and public sector advocates. However, th is has not prevented a number of comparisons on the basis of such data as can be obtained. For the Commission, however, i t presents a major difficulty in comparing the efficiency of the two types of service provision, one which cannot confidently be overcome on the basis of the data available.


The different functions of private and public hospitals are highlighted, for example, by the Queensland Department of Health. They provided a detailed analysis of th e ir s ta tis tic s of the most common diagnosis made on patients discharged from private and public hospitals (Table 1, p.14.3 and 14.4 S.711). As the Department points out. i t is not only the "dramatic technological forms of hospital care - coronary care units, renal care, etc" but also the effect of having a very wide spread of diagnoses requiring "far greater specialisation into Distinct Patient F acilities". They go on to say

"the greater the number of Distinct Patient F acilities· (a) the greater the work force due to specialisation of functions and more in d iv is ib ilitie s in the workforce -(b) the lower the overall optimum occupancy rate will be (the overall

ra te is a combination of the optimum rate for each D istinct Patient F a c ility )."

The conclusion they draw is "Both these consequences increase the costs of in patient care. No reliable estimate is available of the impact on costs" (p 14.2).

The information supplied for 1978-79 by the Victorian Private Hospitals and Nursing Homes Association from its survey of 49 member hospitals indicates the limited range of f a c ilitie s available in private hospitals. One of the religious and charitable institu tio n s ran a casualty department but no outpatients, two ran an outpatients department of some kind but no casualty and four had some kind of day patient department.

Two private enterprise hospitals indicated some form of combined casualty outpatients and day patients department.

A variety of arrangments exist to enable pathology te sts and radiological examinations to be carried out on patients in.private hospitals. In the Victorian survey, nine religious and charitable and 10 private enterprise hospitals had an arrangement for provision of pathology services a t the

hospital usually under an arrangement with a private pathologist. One private enterprise hospital (out of 30 replying) provided hospital s ta ff for th is purpose and three (out of 15) religious and charitable hospitals did so


The most common arrangement in private hospitals is for o ff-site pathology with a technician or nurse from an outside laboratory coming into the hospital on a regular basis.

With radiology, a frequent adjunct to surgical procedures, a number of private enterprise hospitals and religious hospitals and charitable hospitals owned some radiological equiment. A sim ilar number reported no fa c ilitie s at the hospital. A larger number however had services provided at the hospital but owned privately.

As for pharmacy, only two religious and charitable hospitals (of 42 hospitals reporting) had an on-site pharmacy. A further aspect on which the Victorian survey provides documentation is the provision of coronary and intensive care units. Six of the religious and charitable hospitals and four of the private interprise hospitals had coronary care or intensive care units, and four had separate intensive care units with a to ta l of 14 beds in them.

These facts on the work done in private hospitals support the view expressed by the Queensland Department of Health with which a ll other health authorities and most hospital administrators agree. that the private hospitals at present handle a workload "which c alls for relatively low capital­

intensive care" (para 14.2.6). Or. as an experienced Victorian administrator puts i t , "comparisons between the costs of operating public hospitals and the cost of operating private hospitals are invalid as private ( for profit) hospitals do not provide many services provided free by public hospitals in many instances" (5.964).

If they are cheaper or appear more efficien t, then i t is argued that th is is because they are highly selective can s ta ff at minimum levels and transfer their complicated cases to the public hospitals, whose doors must be open to a ll.

Accounting differences

A second problem, also not capable of resolution on the basis of the evidence, is the lack of comparability occasioned by the way in which accounts are kept by the two types of hospital. This point too is made by both private and public protagonists.


Public hospitals in calculating their gross operating expenses do not include the cost of depreciation. interest on capital, rates and taxes on property, payroll tax, various duties, fees and licences, various accruals or the cost of services provided free of charge by some other government departments. This is mainly because the capital works budget is handled in an entirely separate manner from operating budgets in public sector financing.

Not a ll private hospitals include full commercial costs. For example, "charitable hospitals do not have the cost of income tax and sales tax which gives them an advantage for capital works financing. Some charitable hospitals also receive a State Government interest subsidy so that they only meet one per cent in te re st cost out of their revenue" (Mr P ratt, S.820 p,20)

One hospital group submitted that full commercial costs would add 50 per cent to the gross operating expenditure of public hospitals. How th is estimate was arrived at is not known. It would appear that the commercial costs which private hospitals have to bear and present in their accounts may

amount to about 20 per cent of gross revenue (based on M CA fig u res). A similar proportion, 21 per cent of operating costs (not revenue) is obtained from the costing provided by Dr C.R.T. Hughes for St Andrews, Adelaide. Other differences e x is t, which may "inflate" or "deflate" figures available for comparison The method of calculating costs of different "lines" in the

operating budget is d iffe re n t. as for example with administration costs

Charges vary in different private hospitals. The patient receives a charge based on bed day cost which includes the $16 a patient day Commonwealth subsidy, plus such additional charges as are levied by that particular private hospital. These include theatre fees, routinely and in some cases surgical

or medical supplies. Other revenues may be obtained for example through leasing of premises to private practitioners either as consulting rooms or for diagnostic equipment.

The Commission has been informed Ln confidential evidence that in many private hospitals' arrangements ate made to receive a share of a ll charges made by private practitioners for diagnostic services and pharmaceuticals. I t was suggested that th is could amount to a return to the hospital of $6-$12 per

patient day.


In a l l , when presented with the accounts of a public hospital, i t is not possible to compare these with the accounts of a private hospital, some examples of which the Commission has seen. They are markedly different. Thus even i f the operating cost per occupied bed day is calculated for a private and public hospital as can be done on the basis of some of the information provided, i t is clear th at the components of the gross operating expenditure are different, ju st as i t is clear th at the workload handled by the public and private hospitals overall is very d ifferen t.

In considering the evidence before i t , the Commission has noted that the costs per bed day of private hospitals, a t somewhere between $80 and $100 per bed day in 1978-79 (a mean of $93.33 is given for the Victorian survey), is certainly less than that in public hospitals which was reported in the

Interim Report (Table 13) in 1978 79 as $149.70 for A ustralia.

But the Commission accepts that th is figure is not comparable with those for private hospitals for the reasons discussed.

Figures which correct for the accounting differences in an acceptable way are not available but there are some figures which take some account of differences in case-mix and bed size.

The Commission s survey of public hospitals differentiated hospitals according to bed size. The group of public hospitals which is perhaps most nearly comparable to the private hospitals in size and function are the group 51 and 200 beds. This s t i l l includes a number of hospitals with a wide range of services. Nevertheless, th is group of public hospitals, rather than the group of less than 50 beds, is more nearly comparable because the very small public hospitals often have a large number of nursing home type patients, whereas private hospitals of similar size tend to be for acute short-term medical and surgical problems. Looking then at the hospitals sampled in the 51-200 group

(18 out of a to tal of 196 recognised public hospitals in th at size range in Australia), the average costs per occupied bed-day was $110.8 with a range from $47 to $239 (the highest cost hospital including some 40 community health sta ff and supplying a number of other hospitals). The cost per patient treated, for inpatients only, ranged from $582 to $2212, with a mean of $988.4.

2 8 6

Several submissions have suggested much larger differences. An attempt was made in the course of successful negotiations between the Royal Melbourne Hospital and St Andrews Presbyterian Hospital to determine comparable costs so as to provide a basis for reimbursement of expenses to the private hospital by

the public hospital. The figures obtained then suggested that the cost per bed day (in 1976) at the Royal Melbourne was $136 and that at St Andrews $105.12, a difference of $31 per bed day. An Adelaide physician presented a comparison of costs for two hospitals of similar size, but with different case mix (the private hospital doing twice as much surgery as the public,

with no medical s ta ff or out patients) in which he calculated the cost per bed day of the public hospital as $158.07 in 1978-79 and $157.08 in 1977-78 with a cost per occupied bed day for the calendar year 1978 at Private hospital of $90.21 Whether the comparison in this case should be between the $157 08 or the $122.72 which removes payments to medical s ta ff, paramedical services,

pathology and drugs, none of which are costs to the private hospitals is also not clear. In any case, the discussion highlights, in explanation of the difference, the higher costs in the public hospital of s ta ff, both nursing and non nursing as well as the costs of maintenance and administration The lack of comparability of workload must, however, have some impact on these high


One confidential submission provided evidence that i f the "books" were kept in the same format as those of a private hospital, that particular public hospital could have made a considerable operating surplus. Thus i t is very much a matter of presenting different figures for different purposes and no

simple factual answer has been given to the question "Are private hospitals more e ffic ie n t than comparable public hospitals doing the same work?"

Disincentives to Private Hospital U tilisation

While the efficiency of the private hospitals cannot accurately be compared with that of public hospitals, i t seems reasonable to conclude that private hospitals can provide some types of service at a lower cost than the public hospitals for those patients who can afford to pay th eir fees.

Notwithstanding th is many private hospitals are suffering falling occupancies This could be in part due to difference in efficiency but is more likely due to the heavy subsidy for private patients in recognised


hospitals who do not pay any of the additional fees required in the private hospital. The availablity of free treatment for the uninsured in recognised hospitals could be another fa c to r.

The private hospital sector and a number of individuals see two major factors involved Either people are not able to afford high rates of insurance cover which w ill enable them to afford private hospital charges, or they make the rational economic decision that th is is not worthwhile when access as a private patient to public hospitals is readily available and results in few or no out-of-pocket charges. As the National Standing Committee of Private Hospitals summarised:

'the predominant source of operational finance (for private hospitals) comes from hospital benefits . . . paid to hospitals on behalf of patients . . . by health insurers. The continuing v ia b ility of private hospitals in Australia is . . . inseparably linked to the v ia b ility of the health insurance industry.' (S.214, 16)

While accepting the connection between level of insurance cover and the use of private hospitals, other submissions drew the Commission's attention to the fact that the expansion in private hospital bed capacity which has occurred in the la st few years is also a factor in falling occupancy. In relation to occupancy in the obstetric section of private hospital work the

falling birth rate is a fa c to r. An underlying factor may be the build up of technological investment highly specialised units and trained medical s ta ff around the clock in the major teaching hospitals and base hospitals making these hospitals more attractiv e to the privately insured patient. This assessment of the quality of care available in the public hospital must presumably be offset against the convenience of the local setting in which most private hospitals are placed and the pleasantness of being in a smaller hospital where the patients own general practitioner can often provide care or where in any event, only one sp ecialist doctor, is usually involved. The Commission has no evidence to reach conclusions about how patients weigh the economic and qualitative advantages and disadvantages of private and public hospital admission.

Certainly the patient and his family or friends are not the only people with the capacity to influence th is decision. The doctor is a major factor too. For example, a small survey of reasons given by patients for choosng one


particular private hospital (St Lukes Sydney) indicated the importance of the doctor in advising th is decision. The doctor's perspective was put in th is way by one practitioner:

'In some situations I would feel much safer in a public in stitu tio n , but there are many medical or surgical situations that I would feel as safe and in fin itely more comfortable in a private hospital situation (Transcript, 2667)

I f that statement is fa ir, then the question comes back to the economics of the situ atio n . Some doctors have said that, a ll things being equal, they find a patient opts for the cheaper situation. Without doubt, from the point of view of someone facing out-of-pocket payments (though not from his point of

view as a taxpayer), the cheaper situation is as a private patient in a public hospital.

The reason that the private patient in a public hospital faces fewer out-of-pocket charges is , quite simply, because he or she is only charged by the hospital the insurable daily fee agreed between the Commonwealth and State governments (currently $50 or $75 per day). whereas the patient in a private hospital may be charged more than th is, either because the daily charge is greater than the level of insurance coverage held by the patient, or because

of add-on charges Since la te 1965 the cost of accommodation in a public hospital in excess of the daily charges has been met by the Commonwealth and the State through the Cost-Sharing Agreements; in contrast any excess of private hospital fees over the insurable amount must come from the patient.

In addition, both types of patient will face charges for medical services reimbursed under the quite separate system of Commonwealth Medical Benefits, private medical benefits and out of pocket payments

Aggregate data on out of- pocket payments was only available u n til 1977 78. In 1977 78, out of pocket payments to private hospitals in Australia totalled $48 m illion, or 14 8 per cent of private hospital expenditure. This was equivalent to an average of $11.23 per patient per day in 1977-78

The evidence available to the Commission on the detailed incidence of these payments was more recent, but less comprehensive.


Daily Accommodation Charges

The National Standing Committee on Private Hospitals (S 214) commissioned a survey of 39 private hospitals in a ll States in la te 1979. This shows that the most common charge for accommodation varied from $66 in New South Wales, Australian Capital Territory and Queensland to $93 in Victoria, and $96 in Tasmania. The most common charge in Tasmania and Victoria was higher than the then higher-than-basic hospital benefit plus subsidy ($75 plus $16, $91). The implication of th is is that at least half the patients in private hospitals in Tasmania and Victoria faced some out-of-pocket payments, even though these were the States that had the highest proportion of patients with higher-than-basic hospital insurance (same survey Appendix 3). In the other States charges were lower but s t i l l exceeded or equalled the basic hospital benefit plus subsidy ($66). As these States also had lower proportions of

patients with higher than basic hospital insurance, the Commission assumes that a considerable number of these patients also faced out-of-pocket payments.

Earlier reference has been made to surveys of operating costs of private hospitals in Victoria by two private hospital associations The implication from the figures provided is that hospital bed-day benefit plus Commonwealth subsidy does not cover the average operating cost per bed-day in these private hospitals

Additional Charges

The main additional items for which private hospitals may raise charges are theatre fees (except South A ustralia). labour ward charges, pharmacy items not covered by the Pharmaceutical Benefits Scheme and medical and surgical supplies such as protheses. None of these items is charged separately to private patients in public hospitals, as they are covered by the cost-sharing agreements-

No direct evidence on the incidence of out- of-pocket payments for these items was available to the Commission. However, data on insurance coverage provides some indication These items are covered by most insurance funds, but in different ways; they may be covered by higher hospital tables, by optional- variation-to-basic hospital tables, or by ancillary only tables.

Thus some patients who have higher hospital insurance w ill automatically be


covered for some or a ll of these additional charges; others have to take out additional tables to be insured against them. Overall, 3 855 000 people or 26.5 per cent of A ustralia's population were covered for theatre fees and/or labour ward charges a t March 1980.

The existence of d iffe re n tia l out-of-pocket payments suggests that there is a prima facie case, on the basis of economic rationality for people taking out insurance to choose a level of hospital insurance sufficient to meet accommodation expenses as a private patient in a public hospital, rather than more expensive higher levels of insurance. I t also suggests that even these

higher levels of insurance are not adequate to meet the charges which are levied in private hospitals. For this reason, the next section looks at the coverage and level of hospital insurance among the Australian population, and considers its adequacy for private hospital use.

The Importance of Insurance to Private Hospitals

The importance of insurance to the financial survival of private hospitals cannot be overestimated. Put simply, the lower the level of insurance the greater the out of-pocket payments and the less the likelihood of the patient being able to afford private hospital accommodation.

The importance of insurance to private hospital finance is indicated by the fact th at 57.4 per cent of private hospital expenditure came from insurance funds in 1977-78. The survey commissioned by the National Standing Committee on Private Hospitals (S214 Attachment 1) indicated that 97.2 per cent of the private hospital patients surveyed were insured, and th at 63.9 per cent had higher-than-basic hospital insurance. There were marked variations

in the coverage of patients between States. However, there was a loose correlation between the level of insurance of patients and the most common charge found by the same survey (Table 7). The proportion of the population insured for higher hospital benefits is also shown, for comparison.


Table 7 Insurance Status of P at'ents and Most Common Charge in a sample of Private Hospitals, and the population’s Insurance Coverage

Proportion of Most Common Proportion of popul patients with Charge '(b) ation with higher-

higher level level hospital

insurance(a) insurance(c)

% Rank $ Rank % Rank


38 6 66 5/6 20 3 5

82.2 3 93 2 43.1 3

44.5 5 66 5/6 19.8 6

86.8 2 76 3 50.3 1

75 4 75 4 35 0 4

93 1 96 1 49.0 2

63.9 31.3

Notes (a) National Standing Committee on Private Hospitals (S.214, Attachment 1. Appendix 3). Calculated from the analysis of the la s t 50 patients admitted

to 29 hospitals surveyed before 1 October 1979, totalling 1950 p a tien ts.

(b) National Standing Committee on Private Hospitals (S 214, Attachment 1. 3). Survey of 29 private hospitals.

(c) Commonwealth Department of Health. 1980, 236.


There are two comprehensive sources of data on the proportion of the Australian population carrying health insurance and on the coverage and the level of that insurance. The Australian Bureau of S ta tistic s Health Insurance Surveys (March 1979 and March 1980), and data provided by the insurance funds to the Commonwealth Department of Health summaries of which are published in the Director-General s Annual Report.

The ABS fu ll data indicate that in March 1980, 62.3 per cent of the population had hospital insurance. There was l i t t l e variation in coverage among the States, with the exception of Queensland which had much lower coverage. Altogether 23.2 per cent of the population had higher-than-basic

levels of hospital insurance. There was more variation among the States in th is. As suggested above, there is some correlation between the population's coverage for higher levels of insurance, and the fees charged in each State.

The Commonwealth Department of Health data provides a similar overall picture, though the absolute coverage figures are different (59.6 per cent with hospital insurance; 31.3 per cent with higher levels of insurance [Table 9]).

In addition, unpublished data provided by the Department indicates that 26.5 per cent of the population is covered for theatre fees and/or labour ward charges.

The proportion of people with higher-level insurance in both sets of data, exceeds the proportion of hospital admissions (21.5 per cent in 1978-79) and of bed-days (18.9 per cent in 1979-80) which were in private hospitals. Some people who carry insurance cover adequate for private hospitals are

being admitted to public hospitals. They may, of course have been admitted for a condition not suitable for management in a private hospital or for a variety of other reasons.

There is and always has been, extensive use by privately insured individuals of the recognised hospitals in a ll States except Queensland and Tasmania. I t is the trends in th is u tilisa tio n and in the insurance coverage and in the out-of-pocket payments which influence this u tilisa tio n .


Trends in Insurance The major concern with trends, as expressed to the Commission by the private hospitals, is that there has been a decline in the population's insurance coverage, and in the level of that insurance, in recent years. This has resulted in increased out-of-pocket payments for private hospital patients and a correspondingly increased financial incentive to become private patients in public hospitals. This has resulted in decreasing private hospital u tilisa tio n . Each of the elements of th is argument are considered separately.

The f ir s t element is the decline in insurance coverage, and in the level of that insurance.

The ABS data (Table 8) indicates a small but clear decline in hospital insurance coverage between March 1979 and March 1980. The proportion of people who knew they had basic or high hospital insurance fe ll from 63.2 per cent to 60.7 per cent. A decline occurred in a ll the States (but not in the T erritories), but varied in size among the States (Table H, Appendix 20). The proportion of people who knew they had higher hospital insurance f e ll from 24.4 per cent to 23.2 per cent. However, Western A ustralia, Queensland and the Territories recorded rises in the same period.


Table 8 Trends in Coverage and level of Hospital Insurance, March 1979 to March 1980; Australian Bureau of S ta tistic s(a)

People (b)


Ό00 %


Ό00 %

Basic ($50 per day) 5507.3 38.8 5370.0 37.6

Higher ($75 per day) 3465.7 24.4 3309.3 23.2

Subtotal: Basic plus higher 8973.0 63.2 8679.2 60.7

Level not known (c) 580.7 4.1 227.2 1.6

Total with hospital insurance 9553.7 67.2 8906.4 62.3

No hospital insurance 4630.0 32.6 5264.5 36.8

TOTAL 14 208.8 100 14 293.1 100

Contributor Units

Basic 2239.1 34.7 2240.5 34.1

Higher 1374.9 21.3 1304.5 19.9

Subtotal: Basic plus higher 3614.0 46.0 3545.0 55.6

Level not known (c) 265.0 4.1 110.4 1.7

Total with hospital insurance 3879.0 60.1 3655.5 55.6

No hospital insurance 2573.3 40.0 2886.6 43.9

TOTAL 6452.3 100 . 6570.7 100

Notes: (a) Australian Bureau of S ta tis tic s , 1979 and 1980. (b) People estimated from contributor units on basis of estimates of average contributor unit size. (c) This category was differently defined in 1979 and 1980. The

related te x t refers to the subtotal excluding those who had hospital insurance, but did not know the level.


Table 9: Trends in Coverage and level of Hospital Insurance, by S tates, 1977 to 1980, Percentage of Population; Commonwealth Department of Health (a)


A. Basic Hospital Insurance ($50 per day)


1977 67.0 67.6 51.1 64.7 64.6 54.9 64.0

1978 68.0 72.2 51.9 66.9 62.5 68.1 66.1

1979 64.1 67.8 48.6 66.9 63.6 61.9 62.9

1980 61.9 65.9 45.1 60.3 56.1 57.1 59.6

B. Higher Hospital Insurance ($75 per day)


1977 20.5 23.4 16.8 36.9 22.5 46.5 23.3 36.4

1978 22.1 41.5 17.9 53.6 31.1 54.6 31.5 47.7

1979 22.8 42.7 19.2 54.6 39.6 55.5 33.0 52.5

1980 20.3 43.1 19.8 50.3 35.0 49.0 31.3 52.5

(a) Commonwealth Department of Health, Director-General's Annual Reports, 1977 to 1980. (e) Estimates


The Commonwealth Department of Health data covers a longer period. Table 9 shows the la s t four years. This shows a decline in the coverage of at least basic hospital insurance from 66.1 per cent in March 1978 to 59.6 per cent in March 1980. This trend was consistent across a ll States. The situation with higher levels of insurance was different. Coverage rose between March 1977 and March 1979, when i t was 33.0 per cent but by March 1980, had declined to 31.3 per cent. But th is trend was not consistent across States, with Victoria and Queensland recording rise s in 1980. Furthermore, from Table 9 i t can be seen that the proportion of hospital-insured people with higher levels of insurance, rose between 1977 and 1979.

In summary, th is information indicates an overall decline in the population's coverage by hospital insurance, with a less marked and more recent decline in the coverage for higher levels of insurance. What has been the effect of these insurance trends on the amount of out-of-pocket payments

incurred by private hospital patients?

Trends in Out-of-Pocket Payments One approach to th is uses the aggregate data which is available up to 1977-78. While to ta l private hospital expenditure increased from $169 million to $324 million over the four years from 1974-75 to 1977-78, the out-of-pocket payments remained roughly constant in current money terms. Hence, such

payments declined as a source of private hospital finance from 27.8 per cent in 1974-75 to 14.8 per cent in 1977-78 (Table 10). On a per-patient-day basis, these payments only increased from an average of $9.50 in 1975-76 to an average of $11.23 in 1977-78. This was an increase of 18.2 per cent, which was less than the CPI increase of 24.6 per cent, and much less than the private hospital cost per bed-day rise of 45.8 per cent in the same period,

calculated from Australia - wide expenditure data, not individual survey re su lts. (Commonwealth Department of Health, 1976 and 1978, and Australian Bureau of S ta tis tic s , 1979, 3). On this calculation therefore, out-of-pocket payments appear to have declined in real terms', both as a source of finance

for private hospitals, and as a cost to the patient.


Table 10 Sources of Private Hospital Expenditure, Australia; Current Expenditure,

Source of Funds

1974-75 1975-76 1976-77 1977-78

$m % $m % $m % $m %

Government: Commonwealth Other Government Total Government



15.4 82

0 —

15.4 82

35.7 83

0 —

35.7 83








Health Insurance Funds 96 56.8 106 46.1 146 52.9 186

Individuals 47 27.8 42 18.3 47 17.0 48

Other — 0 — 0 — 0 —

Total Private 143 84.6 148 64.3 193 69.9 234

57.4 14.8 0


Source: Commonwealth Department of Health (1980): Australian Health Expenditure, 1974-75 to 1977-78: Analysis, 45-49

Another approach is provided by data from the surveys by the Community Hospitals Association of Victoria of its 16 members. This information permits a comparison to be made between the rise in average costs per bed-day and the rise in benefits - plus - subsidy per bed-day. Such a comparison involves many assumptions and is only used to give a rough indication of the actual situation. In 1975, the average cost per occupied bed-day was $56.77. At that time, the higher hospital benefit was $30, making $46 with the Commonwealth subsidy. The difference between this and average costs was $10.77. In 1979-80, average costs were $114.05, benefit plus subsidy was $91, making a difference of $23.05. This constitutes a rise of 114 per cent in the difference. Over the same period, bed-day costs rose 100.9 per cent. From these figures, i t seems lik ely that out-of-pocket payments have increased in real terms, but only slig h tly more than the bed-day costs themselves.

A third approach is used in a Commonwealth Department of Health discussion paper available to the Commission. In th is paper the comparison is made between the ris e in hospital benefits (both levels) plus the subsidy and that in public hospital bed-day costs. The paper points out that public hospital cost rise s would over estimate, rather than under estimate, private hospital cost rises because of the greater technological expansion in public hospitals. This comparison also makes many assumptions, but, like the second approach, leads to the conclusion that the percentage rise in benefits plus

subsidy, since the subsidy was introduced in 1975, is similar to the rise in bed-day costs. I t could be inferred that payments from other sources (mainly out-of-pocket) have also increased by a similar percentage.

The Australia-wide expenditure data do not support the view that out-of-pocket payments have increased in real terms. The limited comparisons we have been able to make from other sources suggest that out-of-pocket payments have increased but in line with rises in operating costs and benefits plus subsidy per bed-day.

Trends in Private Hospital U tilisation

In the most recent period for which continuous data is available (1975-76 to 1979-80), private hospital separations per 1000 population have remained steady, while occupied bed-days per 1000 population have fallen. Regardless of whether bed-days or separations are considered, private hospital


u tilisa tio n has fallen both as a percentage of to ta l u tilis a tio n and as a percentage of to ta l private u tilis a tio n , that is private patients in recognised or private hospitals. Uninsured patients, hospital u tilis a tio n , and private hospital u tilisa tio n , have fallen as percentages of to ta l u tilisa tio n , while private u tilis a tio n in recognised hospitals has risen. Thus, while to ta l private u tilis a tio n as a percentage of to ta l u tilis a tio n rose, the proportion of th is occurring in private hospitals f e ll. The exceptions to these trends were in Queensland and Tasmania where private hospital u tilisa tio n was increasing, and in South Australia where to ta l private u tilisa tio n was declining.

Examination of very recent occupied bed-day estimates shows th at there was a decline in to ta l private bed-days in 1979-80. This affected recognised hospitals more than private hospitals, with the effect th at private hospital bed-days rose as a percentage of to ta l private bed-days, though they f e ll in absolute terms.

Overall, these s ta tis tic s show a decline in private hospital u tilisa tio n . They do not indicate what the causes of th is decline might be. However, the decline in the level and coverage of insurance, and the differential out-of-pockets discussed above have probably had an influence.

Government Influence on Hospital Mix

The previous sections of th is chapter have considered the functional differences between recognised and private hospitals, the functional and accounting differences that make cost comparisons d iffic u lt and the private hospitals' concern about declining insurance coverage and private hospital u tilisa tio n . In this section, ways of improving efficiency in the use of private and public hospitals through actions by governments are considered, and discussed in the light of evidence presented to the Commission.

I t would appear that the internal efficiency of private hospitals is dependent upon a number of factors. Keeping staffing to minimal levels is crucial because of the cost of labour in a labour-intensive industry. While th is is in part related (as in any hospital) to good management, i t is a

limiting factor on the range of services provided, to be offset against the additional work th is may a ttra c t to the hospital. I t w ill often be more


economically e ffic ie n t to have arrangements whereby doctors rather than the hospital purchase equipment. Furthermore, as with any other service, the supply of beds w ill create economic pressures of its own.

As patient fees are the major source of revenue, private hospital existence depends c ritic a lly on the level of u tilisa tio n . This in turn is dependent, in the f i r s t instance, upon there being a sufficient proportion of the privately insured population with, in the second instance, a sufficiently

high level of cover, both hospital and medical, to make admission to a private hospital bed and the medical expenses this w ill involve a financial p ossibility. I t is noted th at medical as well as hospital fees are important, f ir s t since they are the basis on which doctors provide services in the

hospital and second, because they may be additional revenue generated for the hospital through fe e -sp littin g arrangements.

Thus, the question of private hospital efficiency is inseparable, in the Australian context, from the question of the mix of public and private hospital services.

Governments can influence supply through their regulatory powers over private hospitals and th e ir financial and regulatory power in relation to public hospitals. The Commonwealth has power to approve private hospital beds for subsidy and the States have the power to license beds in private hospitals, without which approval does not take place. In two States, New South Wales and V ictoria, more extensive powers exist by virtue of specific

legislation. So far as recognised hospitals are concerned, State governments have control over cap ital works and the Commonwealth has power to approve (or not to approve) beds for cost sharing. These powers are therefore extensive, while those in relation to private hospitals are somewhat unclear.

An important aspect for some, though not a ll, health authorities and many individuals is that private hospitals be included in the planning for health service provision for the State. Some submissions go further and assert that, i f an over expanded private hospital sector is experiencing reduced occupancy, then for government to subsidise i t further will create needless expense.

While some private hospital advocates would not object to the view that government.planning should include them, they naturally take a different view


of the principles on which such planning provision should be based. An extreme position is that th is principle should be that more private beds should be occupied before a public bed is fille d by a private patient, or that the private sector should be providing a service, for example CT scanning, and the public sector should only do th is i f i t has not been done already.

C ritics of the private hospitals point to those factors which lim it the type of services provided and the lim its to access for the fu ll range of patients. These lim its are seen as a consequence of the need to make a p ro fit which may occasion over provision of services. Expansion of private services is likely to cost more unless other public services are reduced. I f th is occurs provision for the general public may suffer.

Governments can influence the u tilisa tio n of public and private hospitals through th e ir control over some of the financial incentives and disincentives, mainly operating on patients, rather than doctors. This control lie s in two broad areas, level of insurance cover and the level of out-of-pocket payments

faced by patients.

Coverage and Level of Insurance

Hospital and medical insurance are, for most people, necessary for becoming a private patient, but they are not necessarily sufficient to become a patient in a private hospital. I t cannot be assumed th at an action by government intended to encourage people to take out health insurance w ill also encourage them to use private hospitals.

The decision to take out insurance is influenced by the cost of premiums, the likely out-of-pocket medical and/or hospital expenses and the individual perception of the risks of incurring medical or hospital expenses. Habit is undoubtedly also a factor. The decision to cover at a higher than basic level includes the question of premiums and out-of-pocket expenses. Governments can exert some influence on these factors.

Raised public hospital bed charges

If public hospital bed day charges were allowed to rise then i t might be that fewer people would insure unless the e lig ib ility for public hospital treatment were restricted in some way.


I f increased charges were accompanied by restricted e lig ib ility for free treatment i t could be expected that there would be more people, and certainly no fewer, covered by insurance, though again i t is not clear th at there would be more with high levels of insurance cover. If there were more privately

insured people in public hospitals this would increase fee revenue to the States and accordingly reduce levels of government funding, but medical claims on the Commonwealth would increase under the present system.

E lig ib ility for treatment in recognised hospitals

The present arrangement of unrestricted e lig ib ility replaced a system of selective e lig ib ility based on a means te s t. A means te s t or income te s t has the effect of forcing most ineligible people to purchase insurance but not necessarily to purchase sufficient insurance to cover charges in a private hospital. The extent to which this would expand coverage of the population is unproven, since there are no accurate figures on the number of people using

public hospitals who would be affected. Private patients as a proportion of to ta l patients have not declined in recent years however patients in private hospitals have done so while private patients in public hospitals have increased.

Subsidy of health insurance funds

At present, the Commonwealth subsidises insurance for long-stay patients in hospitals and nursing homes through the Re-insurance Pool. Increasing subsidies through th is or other avenues would have the effects of lowering premiums and making health insurance more attractive to more people. This means of making health insurance more attractive emphasises individual choice

of whether to insure rather than the force im plicit in a means te s t.

Selective subsidised health insurance

Paying or subsidising the health insurance premiums of selected groups. This is not done at present, but was tried in the Subsidised Health Benefits Plan in 1970 to 1975, when i t was found to be d iffic u lt to implement effectively. In addition, i t may not prove any cheaper for Government than

continuing to provide services through existing channels.


Tax rebateability of health costs

At present, direct health costs for which no insurance rebate was paid are rebateable, but insurance premiums are not. Reversing th is situation would increase the attractiveness of health insurance.

Tax rebateability favours higher income earners for whom insurance is less of a financial burden.

These means of influencing the coverage and level of health insurance are mainly open to the Commonwealth because of i t s constitutional responsibility for health benefits, though the States have a role in determining public hospital charges and thus benefit levels.

Out of pocket payments

Although hospital and medical insurance may be necessary for a person to use a private hospital, they may not be su ffic ie n t. Recent increases in the overall use of hospitals by privately insured persons have occurred alongside decreasing private hospital u tilis a tio n . Apart from decisions based on the particular condition or the particular doctor of choice, th is is because of the d ifferen tial out of pocket payments involved. A number of factors affect the extent of th is d ifferen tial.

Items covered by hospital insurance

At present, a ll hospital insurance schemes include a rebate for the bed day charge. Other private hospital charges (theatre fees, labour ward charges, prostheses, drugs) may be covered either within the higher hospital table or in optional ancilliary or alteration to basic tables. This means that some people with hospital insurance are not covered for extra charges. Expanding basic hospital insurance to include private hospital extras would certainly make private hospitals accessible to more people. However the costs involved might be considerable. This is a Commonwealth responsibility.


Amount of hospital rebates

Many private hospitals charge more than the current levels of rebate plus subsidy. This means th a t most patients face out of pocket payments to pay accommodation fees. Raising rebates would reduce th is, but incur the problems discussed above.

Nexus between recognised hospital charges and insurance rebates

At present, hospital rebates paid by the fund are tied to recognised hospital charges, regardless of whether the patient was in a recognised or a private hospital. An alternative would be to break th is link and allow rebates to vary according to the actual cost of core and the level of subsidy,

in both recognised and private hospitals. The d iffic u ltie s hinge on calculating these actual costs.

Level of jo in t subsidy to private patients in public hospitals

At present, out of pocket payments by private patients in recognised hospitals are negligible, because the cost sharing arrangements finance the net costs of the hospital a fte r bed day charges. Changing the level of th is subsidy would affect the level of out of pocket payments. Charging private patients for a ll services, thus reducing effective subsidy and increasing out of pocket payments, could be a powerful incentive towards private hospital use, where appropriate.

Level of private hospital subsidy

At present, the Commonwealth pays $16 per occupied bed day on behalf of patients in private hospitals. Increasing this would affect the number of people needing to make out of pocket payments and the level of those payments provided fees remained the same. .

E lig ib ility for subsidies

At present, a ll patients in private hospitals receive the Commonwealth subsidy and a ll private patients in recognised hospitals are cost shared (other than compensation and third party claimants). Making th is e lig ib ility


more selective could mean that the resulting d iffe re n tia l out of pocket payments might encourage people into private hospitals.

Paying patients into private hospitals

Some submissions suggested the Commonwealth Government could pay for pensioners and disadvantages persons to be treated in religious, charitable and other private hospitals. Section 34 of the Health Insurance Act gives the option for the Government to allow private hospitals to have standard ward beds, but only on a budget d e fic it basis foreign to the current autonomy of

the operation of private h ospitals." (Transcript, p.1243). The scheme preferred in evidence is to pay the doctor at 75 per cent of the scheduled fee for his services and to provide an additional subsidy over and above to the $16 but s t i l l on a per diem basis. "The amount could be negotiated individually on a cost plus basis or an overall figure set at say 50 per cent of the average bed day cost. This provision may or may not be limited to a certain number of beds in any individual hospital" (5.209, p .6 ).

At present, responsibility for these la st seven matters re sts primarily with the Commonwealth. However, responsibility could be delegated to the States in certain circumstances.

Options for Change

Choice between options should take into account:

. the relative costs of recognised and private hospital treatment; . the functional sim ila ritie s and differences, and the extent to which care in one can be substituted for care in the other; . the actions which can be taken by governments to influence

efficiency, through influencing both the supply of, and the u tilisa tio n of, recognised and private hospital beds and services.

In considering th is issue, as with others before i t , the Commission is keenly aware not only of the financial aspects but also of questions of standards, accountability and quality of care.


Two issues related to quality of care are raised by a number of submissions in relation to private hospitals. These are the question of clin ical review and standards and clinical teaching in private hospitals and questions of certain charging practices in some private and in some cases public hospitals.

Some submissions seek that patients be assured of high quality care in private hospitals or th a t the same "quality controls" which are advocated in public hospitals be introduced into private hospitals. Not surprisingly, th is occasioned strong rep lies from private practitioners practising in private

hospitals though not from those practising in public hospitals, who saw such suggestions as an attack upon the "intensive and rigorous" nature of self regulation by private sp ec ia lists of high repute.

Where the p a tie n t's care is in the hands of a single sp ecialist perhaps with assistance from other consultants, there is likely to be better care than when several doctors, of differents levels of training, are involved. Fragmentation of care such as occurs in the la tte r case is a factor making

formal review or audit procedures the more desirable. The Commission notes, that in one submission the importance of peer review was emphasised and the d iffic u ltie s of introduction discussed. As Professor Andrew explained:

"The whole question of peer review and especially c rite ria audits is signally complicated by the lack of essential medical d e ta ils, provided by the doctor in charge, in the medical record. In contrast to the public hospital with resident staff who write up th is aspect, the private

hospital doctor is under no obligation to provide the essential medical d etails without which c rite ria audits cannot be institu ted ". (S.953, p.4; see also Attachment G).

Thus the requirement of adequate medical records should apply to a ll hospitals. ·

Professor Andrew, a former dean of a medical school and now Director of Medical Education at a large Melbourne private hospital, sees the issue as linked more generally to the desire for a different role for private hospitals in the future, incorporating undergraduate medical education, with the jo in t

benefits of "exposure of students to common medical and surgical conditions


[and] the powerful continuing and beneficial e ffect on professional standards in the form of an unofficial peer review by students of medical decisions". (S.853, p.5.)

Evidence before the Commission in relation to charging practices in some Psychiatric hospitals in New South Wales indicate th at some patients are being:

(a) admitted and discharged on the same day on successive days; (b) hospitalised without apparently requiring any medical care, because no medical benefit claims were submitted; (c) treated by persons other than medical p ractitioners; (d) hospitalised overnight while in daily employment." (S.806, Section


Further evidence, about one day admissions in private and public hospitals, strongly suggests that the Commonwealth health insurance legislation and New South Wales Government policy "are working in such a way as to cause hospitals to act unethically over the admission of patients for

periods of less than one day" (S.806, p.2; interim submission).

Some insurance funds indicate th e ir view that a new rate should be set, at say 60 per cent of the fu ll bed-day charge, for "part-day" admissions (S.806, Section 4) and that the psychiatric c lassific atio n be reviewed altogether as the entire system of d ifferen tia l financial subsidy for some, but not other, patients is anomalous (Section 6).

Option 1. Encourage the supply of private hospitals

If private hospitals are regarded as suitable substitutes for public hospitals and cheaper into the bargain, then one option is to encourage people to use them. The National Standing Committee of Private Hospitals, a number of medical practitioners, some administrators and other private individuals urge government action to increase the coverage and level of insurance and to remove the financial disincentive to using private hospitals. (Transcript p.3200; S.214, ppl-2.)

"Private hospitals are a co st-efficien t part of the health service and the contribution of private hospitals cannot be disregarded. Their capacity


to continue to be co st-efficien t is being undermined by cost escalation and the current confusion [in health insurance] are continuing to price the private hospital out of existence" (National Standing Committee of Private Hospitals, Transcript, p.3201). Not to mince matters, Dr Ruscoe considered

the private hospital financial position was at its "worst since 1967", especially for "those operating in the acute care and hospitals carrying out a lo t of surgery", he asserted th at there was "government action re stric tin g the a b ility of private hospitals to increase revenue commensurate with inflation"

(Transcript, p.3204).

Discussion of Option 1

For a number of reasons, th is option might not result in improved efficiency in the mix of recognised and private hospitals.

As was shown e a rlie r in th is chapter, private hospitals do not provide the fu ll range of services, so that emphasising private hospital treatment would lim it the access of some patients especially those who are sick or have least means. These services would continue to have to be provided in the public sector.

Secondly, the average costs of public and private hospitals are not comparable because of the functional and accounting differences discussed above.

Thirdly, even i f private hospitals can be p artial substitutes for recognised hospitals and th e ir average cost is less, th is does not mean that a sh ift in u tilis a tio n towards private hospitals would result in an overall cost saving for a number of reasons:

. a drop in recognised hospital utilisatio n would resu lt in savings on the margin. There is no reason to believe that marginal cost equals average cost in a recognised hospital, especially given th e ir fixed costs;

. as the range and complexity of a ctiv ities directed into private hospitals increases, th eir cost is likely to rise;


. the cost of many of the measures to encourage private sector u tilis a tio n (insurance subsidies, tax deductib ility , hospital subsidies) may offset any direct savings through the s h ift in u tilisa tio n .

Fourthly, on the supply side, i t is argued by some submission that a ll services, whether provided by public or private hospitals, cost money, the main difference being in who pays for them. Expansion of private services is likely to cost more unless other services are wound down and th is would lead

to reduced levels of provision to the general public.

Option 2: Efficiency through supply constraint

This second option takes the view that a ll services cost money and that expansion of private services w ill cost more, unless other services are wound down. On this basis, there is scope for improving efficiency through controlling the supply of both public and private beds and services, on a regional basis. I f there were su ffic ie n t beds and services in a region, neither sector could add to th is. I f a regional lacked beds or services, either sector could provide them, depending on circumstances and government policy.

On this theme, some submissions c a ll for greater administrative and legal controls over the private hospitals. On the other hand, some submissions argue for better planning based on b etter and more expert advice, the feeling being that clearer decisions with respect to the public hospitals are a ll that are needed, without the need for p o litic a lly awkward attempts to impose added controls on private hospitals. These decisions should be made with a clear understanding of the place of private f a c ilitie s in a particular type of service provision.

Within this option of constraining supply, changes influencing the coverage and level of insurance and the disincentives to private hospital utilisation are seen as less sig n ifican t, but could s t i l l be undertaken.

Also, subsidies and insurance benefits could be made conditional on the supply limits not being exceeded.

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Option 3: Minimal government subsidy of the private sector

A third option takes the view that private hospitals are unlikely to substitute for recognised hospitals (though the reverse may be tru e ). There is thus l i t t l e ju s tific a tio n for subsidising what the private hospitals do and the Commonwealth bed-day subsidy to private hospitals would be reduced or abolished. To prevent a s h ift out of the private hospitals, th is would have to be done in conjunction with a reduction in the subsidy to private patients

in recognised hospitals and for abolition of the nexus between recognised hospital charges and insurance benefits, and/or changes to increase the coverage and level of insurance.

This option is supported by the argument that private sector a c tiv itie s are most e ffic ie n t when competing in the market without government subsidies.

Option 4: Selective support for private hospitals

This option takes the view that private hospitals provide a more limited range of services and are complementary to, rather than substitutes for, recognised hospitals th a t private hospitals can provide some types of services more cheaply than recognised hospitals for those patients who can afford to

pay th e ir fees and insurance premiums. On this basis, support for the u tilis a tio n of private hospitals could be directed selectively, according to the following principles:

. to remove the disincentives to using private hospitals, where recognised and private hospitals are su b stitu tes, and . in order not to discriminate against private patients requiring higher cost services, which are generally not provided in private

hospitals, maintain higher levels of subsidy for these services.

This option c a lls for a range of measures: F irstly , cost sharing subsidies to private patients in public hospitals and bed-day subsidies to private hospitals can be made selective rather than universal. This can be done on a number of bases. Secondly, measures to increase the coverage and

level of health insurance and to ensure that hospital benefits cover a ll private hospital charges, would be implemented. Thirdly, co-operative efforts between public and private hospitals to u tilise cheaper beds would be



The means of removing the disincentive to using private hospitals is to make the subsidy for treatment equal for patients in both recognised and private hospitals. The fee charged would be the net cost after subsidy of providing the service. Benefits and out-of-pocket payments could eith er be set proportional to net cost-after-subsidy or benefits could be equal for a ll patients, with out-of-pocket payments equal to net cost a fte r subsidy and benefit. Either way, the patient pays more for more expensive fa c ilitie s .

There are a number of possible bases upon which selective subsidies could be allocated.

1, Hospital Type

Subsidies could be allocated on the basis of the range of services provided by the hospital (e.g. super-specialty, general, surgical, convalescent). This has the advantage that i t would enable private hospitals to provide a wider range and more complex services, but has the disadvantages th at i t rewards existing providers of more expensive services and encourages others to expand th e ir services without regard

for need.

2. Case type

Subsidies could be made dependent on the type of episode and where treatment usually takes place, for example, 3 categories could be determined from morbidity data from recognised and private hospitals:

(a) those episodes or types of treatment mainly provided in recognised hospitals. A high level of subsidy would continue with these a c tiv itie s.

(b) those episodes or types of treatment commonly provided in both recognised and private hospitals. These would a ttra c t equal subsidy regardless of where the patient was.

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(c) those episodes or types of treatment mainly provided in private hospitals. In th is case, there is l i t t l e ju stific a tio n for public

subsidy as the private sector apparently performs these functions adequately already.

The level of subsidy payable for a patient can be determined from medical benefit claims, which are associated with the hospital benefit claim.

3. Supply of Beds and Services

D ifferential subsidies could be made to both private and public hospitals according to the supply of beds and services. The subsidy would be paid on a ll patients so long as set planning lim its on the number of beds and services of different types in a region were not

exceeded. I f these lim its were exceeded, subsidies could either be reduced or removed from a ll or certain types of beds or services. This method could be combined with differential subsidies to different hospital or case types. In addition, hospital and medical benefits could be made conditional on supply limits not being exceeded.

4. Regional Allocation

The allocation of private hospital subsidies could be determined flexibly on the basis of local conditions. This could be achieved by block funding of regions for private hospital subsidies on a formula basis. This would be consistent with the Commission's preference for

formula funding from Commonwealth to States. Detailed allocation would then be determined locally. In general, the subsidy would be spread more thinly or more selectively, the more beds and services in a region.

In th is case, competitive forces would ensure that more e ffic ie n t private hospitals would survive at the expense of less efficien t ones in overprovided areas.

Another way to boost u tilisa tio n selectively is to use private hospital theatres and accommodation as "overflow" from the public hospital to reduce costs and waiting time. This requires Commonwealth and State agreement as well as goodwill on the part of particular hospital administration and


Boards. A specific example we have been given is that of the co-operative venture by the Royal Melbourne Hospital and the St Andrews Presbyterian Hospital, in which over 650 patients of the RM H have had surgery at St Andrews, between 1978 and 1980. The venture is , therefore, well under way. The two hospitals have provided the Commission with some information on the costs of th is interesting experiment. For the year 1979-80, the cost per

bed-day to the Royal Melbourne Hospital of operating the ward in St Andrews was $158.91 (Letter to Commission, 30 October, 1980). The average cost per bed-day for the Royal Melbourne for the same year was quoted as $185.13. This does not, however, necessarily imply th a t the savings equal the difference between the two average costs.

The Commission does not have estimates of the savings that have actually accrued to the Royal Melbourne or, more importantly, to other funding p arties, as a resu lt. Also the problem of waiting l i s t s which i t was intended to resolve was no longer significant by the time the program got under way, according to the hospital its e lf .

Conclusions and Recommendations

The issue before the commission is the preferred mix of public and private sector provision of hospital-based services. The evidence of declining private hospital u tilis a tio n has prompted c alls for action to reverse this trend. A number of options for change have been presented. The evidence does not point the way conclusively put points most clearly to the

fourth option - that of selective support for private hospitals.

The Commission is convinced of the important and needed role which the private hospitals play in Australian health services especially for short-term, simple medical, surgical, obstetric and psychiatric care. I f the Commonwealth Government adopts the health insurance recommendations of th is Commission, these and other benefits should a ssist the position of private hospitals by encouraging the population to insure against medical and hospital costs. However, the Commission is aware that these measures cannot produce

immediate results, and for th is reason, considers that short-term action should also be taken. All these measures should be subject to review by the Commonwealth Government at the end of a 12 month period with reduction of the load on the taxpayer in mind.

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Accordingly, the Commission recommends that:

The Commonwealth should provide as a short term measure, an additional d ire c t bed-day subsidy, over and above the $16 provided under Section 33 of the Health Insurance Act, which a ll existing

approved private hospitals should continue to receive. This subsidy should be made to individual hospitals on the basis of direct claims. Existing individual hospitals should be able to claim on a confidential b asis, presenting evidence of the need for subsidy

through audited accounts and occupancy figures.

The Commonwealth should allow private hospitals the rig h t to admit pension health benefit pensioners and eligible veterans, and should provide appropriate financial assistance on the basis of special patient bed-day payments to those private hospitals which take advantage of th is arrangement. The Commission considers a method to permit th is can be devised by means of negotiation with private hospitals associations without alteration of the Health Insurance Act 1973. Medical and other costs incurred (theatre fees etc) could be covered by the usual billing arrangements for pensioners and eligible veterans, th a t is , at proportions of the scheduled fees or in some other way.

Moves to develop practical co-operative service provision ventures between private and public hospitals, should be encouraged. While they may not be cheaper overall, they may lead to more e ffic ie n t use of resources and can do no harm, provided there is prior negotiation of terms involving a ll parties including the appropriate State health au th o rities.

State and Territory health authorities should have regard, on a regular b asis, to movements of privately insured patients in or out of public hospitals and take action promptly to reduce beds in the public sector where redundancy has occurred.



Hospitals are accountable to local citizens and the community bodies that provide financial and other support, consumers of health care, taxpayers, and Local, State and Commonwealth Governments. (Commonwealth Department of Health Submission, Part II, 41)

The process of accountability has several aspects - quality of care, access to appropriate services, financial performance and so on. Cost accountability has a specific purpose:

'To report on financial performance and results achieved to a responsible authority, to permit the evaluation of performance against pre-determined c r i t e r i a . 1 (Commonwealth Department of Health Submission, Part I I , 42).

Cost accountability is concerned with responsibility f ir s t for expense incurred, and second for the evaluation of its outcome. If i t is to be effective i t must be a s tr a tif ie d process with clear lines of delegation and reporting, and systematic analysis of what is achieved.

Cost accountability should ensure that 'efficiency' goals such as producing a high level of service at least cost or obtaining the maximum level of services from a given financial outlay are being achieved.

Hospitals are dependent on taxpayers' funds and are thus accountable to the public. They are also accountable to the State health authority.

State health authorities are dependent on Commonwealth funds for public hospitals and are therefore also accountable to the Commonwealth Government as well as to th eir own M inisters. These complex arrangements produce problems in themselves, not the least of which are the varying requirements

of different levels for data.


Because of the inter-relationships between the provision of medical services and the cost generated in the process, financial and c lin ic al accountability cannot be considered independently of each other.

Problems in Achieving Cost Accountability

Most submissions to the Commision which addressed the issue of cost accountability either did so in a general way or tended to confuse the concept of accountability with th at of control. In fact, the Commission agrees that 'the regulatory mechanism is dominant because responsibility and accountability systems have f a ile d ', (Blandford, 1979). This has manifested its e lf in an ineffective budgeting process which is discussed in the next chapter, and in information systems directed more to the reporting needs of statutory authorities than to the needs for hospital management.

Recognising that cost accountability is not about control, but about evaluation, the Commission believes there are two main barriers to its success in Australia.

F irst, there is the problem of data or of measurement. There is no agreement on ways to measure the output of a hospital. This stems in part from a lack of agreement on objectives such as what the purpose of a public hospital should be, and partly from the more technical problem of how output should be measured. The present measures of output such as bed days and patients treated are inadequate because they do not recognise intensity of treatment or variations in patient need. From the point of view of State health authorities, th is means that i t is d iffic u lt to establish c rite ria for cost effectiveness and to compare the performance of hospitals for which they are responsible. From the hospital administrators' perspective, both in public and private hospitals, i t means that there is no possibility for informed discussion with medical and other s ta ff, and no structure to allow valid assessment of performance.

This lack of data tends to reinforce the second d istin ct problem. The present management structure of hospitals and government health authorities 'separates financial and clin ic al accountability.' (Blandford, 1979) '[the cause of] the current stand off between administrators who are

accusing doctors of causing most rising costs and the practicing

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profession who are taking no notice at a ll of the administrators is the fact th a t there are no figures available for cost' (E.H. Morgan's Submission 868, 20).

In the relationship between State health authorities, hospitals and hospital boards which d iffe r between States lines of authority and the related control structures are unclear, which makes cost accountability d iffic u lt to ensure.

Developments in Achieving Cost Accountability

Considerable e ffo rt is being devoted by Commonwealth and State governments and individual hospitals to overcome the problems of measurement. Some of the developments are:

. Hospower (Victorian Health Commission) - a system for measuring comparative labour inputs in like hospitals.

. Refinement of hospital morbidity s ta tis tic s (for example, the development of length of stay indices by the New South Wales Health Commission).

. The definition of cost-centres:

'which w ill be uniform across hospitals' (Victorian Health Commission Submission, 60, and in New South Wales Health Commission Submission.) and the evolution of management accounts and output measures on this


. The Commonwealth-funded Adelaide Children's Hospital cost containment project, which is also directed to cost centre accounting, 'output' measurement, and ultimately to the development of a basis for prospective funding.

. Costing by disease (see Wood, 1976, and reference to disease costing in Submission Queen Victoria Medical Centre, Submission 438 and Royal North Shore Hospital, Submission 409) and by procedure - the Alfred, St Francis Xavier Cabrini project.

. The research project on zero-based budgets in South Australia. . The development of a computer based system which w ill 'permit the comparative analysis of the costs and performance of recognised hospitals throughout A ustralia.' (Commonwealth Department of Health

Submission, Part I I , 44-73)


These systems are directed towards improving the quality of management information available to hospital administrators to enable them to assess the effectiveness of their hospitals' expenditure. In so doing, they enable the derivation of output measures appropriate to the various sectors of the hospitals' operations. By establishing a uniform pattern for hospital accounting, and by breaking the h o sp ita l's operations into segments which are separately accounted for, in ter-hospital comparisons can be undertaken in a meaningful way. Output units may be meals served, or nursing hours for each patient in a specific ward, or operating theatre minutes, or any of a number of proxies for the real output of hospitals, which is the change in the health status of patients treated.

Thus, at th is stage the Commission considers that the development and application of such systems is not necessarily a means for complete devolution of authority, but is an essential aid in determining the most efficient mix of control by government and autonomy of in stitu tio n s and managers.

A section of a hospital is part of a system, and the plans of individual managers should relate to those of th eir fellow managers and of the hospital as a whole. The plans of the hospital must relate to those of other hospitals in its region, and to the policies of i ts State health authority.

The developments liste d are encouraging. Even so attempts to co-ordinate or standardise such data refinement techniques through structures such as the National Committee on Health and Vital S ta tis tic s appear to have been largely unsuccessful, and there is a real danger that the systems being developed, while nominally based on the Hospital and Allied Services Advisory Council standard chart of accounts, are developing incompatabilities which w ill perpetuate the problems of in ter-S tate comparison.

Most of these developments may be described as improving the financial information systems in hospitals with a view to ensuring that moneys are allocated more appropriately within the hospital. Since the budgetary process is , 'an integral part of the general concept of cost accountability'

(Commonwealth Department of Health Submission, Part II , 42) the refinement of such systems is essential before the budget can become an appropriate tool for cost accountability.


Some progress is also being made in improving cost accountability and efficiency by management or 'stru c tu ra l' changes. At the broad-based level, 'the concept of establishing health commissions with autonomous boards providing services is an important step. I t focuses attention on the one hand on policy-making, setting objectives and monitoring performances, and on

the other the responsibility and accountability for providing services within a fixed budget' (Blandford, 1979). The Commission recognises the d iffic u ltie s involved in defining the degree of autonomy possessed by hospitals and the fact that the transition from a department to commission structure has involved administrative and conceptual problems. The Commission of Inquiry's recommendations on these matters are discussed elsewhere in the Report but i t is noted here that these are relativ ely recent changes which require time to develop fully.

Internal hospital structure and management, at least in the larger teaching hospitals, are changing in an attempt to link more closely financial and c lin ic al accountability. Descriptions are provided elsewhere in the Report but some specific examples are:

. the hospital cost containment committee (Royal Melbourne), . the u tilis a tio n review proceses at Royal North Shore and Royal Prince Alfred Hospital, and . the responsibility reporting system at St. Vincent's Hospital,


Much can be learned from those hospitals where management changes have been implemented and from agencies such as the Peer Review Resource Centre, however, much more needs to be done. I t is to this end that its recommendations concerning cost-awareness in medical training are directed.

Some Inhibitions to Effective Cost Accountability

One of the matters which has concerned the Commission has been the capacity of existing hospital financial accounting systems, however sophisticated or divided, to provide an adequate base for assessment of hospital costs.

All recognised hospitals in Australia account on a cash receipts and payments basis, because th is is the way in which they are funded, and w ill


continue to be funded, since th is is the manner in which parliaments appropriate moneys for services. The consequences of th is are significant for managerial control within hospitals.

. There is no accounting for fixed assets. Indeed, few hospitals maintain any kind of fixed assets re g ister. The Commission has been told that in setting up the jo in t procedures costing exercise between the Alfred and St Francis Xavier Cabrini hospitals, the cost of fa c ilitie s had to be ignored because the public hospital concerned was unable to establish a value for i t s buildings, plant and equipment.

. There is no accounting for inventories. Recent press reports on the Austin Hospital pharmacy's problem indicate one result of th is. Other consequences may be more serious. I t is certainly possible for a hospital to conceal a surplus by building up inventories over year-end, or to run down stocks to conceal a d e fic it.

. There is no accounting for debtors and creditors. I t is therefore possible for hospitals to defer payment of creditors to conceal a d e fic it.

. Contingent, and even established, lia b ilitie s for future payments are not taken into account in any way. Hospitals have large lia b ilitie s , for instance, for long service leave which are brought to account only when the leave is taken or the employee resigns or

re tire s.

. The various management accounting systems in course of development a ll operate on a lim ited accruals basis, taking account of salaries accruals, prepayments, debtors and creditors, although not of capital assets depletion or of longer term lia b ilitie s , contingent or real. Unless the financial accounting system recognises these items, cost centre reports will not be seen as reflecting re a lity .

Another inhibition re la tes to the perceived role of the various constituencies within the hospital.

Clinicians rightly see th e ir prime role as being to tre a t th eir patients to ameliorate th eir condition, and the function of the hospital to provide them with the means to do th is effectively and safely. Neither their training nor th eir perceived role direct them towards questions of cost-accountability.


The role of the nurse is to look after the patients in accordance with the directives of the doctors and the senior nurses. Again, questions of cost-accountability, i f noted at a ll, are secondary.

In the same way, paramedical departments and diagnostic departments see th eir prime role as support for the patient.

Although i t is the responsibility of administrators to ensure that measures are in stitu te d to ensure cost-accountability or awareness among medical and paramedical s ta f f, in practice i t is only in the areas which lie under the direct control of the administrator that cost considerations may

become paramount, for example, in food services, in housekeeping and in general administration.

A third inhibition, which is considered in more detail in the following section, is the budgetary process, which creates strong incentives to spend the funds which are made available, and which, aligned to a cash accounting base, provides a mechanism which enables this to be achieved.

Summary and Options for Change

The Commision sees two ways in which cost accountability can be improved in hospitals:

. By changes in management structures which w ill more closely link financial and c lin ic a l accountability, and . By the generation of more appropriate financial data.

The f i r s t pathway to change is dependent upon acceptance by the medical profession and therefore must be expected to take a more evolutionary pattern. I t has been suggested to the Commission that:

'Cost accountability is a managerial myth in an industry where the accepted modes of treatment mainly depend upon value judgements and not on fa c t' (N.A. Elvin, Transcript, 4)

and that:

'Medical s ta f f are not yet prepared to accept cost as a significant reason for varying patient care and would re sist such costing methods'. (Submission 868 Dr. E.H. Morgan, 16).


The Commission appreciates these views but believes that i f the barrier of data is overcome, changes in management and attitu d e will be assisted. I t has therefore directed its recommendations at th is second level.

A f ir s t step towards achieving effective cost accountability would be to require a ll hospitals to report to th e ir health authorities, and to the public, on an income and expenditure basis. The Commission does not see such reporting as being in any way incompatible with a cash basis for funding. I t is normal commercial practice for companies to produce budgets on both cash-flow and income and expenditure bases so as to assess liquidity needs through the year as well as to assess ultimate p ro fita b ility . The Commission considers that accountability demands that hospitals, which are large enterprises, should report to the community on a meaningful basis, and that current practice fa lls well short of what is needed.

This would en tail:

1) The establishment of adequate fixed asset records, and of accepted norms for the depletion over th eir expected lif e of the various classes of asset.

2) The establishment of costed inventory records in various sections of the hospital.

3) The valuation of lia b ilitie s for long service leave and, i f significant, for untaken holiday leave.

4) Incorporation of the existing debtors and creditors records in the financial accounting system.

The next step, at least for a ll larger hospitals (say those of 50 beds or more) should be the establishment on a uniform base within each State, or nationally of management accounting systems reconcileable with the upgraded financial accounting system, and aligned to a system for physical measurement, as well as financial management of outputs.

In the longer term, the objective of such developments should be to achieve a basis for funding hospitals related to what they are expected by the State health authority to do during the coming year. I t w ill be some years before the most advanced of the systems now in development w ill be able to support such a basis for funding, but the tighter controls provided by

these systems, and the process of becoming accustomed to the use of better


information, w ill force part of the process of education needed to secure its ultimate acceptance.

Recommendations for Improving Efficiency

The Commission saw the development of structured uniform financial and management accounting procedures as being of such great importance that i t commissioned the consulting firm CHS Consulting Pty. Ltd. to prepare a study directed towards the establishment of guidelines for managerial control and

reimbursement of hospitals. The report of th is firm is published in fu ll in Volume 3 of th is Report. The Commission considers that the proposals made in th is report establish a sound basis for reporting of hospital costs, and for the improved accountability of hospitals and for

th eir expenditures, and RECOM M ENDS that its proposals form the basis for development of uniform reporting by hospitals and other in stitu tio n s. It sees these proposals as being compatible with current developments such as the Victorian cost centre accounting pilot study and the New South Wales Management Information Review System.

I t also RECOM M ENDS th a t collation of comparative s ta tis tic s and financial data on a national basis be a function of the proposed Bureau of Health Economics, establishment of which is recommended elsewhere in this Report.




Commonwealth and State governments use budgets as the main means of control of funding and expenditure to constrain costs in recognised hospitals. In most States, this budgetary control is supplemented by controls over s ta ff establishments and capital equipment acquisition. This

is a legitim ate objective for the budget process. The Commission has grave doubts about i t s su ita b ility for control of the operations of large scale public u tilit ie s or for major service organisations such as hospitals. The

desired range and level of service in hospitals can be specified, at least some proxy measures of output can be defined, an integrated planning process is not only feasible but is also clearly desirable, and there is an alternative, private sector system operating in parallel over a significant

range of the public sector in stitutions' activ itie s.

In its submission, the Commonwealth Department of Health asserted that budgets impact hospital efficiency in a number of areas:

. Planning

. Setting policies

. Coordination within the hospital . Control of a c tiv itie s and expenditure (Part II, 42).

All the evidence before the Commission and its own observations, suggest that existing practices do not provide for effective planning and control. They reflect rather than determine activities or behaviour, by entrenching what has been done in the past. They set a lim it, but not a floor, to the

level of expenditure and the activity which will be supported. But existing practices certainly do not contribute to the planning process in either the short term or the long term, nor do they promote coordination of a ctiv itie s within the hospital, and the provision of services according to plans for the

hospital and for the State as a whole.

3 2 7

The reasons for th is lie in the lack of any formal commitment to fund activity beyond the current year, and in the practice of funding by head of expenditure, rather than by function or by service. A further reason is the practice of setting budget allocations on the basis of what was spent in the previous year, with deductions for unspent allocations, and increments for cost escalation and approved increases in services.

Budgets as they exist at present cannot therefore be framed in terms of any long term plans. They cannot be assessed by health authorities in terms of output measures even when these are available. Funding is substantially independent of the services which i t is intended to produce.

Budgeting is not seen as the only activity in decision making processes which affects the allocation of resources, but i t is probably the most important. It is therefore v ita l that the process be organised so as to achieve the ends which are sought.

Many submissions from hospitals, professional organisations and health authorities contained criticism s of current public hospital budgetary and accounting practices. The criticism s centered on the cost reimbursement mode of payment, which, i t is argued, fa ils to promote managerial control, cost constraint and financial accountability. The budgetary process c ritic ise d involves the hospital and two levels of government. As a resu lt, present budgets have become regarded as money allocation devices rather than as tools for e fficien t management:

'Controls in the public service systems are dependent on inspectorial and auditing procedures which emphasise the forms rather than the substance. Elaborate mechanisms are devised to ensure the control of the money supply and the employment and grading of sta ff.

These control procedures are necessary but do nothing in themselves to produce e ffic ie n t re s u lts ; they may indeed be counter-productive.' (Blandford, 1979.)

Present hospital payment arrangements have been designed to satisfy the requirements of the annual parliamentary process for approving budget appropriations to each State department or Authority. State department accounting systems are laid down by Acts of Parliament and approval of


expenditures from the consolidated revenue fund must be by specific item-by-item appropriation by Parliament. Since 1975, budgets have also been prepared and implemented in accordance with the requirements set out in the Hospital Cost Sharing Agreements. In terms of such expenditure control, the administration of the agreements have been relatively successful in recent years. State health authorities have usually kept expenditure over-runs to a minimum (New South Wales Health Commission Transcript). This, however, is

not the only crite rio n of effective financial management and control, le t alone e ffic ie n t resource allocation.

The Commission is aware of the importance of reconciling the different requirements of governments, administrators and providers, differences which become heightened in times of cost constraint.

'Governments equate budgets as a tool for cost reduction and fund accordingly. On the other hand, the health care providers think of budgets as a means of attracting a larger share of the funds and budget accordingly.' (Submission 439 Royal Melbourne Hospital Appendix D).

Deficiencies of the Present System

Most of the criticism of present budgetary arrangements can be grouped under these headings: (i) timetable

(ii) formulation ( ii i) time frame

(iv) scope

The Budget Timetable A common criticism is that budgets are prepared too early (December-January) and approvals are advised too late (for example November-December) in each financial year. If"the approval differs to a material degree from the amount sought, i t is d iffic u lt to adjust outgoings

in the remaining months of the year. But in practice, most hospitals are aware of the climate before the approvals are advised and can take appropriate measures in advance of that advice.


It is clear that in recent years delays in bringing down State government budgets and consequent notification of adjustments to original hospital 'bids' have tended to be one of the major sources of delay. While hospitals usually have some indication of th e ir notional budgets before the s ta rt of the financial year, la te n o tification of final allocations certainly adds to uncertainty and in h ib its planning. Major adjustments are often required to be made to hosital operations during the la s t few months of each

financial year.

A review of the budget approval timetable is supported by several State health authorities and a number of professional organisations and individual hospitals. Proposals include e a rlie r notification of budget allocations, an 18 months budgetary cycle and funding on calendar years. The Victorian Health Commission, however, sees the delay in notifying budget approvals and uncertainty about to ta l subsidy payments for the year as 'inevitable consequences of necessary procedures for public expenditure c o n tro l.'

(Submission 54.)

Formulation and Administration of Budgets

Most comments and criticism s in submissions centre on:

- the incremental nature of budget formulation; - the in fle x ib ility of head of expenditure budgeting; - the 'confiscation' of budget surpluses/lack of rewards; and - bureaucratic interference by central auth o rities.

Several submissions provide a comprehensive analysis of the main issues. F irst, the budget bid and final allocation is predicted on the previous year's level of activ ity and expenditure which is adjusted for anticipated inflatio n and changes in services. This process, therefore, tends to perpetuate the results of past decisions in relation to the location and size of fa c ilitie s which may no longer be appropriate. It is not 'zero based' in th at no regular appraisal of the need for certain services is undertaken. It is assumed that the hospital should continue to do what i t did la st year unless the State health authority rules otherwise. Moreover,

this incremental approach tends to support the 'in e ffic ie n t' hospital to the


same relativ e extent as the more e fficien t hospital. It assumes that a ll expenditure in the previous year was necessary and cost effective.

Second, the focus, under the present scheme, is on 'inputs' rather than ' outputs'. Hospitals are required to prepare estimates for lines of expenditure and revenue laid down in the approved chart of accounts. Although designed as a control device to ensure that public moneys are

properly spent, i t is claimed by administrators that line budgeting lim its hospital freedom to substitu te inputs and transfer expenditures between items in a way th a t might reduce overall expenditure or improve efficiency. This criticism should not be exaggerated, however. The Western Australia

Department of Health and Medical Services reports that in relation to the detailed allocations under the six broad HASAC headings, hospitals are 'free to vary these allocations throughout the year as circumstances dictate and need only advise the Department accordingly. Variations between these groups

require prior Departmental authority' (Submission 716, 3-2). The position is broadly sim ilar in the other States.

A more important criticism of head-of-expenditure allocation is that i t takes no account of the functions which that expenditure is intended to support. To a degree, most State health authorities seek to overcome th is weakness in th e ir control process by fixing s ta ff ceilings on a categorised

functional basis. This may or may not be effective for the purpose of securing control over hospital outgoings. A budget which reflected the h o sp ital's service p rio ritie s by allocation of funds to services would certainly achieve th is , but would demand a very considerable upgrading of hospital management accounting services to make i t practicable.

Such criticism should be balanced against the comment of the Victorian Health Commission th a t i t favours 'item-by-item' examination for two reasons:

. there are no market constraints on either suppliers or consumers of public services; . the absence of acceptable output measures, prevents allocation on the basis of improved output (Submission, 46).


Third, i t is argued in many submissions th at the payment of unspent allocations into consolidated revenue at the end of the year (or th e ir use for financing d eficits incurred by other hospitals) constitutes a disincentive to economy or to expenditure re s tra in t. These 'savings' are

often deducted from the h o spital's base budget for the ensuing year. This creates an incentive for hospital managements to accelerate payments towards the end of the financial year, in order to protect the following year's allocation. The cash flow accounting base a ss is ts them to do so.

The problem of the end-of-year 'spend up' on less essential items appears to be less dramatic than is claimed in some submissions. The Victorian Health Commission, for example, finished the 1978-79 and 1979-80 financial years with a budget surplus on i t s hospital account. Moreover, the Tasmanian Department has indicated th at i t is prepared to give the proposal to retain surpluses a t r i a l , provided i t is understood th at hospitals w ill be required to meet deficits from th e ir own resources. The offer has not been taken up (29).

Fourth, much evidence stated th at delays in the approval of operating budgets and capital works proposals, together with the in fle x ib ility of budgetary practice, leads to excessive bureaucratic control by Commonwealth and State governments . It is put forward by some that having successive levels of control may undermine the concept of accountability, which is so essential to the proper process of management. However, the Commission has been told that at the moment hospitals do not have the s ta ff, the information systems or the resources to assume fu ll responsibility (eg. The 'Guerin' Report, 1979).

Time Frame of Budgets

A number of associations and hospitals support a s h ift in the basis of budgeting from the present annual focus to a longer term currency. It is argued that either trien n ial or five-year budgeting is essential for effective management and planning, especially in regard to major capital works. Such a form of budgeting would also fa c ilita te the carrying forward

of surpluses or savings from one year to the next.


Scope of Budgets

In p art, because of the introduction of the cost sharing arrangements, annual hospital budgets now include a range of separate items, including minor cap ital works costing less than $50 000; inter-hospital ambulance transfers; aids, appliances and dentures for necessitous persons; teaching

and research; s ta ff accommodation; and certain community health a c tiv itie s.

The Commission has been told that the inclusion of these costs f ir s t makes hospitals more expensive than they really are, and also makes year-to-year and hospital-to-hospital comparisons invalid. For example, the Association of Medical Superintendents of New South Wales and Australian

Capital Territory point out that the inclusion of minor capital works in operating budgets has a r tif ic ia lly inflated operating costs for cost-sharing purposes. This is not a significant item in aggregate terms ( ' replacements and additional equipment' was of the order of $50 million or 2 per cent of

to ta l hospital budgets in 1980-81), although many of these minor works, as well as major cap ital items, have implications for operating costs that are not recognised by th e ir treatment in th is way.

The Commission believes that in the final analysis, what is included or excluded in hospital operating costs is unimportant, so long as i t is : . recognised

. id en tified and

. controlled

to ensure th a t there is 'value for money spent' in terms of effectiveness and efficiency, and provided i t is properly accounted for in the ho sp ital's financial records, including i t s published accounts.

Current developments in budgetary practices

The Commission is aware of experimentation with innovative budgetary practices taking place in a number of States.

The New South Wales Health Commission is investigating the fe a sib ility of building up a budget based on activity levels rather than on the present incremental, input-oriented basis. As part of the Management Information and Review System, five Sydney hospitals are participating in a budgeting and


reporting exercise which is designed to produce indicators of cost which will allow comparisons to be made between sim ilar hospitals. By producing department information on output/workload, inputs and costs, i t should ultimately be possible to measure and compare the productivity of different hospitals containing more than 150 beds. Once a ctiv ity levels and unit costs have been defined, budgets can be developed more rationally than is presently possible.

The New South Wales Health Commission has developed a regional allocation formula for identifying regional inequalities in funding allocations. Needs-based target allocations for hospitals and other services are derived on the basis of population, cost differences, beds, morbidity.

It is intended th a t a more 'equitable' distribution of funds w ill be achieved as the opening of new services in under supplied regions is accompanied by reductions of services in regions of surplus. This arrangement, however, may s t i l l perpetuate the inappropriate funding shares between sectors and lines of health care. I t also says l i t t l e about the optimum overall expenditure level. Rather, i t is a mechanism for slicing a cake of a given size.

The Victorian Health Commission is taking sim ilar steps with cost centre budgeting through an extension of i t s Hospower principle. In the absence of measures of fin al output or population catchments, i t is necessary to disaggregate the expenditures of hospitals and ju stify expenditures of the

individual components. The advantage of disaggregation of hospital a c tiv itie s into uniform cost centres is that expenditures can then be related to specific intermediate outputs such as meals and diagnostic te s ts . It is therefore possible to compare the costs of producing these intermediate

outputs in different hospitals.

Given forecasts of output levels in the various cost centres, i t will ultimately be possible to establish hospital budgets that are related to unit costs in e ith e r specific groups of hospitals or the system as a whole. The proposal in fact establishes, within the 'output' levels set, a form of

global budget for each cost centre.

The South Australian Treasury is cooperating with the Health Commission in the development of a program budgeting format for State health


expenditures and a research project on zero-based budgeting is being conducted under the Commission's auspices.

The Tasmanian Health Services Department referred to its introduction of a global allocation to a ll hospitals in the State budget. It also proposed a six monthly budget cycle.

The Western Australian Health Department is conducting an experiment with incentive budgeting.


The Commission has been presented with a number of budgetary options, the advantages and disadvantages of which are outlined b riefly.

Global budgeting allocates a total amount (payments less receipts) to meet an agreed level of activity or output, with the object of ensuring that the net operating cost for the accounting period is not exceeded (Submission 331, Australian College of Health Service Administrators). Others took a

less specific view, ignoring the relationship to output and arguing that hospitals should be free to spend amounts allocated as they saw f i t . Since the Commission believes funding should relate to plans, i t found these claims unconvincing. On the other hand, an argument carrying considerable force is

that the authority to determine the most cost-effective way of achieving nominated objectives should be le ft to those responsible for th eir achievement.

The main problem with global budgeting is the d ifficulty of determining the size of the global budget because of the difficulty of measuring output. For example, should the basis of payment be department budget, per patient, disease costing, per patient or bed-day, or some other measure? Global

budgeting also requires a tig h t reporting and accountability system.

'The underlying principle is subject to accountability to the next highest le v e l.' (Submission 330, Australian College of Health Service Administrators' Submission, 65).


Unless such systems are highly developed, and defined both within hospitals and between hospitals, State Health Authorities and the Commonwealth, control over expenditure may not be su ffic ie n t to ensure cost constraint.

The Commission also believes th a t the allocation of a block amount to hospitals, already the dominant spenders, might well inhibit reallocation between d ifferen t types of health care.

In the short-term , therefore, the Commission does not consider global budgeting to be a viable option.

'I t is not possible to devolve management responsibility and accountability to the hospital level unless adequate budgetary arrangements e x ist by which the hospitals have the capacity to assess their own performance and respond to changing circumstances and unless the Commission and the Governments concerned can assure themselves that

resources are being deployed appropriately and e ffe ctiv ely .' (Guerin, 1979. 6-7)

In the longer term, however, global budgeting could be technically considered in the lig h t of the development of improved information systems and output measures, the delineation of hospital roles and improved management s k ill a t hospital and health authority level.

Incentive Reimbursement

Arguments in favour of some incentive being given to hospitals in which savings are achieved are well known - i t encourages the development of measures to e ffe ct economies and improve efficiency, i t could lead to a review of procedures and standards and consequently new budgets, and so on.

Other counter arguments, many of which were discussed by the Victorian Health Commission in i t s submission are th at:

• The scheme assumes th a t the original budget allocation was correct: . Hospitals are encouraged to in flate th e ir in itia l bids; . Larger hospitals would benefit more than smaller hospitals;


. Attention may be focused on individual hospitals rather than the 'ho sp ital network' which may lead to duplication of minor fa c ilitie s . State control could be weakened and th is basis could conflict with attempts to reallocate resources between hospitals and other areas

of health care; . There may be d iffic u lty in agreeing upon the percentage of savings to be retained, because of the problems in distinguishing 'one-off' from on-going savings. (63.)

The Commission believes that in a public system, there is l i t t l e or no scope for providing financial incentives for improved performance at th is stage. I t also notes th at experience in the United States with prospective reimbursement produces uncertain benefits (Gaus and Bellinger, (1976) claims

that there was l i t t l e change to hospital costs), whereas the Victorian Health Commission Submission noted (62) that some United States research findings indicate positive responses but these should be seen within the context of a private system.

Integrate physical and financial planning

Under such a system, the cost implications of capital works programs would be recognised in budget formulation and more importantly, expenditures could be linked to the objectives or role of the hospital.

Again, the d iffic u lty in measuring output presents a barrier to implementation, as does the current annual time frame of the budgeting cycle and the cash accounting basis which does not recognise the depreciation of capital assets.

Most of these constraints, apart from that of output measurement, are amenable to solution and the Commission sees considerable merit in devising a oudgeting system which incorporates both the capital and operating costs of the hospital in an attempt to allocate resources according to the role and

function of the hospital as a whole.

Some submissions argue for a link between rolling triennial funding and the establishment of a long term corporate plan for each hospital within an overall State plan. As part of such an integrated system of physical and


financial planning, proposed expenditures would be presented on an objective or purpose basis, to:

- Maintain or replace existing f a c ilitie s ; - To meet growth in demand; and/or - To improve quality of care.

The 'Guidelines for the Estimation of Need for Hospital Services' (Health Commission of Victoria 1978) represents a f ir s t step towards the development of a published State plan for health services.

Zero-based Budgets

Zero-based budgets relate allocations to current needs and in times of constraint avoid irra tio n a l across-the-board service cuts.

The concept demands an annual reassessment of each function within the organisation to determine whether i t s continuation is ju stifie d , and whether i t is being carried out as cost-effectively as possible. In application the problems are enormous. It implies that physical fa c ilitie s and s ta ff are

interchangeable between functions, that services can be added or subtracted without disruption to operations, that there are no organisational rig id itie s. Hospitals, and especially large hospitals, are not geared to such constant soul searching, do not at present have access to data which would enable an informed judgement to be reached, and lack the internal structures to secure the cooperation and support of s ta ff at a ll levels which would be required for such an exercise.

The Commission believes that in the context of overall plans for service provision at State level and role definition for individual hospitals, an interactive corporate planning process within hospitals, including periodic reviews of plans for individual departments, is a feasible and less disruptive alternative to zero-based budgeting, and is likely to prove at

least as effective in securing the objective of improving efficiency.


A Longer Budgetary Cycle

Triennial or five-year funding has been proposed as a way to a ssist long term hospital planning and to remove the incentive to spend allocations by the end of the financial year.

From the hospital adm inistrators' viewpoint th is is an a ttra ctiv e option as long as budgetary fle x ib ility could be retained and government promises assured. Some lessons may be learned from university funding, which in the period 1976 to 1978, operated under a rolling trien n ial system. The

government established a funding level for the next year and gave 'in d ic a tiv e ' planning figures for the following two years. However, there was apparently l i t t l e commitment to these two indicative estimates.

From a government or health authority perspective, fle x ib ility may become lim ited under such a system. Original decisions may lock government into firm financial commitments which may need to be changed in the light of changing economic or social circumstances. Nevertheless, further study

should be given to longer than one year financial provision systems.

Revised Budget Timetable_

This is not a new budgetary system in its e lf , but many submissions propose th a t the e a r lie r notification of approvals would reduce uncertainties and f a c ilita te planning.

This would require coordinated action by Commonwealth and State governments and th e ir treasu ries, and would therefore have to be seen as a long term solution. As noted previously by the Victorian Health Commission, in the interim , th is d iffic u lty may have to be accepted as part of the system

of public control over large amounts of expenditure.

Capital Budgets

Tne practice of writing off minor capital outlays to current expenditures has already been discussed.


Major capital expenditures are now funded exclusively by the States and Territories through funds voted by th e ir governments. Funds availability depends on the priority accorded to hospital needs by those governments.

This is as i t should be.

However, there are two aspects on which the Commission would wish to comment.

The f ir s t is the importance of expeditious completion of work once a project commences. The Commission visited two hospitals where major delays in construction had occurred for a variety of reasons, but including some for which the State health and funding authorities could be held to be at least

partly to blame. The effect on morale within those hospitals was notable.

The impact on costs was enormous. The Commission has been informed that in New Zealand the annual allocation of capital funds to hospitals is made on the basis that the f ir s t c a ll on available funds is for the completion or progression of major works in progress, and that new commencements w ill not be contemplated u n til these needs have been met. It would seem to be a policy well worthy of considering in th is country.

The second is the practice of regarding capital outlays as written off, and therefore of no value. Apart from the impact which th is has on costs, which has been discussed elsewhere, the Commission finds i t d iffic u lt to see how in these circumstances State health authorities are able to assess p rio ritie s for major equipment replacement, or how conflicting demands from hospitals for new or replacement buildings and equipment are assessed.

The problem of capital budgeting in isolation to budgeting for services, has also been discussed in the context of integrated physical and financial planning. These two options are therefore closely related.

Conclusions and Recommendations

In formulating its recommendations, the Commission has adhered to these principles:


. That State health authorities are accountable to State governments which are in turn accountable to Commonwealth governments for a considerable proportion of th e ir funds.

Government-funded hospitals must therefore be accountable to the health authorities in th e ir State.

. Tnat the budget process in hospitals should not be viewed in isolation from resource allocation to a ll areas of health care:

1 It is important not to be deluded by the attractions of new systems for budgeting, cost control and performance measurement. Systems by themselves w ill not improve the operation of the health se rv ic e s.1 (Guerin, 1979, 7)

. That in stitu tio n s should operate with as much independence as is consistent with the requirement by Governments for effective systems of cost and c lin ic al accountability.

The Commission concludes that a ll hospitals and in stitu tio n s should be funded on the basis of what i t is planned they should do, rather than on the basis of past experience. A pre-requisite for th is is that information systems be developed to enable activity to be costed. Tne current developments in Victoria and New South Wales and the proposal contained in

the report of C.H.S. Consultants Pty. Ltd. appended to th is report, provide a pattern for th is.

A second pre-requisite is the development at State level of overall plans for in stitu tio n a l services and the establishment within those plans of the roles of individual hospitals and in stitu tio n s.

The Commission RECOM M ENDS that:

- State Health authorities move towards the implementation of output related methods of budgeting as a matter of urgency.


In so doing th is Commission sees i t as essential that the systems adopted are compatible between States and that they provide an adequate basis for ubmissions to the Commonwealth for formula grants.

Pending the development of such systems, the Commission RECOM M ENDS that State health authorities make the best possible use of such information as is available to review future hospital budgets to determine that funding is related to established needs rather than to past expenditure.



The hospital board represents of the corporate body of the hospital, and as such has legal responsibility for the effective management of the hospital. As the governing body, the board must ensure that State Acts and Regulations covering the incorporation and administration of the hospital are observed. I t is also responsible for establishing by-laws in accordance with these Acts which constitute the internal legislation of the hospital.

A large number of Australian hospitals are managed by boards of directors, but the practice varies between the States and T erritories according to legislation establishing public hospitals.

Board Membership

All boards must work within the legal framework imposed on them - not only by the principal statutes under which they are incorporated, but also by other statu tes which affect th eir operations, such as the Health Insurance Act, as well as in accordance with policy directives from the central health

authority. A board may also be required to establish and govern i t s own by-laws, which are the internal legislation of the hospital and which w ill be in accordance with and adapted from model by-laws made available by the central authority. While obligatory for incorporated in stitu tio n s, many

non-incorporated and private in stitutions also have adopted by-laws, for they provide a sound legal basis for administrative action. Quite apart from, and subordinate to , the by-laws, the board may establish policies which govern and guide the general a c tiv itie s of the hospital. These policies may be changed by the board as i t considers necessary; on the other hand, by-law change requires central health authority approval.

The general requirements of board members are that they should possess substantial motivation to serve the in stitu tio n and be prepared to make available the time necessary to adequately fu lf il th eir obligation. In some


instances specific expertise in one or other a re a ,, such as law, economics, management, medical practice or local a ffa irs is seen to be an advantage. As a rule, board members are prominent citizens and in Tasmania i t is obligatory that at least one member is female.. In some instances, board members are seen to be representatives of the community from which the hospital draws its patients. The board is often required to exercise judgement on d iffic u lt matters which require decision between competing health and other in stitu tio n al needs.

The problem created by frankly p o litic a l appointments to boards was referred to by many States. Incidences of division in boards brought about by these appointments were mentioned, some situations being described which could not have led to competent decision making. While the Commission does not propose the introduction of a uniform system for appointment, i t believes that board members should be chosen for th eir personal qualities and a b ilitie s , not for reasons of p o litic a l application.

The Guerin Committee Report (1979) commented on the substantial demands being made on the time and attention of chairmen of boards and some of the other members, particularly those associated with finance and other managerial matters. The corporate responsibility which they undertook on

appointment involved finding an appropriate balance between the different and often conflicting interests of the various stake holders in the hospital, as well as balancing many different claims being made on scarce resources.

The Role of the Board

The model by-laws issued by the Health Commission of New South Wales in 1980 described seven major areas of responsibility of the board:

. Attainment of the hospital objectives; . General governance of the hospital; . Quality of services provided in the hospital; . Effectiveness of resource use; . Accessibility of i t s services; . Community participation; . Integration and coordination.

3 4 4

The document, a fte r defining each of these, says:

' A hospital board is generally comprised of concerned members of the community who are appointed to serve the community in a voluntary capacity. More often than not board members w ill have no special expertise in health care and no management experience in a hospital or health related in stitu tio n a l setting. Many would see th is as a

disadvantage in one given significant authority and responsibility for the governance of an organisation as complex as a hospital. On the contrary, if the board member has a clear understanding of the board's authority and responsibility and a proper perception of i t s role, then

s/he can make a significant contribution to rational, objective and balanced decision making in the hospital environment.'(16)

Items Raised in Evidence

The issues which have been raised with th is Commission with regard to boards of management include th eir composition, their method of governing, relationships with other boards and authorities and ways in which they may subscribe to inefficiency.

Hospital boards were frequently mentioned in submissions and during hearings. The important roles of boards and th e ir place in assuring e fficien t use of resources was strongly supported, and not only by boards themselves.

'The New South Wales Branch of the Australian College of Health Service Administrators supports the retention of voluntary Boards of Oirectors for ALL health services. Boards of directors should operate as a policy group with a performance monitoring function as w e ll.'

(Submission 331, Australian College of Health Service Administrators, New South Wales Branch, 70.) _

'The health system in New South Wales has long enjoyed the advantage of a system of local boards of directors managing hospitals on a voluntary basis. The majority of hospital directors are professional businessmen and women of good standing in their respective communities and possessed of a sincere desire to serve the community. They give


freely of their time and the hospitals enjoy the benefits of th e ir experience in business and th e ir professional e x p ertise ,' (Submission 407, The Sutherland Hospital, Caringbah, 2.)

. they [the board members] are motivated solely by a desire to use their undoubted expertise and business acumen in a community serv ice .' (Transcript, Alfred Hospital, 888.)

'This is recommended in the b elief that control of day-to-day activ itie s by public service bodies and th e ir regulations appears to be to tally incompatible with in itia tiv e , innovation and efficien cy .' (Submission 465, Wimmera Base Hospital, 5.)

'. . . the present system of hospital government by boards of directors serving in an honorary capacity has been good.' (Submission 210, Australian Hospital Association)

Some see them in a different light:

Ί see them as only a further link in the chain and possibly an unnecessary one.' (Transcript, P.F. Howe, 2986.)

'Boards - too large and consist of the wrong people.' (Submission 242, Royal Australian College of General Practitioners, 1)

'. . . In many respects the existing boards are better seen . . . as

the p o litic a l wing of the hospital and that the board serve the purpose of going and thumping the Premier's desk and having good representation in the corridors of power and ensuring that the hospitals needs as an in stitu tio n are being met . . . ' (Transcript, Doctors' Reform Society,

1220 . )

All the investigations into State and Territory health services during the past decade have stressed the importance of boards for governing hospitals and related services. As a resu lt, the responsibility for in stitu tio n al management by boards in South Australia, Tasmania and the Northern Territory has been expanded. I t is not surprising, however, that

considerable variation exists.


'There is a lack of uniformity in the hospital board structure throughout Australia. In New South Wales doctors are actively discouraged from being members of hospital boards. In South Australia, u n til 1976, management was controlled from the Central Office of the

Health Department. The introduction of fu ll scale hospital boards of management, with representation of the medical profession, following the reorganisation of health services, is obviously believed to be important. These differences make i t d iffic u lt to assess the effect

that a hospital board has on cost efficiency and effectiveness (Submission 245, Australian Medical Association, 12.)

Reviewing the composition and election of boards, there is a degree of variance in opinion:

'The person selected to f i l l a vacancy on a board of directors of a public hospital should be "the best person".' (Submission 331, Australian College of Health Service Administrators, 71.)

'. . . hospital boards are not democratically constituted bodies' (Submission 367, Community Health Working Group.)

'. . . present boards are highly unrepresentative of the local community or the hospital they d ir e c t.' (Submission 254, Doctors' Reform Society.)

There is general condemnation of appointments of a frankly p o litic a l nature. Most consider th is action is a major barrier to effective decision making:

'There is a very definite need to retain local involvement in the administration of public hospitals through a system of a board of directors appointed because of expertise, and not necessarily appointed because of p o litic a l persuasion, or some other less than objective

reason.' (Submission 406, Dubbo Base Hospital, 3.)

'. . . the system of f illin g casual vacancies [in New South Wales] is not good, they are run as p o litic a l appointments.' (Submission 331, New South Wales Branch, Australian College of Health Service Administrators.)


Some witnesses giving evidence in camera warned about the excessive influence sometimes displayed by medical practitio n ers. This was particularly so in relation to the expansion and purchase of equipment and services. Boards of management were warned:

'. . . not to be unduly swayed by professional argument based on health needs as seen through the eyes of p ra c titio n e rs .'

The Royal Melbourne Hospital (Submission 439) described its board structure as having doctor board members appointed in th e ir own rig h t, with, in addition, representatives of the medical s ta ff body attending and taking part in the meetings, but without voting rig h ts. This arrangement received support as a suitable method of obtaining medical s ta ff advice but as the Hospital pointed out there needs to be an underlying system which:

'. . . ensures a direct regular contact between the medical leaders of the hospital and the hospital executives and directly involves the chairmen of the [medical] divisions in the management of the h o sp ita l.' (Appendix E, 7.)

The value of independent medical advice was mentioned by Dr Lionel Wilson, Federal President of the Australian Medical Association, in evidence:

' I s t i l l s i t on the board [of a hospital] and can say quite

sincerely th at on certain issues the board of directors needs a medical input that does not have a vested in terest from the medical s ta ff of the hospital and is separate from i t s own servant, the medical superintendent . . . in most large hospitals i t is c ritic a l that the

board of directors have some technical input which is detached.1 (Transcript, 2380.)

Worker participation on boards, already present in Tasmania and South Australia and increasingly sought elsewhere, promotes a degree of emotion. Unions seek more involvement:

'The Hosptal Employees' Federation, based on membership view, believes th at the decision making process should be extended to include its members, particularly in respect to staffing and funding policy, ie,


workers participation or industrial democracy should become accepted principles in the workplace.1 (Submission 350, Hospital Employees' Federation of A ustralia, 13.)

The Report of the Consultative Committee to the Premier of New South Wales (Ducker 1980) supports th is view. A number of witnesses disagree, pointing out that board membership can entail placing an employee board member in a position of re la tiv e authority over the departmental head or even

the chief executive o ffice r.

Within hospitals most of the other health professionals spoke strongly of th e ir lack of involvement in hospital decision making and sought an increased role in board a ffa irs . Their collective view is expressed by the New South Wales Association of Occupational Therapists (Submission 302):

'The occupational therapy service is inadequately represented at the level of decision making regarding funding, allocation of resources, etc. Representation of the needs of a ll paramedical groups occurs through non-paramedical personnel, most frequently the Deputy Director of Medical Services. The p rio ritie s of objectives and resource allocation as seen by the heads of paramedical departments are

frequently not understood by th eir representative at the decision making level. This co n flict is often due to the adm inistrator's lack of knowledge of the true nature of service provided by paramedical departments, the p rio ritie s of s ta ff and fa c ilitie s within these

departments. Such co n flict, obviously results in the setting of inappropriate objectives, policies and the misallocation of funds and resources within paramedical departments.' (New South Wales Association of Occupational Therapists, Submission 302)

Some nursing organisations also consider that they are not sufficiently involved in policy matters: .

'. . . they should have a greater say in decision making at a ll levels. Members of the association feel that they could make a greater contribution to the efficiency of hospitals in the future than we are now permitted to d o .' (Transcript, Tasmanian Matrons' Association,

2011 . )

34 9

I f representative members are appointed they may find d ifficu lty with accepting policies of their hospital board which conflict with those of the organisation which nominated them. Mr Justice S treet, in the case of Bennetts v Board of Fire Commissioners of New South Wales in the Supreme Equity Court commented on th is co n flict of in terest problem:

'Nomination of the individual members and th e ir election to membership by interested groups ensures that the board as a whole has access to a wide range of views, and i t is to be expected within th is wide range of views that inevitably there w ill be differences in the opinions, approaches and philosophies of the board members. But the predominating element which each individual must constantly bear in mind is the promotion of the in terests of the board its e lf . In particular, a board member must not allow himself to be compromised by looking to the

in terests of the group which appointed him rather than to the interests for which the board e x is ts .'

A number of submissions, mainly from hospitals, suggested that what was needed was more autonomy and authority for the board. This autonomy and authority was seen to be contracting as central authority control is increased.

'Authority should be delegated to the hospital board of management to undertake a ll steps necessary to achieve the objectives within the lim its of available funds, with authority to determine s ta ff salaries, grades and numbers and to take whatever other steps are required to ensure the efficien t operation of the hospital. The hospital supports the use of global budgets rather than segmented allo c atio n s.'

(Submission 450, Prince Henry's Hospital, V ictoria.)

'. . . i t is becoming, I think, impossible for boards of directors to

act independently and responsibly in these a re as.' (Transcript, Australian Medical Association, 2379)

Ί happen to believe, and so does our board of directors and so do our departmental managers, th a t they should be able to manage the in stitu tio n on proper managerial lines, without having to feed


everything up and down the management tree every time you need any sort of relativ ely minor decision.' (Transcript, Royal Prince Alfred Hospital, 2333)

A contrary view was also presented, more particularly by central health au th o rities, to indicate some lack of interest in the past by boards in that they failed to assess the needs of the community they serve:

'. . . h is to ric a lly , hospitals have developed a range of services according to th e ir own perception of need, subject to operating within available s ta f f and finances' (Submission 712, New South Wales Health Commission.)

A somewhat parochial viewpoint is implied:

'. . . the fact that the prestige and social immunity of boards have survived so many changes presents peculiar problems to those wishing to improve the patterns of service delivery.' (Hospitals in Australia, 1974, 16.)

1. . . a lo t of boards are focussed primarily on the development planning of h o spitals' (Submission 254, Doctors' Reform Society.)

Others extended these views:

'There has been criticism in some States of hospital boards indulging in 'empire building', i t is claimed that th is is wasteful from the point of the view of the hospital system as a whole.' (Submission 245, Australian Medical Association, 12.)

'An element of rivalry is likely to develop between hospitals particularly as they endeavour to achieve excellence. This can result in a tendency to duplicate effort and fa c ilitie s , and lead to under u tilis a tio n of resources.

'M inisters for Health have contrived over the years to control this competition with varying degrees of success. The major hospitals would prefer to be given th e ir funds and then be le ft to their own devices.


This cannot be permitted and hospitals w ill now be allowed only to develop within lim its set by the Department.' (Submission 716, Western Australian Department of Health and Medical Services, 4.4.)

Confidential information was given to the Commission that board members frequently show l i t t l e concern about hospital expenditure and do not see cost containment as th eir responsibility. They often do not see themselves as representatives of the community or protectors of the public purse. Some submissions p artially supported these views, including the survey resu lt from the Australian Council of Hospital Standards showing that only eight per cent of hospitals included in the survey had considered cost containment of sufficient importance to establish cost containment committees. In addition, i t has been stated that very few hospitals seek comparative information about the performance of similar hospitals, or i f they do they seldom take action.

One other very important matter raised in camera concerned the restrictions imposed on the independence of patients in some in stitu tio n s. These claims were made only a fte r anonymity was assured, but they are so important that open reporting and discussion are necessary, in order that boards of directors can examine the procedures within th e ir own hospitals. The Commission understands th at in a ll probability these complaints apply to a very small proportion of in stitu tio n s. They included such items as:

. restricted v isiting hours; . early rising - in one g eriatric hospital a ll the patients were

required to be up and dressed by 5.00 am whether they fe lt like i t or not; . severe restrictio n s on ambulant patient movement about the ward and hospital, including making the kiosk and hospital grounds out of


. meal times unrelated to those outside the hospital.

. unnecessarily prolonged waiting times for both minor and major forms of attention.

Board member training has been raised by many submissions including the Australian Hospitals' Association (Submission 210) and is encouraged by the Australian Council on Hospital Standards (Submission 201). One board member commented:


' There are no educational programs for board members so that they can obtain more information about the areas in which th e ir knowledge is deficient; nor for the updating of the information they may have. This is in sharp contrast to both American Health Systems Agencies, and

B ritish Area Health Authorities and Community Health Councils, where ongoing programs ex ist to educate board members about current issues and problems in health c a re .' (Submission 828, Dr Erica Bates)

Area Health Boards

A major item discussed in the Commission hearings related to expanding the role of the board to encompass community health a ctiv itie s:

. upon the satisfactory determination of resources allocation, hospital boards should exercise full authority and accept accountability for the operation of health services in accordance with defined policy and become known as hospital and health services boards.' (Submission 421, Prince Henry, Prince of Wales and Eastern Suburbs Hospitals, 6.)

'When objectives are set in health care planning for hospitals these should include the experiences and aims of localised consumer groups such as families and voluntary agencies, to at least an equal extent with those of health care professionals.' (Submission 360, Health Care

Consumers' Association of the Australian Capital Territory, 6.)

The Commission is aware of the arguments in favour of promoting the development of area boards, which are given the responsibility of providing both hospital and community services. Tasmania is considering area boards to replace the multiple boards and councils which have separate responsibility

for various health services. New South Wales favours boards taking a comprehensive role involving both institutional and non-institutional services but desires th is to come about by evolution rather than regulation. South Australia has encouraged the integration of services which has

developed spontaneously in some country areas. Western Australia, on the other hand, has separated i t s in stitu tio n al and community services. While the Commission observed excellent work performed by both sections, integration did represent a great problem.


In a number of circumstances, such as in the Northern Metropolitan Region of New South Wales, with the encouragement of the Health Commission, i t has been possible for the d is tr ic t hospital boards to become area health service boards. I t has been observed that the members of these boards, when offered broader resp o n sib ilities, ris e to the occasion and work equally hard on behalf of community services and local hospital services - even to the extent of channelling considerable charitable funds into community health c lin ic s, vehicles, and the reallocation of tra d itio n a l hospital resources

into the areas of need in the community. I t is also reported that these citizens are prepared to act as 1 ombudsmen' on behalf of patients and families within the health service area.

The area health service board provides the machinery capable of organising a ll personal health services on behalf of a defined population, with a single person, usually the head of the d is tric t hospital, responsible for coordinating a ll personal health services. Health programs have been developed headed by a professional person, who is also responsible for

including both hospital and community elements. The programs include rehabilitation and g e ria tric s, mental health services, maternal and child health services, dental health services, accident and emergency services, ambulance services, services for the severely in tellectu ally handicapped, health promotion, as well as trad itio n al medical and surgical services provided by the hospital and general and sp ecialist medical practitioners in the defined geographical area.

The five area boards in the region, which each serve a community of between 100 000 and 200 000 people, are of in terest to the Commission because an independent evaluation of th e ir services and organisation was conducted by Walter 0. Spitzer, the Professor of Epidemiology and Community Health from

the McGill University, Montreal, in 1980. His report included these comments

'The immediate and predominant conclusion I was able to reach is that the Northern Metropolitan Health Region is decentralised in i ts organisation and management to an extent that I believe is seldom encountered in health systems of western developed countries. . . . To someone with my perspective most of the observable effects of the process seem to be favourable both to providers and recipients of health c a re .' (5)


An a ttitu d e survey of s ta f f, including hospital employees and public servants, towards the concept of decentralisation and coordinated area health services was performed:

'. . . There was not one single complaint indicating that decentralisation was viewed as undesirable. Moreover, there are numerous spontaneous commendations of the policy and i t s positive e ffe cts. I feel th a t i t is remarkable and merits congratulations to a ll responsible for conceptualising and implementing the policy of d e c e n tra lisa tio n .' (Spitzer, 1980, 86.)

This Commission is also impressed by the attitude which has been adopted by the boards responsible for th is quite remarkable example of integration of services and by the emergence of a specific role for each in stitu tio n , which has linked into the to ta l system.

Where area boards are developed, boards of hospitals within the area should disappear except where religious hospitals may wish to retain an advisory board.

F in ally , increasing the community involvement and representation on boards has been frequently mentioned and the need for 'open' board meetings was proposed on a number of occasions:

'Meetings of hospital or area health boards to be held in public with access for the press rather than in the present secrecy which prevents open questioning of hospital policy.' (Submission 828, Dr Erica Bates.)

'. . . and the democratisation of hospital boards so that they are more representative of the local community. ' (Submission 254, Doctors' Reform Society, 13.)

'Regular elections should be held preceded by public meetings at which hospital policies and practices and candidates' attitudes towards those policies and practices are clearly sta te d ... All hospital meetings


should be open to the public and details of such meetings published in the local newspaper.' (Submission 363, Association for the Welfare of Children in Hospital)

Internal Organisation of Hospitals

The effectiveness of the existing organisational structures may impinge on the efficiency of hospitals. The submissions throw some lig h t on th is:

'Whilst the organisational structure of a hospital w ill not be the answer to achieving organisational efficiency, i t can m ilitate against the objectives and strategy [to achieve th is ] . 1 (Dreher, Director of Medical Services, Royal Melbourne Hospital, 1979)

The link betwewen an in s titu tio n 's organisational structure and efficiency appears to be tenuous because efficiency is dependent on many factors. The structure is the set of working relationships that develop between groups and individuals in the organisation. I t may provide the environment for decisions to be made that will reflect informed consensus and have the commitment of the s ta f f, or alternately may re s tric t th is process.

In general, the submissions pay very l i t t l e attention to organisational structure; those that do a ll basically question the tr ip a r tite arrangement of hospital sta ff and how th is m ilitates against the development of a multi-disciplinary approach to patient care. The separate structures of nursing, administration and medicine tend to reinforce the vertical hierarchies rather than strengthen the links between these groups. The Senior Medical Staff at St Vincent's in Melbourne have said:

' There remains in teaching hospitals, however, a tendency for medical, administrative and nursing s ta ff organisations to develop and work on a vertical structure with limited cross fe rtilisa tio n . This tendency leads to a lack of communication and a limiting of the taking and implementing of decisions affecting a ll three organisations.'

(Submission 440, St Vincent's Hospital, 9.)


Some hospitals have developed and experimented with different organisational structure to overcome the limitations mentioned above - Sir Charles Gairdner, Austin and the Royal Melbourne. The Westmead Hospital saw the opportunity provided by a new hospital for experimentation and innovation but concluded that:

'. . . sig nificant departures from traditional lines would be likely to cause internal co n flicts and potential problems so a traditional structure was chosen. (Submission 413, The Parramatta Hospitals/Westmead Centre, 8.)

Most of the attention in the submissions and transcripts has been directed towards the organisation of doctors in hospitals. As v isiting medical s ta f f , as d istin c t from fu ll time salaried and resident s ta ff, provide the bulk of c lin ic a l services in Australian hospitals, most comment

is about th is group. Underlying the statements was the attitude that doctors worked in the organisation but were not part of i t and for some th is attitude has persisted despite radical changes in the delivery and financing of hospital based care:

'. . . (present) medical s ta ff organised structures frequently reflect ad hoc adaptation from (times past and). . . i t is unusual for them to be organised in a structure designed to fa c ilita te collective decision making, encourage review of the medical care process and provide a

network for accountability for resources consumed by their a c tiv itie s in the h o s p ita l.1 (Submission 243, Royal Australian College of Medical A dm inistrators,)

'. . . medical s ta f f structure(s) (are) no longer appropriate for modern conditions, having been developed in the era of doctors' voluntary honorary hospital service in conditions of relatively unspecialised medical practice. . . medical sta ff structures remain . .

.'in d iv id u al orientated' with most visiting medical practitioners more-or-less responsible for oversight of their own a c tiv itie s. . .the prevailing pattern does not foster the coordinated, cost conscious team approach now required for effective and efficient management of hospital


care. U tilisation and peer review w ill be d iffic u lt to implement under these circumstances . . .as will any cost containment program.1 (Submission 700, Part I, 90-2).

'. . . i t (is) . . .essential that hospitals have a formal medical

s ta ff structure that makes members of the medical s ta f f formally responsible for the examination of and recommending of policies and the implementation of those policies i f adopted. . . The medical s ta ff should be accountable in a management sense for the conduct of the area for which they take re sp o n sib ility .1 (Submission 210, 20)

The Commission is well aware of the key role of the medical s ta ff in decision making and resource allocation within hospitals. They are the major influencers of admission, treatment and discharge.

As more responsibility is placed on doctors to evaluate their performance and respond to calls for cost constraint they must be suitably organised to be able to respond collectively to these demands and to be held collectively accountable for taking action.

'[Organisational] structures are used to review programs, set p rio ritie s, carry out consultative functions essential to running the modern hospital. They are the pathways for setting and evaluating clin ical standards and reviewing resource consumption.' (Submission 243, Royal Australian College of Medical Administrators,)

Are the present medical s ta f f structures adequate for meeting these new demands? In short the answer seems, with a few notable exceptions, to be no.

'Major problems found at surveys relate to the medical s ta ff. . . i t is evident that the majority of Australian hospitals lack organisational structures which could assume the responsibilities (expected of the medical professional in the modern hospital, eg. provision of general c lin ical policy, establishment of privileges, evaluation of

performance. I t was found frequently that) medical s ta ff are not formally assessed prior to th e ir hospital appointment and there is no check on the medical p ra c titio n e r's standards of competence or ethics


and behaviour. . . There is an urgent need in Australia for legislative reform in th is a r e a .1 (Submission 201, Australian Council of Hospital Standards, 26-8)

' I t is s t i l l exceptional for the visiting medical s ta ff to be fully involved in the management of a hospital or planning for the fu tu re .' (Submission 246, NSW Branch, Australian Medical Association,)

'Not many hospitals involve doctors with executive decisions on a day to day basis and some even more rarely with long term decisions.' (Submission 439. Royal Melbourne Hospital,)

I f present medical s ta ff structures are inadequate the question is where does the problem lie ? Are the doctors not interested enough to become involved or is management not inviting them and helping them become involved. The submissions from organisations representing the medical professions make a plea for greater involvement in the decision-making bodies within the hospital, even though some see problems with doing so.

'Taking any powerful professional group to a position of greater accountability requires persistence and determination.' (Submission 243, Royal Australian College of Medical Administrators,)

The Australian H ospitals' Association suggests that a factor which has limited the establishment of medical staff structures is the tendency for medical sp e c ia lists to hold appointments in a number of hospitals.

The Australian Medical Association suggests that there needs to be an upgrading of the role of the medical administrator. I t also suggests that failure to carry out the recommendations of management consultants has been to a large extent because of the lack of wholehearted support of top

management and th e ir in a b ility to obtain the cooperation of other s ta ff members of a l l vocations. Lack of professional accountability must be stopped.

'Absolute professional autonomy and cost containment are not compatible. The introduction of systems of delineation of professional privileges for hospital medical s ta f f , long recognised as extremely


desirable i f not essential to maintain the quality of care, could be linked to the development of cost accountability.1 (Submission 382, University of New South Wales)

Not a ll submissions are pessimistic. The Australian Hospitals' Association considers that there are indications of things changing for the better, particularly in teaching hospitals.

The Royal Australian College of Medical Administrators says th at the larger the hospital the more developed the organisational structures, and where fu ll time s ta ff are involved a greater acceptance of organisational constraints are being displayed. This is not a view accepted by many

visiting medical officers.

The Capital Territory Health Commission

This Commission is unique in Australia because i t has the dual role of assisting the Minister for Health to meet his statutory obligation for planning, developing and administering public health services while also being responsible for day to day management of the various in stitu tio n s and services. In its f ir s t task i t functions as an equivalent to the State

health departments and commissions, but i ts second responsibility is normally delegated by the health authorities to in stitu tio n al boards of directors which must work within the lim its imposed by the policies of the respective authorities.

A number of witnesses have informed th is Commission both in public and private hearings, of the b arriers to efficiency which arise from th is unusual arrangement.

In the States and Northern Territory the health commissions and departments are staffed by officers specifically appointed by virtue of their sk ills in policy formulation, planning both short term and strateg ic, and resource allocation. These officers are supported by public servants.


The boards of d ire c to rs, on the other hand, are either appointed or elected by s ta ff groups, professional groups or in some instances, such as in parts of South A ustralia, the to ta l adult population of a local authority area.

The Capital Territory Health Commission consists of three fu ll time members appointed by the Minister, three members appointed by the House of Assembly and two elected by the staff and one registered by medical practitioners. This Commission has been informed that blatant stacking of

the membership has occurred when matters of major policy have been under consideration, and that p o litical party views have been put forward under the guise of community representation. The Commission considers that such events

must in terfere with the efficien t management of the health services in the Territory and is of the view that two major changes should be undertaken.

The functions of planning, major policy determination and resource allocation, as well as the parliamentary obligations, should be dealt with by the Capital Territory Health Commission as a separate organisation, responsive both to the field and the Minister. There should not be elected representative members of th is Commission, rather appointed Commissioners with proven management s k ills chosen for their capacity to judge between the competing health needs of the services.

The Commission should delegate responsibility for the day to day management of the in stitu tio n s and services to a voluntary board of directors elected or appointed in accordance with the wishes of the Territory, but preferably motivated by concern for the care of the patients using the

in stitu tio n s and a desire to see that the public funds spent by the in stitu tio n s are used in the most cost effective way.

The Commission RECOM M ENDS that the Capital Territory Health Commission be reorganised to clearly separate major policy determination, which should be carried out by appointed experts, from fa c ility management, which is appropriately controlled by elected or nominated representatives of local



I t may be argued that separating these functions w ill place an additional layer in the system, create communication problems and increase the size of the bureaucracy. This Commission re je cts these arguments for while i t does not intend to spell out the details for such change i t can see benefits arising without any expansion taking place. Indeed, with a clearer definition of responsibilities i t may well be possible to reduce the size of the operation. The voluntary board created would be a true area board, responsible for the provision of a comprehensive service to the people of the Australian Capital Territory. I t would enable nominated and appointed members to fu lfil the role of influencing major health policy, rather than determining i t ; determining i t would then properly be the responsibility of the accountable Minister.

Central Health Authority Relationships

The effectiveness of the relationship between boards and central authorities has been the subject of some adverse comment which has been referred to elsewhere. Some authorities, such as Queensland and the Northern Territory, clearly indicate the reasons for maintaining fa irly close control on the a c tiv itie s of boards and other agencies providing services. New South Wales, Victoria and Tasmania see the need to retain control of s ta ff

establishments, while South Australia and Western Australia have recently improved cash controls on th e ir in stitu tio n s with considerable effect.

Despite these stated principles, some boards consider that central health authorities are becoming more dominant and less consultative in health care provision, sometimes for reasons which may be outside th eir control:

1. . . and the major shortcomings in hospital administration in Victoria derive from the fact that the Health Commission is required to function within outmoded and excessively re stric tiv e public service oriented c o n tro ls.1 (Submission 207, the Victorian Hospitals' Association Ltd, 17.)

'Nevertheless, i f there is to be more e fficien t provision of hospital services, governments must address these two problems in a more


'open1 manner. There has been l i t t l e consultation by government, not only with each board, but also with groups of boards.' (Submission 245, Australian Medical Association, 13.)

'Of further concern is the apparent inexperience of many of the Commission officers and their inability to understand the complex nature of a hospital and, indeed at times, basic principles of management.' (Submission 407, the Sutherland Hospital, Caringbah)

The important point raised here, namely the mobility and variable capacity of the s ta f f working in health authorites, is of major importance in determining the effectiveness of the institutional relationship. Most boards recognise the a b ility of the most senior officers of central authorities, but express concern about the capacity of the support s ta ff to implement the stated policies.

Generally speaking, the decision to establish health commissions was based on the principle that the coordination and integration of services would be easier i f only one agency was responsible for their provision, rather than the multiple agencies which had been in existance. But when

integration did take place, an accompanying increase in skilled s ta ff to deal with the more complex relationships was not forthcoming. With the exception of New South Wales where the developing regional system used increasing numbers of adm inistrators, most of the expertise in health administration

remained in the hospitals. As a result the central authority tended to find its e lf short on ta le n t and in some instances, numbers, to deal with an arrangement of increasing complexity and requiring new management s k ills .

I t would seem to be appropriate to the Commission for each State government to reexamine the structure of these departments and commissions, particularly in th e ir middle layers, to see i f they have the required quantum of s k ills and are arranged in a manner appropriate to perform e fficien tly .

The Commission's opinion is that they do not.

Accordingly, the Commission RECOM M ENDS that each State and Territory review the structure of middle management within the central health authorities with particular emphasis on the capacity of the system to deal expeditiously with the complex organisational problems.


Boards of Other In stitutions and Related Services

Much of the comment above is applicable to boards of other agencies such as nursing homes, community care centres, g e ria tric and rehabilitation hospitals and ambulance services. A specific additional matter concerns the integration of services for patients by means of consultation, mutual understanding and cooperation.

The Commission has visited c itie s in Australia in which a number of separate, independent boards have accepted responsibility for aspects of patient care, but in which no effort at coordination has been made by any.

If anything, separateness and independence have assumed greater importance than working together to achieve improved conditions and service for the patients. Thus, i f the Commission shows a predeliction for single area type boards responsible for serving a ll of the needs of the patients, i t is not because there is any wish to get rid of a number of boards, or transfer authority to the strongest, rather i t reflects the view th at the efficiency of service can be improved by an increase in cooperation and coordination.

If th is cannot be achieved by mutual discussion, then State authorities should le g islate for i t to occur.

An argument has been presented that community health services should remain separate and, in particular, hospital boards should not be given additional responsibility for community health services:

'. . . The Community Health Working Group is concerned that hospital control w ill lead to undesirable emphasis being placed on particular curative orientated services. Therefore, the thrust of the submission is that they want to ensure the community health services have some administrative autonomy, but that th is be not closely directed in the nature of the services they provide for local h o sp ita ls.' (Transcript, Community Health Working Group, 134.)

While the point is acknowledged, the Commission is unable to see good reason why a composite board with membership widely representative of both in stitu tio n al and community points of view would not produce a better service for a ll the patients, and at the same time ensure that an appropriate amount of the available resources was directed into community services.


Discussion and Conclusions

In the process of analysing the large amount of evidence concentrating on inefficiencies allegedly inherent in the structure of health services, the Commission has been a t pains to ensure that the worth of the system as i t exists is not overlooked. Many comments appear to be negative and not

balanced by the positive features which have been apparent in every State. The Commission has witnessed many examples of innovative systems and services which have been designed to improve the quality of patient care as well as the efficiency of i t s administration.

The principle of having voluntary boards of directors continuing to manage health care f a c ilitie s and services is one which receives strong support from the Commission for i t provides a forum which is partly independent of the bureaucracy, which can represent a community view and yet

accept responsibility for what happens in the system is worthy of continuing development. The lack of uniformity of composition in the States is not regarded as a major problem, so long as boards truly represent the interests of the communities they serve. P olitical appointments could only be

prevented by the establishment of an electoral system with a broad adult franchise as occurs in some country areas of South Australia. In the c itie s i t is not possible to identify the electorate for an individual hospital as the p atients come from many geographical areas, so the widespread use of an

electoral system is not feasible in urban areas.

Nonetheless, i t must be said that many hospitals and services have not developed th e ir organisational structures for patient management to th eir best advantage. This may be a symptom of poor management or i t possibly could indicate a lack of a desire to improve the performance.

Some innovative suggestions on health care organisation were received by the Commission. Geelong Hospital (Submission 449) indicated i t s willingness to be involved in a study:

'. . . of agencies delivering health services in the Geelong area, in order to document in efficien t provision of services which might be re c tifie d by an area adm inistration.' (Transcript, Geelong Hospital, 908A)


The hospital recommends an area advisory board rather than a system of regional administration such as applies in New South Wales:

'Geelong Hospital does not favour a regional board which would have executive powers. . . W e would favour the establishment of an area advisory board which would be appointed by the Minister after consultation with the local health agency. Such board would consist of six persons, selected in respect of their demonstrated s k ill in management. The board would be serviced by a s ta ff of three persons.

The board would consider any matter placed before i t by the health commission, would have right of access to any agency and would, in particular, comment upon:

(a) allocation of maintenance funds; (b) building programs; (c) proposed service programs; (d) overlap of services.

I t should meet at least four times a year and may conduct public hearings.1 (Transcript, Geelong Hospital, 909)

The Hospital submission also suggested that funding be, in the f ir s t place, in areas, as the system in which the health authorities fund agencies directly does not achieve an equitable distribution of resources over the whole State. The area advisory board would comment on the relativ e need of the various agencies before the funds are actually distributed.

This submission presented the d etails of such a study in a form which would make i t readily available for t r i a l . The Commission commends the proposal and suggests that the Victorian Health Commission should give i t early consideration as a potential source of valuable information.

Many hospitals outlined innovative changes that had been made to their organisational structure and presented supportive evidence indicative of the gains in productivity or the range of fa c ilitie s offered to their patients. These plans were also commendable in many instances and highlighted the constructive management s k ills available in some of the large in stitu tio n s.


The Commission has reflected at length on the question of s ta f f representatives on boards and concluded that the principle is not one deserving of support, whether the s ta ff be medical or non-medical. The Commission believes that employees of the board should certainly be given the

opportunity to have th e ir views heard when discussion is centred on matters of in te re st to them, but i t prefers this to be done by the establishment of effective communication systems and by the involvement of s ta ff representatives in committees at a level once removed from the board of

directors. This contention in no way prevents boards having ready access to expert professional viewpoints which may be presented by both medical and non-medical s ta ff in a manner such as described at the Royal Melbourne Hospital (Submission 439). The Commission also believes that each board should, i f possible, include at least one interested medical practitioner, but he or she should not be a 'representative' of the medical s ta ff body corporate. In th is way, an expert opinion without a significant vested in te re st may be obtained.

The Commission has been influenced by the decision in the case Bennetts v Board of Fire Commissioners referred to e a rlie r in arriving a t th is conclusion, for i t considers that conflict of in terest can best be avoided i f a ll board members are appointed to serve the board and not represent another

group or profession other than the patients and the community.

The Commission is concerned about the lack of delegation of adequate authority to boards and in stitu tio n al managers as th is does tend to stunt the development of flexible and innovative management, and nullify measures which may be aimed at increasing institutional productivity. Some of the examples

of central decision making presented by witnesses suggest small minded authoritarianism by some central offices and exhibit openly a lack of understanding of the system by the officers concerned. But, the Commission also believes th at many hospitals have not demonstrated the a b ility necessary

effectively to manage th e ir own affairs. This dilemma may only be resolved when a satisfactory financial reporting system is developed.

In the meantime, the Commission considers that action is necessary from both p arties: the health authorities should seek out and discard unnecessary control systems and practices which serve only to complicate the system and do not contribute to attaining efficient service delivery and the


institutions should take steps to ensure th at they conform to major policy directives and are organised to meet the performance and expenditure targets which i t has been agreed they should a tta in .

Education programs for board members need to be expanded. The national and State hospital associations are seen as the appropriate agencies to carry out this important task. In the past board member education provided by the Australian Hospitals' Association has been mainly concerned with providing an arena for discussing contemporary issues rather than imparting s k ills which would a ssist members to meet the responsibility of their appointment. Very

few programs have been arranged to consider topics of v ita l in terest to boards such as contemporary managerial practice and aspects of management technology, including the use of computers. The very least to be obtained from education would be a reasonable understanding of what should be expected

from the administrative and medical s ta ff.

The Australian Hospitals' Association conducts workshops in Sydney, Melbourne, Adelaide and Perth for board members and administrators but these w ill provide some information for only a few. Nevertheless the program is to be commended.

The Commission has been informed that the Adelaide branch of the Association has recently compiled an orientation manual for new board members. This is a long outstanding need, as is a regular journal providing information. The Commission is pleased to hear that a l i t t l e progress is being made in th is important area, for i t holds the strong view that the role played by board members, including th eir understanding of the functions and duties of the administrators and senior professional s ta ff, is too important to be le f t to the individual accruing knowledge about a very complex system by a process of tr i a l and error.

The Commission RECOM M ENDS th at the Australian Hospitals' Association and State Hospital Associations jo in tly plan and implement a structured program of board member education. I t also RECOM M ENDS that an orientation manual applicable to new board members of any health care in stitu tio n in any State be compiled as a matter of urgency.


As far as the role of boards is concerned, the Commission is impressed with the model by-laws issued by by the Health Commission of New South Wales and previously referred to . The document outlines the board's responsibility and accountability and provides a mechanism by which these may be achieved. The document is RECOM M ENDED for consideration by hospital boards, as well as by State and Territory health authorities.

A number of d iffering internal organisation patterns have been presented to the Commission, a ll of which are aimed at improving the efficiency of communication and consultation with the differing professional and non-professional groups within the in stitution, including the medical s ta ff. The importance of effective organisation structures cannot be overstated,

therefore i t is disappointing that so few hospitals have bothered to indicate th eir system. The Commission has come to the conclusion that experimentation with organisation structures to promote efficiency and effectiveness is an underdeveloped field in Australian hospitals. I t is understandable that many managers do not have the time to involve themselves in wholesale reorganisation of th e ir hospitals when short term benefits may not be obvious. But th is should not stop innovative work in th is area along the lines of the John Hopkins Medical Centre experiment in Baltimore and the Munich model of some German hospitals, particularly at a time when existing systems are unable to make appropriate responses to the rapid changes occurring in the delivery of health care.

The Commission believes that having single boards of directors responsible for the provision of to ta l health services to specified communities offers the best means of improving the efficiency of the existing structure. There are a number of barriers to implementing these systems, such as d ifferen t sources of funding, variable employment conditions and wages for public servants compared with institutional employees as well as the in s titu tio n a lly oriented attitude and competitive interests of some boards. These b arriers have not proved insurmoiintable in the past, or in other countries when changes to delivery systems have occurred.

The Commission RECOM M ENDS that area boards be developed which w ill take over a ll the health care responsibilities for certain easily specified and readily id en tified d is tr ic ts . In itia lly th is objective should be sought by evolutionary means, th at is as a result of positive action by existing boards


and authorities within the nominated d is tric ts , to achieve cooperation, amalgamation and synthesis. I f progress is not apparent within a reasonable time, the States should bring in area boards by legislation.

An alternative proposal which State authorities may consider appropriate in d is tric ts where there are many service providers, as in urban areas, is the establishment of councils with functions equivalent to the community health councils found in B ritain . These were created in 1974 in an effort to challenge the managerial 'monopoly' which permeated the National Health Service organisation. Each council consists of about 30 members of the local public, with tenure limited absolutely to six years so that a true but varying consumer voice is obtained. They have lim ited powers which include the power to attend certain meetings, the power to inspect and approve plans which involve expansion or contraction of any service provided within the d is tric t, and a duty to present an annual report which must be answered by the central authority. The Royal Commission on the National Health Service, 1979 (Merrison) came out strongly in support of the councils and recommended an expansion of th eir role as 'p a tie n t's friend'. Dr Erica Bates of the University of New South Wales, who undertook a survey of the councils while on study leave, also gives qualified but definite support to the concept.

Experience with structures designed to formalise a consumer voice in health services is limited in A ustralia, but the Commission is aware that advisory councils to area boards were established in some Metropolitan Regions in New South Wales and some s t i l l e x ists. What is distinctive about

the B ritish experience in the Commission's view i s the clarity with which the powers and obligations appear to have been defined. Advisory structures too often f a il when neither management nor the advisory committee have a clear understanding of the role to be played. The Commission considers that further experimentation in providing local consumer input to the health service should be encouraged by the State and Territory health authorities.

Patients and their Expectations

While in the final analysis, the total e ffo rt of our health system, whether service provision, education or research, is aimed at improving the health of individual patients and the health sta tu s of the community, patients are largely ignorant of the services they are receiving and often


what they are paying for. Also, in the long run, the funds to run the system are obtained from th is same community of patients. And yet when the system comes under scrutiny, as with th is Commission, the voices of the patients are

the quietest of a ll and few patient groups presented evidence.

However, the submission from the Australian Consumers' Association (Submission 372) did consider the use of the term 'consumer expectations' which was mentioned in a number of other submissions as a factor which was a barrier to reducing costs and improving efficiency. The Association argued strongly th a t the doctor and the hospital were responsible for the costs

involved, as i t is the doctor who admits the patient, decides the treatment and the length of stay - not the patient.

The submission also contained details about variations in operation rates in d ifferen t parts of Australia and commends the second opinion system on the need for surgery which was instituted at Sydney Hospital. Special attention is given to the failure by doctors and pharmacists to inform

patients about the medication they are taking:

'Although th is may seem to be a minor matter in so far as hospitals are concerned, by the same token hospitals should be able to improve the situation by providing simple direct instructions about the most commonly used medications . . . ' (Submission 372, 4.)

The Association sees advantage to the patients in the use of techniques such as peer review and accreditation in both public and private sector hospitals. The Health Care Consumers of the Australian Capital Territory desire a system:

' . . . providing effective avenues for consumer complaints, so that these reach the health care planners and are not dissipated among health care professionals.' (Submission 360, 6.) ■

but the Australian Consumers' Association wants:

' . . . hospital ombudsman or patient representative. Such a person should be of su fficien t stature to have access to senior hospital s ta ff,


including visiting sp ecialists, and would need to be someone familiar with the operation of the h o sp ita l.' (Submission 372, 10.)

I t also supports the concept of Community Health Councils and consumer representation:

Ά consumer input may be a source of frictio n and add to the time taken for decision making, but without i t the system may act to the disadvantage of those whom the hospitals (and other health care services) should be serving.1 (Submission 372, 12)

Finally, the Association discusses the significant problem which would be imposed on the poor i f a charge for pharmaceutical items was reintroduced in public hospitals, regarding such a move as a retrograde step. This is a matter of concern to the Commission which is in sympathy with th is view and would not favour introduction of a charge because of the d istin c t possibility that i t would have an adverse effect on the quality of care.

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The submission of the Commonwealth Department of Health was used as a suitable introduction to a number of the issues which received extensive comment before th is Commission.

'Staffing costs represent some 70 per cent of hospital recurrent costs, and yet in contrast to the efforts which have been directed at assessing the appropriate supply and distribution of physical resources, there has been l i t t l e attention given to the size and functional

distrib u tio n of the health workforce'. (Submission 700, 1, 26.)

'There is no general agreement in Australia over optimal staffing patterns, mixes and organisation in hospitals. For the most part, these have developed on the basis of past local experience, and hence vary widely, even between hospitals of similar size and service mix.

'Wide variation in staffing patterns suggests, however, that the productivity of health personnel has not been a major concern of hospital adm inistrators.' (59)

The f i r s t issue, th a t of appointment inefficiency, was raised by the Royal Canberra Hospital about the appointment of clerks to positions involving patient reception, switch board and courier services. Since 1975 th is role has been taken over by the Public Service administration.

Normally appointments are made without reference to the hospital and in accordance with the categories of staff suitable' for clerical duties within the Public Service. The hospital shows that the duties of the clerks taking

up these positions are quite different from the usual clerical positions in that they involve d irect contact with patients and the greater responsibility of caring for p a tie n ts' welfare, as well as such duties as distributing pathology specimens and other medical supplies. These duties require


accuracy and speed and normally demand the appointment of mature, responsible sta ff rather than inexperienced juniors.

The hospital demonstrated a turnover of th is s ta ff since 1975 at a rate almost three times that which previously existed. It also commented on the unsuitability of the Public Service c lassific atio n of clerical duties for hospital appointees and the long delay which usually occurred in finalising appointments. These comments were substantiated by other witnesses and the Commission sees the situation as one requiring rectificatio n because of the obvious inefficiency. The Commission therefore RECOM M ENDS that the Public Service Board consult the hospital administration as part of the process of arranging suitable classific atio n s of s ta ff, and expedites the appointment

process of a ll appointees to the hospital service.

The Queensland Department of Health discusses the problem of specialisation of health manpower in d e ta il, pointing out that in the past 30 years the professional health workforce has expanded from about a dozen functionally d istin c t occupational categories to some hundred. The

submission recognises two problems for the e fficien t administration of the hospital sector:

'F irs tly , such fragmentation brings increased management costs and increased "in d iv isib ilitie s" in labour. In principle, these consequences could foster increased diseconomies of scale___The prospect of dilution of professional expertise is , today, a greater constraint on hospital system design that any scale diseconomies of the

fa c ility , as a whole.

'Secondly, the advent of the 'professional' type of occupational differen tiatio n brings to the fore two related issues:

(a) technical quality of care is seen to depend on the scie n tific and technological competence of practitioners; (b) but such competence is seen as being assured only by increasing hiring standards and educational qualifications and, therefore, the

costs of professional labour.' (Submission 711, 17.3)

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The Queensland submission discusses the dilema for hospital management, which must decide whether to re s ist untestable allegations about the quality of care being improved on account of increasing educational qualifications and the introduction of new categories of subspecialists, as compared with

not changing the existing level of care in the interest of containing costs.

A deal of American lite ra tu re is available based on assessments being made of the value of what is title d 1 fla t of the curve' medicine, which is determining whether additional inputs of resources will provide either cost or health benefits for patients. Some special costly procedures should be

carried out only i f quite rigid c rite ria are satisfied. The best known example of the negative effect of special treatment relates to the indiscrim inate use of antipartum electronic foetal monitoring which was shown to increase rather than reduce neonatal m ortality. From the cost point of

view however, much more important is the lack of evidence of· the value of coronary artery by-pass surgery to some 90 per cent of patients undergoing i t . While in th is instance i t is possible that benefits to the patients may

be demonstrated by research in the future, that is s t i l l undecided. However the situ a tio n hardly ju s tifie s the mammoth increase in costs and the specialised workforce which has been devoted to the procedure since its inception a few years ago. If th is surgery is beneficial, i t seems its

benefit w ill be marginal and the possibility s t i l l exists that the expensive procedure could be detrimental to many patients.

The Queensland Department of Health makes th is important point:

'In the absence of objective tests of claims about the trade off between costs and quality, 'p o litic a l' c rite ria alone are available for decision making.1 (Submission 711, 17.A)

The Department considers that these political c rite ria w ill tend to be quite adequate, so long as they are subject to the type of checks and balances which ex ist in the Queensland system, where responsibility for operational efficiency rests jointly on a senior administrator and a senior health professional. An additional safeguard resides in a triumverate

including a nursing superintendent, also being involved in the public hospital.



The rather pragmatic approach of the Queensland system is also found the other States, with i ts relative effectiveness depending on the degree of influence which the providers and the administrators have on th e ir p o litic a l masters. The Commission sees as important the development of many more

evaluated tr ia ls undertaken in cooperation with epidemiologists and health economists before new technologies are introduced.

The Commission supports the ideas of centres of excellence being developed within each State. Normally these may be found in some of the large teaching hospitals but th is need not necessarily always be so. The worry is that the number of centres has never been determined and every large hospital, whether a university teaching hospital or not, has desires to become a centre of excellence. The number of specialty units found in some States alone is an indication of the influence which providers can have on politicians, but additionally in some cases, the units are not performing enough work to provide the highest level of care. This matter greatly effects the u tilis a tio n of s ta ff in the health service. Each State should decide on the number of specialty v is its to be provided and th e ir location and any over position should be dealt with.

The Queensland submission also refers to the increase in s ta ff categories which has occured in recent years and the 100 or so professional occupations of health workers. These must be represented virtually in their entirety even in a system serving a population as small as 200 000. While seme 30 of the health occupations are differentiated at the undergraduate level, sub-specialty training is increasing in its diversity at the post graduate level, particularly in medicine and nursing but now also in some technical sections.

A number of witnesses commented on th is explosion of sub-specialties and the new training courses for them in the past few years, particularly in colleges of advanced education. One problem th is increase has produced for the system is caused by the lack of clarity of particular roles of these new work groups. Areas of demarcation between various professional groups are not clear and disputes are well known. A recent example advised to the

Commission involved a seriously i l l patient at Lithgow. Despite the presence of a helicopter providing intensive care transport, transfer to Sydney was made by road transport to avoid a threatened industrial demarcation dispute.


Many other examples in which patients have been placed in jeopardy have also oeen reported. As the number of work groups involved in health care increases so the problems of determining the boundaries of th e ir a c tiv itie s have escalated. A requirement for additional administration to improve the

integration has arisen, without any certainty that patients are benefiting. Many people suggest th a t the reverse is actually the case, in that the increasing sub-specialisation has caused greater d ifficulty for patients seeking to benefit from the advantages of the special sk ills of each group.

The Commission considers that whenever possible the work of different categories of s ta f f within the health field should be amalgamated.

Certainly, no additional classifications of health service s ta ff should be introduced, for i t is clearly apparent that the additional health benefits that may accrue are marginal and the access for patients needing special

services is made more d iffic u lt. In the Commission's view the days for increasing sp ecialisation are over and a more generalist approach should be encouraged.

Changes in the Health Force Skill Mix

The changes in the public hospital workforce in Western Australia between 1971 and 1977 are shown in Table 1.



Manpower Category Manpower per 1000 Pop'n % in Category 1971 1977 % Change 1971 1977

Admin, and c lerica l 9.3 14.1 51.6 9.5 11.3

Medical - salaried 2.9 5.2 79.3 3.0 4.2

Medical - sessional (a) 0.4 0.9 125.0 0.4 0.7

Technical 5.0 8.1 62.0 5.1 6.5

Ancillary 2.0 3.2 60.0 2.0 2.6

Nursing - qualified 17.1 22.7 32.7 17.5 18.2

Nursing - aides 12.2 16.9 38.5 12.5 13.5

Nursing - students 15.3 14.2 7.2 15.7 11.4

Domestic 28.0 33.3 18.9 28.7 26.7

Maintenance 6.0 6.4 6.7 6.1 5.1

All Manpower 97.7 124.9 27.8 100.0 100.0

Source: Schapper and Hobbs, 1979 Note: (a) Full time equivalent

Other evidence suggests that the same sort of changes are occuring in the other States and T erritories. There has been a relative increase in skilled s ta f f in the medical, nursing and technical fields and in the administrative and clerica l categories. Further work has shown that an

increase in costs has resulted from the increasing proportion of skilled workers.

The Australian Association of Surgeons noted the large increase in administrative s ta ff which had occurred without evidence of improved performance. This was a challenge frequently directed both to health commissions and departments and to the administration of individual in stitu tio n s. In the Commission's view, i t is a challenge with some

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substance but the d iffic u lty not overcome has been determining how much of the increase was due to the greater complexity of the health system brought about by sub sp ecialisation of s ta ff and by technological change.

Staff Establishment and S taff Patient Ratios

A Queensland medical administrator (Submission 968) applied the Victorian Hospower technique across a number of Australian teaching hospitals to obtain comparable data of to ta l sta ff u tilisa tio n . He presented the information as follows:

Alfred (Melbourne) Royal North Shore (Sydney) Royal Melbourne Sir Charles Gairdner (Perth)

Royal Prince Alfred (Sydney) Mater (Brisbane) Royal Brisbane Princess Alexandra (Brisbane)

20 hours/day/patient 17 hours/day/patient 17 hours/day/patient 16 hours/day/patient

14 hours/day/patient 11 hours/day/patient 10 hours/day/patient 9 hours/day/paitent

While he was unable to see l i t t l e variation between the States in the standard of c lin ic a l care, his comments on the figures were:

'Quality of care is assumed to be higher with higher staff/p a tie n t ra tio s . There is l i t t l e hard data on which to base a determination of optimum s ta f f numbers of various categories or to measure quality of care. However, re su lts of major teaching hospitals throughout the

country probably vary very l i t t l e .

'There is almost certainly a point where further s ta ff increases actually reduce quality of care by complicating communication, dividing responsibility and reducing technical expertise, eg, comparison of numbers of surgeons per numbers of operations in New South Wales

suggests in su ffic ie n t available operative material per head to maintain technical competence.' (3)


This also supports the view that sub-specialisation is a concept of rapidly limiting returns. The Tasmanian Department of Health Services made th is comment:

'In recent years, the Department of Health Services has adopted a more positive approach to improving the u tilis a tio n of hospital sta ff and, despite obvious constraints, significant achievements have been made. Essentially the approach taken has been to consider how appropriately the to ta l human .and other health services resources of the State are currently being used, and how they could be better u tilise d given existing constraints, and how might resources ideally be used in the long term .' (Submission 714, 37)

The Commission has observed the e ffo rt which every State authority has made to obtain the best possible use from th e ir available s ta ff. Tasmania's efforts have been made with the cooperation of professional and industrial groups and with the assistance of management consultants. The Hospital

Employees' Federation of Australia (Tasmanian Branch No. 1) commented on the rostering changes as follows:

'As a resu lt of that expert assistance and the jo in t negotiations between the Director, the consultants and our Union, a radically new system of hospital s ta ff rostering has been gradually evolved and refined. This new rostering system has enabled the hospitals, as a by-product to the consultants' work to exercise great control over s ta ff numbers and the wages paid to that s t a f f '. (Submission 351, 1)


This is an approach to output measurement developed in Victoria, which relates the productive hours of s ta ff time to the inpatient days of care of a hospital, adjusted for average length of stay and outpatient attendances.

This allows comparisons to be made between 'lik e ' hospitals which have sim ilar case mixes. The system has revealed significant differences in sta ff/p a tie n t ratio s between hospitals in the groupings and had the effect of stimulating those with high s ta f f patient ratios to examine th eir staffing u tilisa tio n .


The Victorian submission sums up the value of Hospower:

1 I t has to be accepted that empirical output measures w ill never be more than imperfect proxies for true outputs defined in terms of health outcomes. However, they should be judged by comparison not with an ideal but unattainable output concept, but with alternative practicable

measures. The only real alternatives are unadjusted bed days and no output measurement at a ll: case adjusted throughput indices are clearly a great advance on both. Used in the context of 'lik e ' groupings, Hospower productivity ratios can be made sufficiently objective and

sensitive to add powerfully to management systems and budgetary c o n tro l.' (Submission 342)

In view of the rapid progress which was made with the system, consideration was given to using i t as a guide to the allocation of a proportion of hospital funds by the Victorian Health Commission. This proposal was not well received at the time. The Victorian Hospitals'

Association Limited commented:

'The Health Commission's announcement in 1978 of its intention to apply Hospower to hospital budgetary allocations has stimulated interest among Victoria hospitals in further development and refinement of the system. The Association is closely involved in attempts to improve

Hospower, and is aware of and supports recent Commission in itia tiv e s to accelerate th is process. At the same time the Association is mindful th at Hospower may be manipulated at hospital level and its precipitate

application as a resource allocation and performance measure at this stage may therefore severely prejudice its long term cred ib ility . Nevertheless, i t remains a management tool of significant potential and one which is unique to the Victorian hospital f ie ld .' (Submission 207,

21 )

The submission also indicated that the system had wider potential:

' Other States have displayed interest in Hospower, . . . [the Association] firmly believes that th is system has strong potential for application on a national b a s is ...'. (21)


The Commission is greatly impressed with the value and simplicity of the Hospower system for i t has been developed from an existing payroll system and from other readily available s ta tis tic s . I t is obviously capable of further refinement. The Commission RECOM M ENDS th at Hospower, or a similar system, should be adopted by each State health authority in order that re a listic comparisons can be made in the s ta ff u tilis a tio n by in stitu tio n s.

Staff Training

The Royal Australian College of Medical Administrators made th is comment

'Hospitals and other publicly funded health services are the major employers of most health professions and play a major role in th eir training. In the main the numbers entering the health professions, in as far as they are controllable, are inadequately influenced by the health authorities. Factors influencing supply and demand are complex,

require frequent fine tuning by as yet poorly coordinated public a u th o ritie s'. (Submission 243, 44).

These views were submitted by many other authorities, organisations and individuals. The Australian Hospital Association has for a long time been seeking effective channels of communication between the health and education authorities, for i t believes th at the education authorities have an autonomy which has been a major factor in the escalation of health costs in Australia.

' Frequently these educational bodies have complete authority to determine curriculum content and general levels of academic attainment required for registration, or admission of graduates to the appropriate professions. Some authorities are required to seek m inisterial approval

for policy changes but th is places no requirement on the relevant m inisters to seek the views of health care agencies who must ultimately employ the new graduates'. (Australian Hospital Association, Health Services Monograph 10/78).

The Tasmanian Department of Health Services took th is view:

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1 The Tasmanian Government has already been forced in the past to provide employment for nursing and medical graduates beyond levels which i t would normally do so. The p o litic a l pressures to do so in the future w ill be even greater, particularly as the over supply situation with

respect to some professions comes increasingly into conflict with in itia tiv e s to contain costs of health services'. (Submission 714, 39).

This Commission believes that th is is an untenable situation in which costs can be generated in one sector, health, by decisions made in the name of education, and over which the health sector has no control.

The Committee of Inquiry into Education and Training (Williams, 1979) has already commented at length on th is problem and suggested the appointment of national and State advisory committees on health manpower.

This Commission supports these conclusions and RECOM M ENDS that national and State manpower committees be established which have the capacity to forecast requirements in the various s ta ff categories and the authority to adjust the intake of students regularly, to meet the anticipated demand.

Another matter was raised by the Department of Health and Medical Services, Western A ustralia, which is interested in the cost of education, particularly nursing education, to the public sector. It states:

'The whole of the cost of nursing education is borne by Government and non-profit hospitals (apart from a small amount of post graduate education carried out by the Western Australian Institute of Technology) but provides trained nurses for private profit taking hospitals, doctors' surgeries, and other Government departments such as Child

Health and Community H ealth'. (Submission 716, 5.2).

Certainly th is comment does not take into account some training by private hospital nursing schools throughout Australia, but i t does demonstrate th a t the burden of training, particularly basic training, is almost en tirely carried by the public sector.


In evidence to the Commission Professor Walter Spitzer, Visiting Professor in Epidemiology, University of Sydney, and Acting Director, Clinical Epidemiology Unit, Royal North Shore Hospital, referred to the problem of oversupply of health manpower as:

'. . . t h e increasing apparent surplus of health resources- p articularly in the manpower fie ld , which disturbs the balance of the whole situation very markedly and which in my personal view I would submit is not taken su fficien tly into account by those in a position to make decisions or recommendations, particularly in long range planning.

It is a buyers' market now. It used to be a s e lle rs ' market half a

century ago'. (Transcript, 334).

The Commission agrees with th is view and is convinced that ad hoc and 'stop s ta r t' methods are no longer appropriate for the complex problem of sta ff u tilis a tio n . A regular system of review and adjustment is called for for the eighties.



Purchasing p olicies of State authorities and hospitals have been the subject of much comment. The Commission is aware that they were an issue in the 1979 South Australian Public Accounts Committee report.

The submission of the Australian Medical Association to th is Commission looked at purchasing in itia lly from an unusual angle.

'As with many other organisations, opportunities exist in hospitals for the su b stitution for labour by capital. In a time of rapidly increasing labour costs, and paradoxically perhaps a time of decreases in the cost of some capital items, scope exists for employing capital equipment, even i f i t is under utilised, to save labour costs.

It went on:

'For example, a recent study at the Mater Misericordiae Hospital at North Sydney, although incomplete, showed that there were savings to be achieved by having a CAT scanner, albeit under-utilised, on the premises rather than endure the costs of transferring patients to another hospital for examination.'

By taking th is approach, the Association helped to keep the question of purchasing in focus. Relative to the provision of beds and staffing, purchasing offers less scope for the constraint of spending. It is nonetheless important for that. .

Tne Australian Medical Association submission, having taken th is approach, then made some general comments:


Ά further example of areas of e ffic ie n t purchasing techniques is the avoidance of unnecessary d ifferen tiatio n of equipment. At the present time lack of coordination and incentives can lead to the purchase of equipment which perform sim ilar tasks, but because they are produced by different manufacturers, give rise to increased costs of

operation and maintenance.

'The l i s t of opportunities available can also be extended to such items as laundry, cleaning and routine purchases. In addition, a policy requiring certain hospitals to purchase Australian made a rtic le s when less expensive imports are available does not help the cause of cost containment.'

The submission concluded i t s comments on purchasing with a plea for greater freedom.

'The overall conclusion of th is section is unmistakable. For e fficien t operation hospitals must be given the independence and incentive to seek supplies where they can be obtained most cheaply.

Gosford D istrict H ospital's submission gave examples of inefficiencies caused by Health Commission policy that hospitals must purchase by contract and from stock at the Government Stores Department and the Government Printer. Close monitoring of the policy by Health Commission inspectors

allowed l i t t l e or no fle x ib ility . The submission said that while the advantages and savings to be made by using both organisations would not be denied, numerous examples could be provided where s tr ic t adherence had proved costly. The ho sp ital's submission also said that in fairness to the Health

Commission, lack of quality control in the Government Stores Department would appear to have been at fault as much as the rigidity of the Health Commission's policy.

Tne suomission told of a consignment of new mattresses bought through Government Stores which lo st th e ir shape within weeks; and aside from discomfort to patients, took several months to replace: also an anaerobic system bought for the pathology department for $402 was inoperable for two

years because the supplier could not provide parts. Unrealistic lim its on some items resulted in excessive ordering, for example, the maximum order of

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12 dozen p la s te rs , less than two weeks use, necessitated at least 26 orders a year. On a number of items, in particu lar replacement motor p a rts . freight charges for delivery to Gosford often resulted in the cost exceeding the

price a t local d istrib u to rs.

'W hilst i t may well fa ll outside the Commission of Inquiry's terms of reference, the universal complaints levelled at both the Government Stores Department and the Government Printer would suggest that a total review of both instrum entalities by the State Government would be in the

in te re sts of a ll departments, hospitals, etc, u tilisin g th e ir services.'

The Royal Australasian College of Radiologists pointed to some in f le x ib ilitie s of major equipment purchasing practices:

'S ta te health authorities, bound by government tendering policies usually accept the lowest tender. This risks the purchase of unsatisfactory equipment d iffic u lt to operate, subject to frequent breakdown, and requiring e a rly replacement, unless specifications are detailed and precise and are w ritten with a fu ll understanding of the performance

requirements. Lease/purchase of equipment should be more widely permitted.

'Accounting systems which separate the cost of new equipment purchase from the cost of old equipment maintenance encourage in e ffic ie n cy . New equipment purchasing, and old equipment repairs and replacement and the cost of delays in terms of patient bed days, should

be c o rre la te d into a to ta l cost to allow more efficien t equipment purchase.'

The reference document 'Hospital Radiology in New South Wales, A Submission to th e Hospitals and Health Services Inquiry into Radiological Services in A u stra lia ', submitted by the College, said:

'The present government purchasing system often resu lts in the purchase of cheaper equipment which is basically inadequate and in fe rio r. This is often a forced result of trying to 'spread'

inadequate funds over many essential repair/replacement requests.

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'Price is proportional to quality. The cheapest unit in itia lly often costs much more than the most expensive eventually because of frequent breakdowns, expensive repairs, increased patient bed days cost due to breakdown delays, shorter operational life and thus earlier

replacement (certain types of cheaper equipment are notorious for requiring to ta l replacement with two years of in sta llatio n , and for having as much as 20 per cent breakdown time in those two years of operation) - thus the final cost is greater than that of buying good quality equipment in itia lly . "Single brand" rooms of matched equipment while costing more in itia lly than the multiple cheapest item "Heinz variety" are much cheaper to in s ta ll and to operate because of avoidance of the multiple and continuing problems of interfacing and servicing different equipment items which were never designed to operate to g eth er.'

On consumables, the College's submission said:

'Bulk purchasing may allow some economies, although a monopoly situation should not be allowed to occur as th is is more expensive in the long ru n .1

The submission of Douglas Bean Australia Pty Ltd said:

'One of the problems which has beset Australian manufacturers over many years has been the continuance of the State preference system.

'The general principle of th is is to apply a penalty by adding a percentage to the contract price submitted by a company from a "foreign State" so that a "local manufacturer" can "win" the tender.

' A typical example would be a furniture manufacturer whose business is situated in Western Australia and who wishes to tender a price for a substantial quantity of say beds to the New South Wales Government purchasing authority, but has added to his tender price a protective amount so that local suppliers receive a price advantage.

'The effect of th is procedure is of course that the purchaser, who is the State buying authority, is paying more for its goods than is necessary.'


The submission also observed:

1 I t is to the cred it of some large public hospitals that they have great reservations regarding purchasing from bulk suppliers and some actually avoid placing orders because of reasons of quality. Examples of th is are numerous in the instrument field where quality is often in

the fie ld of personal requirement.'

The submission of Travenol Laboratories Pty Ltd said th at some policies aimed a t preferring local suppliers are in fact detrimental:

'S tate pricing preferences allocated for local manufacture are p rejudicial to the control of costs, in that support of small scale production is d irectly detrimental to a viable industry requiring large scale production for maximum utilisatio n of plant, equipment, fa c ilitie s

etc. Overseas experience bears this out, in that markets in countries such as the U.K., U.S.A. and Europe, which are similar in size to the Australian market, do not u tilis e more than one plant to supply the needs of such markets.'

Many health au th o rities favoured central or group purchasing. Some of the State health au thorities require that hospitals use central purchasing f a c ilitie s . Tne Western Australian Department of Health and Medical Services outlined i t s policy in i t s submission:

1 All major items and items of frequent use are purchased by tender. Perishables such as bread and milk may be purchased direct from suppliers or by local tender.

'Bulk tenders are called by the Government Tender Board on behalf of hospitals and other Government institutions for a wide range of items including drugs, meat and floor polishes. ‘Once drugs are on tender, hospitals send orders direct to Government Stores. Tenders for

electromedical supplies are called usually specifically for hospitals only. Health and Medical Services has for 26 years had i t s own Markets Depot for the purchase and distribution of fru it and vegetables. This was found necessary to ensure a constant supply of quality produce.


'Requisitioning for stores is centralised through the Department's Equipment and Supplies Section. Orders are checked and approved before passing to Government Stores. Where possible, electromedical supplies are standardised so that maintenance and module replacement is possible.

The Queensland Department of Health submission described the group purchasing scheme:

'The Regulations under the Hospital Act require Hospital Boards to purchase supplies (with the exception of commodities such as food etc. which are purchased by local tendering) through the State Stores Board.

'The State Stores Board is the central purchasing authority of the Queensland Government and was constituted in 1923 for the purpose of arranging economical purchase distribution and u tilisa tio n of goods, material and equipment required by a ll State Government services. Put

simply, its role is to ensure that the best possible value for money is obtained for goods and services purchased by the Queensland Government.

' I t is generally accepted that the advantages to be gained from an e fficien t and suitable central purchasing system outweigh those of decentralised purchasing due to the increased purchasing power of the central agency.'

The submission also described the role of expert advisers in the review, specification and recommendation process.

Drugs, for example, are boug t through a centralised buying, -manufacturing and specification system established in 1947 and now called the Central Pharmacy and Central Drug Store to provide a ll publ c hospitals in Queensland with drugs. It was f e lt that by combining a ll requirements for drugs for bulk supplies, manufacturers would be induced to offer greatly

reduced prices. In general, th is competition among manufacturers s t i l l exists.

The supply of drugs, medicines, ointments, tablets and other pharmaceutical items to State Hospitals is arranged through the Central Pharmacy and Central Drug Store within the Royal Brisbane Hospital Complex


and under the administration of the North Brisbane Hospitals Board. Day-to-day operation of the unit is controlled by a Chief Pharmacist employed by the Board, and a member of the Departmental Drugs Committee. Drugs are supplied to hospitals in accordance with the Queensland Hospitals Standard Drug List, compiled by the Departmental Drugs Committee, and hospitals are

required to adhere to the standard drug l i s t . If considered medically necessary, hospitals can submit requests for drugs not on the l i s t but such request must include d e ta ils as to why effective treatment could not be given

with a standard drug.

Perhaps the most notable independent purchasing group observed by the Commission was the Victorian Hospitals' Association Ltd. A witness described i t s main function:

1 The asso ciatio n 's trading activity with its members extends across the whole spectrum of the hospital consumables suppliers excluding perishable foodstuffs. It embraces contract purchasing via public tender and lower volume items of a non-contract nature in accordance with the polciy enunciated by the board in the following terms

'At a ll times to offer for supply to member hospitals and in s titu tio n s , goods of a comparable standard of quality at a price lower than can be obtained from any other source.

'P articip atio n in the group purchasing scheme is voluntary and i t follows th a t the level of hospital support is in direct relationship to the asso ciatio n 's capacity to contain prices and to maintain an e ffic ie n t warehousing and distribution operation.

' The five-fold sales growth during the seventies and the projected $35 million turnover in the current year is evidence of its success.'

The Association is used voluntarily by hospitals from a number of States, principally V ictoria. Witnesses said:

'We would not like to see hospitals compelled to use the VHA, we would like the opportunity for the VHA to prove to hospitals, which i t can do, th a t i t is an advantage because the more hospitals that use the


VHA for th is purpose, then the greater the purchasing power of the VHA i t s e l f . Strength is in unity in th is situation and we would then hope that most hospitals would, and in fact do, use the association. . . .We would be very chary of support by direction which would, I think, take us very close to a State Tender Board operation and we do not see that as being an improvement in our efficiency or that i t would encourage us to improve. It may in fact, we feel, engender resistance on the part of h o sp ita ls.'

The submission from Victorian Hospitals' Association gave recommendations on drug procurement:

'We have had i t put to us by the VHA Pharmaceutical Advisory Committee that certain changes would improve the scheme's effectiveness and advance the committee's endeavours to contain the cost of pharmaceuticals, and the committee has asked that the following

recommendations be incorporated in th is submission.

. that generic prescribing in hospitals should be madatory:

. that generic dispensing in hospitals should be madatory; . that hospital participation in the collective purchasing scheme should be mandatory; that the scheme should be widened to embrace the purchase and supply

of pharmaceuticals to in stitu tio n s in the Health Commission's Mental Health Division which should be represented on the Advirory Committee.

In evidence, a witness expanded:

'The submission is not suggesting that pharmacy supplies in their entirety should be purchased through VHA. What is being suggested is that there be a mandatory collective purchasing l i s t which, as I would imagine, would probably not exceed one hundred drugs. The point on the mandation, as I know you would be more than well aware, is directly

involved in the argument on general dispensing, generic prescribing which has in fact been taking place for a number of years and i t is our submission that u n til such time as there is effective mandation to give

support to hospitals to enable them to provide drugs genetically, to


bring in a mandatory collective purchasing system which would require generic submissions, there would be no real support for that activ ity .

Royal Newcastle Hospital generally favoured group purchasing:

1 Group purchasing should be undertaken wherever i t can be shown to have economic advantage. The Royal Newcastle Hospital does not automatically purchase from Government Stores but maintains close contact with many sources of supply. The quality, price, delivery date

and service are factors which influence our purchasing decisions and th is has been advantageous to the h o sp ita l.1

A submission from Messrs D.D.J. Morris and D.C. Smith of Canberra drew the conclusions:

'(a ) That each authority (State or Territory) should centralise its supply function but should operate through smaller more manageable regional units where necessary.

(b) That a national supply committee be formed to provide liaison, cooperation, coordination and standardisation between a u th o rities and with a view to setting a national supply policy (including a common supply language). The committee to consist

of the director of hospital supply from each authority.

(c) A national secretariat be formed and funded by the Federal Government to support the above committee.1

Key among existing problems seen by Messrs Morris and Smith was:

1 There is often a tendency in hospitals towards a "Feudal Lord" system where the chief executive is a ll powerful (as perhaps he should be) but where he retain s a ll the authority and fa ils to delegate su ffic ie n t authority necessary for, amongst others, the supply manager to successfully carry out his re sp o n sib ilitie s.'


They ended their submission:

'We do not wish to see the present and perhaps uneconomical system replaced with an overstaffed, bureaucratic and inefficien t system but rather replace i t with a more economical, effective and efficien t system which will take the in itia tiv e away from the supplers, w ill satisfy the

demands of the consumers (hospitals) and w ill give the taxpayers more value for th eir money.1

In the discussion paper 'C entralisation of Supply, Capital Territory Health Commission', Mr Smith said:

' Despite the lead shown by our p ro fit making counterparts, both in industry and overseas health services, local health authorities, particularly in New South Wales and the Australian Capital Territory show a remarkable reluctance to improve th e ir supply systems.

’Perhaps the cost of labour which is by far the largest single item of expenditure, has blinded our leaders to the s t i l l large amount of expenditure on goods and services, storage, transport and supply personnel (in its e lf supply is a contributor to the labour cost).

'I f private companies operated like some of our hospitals, they would soon go out of business. The days when hospitals could be run like a large household establishment have surely gone. Health care is big business, we should handle i t as such.

' There is sufficient evidence to support the case for centralisation, indeed the Scott report on governmental purchasing came heavily down in favour of centralised purchasing and despite anything said to the contrary the Purchasing Commission is flourishing within the Department of Administrative Services.'

The submission of the National Association of Testing Authorities said:

' There is no doubt that hospitals are increasingly using equipment of considerable sophistication and high level technology. Hospitals contain much expensive and highly sensitive electronic and mechanical

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equipment and th is certainly has played a role in the escalating costs of hospital services. There is , allied to this increasing sophistication, a concern that often equipment is purchased on the basis of inadequate information and experience and without adequate

specifications being set or tested, nor is i t adequately maintained a fte r purchase.1

The submission recommended the direct involvement of users in selection, specifications and centralised purchasing:

' I t is en tire ly reasonable that departmental heads should be responsible for selection of equipment, but there is an apparent need for b e tte r defin itio n of purchasing policies and c rite ria such as detailed technical specifications, requirements for maintenance, service costs, need for calibration. Apart from major equipment items, purchasing of more everyday items such as cleaning m aterials, linen,

floor coverings, mechanical plant etc. should be controlled by specificatio n . Purchasing by the defence services is an interesting p a r a lle l.

'On th is basis, a ll purchasing should be by specification and control of quality can be maintained by an appropriate quality assurance programme which re lie s on testing and certification by the manufacturer.

'What we are suggesting, therefore, is that purchasing in hospitals should be centralised; that systems should be set up to ensure that equipment is both suitable and necessary; that specifications are w ritten for a ll purchases and that compliance with these specifications

is demonstrated a t the time of purchase.'

Centralised purchasing is not without problems. It would appear that the d iffic u ltie s increase in proportion to the·distance between the user and the supplier. In v is its to hospitals in remote parts of the country by the Commission, some absurd examples became apparent. In one hospital a

video-tape replay machine had been supplied for educational purposes but there was a delay of two years before any tape cassettes were provided.


Witnesses appearing for the Toosey Memorial H ospital, Tasmania, gave another example:

'I t must seem cheaper to buy everything through the Supply and Tender Department but i t is not always cheaper. W e wanted a packet of safety pins recently and had written for a packet. It took two telephone trunk calls from Hobart and parcel post to receive them.'

The Commonwealth Department of Health in i t s submission said:

'Group purchasing among hospitals has become an accepted principle among 25-30 per cent of voluntary hospitals in the United States of America and Canada. In addition, a centralised procurement system exists for both military and civ ilian U.S. Federal health care

fa c ilitie s .

The basic objective of group purchasing is to achieve greater buyer power which should enable lower prices to be negotiated from suppliers. Apart from achieving cost savings, other advantages are that:

. a group should be able to employ more highly skilled purchasing personnel than an individual hospital because the group's administrative costs are spread over a higher volume of purchases; and . the group purchasing program becomes a centre of information on

product use, quality, service and sources thereby eliminating duplication by officers in individual hospitals. ' Examples of savings by various groups on the purchase of CAT scanners, nuclear medicine, ultrasound and general purpose X-ray equipment are as follows:

. Medicorp Inc. (a group purchasing for 39 owned and 15 managed hospitals) saves 7-10 per cent; . Hospital A ffiliates (a group purchasing for 41 owned and 50 managed hospitals) sves 4-25 percent; and . Hospital Corp. (a group purchasing for 70 owned and 18 managed

hospitals) recently saved $120,000 per scanner on a group purchase of 12 scanners.

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' Given the suggested cost savings potential of group buying, consideration should be given to expanding the different forms of group buying in A ustralia particularly for equipment.'

The Wangaratta D istric t Base Hospital said there was room for improvement. Its submission promoted a regionalised approach:

' This hospital supports the concept of shared services both to save expenditure, and also to promote effective department structures in country areas.

' I t is suggested th at cost savings can be brought about by:

Bulk purchasing by one hospital, as opposed to small orders being placed randomly by a number of miscellaneous h o sp itals:

Reducing the size of inventories maintained by many hospitals as a re su lt of a coordinated purchasing policy and effective imprest supply system; . . .

' Centralised purchasing in country areas with centralised stores based at regional centres offers economies of scale in purchasing and reductions in the amount carried in reserve. Wastage where stock is carried for sig n ifican t periods of time with limited shelf life

(eg. rubber goods) would be avoided. Delivery would be effected on an imprest basis possibly per medium of the laundry services.

' Equipment purchases for smaller hospitals would have the benefit of review by the regional purchasing officers and sta ff at the smaller hospitals would obtain advice through him of the relative merits of competing brands.

' This proposal would mean increased space requirements at regional centres for sto res, but would undoubtedly -result in savings - by using existing stocks up more effectively, and reducing the annual cost of items purchased. Centralisation would undoubtedly lead to greater

uniformity of items purchased.'


Recommendations to improve efficiency

Although i t is aware of some problems and discontent with centralised purchasing schemes, the Commission generally favours them as a means of constraining costs. The Commission RECOM M ENDS that health authorities proceed forthwith to introduce centralised group purchasing either through government departments or independent bodies such as the Victorian Hospitals' Association Ltd or private suppliers. The financial benefits of group purchasing should be passed on to the end user hospitals directly and not be retained as a pro fit or surplus by the purchasing authority nor passed on to

others. Flexibility must be maintained so that individual hospitals may acquire the same goods at less to ta l cost d irectly , so long as overall purchasing leverage is not significantly affected.

Where appropriate, smaller, more manageable, geographically regional supply units should be set up, particularly where distance is a problem.

These units should have the responsibility for supply in respect of th e ir area. They w ill need some s ta ff expertise and should have some stock carrying capacity for the more frequently used items.

The Commission RECOM M ENDS that health authorities proceed as quickly as possible to introduce generic prescribing, dispensing and supply of most drugs and pharmacy supplies used in hospitals. As in Queensland, there must be some emergency mechanism to by-pass the routine system in cases of urgent medical need.

The Commission RECOM M ENDS that health authorities proceed as quickly as possible to introduce broad scale, standardisation of other supplies and equipment. Specification and quality control processes should be introduced, but they must not be disproportionate to the costs or value of items to be acquired.

The Commission RECOM M ENDS th a t health authorities consider to ta l life costs for major items of equipment rather than continuing to buy on a purchase cost basis only. More fle x ib ility should be introduced into financing. Leasing, for example, may at times be more appropriate than

outright purchase.


The C o m m issio n RECOMMENDS t h a t S t a t e p r e f e r e n t i a l s y s t e m s w h ich i t

considers unduly favour local State suppliers be discontinued, advantages which would arise from suppliers being able to tre a t Australian hospital market as one, may outweigh those which are exist under present arrangements and should be available to a ll

The the whole believed to

i f so desired.




In the final analysis, the major burden of ensuring effic ie n t use of available resources and of securing effective constraint of expenditure on hospital services re sts with the management of individual hospitals. The Commission in i t s v is its and discussions paid particular attention to th is aspect, and many submissions bore upon facets of hospital management. Whilst

the Commission recognises the constraints imposed upon managerial effectiveness by tra d itio n a l hospital organisation structures, and by an inadequate accounting, budgeting and financial management information base in recognised hospitals, and whilst i t acknowledges the dedication and competence of some hospital managers, much that i t saw in hospitals of a ll

sizes in a l l States was unimpressive.

The Commonwealth Department of Health, in its submission, said that 1 It (the Department) has the essential task of promoting the equitable allocation and e ffic ie n t management of health resources across Australia as a whole'. (S.700). Yet th at Department has no direct responsibility for recognised hospital management or for service delivery, which is the point at which

costs are incurred.

Management Standards and Practice

The Australian Council of Hospital Standards provided in i t s submission an analysis of 100 responses to questionnaires completed by hospitals prior to accreditation surveys over the past three years. Hospitals responding covered the fu ll range of Australian hospitals, from the smallest, fewer than

50 beds, to the la rg e st, those with more than 500 beds. The questions were designed to indicate the extent to which modern management practices were u tilise d in hospitals. The responses were disquieting.

. 65 hospitals, including 4 of the 5 very large hospitals, involved departmental heads (middle management) in budget preparation.


. Only 46 of these hospitals, again including the 4 very large hospitals, provided regular reports of actual performance against budget to departmental heads.

. Only 8 of the 100 hospitals, and only one of the very large hospitals, had sought to implement modern management practices, such as management by objectives.

. 54 hospitals, including 4 of the very large hospitals, used available data to compare th eir ho sp ital's performance with that of comparable hospitals.

. Only 8 hospitals, including one very large hospital had established cost containment committees.

. 33 hospitals, including 4 of the very large hospitals, had carried out work study exercises to assess s ta ff productivity and manning requirements.

. Despite the lack of planning suggested by the above data, 54 hospitals, including a ll 5 of the very large hospitals, claimed to have written plans for th e ir future development and operations.

. 24 of the hospitals, including a ll 5 very large hospitals, had employed management consultants at some time to investigate and advise on aspects of th e ir operations.

. 39 hospitals, including only 2 of the very large hospitals, had written manuals of financial procedures.

In summary, th is is an unimpressive picture of the influence of modern management techniques on th is important, and costly, area of public expenditure.

Some explicit statements on management practices were submitted as evidence at a confidential hearing of the Commission. The exhibit read in



'Perhaps i t w ill help your understanding of my approach to my hospital re sp o n sib ilities and the views I put forward i f I state clearly th at I firmly support the view of many business consultants and efficiency experts th at no business is more than six or eight per cent technical. In short, the same basic business principles apply to any

enterprise to the extent of 92 to 94 per cent. After twelve years of fru stratin g and sometimes traumatic hospital board experience, I am convinced th is contention applies to hospital administration, staffing, finance and planning throughout Australia.

Ί now wish to s ta te in clear cut, categorical terms, that from my experience, public hospitals in Australia are sadly lacking in most areas of management organisation, design and construction of buildings and also in medium and long term forward planning for health.

Responsibility for th is sorry state of affairs is not due solely to the individual hospital administrations in as much as the Commonwealth and State health departments are woefully lax in their controls to ensure efficiency in the disbursement of the taxpayers' monies. In short, efficiency measures must be dictated and policed from the Commonwealth and State governments.' (Confidential exhibits)

In evidence, th is witness quoted a number of instances of managerial inefficiency, ranging from unsubstantiable demands for additional s ta ff and reluctance to introduce contract cleaning despite proven cost savings, to in e ffic ie n t rostering of overtime, drawn from the hospital with which he was

associated. This Commission's own investigations support the view expressed th at th is hospital was not alone in its lack of effective management.

Many other instances could be quoted. The Victorian Health Commission, in correspondence with the Commission, advised that i t did not intend to provide for inventory changes in a proposed income and expenditure accounting system because few hospitals had adequate costed inventory control records. The Commission was also informed that few hospitals maintained fixed asset

re g isters, and th at th e ir construction would be a major task. The Commission has recommended elsewhere th a t these deficiencies are so important that correction is e ssen tial.


In i t s submission, the Mater Misericordiae Hospital in Sydney explained the failure to develop skilled management in hospitals:

'I t is hard to identify in any sector of the health services a clear career pattern for any employee. Currently employees are engaged by a variety of employers under a wide variety of terms and conditions and against a barrier of lack of p o rta b ility of any employment benefits.

This appears to be a major factor in lim iting the av ailab ility of qualified and experienced health adm inistrators.1 (S.411, 4).

The Sutherland Hospital, in i t s submission, suggested th at the problems of effective management were not wholly the responsibility of the hospitals:

O f further concern is the apparent inexperience of many of the Commission's officers and th e ir in a b ility to understand the complex nature of a hospital and indeed a t times basic hospital management.' (S407, 1).

C riteria for Improvement

Other sections of th is Report concerned with accountability, budgets, training, manpower planning and organisation structures have set up detailed c rite ria for the restructuring of hospitals with the object of securing improved management practices. The Commission is here concerned rather with establishing an overview of the environment in which these proposals can be brought together in an effective operating management structure which

recognises that information is valuable only i f i t is wanted, understood and used by those to whom i t is provided. This demands th a t i t is internally and externally consistent - that is , prepared on a consistent basis from year to year both in individual hospitals and in a ll hospitals in the system - that

i t provides information in a manner which is understood by those to whom i t is directed, which may well mean th at for many purposes money measures will be inappropriate, and that i t be supported by clear lines of delegation and by a fu ll understanding of individual authority and responsibility.

Meeting these c rite ria in a hospital environment is not a simple process. In an a rtic le in the Harvard Business Review of January February 1977, Professor R. Herzlinger raised one problem:

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'The problem of the m ultiplicity of external demand for data could be partly reduced through coordination of the agencies th at fund a particu lar organisation entity in the design of the data system for monitoring the program. The many federal agencies that finance community health centres could, for example, design a single system that would meet not only th e ir data needs but also those of the insurance companies and the s ta te welfare departments involved.

W e should not, however, be overly sanguine about the likelihood of th is solution. Under the present structure of federal and most other government u n its, the different groups have no reason to coordinate. Moreover, organizations and benefactors fund programs for different

reasons, and they are unlikely to agree on a common data set that meets a ll th e ir needs. Finally, even i f federal and state agencies could cooperate on information system design, their actions would s t i l l be subject to le g is la tiv e review, which is not always in te llig e n t or

o b je c tiv e .'

These cricicism s appear to the Commission to be as valid to Australia as Professor Herzlinger considered them to be for the United States of America.

She went on to deal with information systems, and pointed out:

'The top manager who remains uninvolved in the design of the context of the system negates the reason for its existence. Participation in the system design process ensures that the system is relevant and responsive to management's needs.'

The Commission is aware of many hospital information systems in use or under development: notice was brought to them in a number of submissions, in verbal evidence and in discussion and correspondence with those using the systems or promoting th e ir use. The range of systems covers both clinical and financial management and a ll were intended to improve the efficiency and effectiveness of the health care services that they support.


Australian Developments

Major deficiencies noted elsewhere in th is Report relate to information systems, to planning arrangements and in stitu tio n a l role definition, and to institu tio n al organisation.

Much work has been done in each of these areas.

Thus, in the area of information systems, the Commission has noted with, approval the evolution of the New South Wales 'Management Information Review System' (MIRS or the 'Hornsby P r o je c t'), the Victorian 'Hospower' system, which now appears to be achieving h o sp ital acceptance after several years application, the associated Victorian cost centre accounting pilot project introduced this year in nine h o sp ita ls, and the National Council for Health and Medical Research sponsored 'Adelaide Cost Containment P roject', based at the Adelaide Children's Hospital. Some individual hospitals have made progress independently - St V incent's Hospital in Sydney with a responsibility budgeting and reporting system, Royal North Shore in Sydney, the Alfred and St Francis Xavier Cabrini hospitals in Melbourne with disease and procedures costing systems. Three States have made extensive progress with comparative morbidity and length of stay data collections, that for New South Wales covering a ll hospitals, public and private, and calculating comparative indices for each hospital for each condition.

The Commonwealth Department of Health has proposed the introduction of a comparative 'Cost and Performance Analysis System' for a ll hospitals. The Commission has been told that th is exercise, in the form proposed, does not have the fu ll support of a ll hospitals or of all State health authorities.

Despite these developments, the Commonwealth Department of Health said in its submission:

'Most accounting systems which are in use in Australian hospitals do not allow measurement of productivity or efficiency. At present, costs for different hospitals tend to be compared using the average cost per occupied bed day. This comparison generally shows that costs for a teaching hospital are far in excess o f those for a smaller community hospital and the conclusion i s frequently made that only those p atients

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requiring the fu ll range of sophisticated services should be treated in teaching hospitals, while routine treatments should be carried out in smaller hospitals.

'The problem of using bed day costs for comparative purposes is that the case mix of each hospital is likely to be different and each has d ifferen t f a c ilitie s providing different services. Account must be taken of these differences when examining the variations in unit costs

between individual h o s p ita ls.1 (S.700)

Despite the current widespread interest in the containment of hospital costs, which was evidenced by the appointment of th is Commission, there is s t i l l no re a lly useful comparative data available in Australia which w ill permit the efficiency of a single hospital or of a ll the hospitals in a State

to be evaluated.

Dr Ring appearing as a witness on behalf of the New South Wales Health Commission discussed the delays involved in the development and use of information systems.

'The data collection system in New South Wales has been a developmental one going back now some ten years. W e are now in a position which we have not been in before where we are able to examine pretty well the e n tire health system. W e have reached th is stage only,

I suppose, for 1978 data. As we have started to use information i t became quite obvious th a t when you wanted to draw inferences you could never be sure whether things outside the scope of your collection were not the explanation for what you might be looking a t . ' (S.712)

He commented sp ecifically on the apparent lack of enthusiasm on the part of h o sp ita ls' administration:

'We have a very usable body of data as from 1978. Our original thought was th at much of the use of data might occur in hospitals themselves. To th a t end we made quite an extensive range of information available to each of our hospitals. The actual use made of th is information by hospitals has not been as rich as we in itia lly thought. '



Commenting on the e ffo rts of the N.S.W. Health Commission which was starting to introduce its 'Management Information Revenue System1 to a wider range of hospitals, Dr. E.H. Morgan of Wollstonecraft observed in his submission,

'The Health Commission is gradually introducing a system of department budgeting which, while an improvement on present accounting methods, is s t i l l directed at ascertaining (in greater detail) 'where the money goes' and not to 'what does the money do?' (product).' (S. 868)

Others put the view to the Commission that some hospitals are over-managed. Small hospitals in particular feel they are the victims of th is problem. The Board of Management of Toosey Memorial hospital (Tasmania) said

'While appreciating that both the State and Australian Government require basic essential information and each hospital requires basic patient records i t appears incongruous that 10% of our s ta ff are needed for th is purpose.' (Transcript)

They added that recent years had seen an increase in financial and s ta tis tic a l returns, coupled with greater emphasis on budget control and personnel matters. The validity of th is emphasis was not questioned, the costs i t created demanded examination.

In evidence the Victorian Medical Record Association said

' . . . quite often there are dual collections of the same s ta tis tic s . Some of the hospitals have s ta tis tic s collected not only in medical records but perhaps the same s ta tis tic s may be collected in finance. Many of the hospitals are looking into th is of th eir own accord but others are ju st proceeding along those two paths without trying to

rationalise the f a c i l i t i e s .' (Transcript)

Mr. Boylan appearing as a witness for the New South Wales Health Commission responded to th is type of criticism .


'We are very conscious of the criticism that we do seek more information than the hospital believes we need. The problem may be that we do not communicate well enough to explain the whys and wherefores, but i t is abundantly clear that as resources by way of money become less and le ss the competing forces for what moneys we do have are demanding a

greater deal of information to make decisions as to where we w ill place the money. I t can be fa irly said that a lot of information has not been kept in the past in the detail we now need, particularly in some of our dealings with the Commonwealth Government who reasonably and fairly say why do we need so much of a particular thing, for instance, and we have to extract enough information to satisfy their needs.1 (Transcript)

Dr Ring described the New South Wales Health Commission's own use of the information i t collected,

' . . . the real value of th is kind of information is as a central tool

and considerable use has been made of this information in that way. It was an element in determining some facility of the hospital ra tio n a lisatio n i t s e l f . I t is now, I suppose, a central planning tool, both centrally and regionally, and for individual hospitals when the

need for a policy in the level of services is required. I t is being,

for example, used as the basis for a developmnt of a plan for opthalmic services across the sta te . I t is the data base for the regional allocation formula by which over time we will be able to move more equitably towards a funding basis for the regions.' (Transcript)

Mr John Blandford in his paper 'Professional and Management Efficiency' commented on controls in health care management.

'Controls in the public service systems are dependent on inspectorial and auditing procedures which emphasise the forms rather than the substance. Elaborate mechanisms ar.e devised to ensure the control of the money supply and the employment and grading of s ta ff.

These control procedures are necessary, but do nothing in themselves to produce e ffic ie n t re su lts; they may indeed be counter productive.'


In Queensland, with strong central controls, particularly on s ta ff numbers, and with shorter lines of communication, i t was evident that costs had been constrained without detriment to the quality of care.

Computer Applications

State health authorities in Australia in recent years have generally adopted a conservative stance in relation to computer applications in individual hospitals, preferring to develop uniform systems centrally, in association with the management of one or more hospitals, rather than to permit uncoordinated and expensive development of in house systems tailored to the perceived needs of individual hospital managers. In lig h t of some unfortunate early experiences, th is approach appears to th is Commission to be wise. The dangers of attempting to reinvent the wheel in th is area are very


The New South Wales Health Commission's document 'Revised Policy for Coordinating Computer A ctivities' lays down sensible guidelines for future development in that State. I t shows a strong awareness of the need to plan and control the use of computers and to ensure that implementation of new applications proceeds in an orderly, structured manner. The Commission has been told that often in the past new development has proceeded too rapidly in an endeavour to satisfy users' p rio ritie s with the resu lt that systems have proved inadequate in terms of th e ir capabilities, d iffic u lt to operate and hard to maintain. As in a ll major activ ity , the design and implementation of computer systems demands careful planning, involving fu ll consultation with those who w ill operate the system and use its output, a detailed weighing of costs against benefits, and a structured program for review of progress at each stage up to and including the final implementation.

The Commission is , however, aware that there are some who feel th at the present approach is too re s tric tiv e , especially with the emergence of small and relatively cheap equipment which could be used for the establishment of departmental, episode and procedural costing. Dr E.H. Morgan, in his submission, commented:


'With the microprocessor revolution the opportunity for distributed data processing now ex ists. Each department would have an inexpensive microprocessor based unit using modificatons of cheap 'o ff the shelf' small business soft-ware to evaluate its own input costs and place a

value on i t s own output. The results of each day's operation would be fed to the h o sp ita l's main computer for the purpose of charging clien t departments. In view of the document Management Review of Health Commission Computer Policy concerning the use of computers by hospitals,

the Health Commission of New South Wales is far from ready to consider such approaches. '

Some hospitals have been able to proceed with costing studies aided by computer processing of data.

Professor Sir Edward Hughes and Dr. T.J. Wood presented evidence to the Commission on a 'Study of Like Surgical P atients'. They observed in their submission,

'I t is evident to us th at in Australian Public Hospitals at present there is no mechanism for allocating the costs of hospital services to individual p atien ts, nor is there any way of relating the costs incurred to the outcomes of medical intervention ...

'Neither the c lin ician s who generate costs, nor the administrators who control costs have the necessary information to effectively manage the costs of c lin ic a l care.

'The Study of Like Surgical Patients is based on the hypothesis that a private hospital would be managed on private enterprise principles and

therefore be more cost effective than a public hospital . . .

'The Study has devised a system of allocating costs to departments and th ereafter to individual patients ...

•The determination of costs is one measure of c lin ical efficiency, but th is must be considered together with the effectiveness and quality


of care delivered to any individual patient. Hence, the Study has attempted to devise measures of medical and nursing intensity of care, and has applied principles of Peer Review.'

In summary, they said,

’Although data from the Study is not available, the project has convinced us of the value of devising and implementing systems aimed at allocating costs to p atients. The a b ility of doctors to do more for patients as a resu lt of improved techniques has resulted in a greater range of illnesses being treated effectively. Unfortunately, these improvements have not been accompanied by a like improvement in the quality and types of financial reporting made available to hospital management, nor have the doctors been brought into the cost accountability process. The end resu lt has been that more services are delivered at increasing cost as a re su lt of medical intervention, without administrators having the means of controlling these costs.

This Study has shown that i t is possible to link costs with quality and to bring clinicians to make cost effective medical decisions.'

Having recognised many benefits of fu ll cost acounting, Dr E.H. Morgan of Wollstonecraft concluded in his submission,

' A true assessment and attrib u tio n of costs is the la s t thing anyone working in the hospital system at present wants to know.

'I ts introduction would introduce a revolution in the present balance of power sharing in the hospital. This would have incalculable consequences. On balance i t is considered that greater harm than good could r e s u lt.'

The Commission is more hopeful than Dr. Morgan that improved information will contribute to cost constraint and accountability.

Some Other Aspects of Management

I t is likely that some managers in the health care services industry have used the lack of comparative accounting information a an excuse for


in activ ity . The Commission was, however, impressed with the a c tiv itie s of those few now using available comparative information and seeking to use more effective and objective cost and s ta tis tic a l data.

Financial information alone is not sufficient to aid the management of hospitals and other health services. The Commission has been informed of many s ta tis tic a l measurement systems which address quantities and levels of c lin ic a l services. Whilst the Commission's terms of reference are heavily

directed towards cost constraint, i t is essential as the Letters Patent specify th at quality of care be maintained. Health care services are of course the ultimate aim of the spending.

Describing i t s current management processes, the Board of the Royal Melbourne Hospital said in i t s submission:

'The Royal Melbourne Hospital restructured its medical organisation some four years ago to fa c ilita te the establishment of divisions of Medicine, Surgery and Investigational Medicine. Each of these divisions is now under the direction of a chairmen who has the respect of his professional colleagues and who acts on their behalf in discussion with management in arriving a t appropriate policies for the conduct of the Hospital. In terdisciplinary meetings of senior executives (general administration, financial administration, nursing and medical

administration) with divisional chairmen has brought about a close and meaningful involvement of c lin ic al doctors in the to ta l administration of the Hospital. Some responsibility for resource allocation is now being taken by divisional chairman and efforts are being made to extend

th is a c tiv ity .'

Dr J.G. Golledge of Brisbane said in his submission: (S.968, )

'Involvement of medical s ta ff and other-staff at the work face in cost consideration has proved very helpful as a tool in cost control, and despite doubts expressed by lay administrators, clinicians do accept th is responsibility and involvement when i t is offered to them.'

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The Commonwealth Department of Health said in i t s submission that i t appears that the prevailing pattern of medical s ta f f organisation in Australian hospitals does not foster the coordinated, cost conscious team approach now required for effective and e ffic ie n t management of hospital care. I t added that:

'U tilisation and peer review w ill be d iffic u lt to implement under these circumstances (Wilson 1978),as w ill any cost-containment program requiring the cooperation of a ll medical s t a f f . 1(S. 700)

Several submissions supported enhanced s ta ff training.

'The New South Wales Branch of the Australian College of Health Service Administrators believes there should be improvement in in-service training and continuing education for health service s ta ff in relation to:

(i) management; and ( ii) task training.

Business and commerce make a point of a c tiv itie s such as in-service training and continuing education and the New South Wales Branch of the Australian College of Health Service Administrators believes that such training should be an integral part of health services in A ustralia.'


The Health Commission of New South Wales has issued several circulars requesting Boards of Directors in the appointment of senior officers to take cognisance of qualifications held by applicants and to give preference to qualified applicants. The Health Commission of New South Wales recognises, as does the New South Wales Branch of the Australian College of Health Service Administrators, that the possession of academic qualifications alone

does not ensure the su ita b ility of a person. However, the holding of qualifications is indicative of a level of professional expertise.

In the absence of experience within an individual hospital, many seek outside assistance.


Much evidence presented to the Commission spoke well of advisory services and the value of using outside consultants but some was c ritic a l.

Dr N.E. Elvin of Garran, Australian Capital Territory, in his submission was among those who spoke out against inappropriate advice. (S.971)

In the end analysis, management attitude is the most important factor. Where costs are important and labour represents such a large share, management focus must be directed there.

The Australian Medical Association in discussing labour costs in its submission said:

'An important aspect of these costs is the effect of overtime payments. The extent to which overtime payments are made is partly a re fle c tio n of the efficiency of rostering. The more e fficien t is the rostering of s ta f f the more savings can be effected by the avoidance of overtime payments. Thus rostering should be an important part of the management function of hospitals. However, under the present system of

fund allocation to hospitals one is forced to ask again the question - where are the incentives?

'Once again one is forced to conclude that at present no incentives ex ist. I t is therefore apparent that effective u tilisa tio n of s ta ff is

a function of management and the introduction of rewards for efficien t performance and penalties for inefficient performance is e s s e n tia l.' (5.245)

There is other evidence that a ll is not well in hospital management.

The Commission has received evidence of wasteful practices in relation

to ordering and u tilis a tio n of supplies. I t has been told of rosters deliberately organised to ensure that certain employees had a guaranteed overtime component in th e ir wages, whether the hours needed to be worked or not. I t has been advised of arrangements for payment of salaries and allowances in excess of award rates without authorisation from either the h o sp ita l's board or the appropriate health authority. I t sees these matters as manifestations of poor managerial control, and of a to tal lack of appreciation of the managerial function in publicly funded in stitu tio n s.


Even more disquieting is the tendency of a few boards and managements to tre a t the funds allocation process as irrelevant, and to allow th eir hospitals to overspend. In relation to one such hospital, a senior officer of the relevant State health authority said in closed hearing:

'Personally, I think . . . hospital is a hospital out of control.'

The Commission believes th is to be a serious indictment of the hospital's management. I t has visited other hospitals whose financial performance and general operations were equally lacking in managerial discipline. I t has been informed th at in some States the legislation makes no provision for dismissal of boards or for disciplining of board employees whose performance is clearly below the standards legitimately expected of them. It believes such provision to be necessary, and RECOM M ENDS that State Governments who lack th is power leg islate to provide for the dismissal of Boards whose standards are below those reasonably required of them.

Another aspect which is of concern to the Commission is the form and nature of the external audit. In some states no more is required than a certificatio n that monies received have been properly dealt with, and that expenditures made have been duly authorised. In part, th is is a reflection of the inadequate base of hospital accounts. While these continue to be maintained on a receipts and payments basis, there is l i t t l e else that auditors can certify to. But the Commission believes that external auditors have functions which extend beyond the simple validation of receipts and payments: that they should concern themselves with the efficiency of operations, the value secured for the taxpayers' monies expended, and with the control systems, including the accounting and physical control over both consumables and fixed assets. The Commission is aware that in New South Wales, the accounts of local authorities may be audited only by auditors who have obtained a specific qualification and are licensed by the Department of Local Government for th is purpose. The Commission believes that the requirements for hospital audits, especially for the larger hospitals, are no less than for audits of local government, and that those seeking appointment to these positions have a t le a st equal need of special qualifications. It RECOM M ENDS that State health authorities:


(a) establish minimum audit specifications for hospitals embracing requirements for fu ll financial and managerial systems audit; (b) establish formal licensing requirements for those seeking appointment as hospital auditors.

Conclusion and Recommendations

The Commission believes that despite the dedication and competence of many hospital managers, standards frequently fa ll below that which is required.

In p a rt, th is is a reflection of the inadequacy of information systems for management. The Commission RECOM M ENDS that steps to improve information systems on a uniform or compatible basis covering a ll recognised hospitals be taken as a matter of urgency, as recommended elsewhere in th is report.

In part i t re fle c ts inadequate in-service training and promotion structures designed to establish proper career paths for hospital adm inistrators and to ensure that those promoted to senior posts are adequately qualified both academically and by experience for the posts they

are assuming. The Commission RECOM M ENDS that steps be taken by State health auth o rities:

(a) to overcome barriers to mobility which prevent a proper career progression; (b) to in s titu te in-service training schemes directed to assuring that hospital administrators and more junior management have a fu ll

understanding of th eir roles, and of their accountability to their seniors, the board, the health authority and the community.

In part i t derives from problems of hospital organisation. Recommendations relatin g to th is appear elsewhere in this Report. All that needs to be said here is th at structures should be designed to achieve adequate delegation of responsibility and to ensure appropriate




In A ustralia, the primary methods of payment of medical and other p ractitio n ers are fee-for-service. sessional and salaried. The method used varies according to the insurance status of the patient and the location of service. Thus a 'hospital patient may be treated by a salaried doctor employed by the hospital, by a v isiting medical officer paid by the hospital

on a sessional or modified fee-for-service basis, or by an honorary medical o ffice r. A private patient in a recognised hospital may be treated on fee-for-service by a private practitioner, a salaried specialist using his rights to private practice, or by a variety of medical sta ff, interns, residents or re g istra rs, who are unable to charge. All outpatients in recognised hospitals are treated by doctors paid by the hospital on a salary sessional or modified fee-for service. A private patient in a private hospital, or a private patient not in an in stitu tio n will usually be treated by a private practitioner on fee-for-service.

Because many practitioners tre a t more than one type of patient an individual p ractitioner may be paid by a mixture of methods. Common arrangements include:

. salaried practitioner with limited rights to treat private patients on fee-for-service;

. private fee-for-service practitioner who is also paid on the basis of a sessional, or fee for service contract to tre a t hospital' p a tie n ts, and tre a ts his private patients on fee-for-service.

In considering the confusing picture of methods of payment of medical and other p ractitio n ers in Australia, i t is useful to recall the obvious point th at i f something is paid for there must be a buyer and a se lle r, and a contract, whether written or not. For some, this way of speaking of health services is anathema, yet i t is not the Commission's intent to impute


mercenary motivation, merely to clarify the nature of the payments involved in health care provision with a view to identifying any inefficiencies or avoidable costs.

Under the fee-for-service arrangement, a direct contract exists, though not in written form, between the doctor (or other service provider, where appropriate) and the patient. This applies where the doctor is, in addition, paid from other sources as well.

Payments to doctors (or others) are also made under a different type of contract, in which the patient has a contract with the hospital (or other service) and the doctor is acting as the agent of the hospital. Where the hospital pays the doctor on what has come to be called modified fee-for-service, there is no consideration by the patient such as would bind the contract between patient and doctor. While the term 1fee-for-service' is used in this instance, payments made in this way should not be confused with the individual patient - doctor type of contract, and are clearly of the second type, ju st as are sessional or fu ll time salaries

There is no control over the fees that private medical practitioners may charge for their services. The Commonwealth Government publishes a Medical Benefits Schedule for payment of health insurance benefits, based on a Schedule of Fees determined by an independent tribunal. Several hundred specific items of service are liste d , each with i t s fee. A number of committees (such as the Pathology Services Working Party) with Australian Medical Association and Commonwealth Government membership, revise and bring up to date the lis ts and check on malpractice. The Australian Medical

Association (in each State and some local branches) also publishes lis ts of recommended fees to be used as guidelines; these are in many cases somewhat higher than the Schedule. In New South Wales, Prices Tribunal hearings were conducted recently to determine i f there should be a maximum fee for medical services.

In so far as patient care is concerned, the employer/employee relationship must affect lia b ility in some way. In British, and to some extent Australian courts, the lia b ility of each party has been tested. But much is s t i l l le ft, from day to day, to the same guiding forces of accepted practice. The complexity of th is issue of lia b ility , from a legal point of


view, is illu stra te d by a case before the courts at the time of writing. A judge in the New South Wales Supreme Court was reported (Medical Letter, 1980) as having said that i t had not been shown that the hospital had the

power to d irect the visiting sta ff in the manner in which they carried out th eir duties and therefore, the hospital was not responsible for their actions. This was a case of a patient suing the Royal Prince Alfred Hospital and two of the honorary medical officers for negligence. The court’s decision th a t there was no evidence of negligence has been reversed, and the case is to be retried before a jury.

The employer/employee contract is explicit about a range of rights and obligations of the respective parties to each other including a variety of terms and conditions. A former President of the Australian Medical Association contrasted the position of the self-employed private practitioner with his salaried counterpart either within or outside the professions-

1 There are basic differences between the method of derivation of incomes of medical practitioners in private practice from incomes received by way of wages and salaries. Doctors in private practice are not remunerated by a salary, or in the form of an annual or other

periodical guaranteed income, but by a fee for each service which they provide. In this respect the manner of conduct of private medical practice is similar to that of other forms of private enterprise in the community whether in the area of professional a ctiv ity . or commerce, or

engagement in a tra d e .' (Retiring address of the then President of the Australian Medical Association, Dr JR . Magarey, to the Federal Assembly of the Association, May 1979, in Commonwealth Department of Health, Attachment A to 4.1)

In considering th is comment, however, one must remember that most sp ecialist medical practitioners, at least, and a considerable number of general practitioners with visiting rights at hospitals are paid in part under sessional contracts as well as by th e ir private patients. These

contracts make provision for leave, superannuation and similar matters. For example, in New South Wales, the conditions of service agreed upon provide that:


1 In addition to a sessional payment the v isitin g medical officer is also entitled to receive:

An on-call allowance of 10 per cent of the normal sessional hourly rate.

A call back allowance from 10-25 per cent extra.

Five weeks annual leave per annum.

Three weeks conference and study leave. Long service leave.

Superannuation loading of 7.5 per cent of base hourly rate.

Additional private practice loading of $2 per hour for specialists and $1-50 for a general p ra c titio n e r.' (Submission 402, Royal Newcastle Hospital, 16)

Where the employer/employee contract is based on a proportion of the scheduled fee no conditions of service are included so far as the Commission has been able to ascertain.

Where medical services are concerned the most common contract in Australia is of the individual type. Nearly a ll medical services within private hospitals and nursing homes are provided by individual private practitioners. Even within the public hospitals about half the patients are treated by private practitioners, although th is varies across States- and across hospitals of different size and function.

The employer/employee type of contract for medical services is in Australia generally confined to the public hospitals. This is not so in a number of other countries. In America, private hospitals often have contractual arrangements with doctors, either for particular types of service, for diagnostic services, or an insurance fund may contract with doctors for a ll services, as with the prepaid plans. Again, in Britain and some other European countries, doctors working outside hospitals do not for the most part rely on private contracts with patients, but on capitation payments (that is , payment of a specified annual amount for each listed patient). The reverse is true for most other hereof professionals, the

reasons being essentially h isto ric a l.

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Most non-medical services are provided on the basis of contracts between professionals and an in stitu tio n , or seme other third party. For example, nurses generally have contracts not with the patient directly, but with an employing authority, which may be a central health authority, a hospital

board, a private proprietor of a hospital or nursing home, a management conmittee of a health centre or a private doctor or group of doctors. In principle nothing confines a professional to working under the employer/ employee type contract, nor stops them from seeking to earn th e ir income

outside the in stitu tio n a l setting by means of a fee-for-service. Indeed, a number of individuals in seme of the professions supplementary to medicine, such as d ie titia n s , physiotherapists and some home nurses do so. Some professionals in areas related to medicine regularly do so, notably. pharmacists and clin ical psychologists. There are also a great many people providing services outside the orthodox medical sphere on such a basis.

However, in practice the capacity and willingness of the public to pay limits the scope of such activity, among para- professionals, largely to those for whom supplementary arrangements provide that payment on referral from a doctor is subsidised by government or covered by a health insurance fund.

The contract between individual patients and providers has remained e sse n tially simple and informal. The sums of money involved have greatly increased, and the relative contributions of the various funding sources (the

individual, the insurance fund and the Commonwealth Government) have flu ctu ated . In the larger public hospitals, there are now more full-tim e s ta ff with rights of private practice involved in more complex patient care. F in ally , i t may be th a t, since larger numbers of private patients are being

admitted to the public hospitals, there has been an increase in privately contracted medical services. Tne extent of these changes has not been easy to ascertain.

Employer/employee type contracts, however, for medical services in public hospitals, though they were originally more or less between individuals, have become considerably more formal over the past ten years in A ustralia. Such contracts are now usually backed by agreements and awards

involving detailed terms and conditions, subject to arbitration and the courts. As the Australian Council of Salaried Medical Officers reminded us:


'Methods of payment and conditions of service for medical s ta ff are essentially the province of the appropriate system of industrial regulation within each appropriate State or Commonwealth area and thus are outside the p racticality of influence by the Commonwealth Government.1 (Submission 248, 6 Item H.l)

The remuneration set by arb itra tio n d iffers according to the level or grade of the doctor, based essentially on sen io rity , that is , the number of years since graduation; on job specifications, and in senior positions on job experience and qualifications. While there is in each case an individual contract between the employing authority and the doctor, the contract is based on the outcome of determinations for large groups of providers who have a common in terest, depending on the type of hospital where they work, the Act under which they are employed and th e ir 'le v e l'. Extensive 'unionisation' has occurred; for example, there are associations of salaried medical

officers, public medical officers, repatriation medical officers, Commonwealth medical officers, the State branches of the Australian Medical Association which specifically represent v isitin g medical officers in arbitration proceedings, and a number of colleges and other associations which may participate in proceedings.

Proceedings take place in each S ta te . and in some cases separately for groups of hospitals. Nevertheless, there is a great deal of uniformity in the awards made for major categories of doctors across the States, with Queensland retaining perhaps more particu lar arrangements than the other States. There, for example, doctors arrange for rights of private practice

in the appointment of medical superintendents in non-metropolitan areas. For both parties there is much more s ta b ility and certainty under these types of arrangements than formerly. While some sp ec ia lists were paid under a variety of arrangements by hospitals or health authorities, the extent to which arbitration now governs these payments has changed markedly; i t was a fte r a ll

in 1970 in South Australia th at the f i r s t group of honorary medical officers sought and obtained a private a rb itra tio n to obtain payment for th eir services. As for the changed conditions of resident medical officers this too has been remarkable. Finally the changed situation for sta ff

specialists, that is senior sp ec ia lists employed by public hospitals, especially the large metropolitan teaching hospitals, was well described by

4 2 4

the Public Medical O fficers' Association of New South Wales in its supplementary submission:

'5.1 It is many years since the s ta ff specialists position was one fille d by a junior, newly qualified specialist, often just returned to Australia from overseas training, to provide income while he established his professional reputation prior to entering private practice. This led to a succession of junior people turning over relatively rapidly in the positions, with

l i t t l e or no chance to contribute to improvement and development of services or teaching.

' 5.2 Current Role Today i t is accepted that a position as a sta ff

sp ec ia list is a career position and as a result there is now in the major hospitals a large group of these sp ecialists undertaking these important tasks of providing ongoing teaching, high quality service especially in the subspecialties, and development of hospital practice. The fact that th is is a stable group has allowed th is role to be fu lfille d in a far more e ffic ie n t and effective manner, and i t is essential i f th is is to continue, that such a career structure remains attractive to a ttra c t the high calibre s ta ff needed to provide i t . '

(Submission 354, supplementary submission, Section 5)

Medical Services in Public Hospitals

The formal contracts which doctors in Australia make with the au th o rities for provision of services in public hospitals are for full-time salaried employment or part-time arrangements, both for fixed periods of appointment. The major distinction within full-tim e employment is between doctors who are in train in g , some of whom may be quite senior, and those who

are sp e c ia lists in a p articu lar branch or subspecialty of medicine. The major d istin c tio n within part-time contractual arrangements is between sessional payment and payment as a per centage of the scheduled fee.

Salary levels and conditions of service for full-time salaried employees are determined through the industrial system. Sessional payments and conditions of services for v isiting medical officers are determined sim ilarly.


The conditions of service for both salaried and sessional s ta ff include various forms of leave, superannuation, on-call and call-back payments, overtime and penalty rates (resident s ta ff only), and for sessional s ta ff, a private practice loading, or for salaried s ta ff the limited right to earn income by charging for the treatment of private p atien ts. The financial significance of these conditions of service (not including private practice earnings) was highlighted in a study of th e ir effect on labour costs in Victorian hospitals (Tatchell, 1980). This study showed that conditions and allowances added 51 per cent to average pay for ordinary hours worked in 1979.

Not a ll fee-for-service arrangements are backed by formal contracts. Where th is is so, the contractual basis is most often negotiated directly oetween the doctors and the State health authorities. An exception is in the Australian Capital Territory, where fee-for-service contracts have been concluded through arb itratio n . Fees paid are usually 85 per cent (most States) or 75 per cent (New South Wales) of the Medical Benefits Scheduled Fees, which are determined by the Commonwealth Government:s Medical Benefits machinery (Inquiries on Medical Fees for Medical Benefit Purposes, Medical Benefits Schedule Revision Committee. and so onx .

The allocation of money for sessional payments can be done in a number of ways. In Victoria, i t is now done by a formula based on the average number of hospital patients modified by administrative and teaching requirements (Victorian Health Commission, Submission 722, 92). Previously, sessional allocations had been determined on a hospital by hospital basis, sometimes through work studies by consultants (eg. Peat Marwick Mitchell Services, Report on Study of Sessional Medical Requirements, Austin Hospital, October 1978).

In some parts of New South Wales, Tasmania and Western Australia, there are visiting medical officers who have not accepted contracts. Work is s t i l l being done on an honorary basis, th a t is , without charge to the hospital or the patient (Submission 245, 40). The Commission has not been able to assess the precise extent of th is. Mr Justice Macken, a judge of the New South Wales Industrial Commission, indicated the history:


'Section 36 of the Public Hospitals Act 1929 precluded medical practitioners from charging public patients any fees [being] rewarded for th e ir work by the fees paid to them by intermediate and private p a tie n ts .1

He also described its demise:

1 In 1975 the Governments of the Commonwealth and New South Wales entered into an agreement by which the honorary system was abolished . . . From th is time honorary medical officers came to be known as visiting medical o ffic e rs .1 (Macken, 3 . , in the Industrial Commission of New

South Wales, 8 December 1978)

A sim ilar series of decisions was taken in a ll States, but as has already been pointed out honoraries in a number of hospitals had already moved to a lte r the trad itio n al state of affairs.

Contract payments to v isitin g medical officers are quite specifically for treatment of "hospital" inpatients and outpatients Those with sta ff sp e c ia lists and resident medical officers are not so specific. The Victorian Health Commission indicated th at:

'Despite the legal distinction between the status of doctors treatin g private and hospital patients, a substantial proportion of doctors supply services to both. Most visiting medical officers tre a t private patients in the hospitals to which they are appointed and most senior salaried sp ecialists have rights of private practice. However,

resident medical s ta ff have no right of private practice on hospital prem ises.' (Submission 722, Victorian Health Commission 90)

Thus, although payments to medical s ta ff employed by the hospital are for service to hospital patients, both salaried specialists and visiting s ta ff do some work which is paid for by the hospital, and other work which is paid on behalf of the patient.

On the question of rights to private practice, the Western Australian Department of Health and Medical Services described the situation in that State as:


'Full time salaried doctors of sp ec ia list status have an automatic right to tre a t privately insured patients during normal working hours and retain 25 per cent of salary a fte r allowance of 17.5 per cent for collection and related expenses. Excess earnings are paid into a board controlled fund.

'Part time or sessional sp e c ia lists have an unlimited right to private practice with no control exerted by the employing h o sp ita l.' (Submission 716. 6-1)

Arrangements for handling private practice earnings by full-tim e salaried specialists vary from State to S tate. For example, salaried pathologists in some States have no rights to private practice, and neither do they have these rights when employed by the Commonwealth Department of Health or the Department of Veterans' A ffairs. Private practice rights usually allow for earnings up to a set lim it to be retained, with the

remainder going into a tru s t fund which may be used for a variety of purposes: travel grants, research, purchasing equipment and so on.

Treatment of private patients in a public hospital by both salaried specialists and visitin g s ta ff involves the use of hospital fa c ilitie s without charge, in return for treatment of public patients Visiting sta ff are now paid, but they s t i l l use hospital f a c ilitie s without charge. The main exceptions to th is are the diagnostic sp ec ia ltie s. Both visiting and

salaried diagnostic sp ec ia lists normally pay a se t per centage of th e ir fees to cover the cost to the hospital of equipping and staffing the diagnostic departments. The balance of the fee goes d irect to the sp ecialist or into the tru s t fund. Another exception is the $10 charged in three Tasmanian teaching hospitals for each private patient admitted, though a representative

of the Tasmanian Department of Health and Medical Services suggested that th is was:

'also a fee that recognises th a t he is being paid for the time he is spending with th at intermediate p a tie n t.' (Transcript, 2189)

Despite the general sim ilarity of the types of contract for visiting medical services in a ll States, there are in te rsta te differences in the 'mix' of such arrangements. In Queensland there are no fee-for-service contracts,

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a ll v isitin g medical officers having been paid since 1938 (Submission 711, 24-1). in Western Australia sessional payments are used in the teaching hospitals, with on-call allowances and fee-for-service for call-back work.

In other hospitals in the West, they are paid on a modified fee-for-service contract (Submission 716, 601, and see also Clause 8(B), Salaries and Conditions of Service Agreement, 1979, Clinical Staff, Western Australian Metropolitan Teaching Hospitals). In Victoria, the contractual basis from

1980 for v isitin g medical officers other than in the hospitals where sessional arrangements have been implemented, is s t i l l under negotiation (Submission 722, 93).

In New South Wales the Commission was told by the Health Commission that

'Modified fee-for-service arrangements apply in most smaller hospitals in New South Wales. In the larger hospitals, v isiting medical o fficers are paid for treatment of hospital inpatients and outpatients on a sessional basis. The Commission has been negotiating with the Australian Medical Association to reduce the number of fee-for-service hospitals but no agreement has yet been reached.' (Submission 712 New South Wales Health Commission, 12)

In South Australia, arrangements have:

1 followed the traditional pattern of a mixture of full-tim e and v is itin g s ta f f in metropolitan hospitals and visiting s ta ff paid on modified fee-for-service in the country.1 (Submission 719, South Australian Health Commission)

In Tasmania the largest number of appointments is under sessional arrangements, and:

' only one surgeon is appointed under a"modified fee-for-service c o n tra c t.' (Submission 714)

In the Northern Territory one neurosurgeon is appointed under a visiting medical o fficer type contract. In the Australian Capital Territory most services are provided by v isiting medical officers under both sessional and fee-for-service contracts. The Department of Veterans' Affairs has only


sessional arrangements for v isitin g medical officers and then only where no full-tim e sp ecialists are available.

For full-tim e s ta ff, information has been supplied to the Commission by State health authorities. Despite some inconsistencies in th is information, i t provides a picture of the mix of resident s ta ff of varying levels and specialist s ta ff (Tables on th is matter are in the Chapter on Manpower).


In 1977-78, expenditure on private medical services both in and outside hospitals was $ll76m. or 17.4 per cent of Australian current health expenditure. Estimates of the expenditure on private medical services which takes place in private or public hospitals, and in other settings, have been attempted by the Queensland Department of Health (Submission, Section 14) but the Commission does not have accurate or up to date figures.

Table 1 indicates the estimated payments made in each State and Table 2 the per centage of to ta l expenditure for payments to visiting medical officers in each State, and the per centage of the to ta l salaries and wages for payment salaried medical s ta f f. Table 3 indicates the different mix of visiting medical officer contracts across the States.

Table 1: Estimated Payments by Health Authorities for Medical Services in Recognised Hospitals in 1979-80

Total Medical Payments $000

V M O Payments $000

% of

Total Medical Payments

Medical Salaries $000

% of Total Medical Payments

Ratio of V M O Payment to Medical Salaries

N SW 103 052 28 520 27.7 74 532 72.3 0.38

VIC 86 264 36 304 42.1 49 960 57.9 0.73

QLD 34 114 7 092 20.8 27 022 79.2 0.26

SA 32 531 10 259 31.5 22 272 68.5 0.46

W A 30 462 13 685 44.9 16 777 55.1 0.82

TAS 8 878 3 076 34.6 5 802 65.4 0.53

NT 3 477 93 2.7 3 384 97.3 0.03

ACT 4 688 1 514 32.3 3 174 67.7 0.48

AUST 303 466 100 543 33.1 202 923 66.9 0.50

Source: Based on data supplied by Commonwealth Department of Health a t request of the Commission.


Table 2: Some Interstate Comparisons in Payments for Medical Services in Recognised Hospitals, 1979-80


Total Current Expenditure ($000) 1,115,180 715,178 358,701 269,661 308,369 89,388 44,858 55,899 2,957,234

V M O Payments as % of Total Current Expenditure 2.5 5.1 2.0 3.8 4.4 3.4

Medical Salaries as % of Total Current Expenditure 6.6 7.0 7.5 8.3 5.4 6.5

Total Medical Payments as % of Total Current Expenditure 9.1 12.1 9.5 12.1 9.8 9.9

0.2 2.7

7.5 5.6

7.7 8.3




Total Salary and Wage Expenditure ($'000) 784,424 491,429 244,195 183,268 201,572 64,797 27,892 34,085 2,031,362

Medical Salaries as % of Total Salary and Wage Expenditure 9.5 10.2 11.1 12.2 8.3 9.0 12.1 9.3 10.0

Source: Based on data supplied by Commonwealth Department of Health at request of the Commission


Contract and fees

Sessional Contract Fee for service for service as %

of Total Payments

NSW 10,811 2,533 15,176 62.1

VIC 25,843 - 10,461 28.8

QLD 7,092 - - 0.0

SA 6,360 57 3,842 37.0

W A 5,255 - 8,430 61.6

TAS 2,616 - 454 14.8

NT 81 - 12 12.9

ACT 62 - 1,452 95.9

AUST 58,120 2,590 39,827 42.2

Source: Based on data supplied by Commonwealth Department of Health at request of the Commission.

In 1979-80, estimated payments by recognised hospitals to visiting medical officers totalled $100 million, or 3.4 per cent of current expenditure on recognised hospitals. This per centage varied from 2.0 per cent in Queensland, to 5.1 per cent in Victoria (see Table 2). The breakdown between sessional and fee-for-service payments varied from Queensland where no fee-for-service payments were made, to Western Australia where 62 per cent

of visiting medical officer payments were fee-for-service (see Table 3).

Also in 1979-80, the estimated medical salaries b ill was $203 million, or 10 per cent of salary and wage expenditure in recognised hospitals. The expenditure percentage varied from 8.3 per cent in Western Australia to 12 2 per cent in South Australia (see Table 2).

Total doctor payments (ie. medical salaries plus visiting medical officer payments) comprised 10.3 per cent of current expenditure on

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recognised hospitals, varying from 12.1 per cent in Victoria and South A ustralia to 9.1 per cent in New South Wales (see Table 2).

Trends in expenditure and staffing

In the Interim Report the Commission referred to cost increases in this area of nealth expenditure: new expenditures through payment of visiting medical o fficers have entered the hospital accounts; rates of payments for doctors and the cost of th e ir conditions have increased markedly, and numbers

of resident and senior medical s ta ff have increased.

It has been noted th a t before 1975 fewer visiting medical sta ff were paid for services to 'h o sp ita l' patients (or public patients as they were then c alled ). The introduction of payment of visiting medical officers has therefore been noticeable in the accounts. Table 4, derived from the survey of public hospitals conducted by the Commission early in 1980, shows that payments to v is itin g medical s ta ff are a larger component of expenditure for

public hospitals of fewer than 200 beds than for the larger hospitals. While the payments to salaried medical s ta ff were not sought in the survey these would presumably show the reverse pattern.

The study by Tatchell (1980) mentioned above analysed in detail the trends in the costs associated with employing both salaried and sessional medical s ta f f . The study shows that although medical sta ff experienced a

lower rate of increase in basic award payments for ordinary hours worked than eith er nursing or general s ta ff (though higher than medical ancillary s ta f f ) , they recorded the fa s te s t growth of a ll s ta ff groups in gross pay. This was due mainly to a growth in the cost of conditions and allowances which

increased from a premium of 14 per cent on average pay for ordinary hours worked in 1973, to 51 per cent in 1979. In more detail, the study shows th a t, of the 212.5 per cent increase in average gross weekly earnings, 54 per cent was due to increases in basic award r a t e s ,'2.6 per cent was due to

increases in over award payments, 7.4 per cent was due to changes in the s ta ff s k ill mix or level of employment, and 36 per cent was due to more generous conditions and allowances. The study suggests that a large factor

in th is was the separation of overtime, penalty, on-call and call-back payments from ordinary hourly payments for resident medical officers.

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Payments Size of Hospital

V.M.O. Payments

Total Salaries

Ratio of V.M.O. Payments to Total Salaries

$ $

6-50 beds 334,497 5,952,335 .056

51-200 beds 1,901,292 28,908,683 .066

201-500 beds 5,530,089 222,995,090 .025

501 + beds 6,196,965 184,047,973 .034

TOTAL (N = 65) 13,962,843 441,904,081 .031 Source: Commission survey of a sample of recognised hospitals, April-May 1980.

As an example of the costs of full-tim e medical s ta ff, one 220 bed suburban hospital spent 9.8 per cent of its salaries and wages on medical salaries in 1978-79, when medical s ta f f constituted 4.6 per cent of s ta ff employed. In 1970-71, the figures were 6.5 per cent of salaries and wages payments, and 3.1 per cent of s ta f f (Australian College of Health Service

Administrators, Submission 331, Attachment A).

No Australia-wide information on changes in medical s ta ff numbers can be readily compiled. However, some impression of the increases in s ta ff numbers in Western Australia, New South Wales and Victoria can be gained from published sources. Table 5 presents the numbers of salaried doctors and

resident medical officers in New South Wales for the years 1970 to 1978, and in addition presents the overall number of doctors, and the number of specialists and general practitio n ers. Table 6 presents data from an e arlier small survey of the three Victorian teaching hospitals associated with Monash University Medical School.

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In both these se ts of figures - though they are not comparable - there is a steep increase in the numbers of resident medical staff. In the New South Wales figures there is a slig h tly steeper increase in specialists in private p ractice, while salaried doctors have kept pace with population


The Victorian figures indicate that there was sizeable salaried medical s ta f f well before 1974-75 (the year before Medibank and the Cost Sharing Agreements). The major growth in both honorary and salaried sta ff occurred before the early 1960's, according to these figures. Table 7 shows the numbers of a ll types of salaried medical sta ff in Western Australia between

1961 and 1978 and the to ta l doctor numbers for the same years. The salaried s ta f f numbers includes hospitals, university and government.


Resident Medical Officers

Salaried Medical Staff

Honorary Medical Staff

1947-48 49 67 290

1954-55 79 137 297

1964-65 150 238 429

1974-75 266 296 463

Source: Derived from Andrew, R.R. (1976), ' Hospital Staffing and Hospital C osts', Medical Journal of Australia, 2: Tables 4 and 5.

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Table 5: Estimated Number of Medical Practitioners in New South Wales and Australian Capital Territory, 1970-1978

Year Population Total Doctor/ General. GP/ Special- .S pecialists.Salaried. Salaried. Resident. Doctors Popul. P rac tit- Popul. is ts Popul. Doctors Doctors/ Medical

Ratio ioners Ratio Ratio Popul. Officers

(GP) Ratio (RMO's) 1

R.M.O.s/ Popul. Ratio

1 to: 1 to:

1970 4,732,648 6,352 745 2,891 1,637 1,841 2,571 320 14,790

1971 4,825,000 6,453 748 2,891 1,669 1,925


2,507 332 14,533

1972 4,904,900 6,738 728 2,702 1,815 2,141 336 14,598

1973 4,961,600 7,110 698 2,798 1,773 2,431 2.041 365 13,593

1974 5,019,000 7,451 674 2,859


1,756 2,684 1,870 365 13,751

1975 5,075,400 8,023 633 1,684 2,872 1,767


366 13,867

1976 5,117,600 8,348 613 3,188 1,605 2,987 380 13,467

1977 5,141,700 9,013 571 3,451 1,452 3,154 1,630 372 13,822

1978 5,212,683 9,716 537 3,899 1,337 3,264 1,597 345 15,119

1,300 1,305 1,409 1,516

1,543 1,771 1,793 1,946


3.641 3,697 3,481 3,273

3,253 2,866 2,854 2.642


Source: New South Wales Health Commission, 'The Growth of Medical Manpower in New South Wales', 1978. 27.

Table 7: Medical Practitioners in Active Practice by Type of Practice, Western Australia, 1961-1978

1961(a) 1966(a) 1971(a) 1978(b)



Private Practice

General Practice Specialist

No. Ratio No. Ratio

348 (1:2116) 160 (1:4604)

415 (1:2016) 183 (1:4572)

491 (1:2092) 236 (1:4353)

650 (1:1863) 594 (1:2039)

Salaried Total

No. Ratio No. Ratio

297 (1:2480) 805 (1:915)

315 (1:2231) 981 (1:853)

529 (1:1942) 1256 (1:818)

655 (1:1849) 1899 (1-638)

Lugg, M.M., Medical Manpower in Western Australia (1979), unpublished paper.

(a) Number of doctors working in Western Australia. (b) Full-time equivalent doctors working in Western Australia.


Efficiency of Different Methods of Payment

Three issues arose in evidence concerning the methods of payment for medical practitioners in Australian hospitals and related services. Each is considered separately in th is section.

F irst, evidence to the Commission related to the relative costs of the two basic types of contract for payment, which was described e a rlie r as either a doctor-patient contract or a doctor-facility contract. This comes down to arguments presented about the relative merits, from a cost and efficiency angle, of f^e-for-service medicine and salaried medicine Second, sane evidence concerns lot th is broad question, but the more specific one of the relative cost and e ficiency of the two basic types of employer-employee contract, that is , full- time employment as compared with permanent part-time arrangements of various kinds. To that consideration, the question of the cost of rights to private practice of salaried doctors is relevant. Third, and more specifically s t i l l , there is evidence on the comparative costs and efficiency of the various part-time contractual arrangements, that is , sessional versus modified fee for-service contracts - or combinations of the two.

In considering th is evidence, the following comments may be helpful. In principle, nothing re s tric ts the hospital, or whatever is the employing authority, from purchasing medical or other services in the cheapest possible manner consistent with a high standard of care such th at i t protects its lia b ility .

In p ractice, as becomes plain from the evidence before th is Inquiry, several d iffic u ltie s arise, as they do in so many of the areas before us. F irst, there is no easy answer to the question of which form of contract is the most cost effective, partly because i t is not easy to work out the most cost effective answer for a country as a whole. Cross-cultural comparisons are notoriously unreliable. The second difficu lty is even greater, and

relates to the weight of past practice upon the present and future, The price which w ill be paid is affected by the a b ility of the parties to negotiate terms, which is in turn greatly affected by th e ir relative power.


Third, the matter is further complicated by the extensive system of financial underwriting of costs which maintains our mixed system of clin ic al service provision.

Here the Commission has already pointed out that there is an important difference in the source of funds for different methods of payment. Private fee -for-service practice (whether by private practitioners or salaried p ra c titio n e rs using th e ir private practice rights) is financed from a mixture

of Commonwealth sources (Commonwealth medical benefits, pensioner health b enefits, disadvantaged benefits, repatriation benefits), private insurance rebates and out of pocket payments. Payment to salaried and visitin g medical

p ra c titio n e rs for treating hospital patients are cost shared by the Commonwealth and the States. This has important implications; any sh ift between private and hospital practice is also a sh ift between Commonwealth, private and State sources.

Method of Payment and Level of Service

Evidence on these issues to some extent overlaps because in the smaller hospitals in p a rticu lar, in a ll States, Queensland, the v isiting but medical o fficer may be paid for each service for 'hospital' patients by the hospital, not the p a tie n t. Hence to same extent, a ll three questions hinge on certain

key fa c ts, and the alternative interpretations placed upon them. Under the fee-for-service system of payment, the doctor is paid for each service performed by him or on his behalf and the patient can claim accordingly.

The phrase 'on his behalf' is important, because services provided by a nurse, for example, in a c lin ic, can be charged for by the doctor when they are provided to a private p a tien t, and can be claimed for under these circumstances. In addition, the Commission is aware that teams of workers -

nurses, technicians and others - one paid for by governments (under cost sharing arrangements which provides support equally to doctors treating both private and hospital p a tie n ts).

The itemised type of exchange is the source of claims that th is method of payment encourages productivity, since the doctor is paid only for what is done (see for example, Wimmera Base Hospital, 6). It is the source too for the claim th a t th is method is 'price-sensitive' in that the patient and the


doctor are both aware of money changing hands (see for example, Dr Peter Hughes submission 863, the National Association of Medical Specialists submission 5239, the Australian Association of Surgeons submission S230 and a variety of individual submissions).

But the same fact about th is method of payment is the source of claims that th is sytem encourages unnecessary or excessive service provision since the doctor is paid for whatever is done and earns more for doing more (see for example, New South Wales Health Commission submission 712, 12: Professor Opit submission 833; Commonwealth Department of Health submission 700: Hospital Employees' Federation submission 350; School of Health Administration and Royal Australian College of Radiologists submission 237).

Moreover, a number of submissions challenge the extent of price-sensitivity of fee-for-service arrangements on several grounds: the payment takes place after the service is required; the payment is subsidised extensively by third parties (either government or insurance funds or both); and the patient is in most cases, especially where medical services in hospitals are concerned, not in a position to make decisions about 'purchase'

or 'p rice' of the 'goods' being offered. The argument is expressed in the following way by the Commonwealth Department of Health:

'The doctor is effectively the sole a rb ite r of the amount and type of treatment appropriate to a p a tie n t's condition (Fuchs, 1973) for he not only acts as a supplier of medical services, but also acts as the p a tie n t's agent, influencing the pattern of subsequent service use.

Once a patient presents to a doctor, the la tte r assumes the bulk of responsibility (both ethically and legally) for determining the p a tie n t's consumption of health care resources. The doctor influences the p a tie n t's perception of his needs, makes recommendations in respect of re v isits, referral to other doctors, investigations, hospital

admissions, length of stay and discharge and prescribed medication ... A major implication of doctors' control in the u tilisa tio n of health care resources is that incentives for cost containment should be aimed primarily at doctor behaviour.' (Submission 700, F>art I, 54)


The method of payment is said to influence not only the number of services provided, but also the type of services provided. It can influence the decision on whether to use specialist or general practitioner care, in s titu tio n a l or non-institutional services, medical or other health

professionals, surgical intervention or non-surgical management of an episode, and so on.

Fee for service 'may encourage . . . the delivery of services such as surgery which, under present fee structures, are more lu crativ e.' (Commonwealth Department of Health, Submission 700, Part I. 104)

'Fee for service practice has been said to bias the distribution of income status within the profession in favour of those sp ecialists who undertake specific procedures rather than mainly consultative work. The pricing structure for performing technological procedures frequently

produces a net return per hour well above that of other forms of medical a c tiv ity .' (Committee on Applications and Costs of Modern Technology in Medical Practice, 1978, 40)

The Hospital Employees' Federation analyses the basis of health care in A ustralia as a form of private consumption, manifested in fee-for-service practice and private insurance, and concludes by quoting Scotton who wrote th at the Australian health care system is:

'biased towards the institutionalisation of treatment, the sp ecialisatio n of manpower, and indeed the medicalisation of health i t s e l f . ' (Submission 350, 24)

Even the choice of fa c ility may be influenced by th is factor, the Commission was to ld , because 'there is an incentive for doctors to tre a t patients a t smaller hospitals rather than larger ones.' (New South Wales Health Commission, 12) ,

A number of submissions have provided figures comparing rates of provision of some types of service. In countries such as the United States or A ustralia with predominately fee-for-service systems of payment, rates of surgical procedures and hospitalisation are generally higher than in those

countries such as Britain where salaries are the chief forms of payment for


doctors (Submission 833, 6-17; Submission 350, 41-42 and Appendix B; Professor Palmer, Transcript 56-59; Exhibits 3 and 4). Hospitalisation rates and surgical rates are lower, in a particular country, when doctors are covered by contracts, such as under a pre-paid health plan, than in the same

country in areas where there are no such arrangements and payment is on the basis of each service.

In Australia, comparing rates of surgical procedures in different States again indicates lower surgical rates in Queensland, with fee-for-service work, than in New South Wales, where there is a high proportion of fee-for-service payments (New South Wales Health Commission Submission, Background Paper No. 2).

Cross cultural studies suffer from a number of deficiencies in that they cannot take account of the many differences other than the factor of how doctors are paid. They cannot consider, for example, the number of doctors, hospitals and other fa c ilitie s , the way health services are financed, the extent and effectiveness of methods of reviewing .admissions and procedures and the nature of public expectations and a ttitu d e s. Broad scale studies within the same country have usually concentrated on rates of elective surgery which may not be typical of rates of other a c tiv itie s of doctors.

The sen sitiv ity of doctors to financial incentives is a. vexed question. Economists have told the Commission that the doctor has a target incane in mind like any other individual. The Commonwealth Department of Health observed:

'Given that the implementation of a given course of treatment is often discretionary . . . and given that under fee-for-service, doctors' gross incomes are simply the product of services delivered and fees levied, i t is clear that doctors have both a great deal of a b ility and the incentive to influence the level of use of th e ir services.

(Submission 700, Part I, 71)

Naturally, doctors are loath to see themselves in th is lig h t. The Australian Association of Surgeons, for example, rejoinded hotly to such claims by health authorities in evidence to the Commission. The

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correspondence columns of the medical journals bear witness to the strength of feeling on th is issue.

The Queensland Department of Health has looked at th is question of the quantity of services provided under different methods of payment from a slig h tly d ifferen t angle. In i t s submission a small study was described, in which the surgical supervisor a t the Princess Alexandra Hospital recorded

independently the work done in public and intermediate sessions by each of 22 v isitin g surgeons over a period covering 10-20 operating sessions. Although the study is not large enough to be of general significance, and the Queensland situ a tio n is in any case rather distinctive, i t is possibly

consistent with common sense to suggest that doctors vary as much through th e ir individual competence and character as through th e ir awareness of targ et incomes. Their conclusion was:

'There is very l i t t l e difference between the workload in public and intermediate sessions. Bearing in mind the difficulty in exactly assessing numbers, due to differences in difficulty and length of operations, the teaching requirements in public sessions etc. the following assessment was made from the figures

For 13 surgeons, slig h tly more public than intermediate; For five surgeons, no apparent difference; For five surgeons, slightly more intermediate than public. The re su lts are easily explicable on the present workload and there is no suggestion that there is any natural tendency to do more in one section than the other.' (Queensland Department of Health Submission, 10, 24).


On balance, the figures available suggest there are incentives in fee-for-service payment which encourage high levels of u tilisa tio n and u tilis a tio n of costly forms of treatment, and that these levels may as a result be higher than would otherwise be the case.

However, the evidence suggests that the incentives in fee-for-service medicine are not necessarily an inherent aspect of the type of contract but are at le a s t in p a rt, a consequence of the particular structures that have


evolved in Australia to finance the fee-for-service method of payment, that is , the Medical Benefits Schedule and the Schedule of Fees, Thus a number of submissions advise modification of the items on which medical benefits are

payable by the Commonwealth Government, or the level of benefits to be paid in different circumstances. Some suggest action by insurance funds to lim it rebates on particular items.

Other submissions emphasised the incentives which arise from the system

of insurance against hospitalisation. For example, the Australian Association of Surgeons pointed out in relation to day-only surgery that, 1. . . these financing methods discriminate against less resource intensive methods of patient care' (Submission 230, 29).

Again, the a b ility to insure fully against a ll costs, referred to e arlier, was also considered to be a factor in encouraging use of services, whereas the absence of the need to insure at a ll with the availab ility of salaried s ta ff was frequently referred to as another aspect encouraging the use of services in the 'p u b lic 1 sector.

The strong impression is gained that a high level of service provision and u tilisa tio n is encouraged by a great many aspects of the health care system, under both fee-for-service and salaried methods of payment.

Financial incentives may be operating to encourage, or at least not to discourage, activity on the part of doctors in private practice. But the Commission has also been told th a t 'the most expensive piece of technology is the biro pen in the hands of a re sid e n t.' (Submission 849 3). In th is context, no financial incentive is operating but the doctor is influenced by his awareness of his superiors, who may c ritic is e him for not doing something, as well as being less experienced in diagnosis. In addition he may wish and need to get experience in certain procedures.

Moreover, most doctors in Australia receive payments both from private individuals and from hospitals, making 'pure' comparisons impossible.

The same method of payment appears to involve different incentives in different settings. Nor is there any country which appears to have discovered a method of payment free of incentives and disincentives. For example, capitation payments are a major element in the method of payments


for general p ractitio n ers in Doth Britain and the Netherlands. But in B ritain, s p e c ia lis ts in hospitals are paid on a salary, whereas, i t appears, in the Netherlands, they are also paid on a capitation basis. The noted B ritish health economist, Alan Maynard, observing these two countries, said

th at in B ritain, while complaints of over referral were common (from h o sp itals), l i t t l e was done. In the Netherlands, the number of referrals by physicians was monitored by other physicians:

' and th e ir incentive to do so is the realisation that over referral to the hospital decreases the level of health fund resources available for increases in capitation fees.' (Schweitzer, 1976, 170)

In a pre-paid health plan where the doctors share in any surplus there is an incentive to minimise referral to more expensive forms of treatment. Under fee-for-service when the patient is not fully insured the doctor may consider the cost to his patient of the services he orders. However, when a patient is fu lly insured, or when he pays nothing, there is less incentive

for the doctor to consider the cost of the services he orders.

One conclusion from the International Conference on Hospital Cost Containment in 1976, appeared to be that the level of services provided by doctors under any method of payment can be influenced by the extent and effectiveness of u tilis a tio n and peer review, that is , by increased scrutiny

of the appropriateness of service provision. Many submissions emphasised th is view. For example:

'accred itatio n with its implications of peer review and tissue audit w ill a s s is t in policing and controlling the rate of operations.' (Western Australian Department of Health, paragraph 2.3).

But not a ll would agree. The Hospital Employees' Federation (Submission 350, 60) is not optim istic that utilisation review will affect u tilis a tio n ra te s .

Options are:

1. Retain the present system of mixed methods of payments, at least u n til appropriate studies have established cost and efficiency comparisons more accurately than is presently the case.


2. Retain the present system of mixed methods of payment but build up, any or a ll of the following: . mechanisms of c lin ic al review (peer review and/or u tilisa tio n review).

. monitoring of claims for payment submitted by patients to insurance funds and/or Commonwealth Department of Health- . monitoring of claims for payment by doctors to hospital.

This option implies the view that costs could be lower and efficiency greater i f such monitoring were employed regularly.

3. Attempt to a lte r the balance of methods of payment, either . by seeking a reduction in the amount of private practice; or . seeking a reduction in the amount of salaried practice.

This option implies the view that costs could be lower and efficiency greater i f the system were not so extensively mixed. Neither route is likely to proceed without major industrial and p o litic a l problems.

4. One way of altering the balance is by introducing new modes of practice to Australia, for example, an extension of case payment: an introduction of capitation type payment; or an introduction of alternative contracts, such as are used in a pre-paid health plan.

These options also- imply the view th a t costs could be lower and efficiency greater i f d ifferen t incentives were to operate on doctors than are available in A ustralia.

5. Co-insurance payments. This question is considered elsewhere in th is Report. To the extent that u tilis a tio n and service provision is influenced by the existence and size of a patient moiety, co-insurance may affect the overall efficiency and cost of the method of payment for the doctor. That is , i f u tilisa tio n is less under co-insurance, then to ta l payments w ill also be less under

fee-for-service arrangements where co-insurance is present.

6. A change in the basis on which payment is calculated for fee-for-service arrangements. At the present time, payments are calculated on the basis of the s k ill involved and the overheads


estimated, and, to sane extent, on the basis of past practice. The time component, that is , how much time is involved in providing the service, is not used in the calculation, except for general p ractitio n er consultations and a few specialties such as psychiatry.

There would appear to be scope for improvement here and th is should be the subject of detailed consideration by the Commonwealth Department of Health. The Commission is aware of a Working Party which has been looking at the Medical Benefits Schedule, and of the

Medical Benefits Revision Committees, as well as other Committees, such as the Pathology Services Working Party.

The Commission RECOM M ENDS that the question of time-based payments be given particular consideration both by these Committees and by health authorities and hospitals with fee-for-service arrangements with v isitin g medical officers.

V isiting Medical Officers and Full Time Medical Staff

Within the recognised public hospitals, payments for medical services by the hospital are made to full-time specialists, resident medical officers and v isitin g medical s ta ff. Payments for medical services within the hospital are also made by patients to private practitioners, many of whom, but not

a ll, are also v isitin g medical staff, and to full-time s ta ff specialists, consistent with th e ir rights of private practice. Resident medical s ta ff do not have rig h ts of private practice within the hospital, but provide clin ical services to support both full-time and visiting medical s ta ff within the

teaching hospital and i t s associated peripheral hospitals. Full time sp ec ia lists provide not only clinical services, but also a ssist in teaching medical undergraduates and graduates, that is , registrars and resident sta ff, both in the p a rtic u la r hospital, and in other hospitals.

The Victorian Health Commission commented:

'F u ll time specialists in teaching hospitals spend about 50 per cent of th e ir time in clin ical practice, the remaining time being used for laboratory and research work, attending meetings and c lin ical teaching sessions and some administration. Visiting medical s ta ff spend about a


fifth of th e ir time in non-clinical duties, the largest proportion being in consultative meetings with colleagues.' (Submision 722, 91)

A precise judgement of the comparative efficiency of v isiting and salaried medical s ta ff would require comparison of th e ir cost and efficiency in treating both 'ho sp ital' and private patients. For 'h o sp ital' patients, the costs involved are the sa la rie s, sessional or fee-for-service payments the conditions of service, and the hospital fa c ilitie s used by the practitioner, a ll of which are funded through the Commonwealth/State hospital funding arrangements. Although the overall cost of salaries, visiting medical officer payments and conditions of service are readily available, no conclusive figures on the comparative efficiency of these two

forms of payment are available to the Commission.

The State health au thorities, while in general firm in th eir views about the most suitable method of payment of v isiting medical officers (see next section) did not express strong views about the relative costs and efficiency of visiting medical officers and salaried s ta ff. The Victorian Health Commission, for example, observed that·

1 Theoretically, the advantages of full-tim e s ta ff are early discharge of patients (because of daily visiting) early warning of complications, geographical full-tim e availability for advice to management, advice to ward s ta ff and more flexible use of hospital

fa c ilitie s . There is no evidence, however, that these advantages have eventuated in p ra c tic e .' (92)

Not unexpectedly th is is not the view expressed to the Commission in evidence by salaried sp ec ia lists. The Public Medical Officers' Association of New South Wales for example, stated that especially in the teaching hospitals;

'V isiting medical practitioners do not wish to and cannot fu lf il the role of the s ta ff sp ecialist. Their roles are complementary, but not interchangeable, and i f performed by v isiting s ta ff the above tasks would be performed ineffectively, inefficien tly and be far more expensive.' (Submission 354, paragraph 5.4, supplementary submission)


The Department of Veterans' Affairs indicated i t s policy 1 requires a proficiency best met by a private practitioner or where i t would not be practicable or economical to employ a salaried p ra c titio n e r.1 (Submission 701. 13)

The Royal Australian College of Medical Administrators did not discuss th is p a rtic u la r issue directly, but in relation to the importance of medical s ta ff organisation in improving the efficiency of public hospitals, commented that full-tim e s ta ff tend to play a part in organisational respo n sib ilities more readily than visitin g staff.

The Doctors' Reform Society fe lt most strongly about th is question and argued:

' Equity and efficiency are unlikely to be achieved without a tra n sitio n to a predominantly public hospital system for sp ec ia list in p atien t and outpatient care . . . There is no reason why a predominantly public sp e c ia list sector should not co-exist with a predominantly

f'ee-for-service primary care system which was underwritten by universal insurance and rebates for most of the schedule f e e .' (Submission 254, 13-14)

Another issue is the appropriateness of staffing levels and especially the mix of s ta f f in public hospitals. Professor Andrew, reflecting on a lifetim e of influence in the teaching hospitals in the light of his more recent experience in a large private non-profit hospital, was struck by the many tasks done by resident staff in the public hospital which the v isiting

sp ec ia lists find time to do in the private hospital.

' Having been an Honorary myself for many years, and now employed in the private sector, i t has been salutary for me to observe th a t, in private hospitals such as Cabrini (the second largest in Australia) the s p e c ia list s ta ff, nearly a ll holding teaching hospital appointments, manage very well without residents. There is a whole area of problems

of many kinds - accidents, open heart surgery, organ transplants, renal d ia ly sis, medical emergencies and so on, which can only be managed in large sophisticated public hospitals. But there is a large volume of


elective surgery and acute internal medicine problems which can and are managed in private hospitals by the doctors in charge without resident medical s t a f f . 1 (Submission 853, 2)

The option for improved efficiency follows:

'The argument then is th a t the v isitin g medical officers who manage most of th eir cases in private hospitals without residents, and are well rewarded for th e ir public hospital re sp o n sib ilitie s, could well be a required for them to do the many procedural tasks in public hospitals, which are partly used as a ju stific a tio n for the overgrowth and present resident manpower. Fewer senior resident medical officers and registrars (interns are a number directly proportional to graduates as the f i r s t postgraduate year is required by a ll States for registration) would then need to be appointed to the large costly teaching h o sp ita ls.1 (Submission 853, 2)

The second major consideration in the comparative efficiency of visiting and salaried medical s ta ff is the cost of the right to charge for the treatment of private patients in public hospitals. Australian public hospitals, unlike those in several European countries, accept 'paying' as well as 'non-paying' patients. All medical s ta ff, except residents

registrars and medical administrators in a ll States, except parts of Queensland, can charge private patients, as well as treating 'h o sp ital' patients free of charge. For part-time s ta ff, the fee is part of the

doctor's private income. For full-tim e s ta ff in some States, the right to private practice is formally recognised in arbitrated awards but th is right is not always exercised and is lim ited. Earnings above a set lim it go into a tru st fund.

The concern in th is area is on a number of grounds First some have questioned whether salaried sp e c ia lists should have th is right at a ll.

Second, some are concerned about some of the side effects of salaried specialists having th is right, including the use of reserves in tru s t funds. Third, concern is expressed about the cost of providing public fa c ilitie s for both salaried specialists and v isitin g s ta ff to tre a t private patients. A related crucial aspect on which the Commission has had considerable confidential evidence is the cost of payments made to visiting sp ecialists


when tre a tin g private patients in the public hospital, where the public hospital provides the technical support and in frastructure, which makes those earnings possible. In one case, the earnings to the private sp ec ia list amounted to five times what might have been anticipated for the same service provided by a full-tim e sp ecialist with limited rights to private practice.

The Commission is not concerned directly with the size of doctors' incomes. but d iffe re n tia ls of such magnitude must affect the efficiency of the public system, certainly have implications for the nation as a whole for cost containment and must be borne in mind when considering changes to the rights

of private practice of full-tim e salaried sp ec ia lists.

The question of whether salaried sp ecialists should have private practice rig h ts was raised by the Medical Benefits Division of the Commonwealth Department of Health (Submission 700, Part II, 2-12). The Division claims th at such rights are anomalous because they may involve

double payments to doctors and to hospitals, and because they s h ift costs from Commonwealth-State arrangements to Commonwealth and private medical benefits arrangements. The arguments in favour of private practice rights

are more pragmatic private practice income is necessary to a ttra c t and retain suitably qualified s ta ff specialists. For instance, the Public Medical O fficers' Association of New South Wales argues that despite the increasing numbers of medical graduates 'there is s t i l l a lack of highly

trained personnel and considerable problems are s t i l l found in trying to a ttra c t senior s ta f f ' (Submission 354, supplementary, 11). This is p articularly the case, the Commission was told, in radiology.

In practice such rights are long standing and have become an integral and formal p art of salaried specialists' remuneration. The Western Australian in d u stria l a rb itra to r commented:

'I t is important to recognise that the exercise of a right of private practice with the retention of earnings therefrom is an aberration in terms of normal salary remuneration for full-tim e employment. However, i t must also be acknowledged that i t has existed

in various forms in the area under review for a considerable period and is now of widespread application.' (Salaries and Conditions of Service Agreement, 1979, Clinical Staffs, Western Australia Metropolitan Teaching Hospitals, Attachment 4, 8)


The Commission's attention has been drawn to a number of sections of the Health Insurance Act, relevant to the present situation for provision of medical services in public hospitals. Part I I of th is Act specifies arrangements under which Commonwealth Medical Benefits are payable. The Medical Benefits Division of the Commonwealth Department of Health, emphasised some of the history and significance of these provisions:

1 Prior to the introduction of Medibank in 1975, Commonwealth medical benefits were payable in respect of diagnostic services provided by public hospitals, i f the patients were billed by the hospital. Under these arrangements, there was l i t t l e or no opportunity for salaried diagnosticians to increase th e ir earnings through the exercise of private practice rights. On the introduction of Medibank. medical benefits ceased to be payable for medical services provided by recognised hospitals (Section 18(1)(a) of the Health Insurance Act). At the same time, Section 18 of the Health Insurance Act provided that diagnostic services in recognised hospitals be provided to a ll patients

free of charge.

1 In October 1976, Section 18 of the Health Insurance Act was repealed, allowing the raising of charges for diagnostic services in recognised hospitals for private patients. Section 17(1)(a) of the Act remains in force, so (where the supervising s ta ff sp ecialist has private practice rights) private patients are billed in the name of the s ta ff

sp ecialist who supervised the rendering of the service, rather than in the name of the hospital where the service was rendered. Accounts for services rendered, however, are generally raised and collected by the ho sp ital's accounting section and may be paid into a tru st fund.'

(Submission 700, Part II, 6-7)

A second area of concern was the side-effects of private practice rights for salaried specialists. The lack of accountability for private practice earnings, and the lack of compliance with income lim its was one area of concern. Some States have tackled these problems by changing tru st fund guidelines and ensuring that hospitals b ill private patients on behalf of salaried sp ec ia lists, to improve accountability, which they can do under the Act. However, there is very l i t t l e incentive for the hospital to control private practice earnings too closely, because i t financially benefits, both


directly through fee sharing arrangements, and indirectly through use of tru s t fund reserves for purchasing or replacing equipment. This la tte r use of tru s t funds is of particular concern to State health authorities, who feel th at th is may thwart th e ir plans for rationalising services and avoiding duplication.

One e ffe ct of private practice rights was said by some to be the encouragement of over servicing, (Submission 806, confidential exhibit, no. 2). As salaried sp ecialists earn th eir private practice income by fee-fo r-serv ice, th is argument clearly applies no more to them than to

private p ra c titio n e rs , especially as salaried sp ecialists receive an assured income, and th e ir private practice earnings are limited (Submission 354, supplementary, 12).

The th ird area of concern was that private practice by both salaried sp e c ia lists and v isitin g medical staff results in additional costs to the hospital. As pointed out in the previous section, diagnostic sp ecialists pay a proportion of th e ir fees to the hospital under fee sharing arrangements. Other p ra c titio n e rs usually do not. The issue is one of who pays for these

f a c ilitie s , not whether they should be made available. The Royal Newcastle Hospital was:

'n o t aware of any other field of private enterprise where public f a c ilitie s are made available for the purpose of earning private income to the same extent as applies to the f a c ilitie s provided to visiting medical p ractitio n ers for private patients in public hospitals at no

cost to the v isitin g medical p ra c titio n e r.1 (Submission 402, paragraph 8.4)

The Australian Hospital Association, Western Australian Branch, fe lt that 'a doctor tre a tin g a private patient in a public hospital should be required to pay the fu ll cost for the use of the-hospital's services and f a c i l i t i e s . ' (Submission 211, 5)

The Australian Medical Association highlighted the potential role of fa c ility charges in making practitioners more conscious of the cost of the f a c ilitie s they use:


1 Given the lack of information on an output b asis, i t is not surprising that output costs cannot be determined accurately. Failure to recognise th is merely resu lts in fa c ility charges being another revenue raising device rather than a means by which information can be made generally available on the cost of various procedures.'

(Submission 245, 41)


In the face of a lack of evidence on the comparative efficiency, cost and quality of salaried and v isitin g medical s ta ff, the Commission supports the continuation, for the time being, of a mix of these methods of payment. However, there are a number of options in the area of private practice rights. In deciding between these, the Commission has considered several problems which underlie the question of methods of payment. F irst, arbitration has set i t s seal upon a principle which has been in operation for a long time, that full-tim e doctors should have a limited right of private practice and th is is in operation in a ll States and in the Repatriation hospitals-

However, a confusion would appear to have arisen in which the right to charge is defined by the insurance statu s of the patient rather than the underlying basis on which a contract between the doctor and the patient is made. Thus, i f the doctor is acting as agent for the hospital, i t does not

seem appropriate to charge the patient, whereas, i f the patient has been referred to a particular s p e c ia lis t, whether a clinician or otherwise, then i t is appropriate within the system to charge for the services rendered.

Second, a number of witnesses have informed the Commission of the problem of maintaining and replacing major equipment, particularly in the large hospitals. The funds provided for th is purpose by the health authorities are regarded as to ta lly inadequate and even those funds made available are associated with excessive delays.

This stems partly from the meaning of the term 'c a p ita l' and the way in which funds, separate from normal operating funds, must be used in accord with government policies. As a re su lt, with the concurrence of the sp ecialists, many hospitals have been using money provided from the private

4 5 4

practice tr u s t funds for th is purpose. In other words, the major equipment problem is being overcome in a somewhat backhand way by using funds that are not provided and are not controlled by the State health authorities.

Hospitals which u tilis e th is system have expressed great concern over the continuing provision of funds should private practice tru s t funds be stopped. The Commission agrees that an alternate source of these funds should be provided in a proper way before such a step is taken.

Nonetheless, under the present arrangements, a substantial transfer of costs is taking place, with a net increase in the Commonwealth contribution, through medical benefits, and a net reduction, through revenue obtained, of State payment. There is no evidence that the transfer has eith er reduced

overall costs or th a t i t has the potential for doing so. On the contrary, i t may well have increased costs in the past and may do so in the future.

Options put to the Commission in the area of private practice rights of full-tim e s p e c ia lis ts are outlined below.

Option 1: Withdraw Private Practice Rights for Salaried Specialists

Some have called for review with a view to abolishing rights to private practice for salaried specialists. This would require paying a bonus to sp e c ia lists in order to continue to attract and retain them. This option is mainly supported by providers of finance (Submission 700 Part 2. 12;

Submission 806; Submission 807). If private patients were not billed for services performed by salaried specialists, th is option would result in a s h ift in expenditure from Commonwealth and private sources of medical benefits to Commonwealth-State sources of hospital finance, as the

sp e c ia lis ts' bonus would have to come from normal hospital funding. This would not occur i f Section 17 of the Health Insurance Act were changed so that hospitals could charge private patients for services provided by salaried s p e c ia lis ts , since this would imply that benefits would be payable

for medical services provided by hospitals.

A lternatively, greater use could be made of hospital insurance, either through raising bed day charges, or through greater use of the daily 'professional service fe e 1 for treatment by hospital doctors. These would have the e ffe c t of reducing the Commonwealth's financial commitment, both


through hospital funding arrangements and through medical benefits paid on services provided by salaried sp ecialists, and transferring some of th is commitment to hospital insurance funds. This could have deleterious effects on premiums and fund membership. The Commission does not recommend th is course of action.

In practice, th is option would be very hard to implement because private practice rights have become an integral part of salaried specialist remuneration, formalised through industrial agreements of various types around the States. I t has been said that the quality of care of patients could be lowered i f changes to the present system meant that salaried specialists le ft hospitals to set up in private practice. The system could revert to the one when most salaried specialists in public hospitals were relatively junior and many were s t i l l learning. A representative of the Tasmanian Department of Health and Medical Services commented:

'I t is hard to take something away that somebody has, particularly i f i t is a doctor.' (Transcript, 2191)

Option 2: Limiting the Scope of Private Practice Rights

One of the Commonwealth Public Service Board's principles for private practice rights for i ts medical employees is that:

'private patients were those specifically referred to the hospital specialist by an outside medical practitioner, or who specifically requested the sp e c ia lis t's services by name.'

The Board states that th is definition of private patients:

'may well be at odds with the definition employed by some public hospital systems, including th a t of the Australian Capital Territory, . . . which re st more in the insurance status of the patient than on the nature of the request or re fe rra l for service.' (Public Service Board le tte r to the Commission, 17 November 1980)

Once defined in th is manner, the doctor who is in charge of the patient should be able to refer to the most appropriate consultant or diagnostician


whether salaried or otherwise. Enforcement of th is principle would effectively lim it the number of private patients who could be charged by salaried s p e c ia lis ts. Patients not referred in th is way would be part of the usual workload. There would be as a result a reduction in medical benefit payments.

Another way to lim it earnings through private practice rights exists. A number of States have moved to tighten arrangements for tru s t funds and for earnings through private practice. The Commission endorses these moves and would encourage further action of th is type.

Option 3: D ifferential Medical Benefits

A th ird option, which could apply to both salaried sp ecialists and v isitin g medical s ta f f, is to retain private practice rights for salaried s p e c ia lis ts but to use the Medical Benefits Schedule more extensively to distinguish between categories of services, that is , services provided using hospital f a c ilitie s and services provided using private practice fa c ilitie s .

The h o s p ita l’s f a c ilitie s are already paid for either through Commonwealth-State hospital financing arrangements, or through hospital insurance, and th is in its e lf is a powerful ju stific a tio n for d ifferen tial

benefits. This is already done to some extent in pathology on a work value basis and for CT scanning, on what appears to have been a somewhat arbitrary basis. One basis of th is option is to pay practitioners using hospital f a c ilitie s the professional s k ill component of the fee only, and not to pay them the private practice cost component.

This option does not contribute, in its e lf , to cost consciousness for either p ra c titio n e rs or patients, although i t has some potential for limiting payments. The a v a ila b ility of the same service at different prices (inside/outside hospital) could create the impression that the service provided in the hospital was inferior, with a resultant reflection on the competence of the practitioner concerned (Submission 248).

Option 4: Extension of Charging for Use of Hospital F a c ilities

A fourth option, which also applies to salaried sp ecialists and visiting medical s t a f f , is to extend the charging of practitioners for the use of


hospital f a c ilitie s and resources. In principle, th is would not only offset expenses incurred by the hospital, but might also raise the level of cost consciousness amongst doctors, and help to make them more accountable for resources used. In practice, as pointed out in several submissions, the charges would probably be passed on to the patient by increased fees

(Victorian Hospitals' Association, Submission 207; Australian Hospital Association, Submission 210; School of Health Administration, University of New South Wales, submission 382). This would have detrimental effects on the viability of private health insurance.

One suggestion has been made to overcome th is problem with fa c ility charges (Submission 806, Attachment). It proposes block payments on an episode (case) basis, from which the doctor pays the fa c ility costs 'incurred by the patient for whose admission he had been responsible'. In addition to recouping fa c ility costs and making doctors more cost conscious, this proposal contains positive financial incentives to be more efficient in the use of hospital resources:

'If- for instance, the duration of an occupancy or the utilisatio n of services f e ll short of the specification in the appropriate 'standard packager, the admitting doctor would gain a bonus.'

But this proposal s t i l l does not take account of the fact that many charges made arise through re fe rra ls between doctors, either for diagnostic investigation or for consultation. On balance, the Commission does not favour th is approach.


While the available evidence has not allowed the Commission to come to a firm conclusion on the relative efficiency of different methods of payment of practitioners for the treatment of 'hospital' patients i t has been able to consider the efficiency of treatment of private patients in public hospitals by different types of practitioners.

In the f ir s t instance, the Commission RECOM M ENDS that there be an urgent review by each of the appropriate employing authorities of rights to private practice in the hospital with a view to limiting th eir scope, consistent with


the underlying intent of the contract between an individual patient and doctor.

At the same time, the Commission RECOM M ENDS that the authorities adjust the funding of hospitals concerned where appropriate and in line with State health p o lic ie s, to ensure that essential equipment and services now provided from the Trust Funds are not reduced to the point where the quality of care

of p atients suffers.

Finally, notwithstanding the arguments in favour of continuation of the system, the Commission RECOM M ENDS that steps be taken to phase out the right of private practice for full-tim e salaried specialists. This should take place over a period of years through a process of a ttritio n , consultation between a i l p a rtie s, adjustment of the remuneration of salaried sp ecialists to appropriate levels by normal means, and by ensuring that from an early date to be fixed no newly appointed specialists in public hospitals be given

the rig h ts of private practice. As i t is understood there are mandatory re tirin g ages in a ll States this would have the effect of eliminating the procedure over a fa irly long period of time unless consultation and agreement can bring about i t s demise at an earlier date.

Payment for Services to Hospital Patients

It is s e lf evident that visiting medical o ffice rs. however paid, cost more than honorary practioners treating public patients, for example, Victorian H ospitals' Association, Submission 207. 10; Australian College of

Health Service Administrators, Submission 331, 18). However, accepting the in e v ita b ility of paying practitioners for the treatment of 'ho sp ital' patients, since th is principle has been established and formalised by extensive a rb itra tio n , the efficiency of different methods is discussed in many submissions.

Two sp ecific studies comparing the cost of payment on fee for-service as against sessional payments, both indicate a higher estimate for fee-for-service than sessional payments. F irst, the Queensland Department of Health did a 'hypothetical' study in which payments which would have been claimed on a fee-for-service contract were imputed, and compared with the actual sessional payments to visiting s ta ff at the Royal Brisbane Hospital


for a two-week period in 1976 (see Queensland Department of Health Submission 711, 24.10, for d e ta ils of study). The workloads of the specialists were measured so th at reasonable estimates of schedule fees for work done could be made. The resu lts were ma'kedly ’in favour of' sessional payments (see Table 8).

Second, an unpublished study, known as the Pilot Study of Pool Mix, was conducted in Victorian hospitals in 1977. In no specialty was i t cheaper to use fee-for-service arrangements than sessional arrangements in large hospitals.

In some specialties, notably orthopaedics, urology and opthalmologv, the margin was considerable, whereas in others, notably general medicine, there was a minimal difference. The difference in the costs of the two types of arrangement varied between 2 per cent and 25 per cent. It is notable too, that at the time, sessional payments were larger than at present, because of the allowance made for being on-call through the week and at weekends which is now much more re s tric te d . The new sessional arrangements would make the cost of fee-for-service payment relatively even greater,

Certainly, most of the State health authorities have made th e ir views plain th at, wherever possible, sessional arrangements are preferable to fee-for-service (Victorian Health Commission submission 722, 93' New South Wales Health Commission submission 712, 12; Tasmanian Department of Health

Services submission 714, 43). Whether th is is purely a question of comparative costs or rather a matter of associated factors, is not clear from evidence.

The Department of Veterans' Affairs also has a clear view on this matter:

'The sessional rates paid by the Department do not contain any component of fee-for-service according to the number of patients seen by the practitioner during a season. The Department has never paid visitin g sp ecialists on a fee-for-service basis and such an arrangement has not been sought by medical associations. The Department is satisfied with the sessional payment concept and would not seek to a lte r

i t . ' (Commonwealth Department of Veterans' Affairs, Submission 701, 14)

4 6 0

Table 8: Comparison of Fee for Service and Sessional Rates over a Two Week Period at Royal Brisbane Hospital

Type of specialist No, included Total no. Total sess. Estimated fee-for-service payments Percentage incr- in survey sessions payments for same work in same period ease of fee-for-

per f/n for f/n _________________________________ service over

$ I.P. & O.P. Operating Total sessional rates

sessions sessions $

Physicians 14 94 5014.50 38747.98

General surgeons (including two vascular sessions)

8 56 3820.00 9536.01 18855.01

Orthopaedic surgeons 7 43 2490.60 8683.09 4988.09

Urologists 4 26 1521.80 2615.80 2350.35

Plastic surgeons 2 14 708.80 1637.35 3451.38

Neurosurgeons 2 32 1769.20 3817.92 1829.62

ENT surgeons 6 36 1814.65 4041.57 3242.71

Gynaecologists 5 22 1294.00 2387.34 1722.42

Anaesthetists 7 22 992.13

Psychiatrists 7 57 2557.37 13536.12

38747.98 772%

28391.02 743%

13672.03 548%

4966.15 326%

5088.73 717%

5647.54 319%

7284.28 401%

4109.76 317%

1771.71 178%

13536.12 529%

Type of sp ecialist No. included Total no. in survey sessions

per f/n

Total sess. payments for f/n


Estimated fee-for-service payments Percentage for same work in same period increase of __ __________________________ ____ fee-for-service

I.P. & O.P. Operating Total over sessional

sessions sessions $ rates

Dermatologists 3 26

Radiologists 6 16

Histopathologists 4 8

Neurologists 4 26

Ophthalmologists 1 4

Rheumatologists 1 10

Allergist 1 2

Facio-maxillary surgeon 1 8

1036.10 4829.15



1297.60 5617.46

175.60 414.52

600.00 2244.91

100.90 535.58

428.00 746.13 406.08

4829.15 466%

7256.79 886%

876.16 375%

5617.46 236%

414.52 236%

2244.91 374%

535.58 533%

1152.21 269%

TOTALS 26673.25 146142.10 547%

Conclusions: TOTAL PAYMENTS on a fee-for-service basis are 547 per cent of TOTAL payments on a sessional basis, estimated over a two week period, 26 January 1976 to 8 February 1976.

On the other hand, doctor associations (other than the Doctors' Reform Society) while advocating both means of remuneration be available, have generally expressed views such as those of the Victorian Branch of the Australian Medical Association;

'The Australian Medical Association (Victorian Branch) believes that there could be many situations in which fee-for-service remuneration would be more cost effective than sessional arrangements. ' (Submission 245, 102)

For example, the Australian Association of Surgeons fe lt fee-for-service was the most economical way of paying surgeons. The Dandenong X-Ray Centre (Submission 256, 21), a group of private radiologists who gave a comparison of costs in two suourban hospitals, said 'Fee for service is an economic way

to s ta f f radiology departments in some h o sp ita ls.'

But other hospitals have made comparisons from which opposite findings emerge. Clearly, studies in one locality may not be relevant to a ll similar settin g s.

Tne evidence before us indicates that a number of factors w ill affect the p a rtic u la r conclusions about which method of payment is most suitable.

In the f i r s t place, in rural areas with few i f any resident s ta ff, or

sp ecialties with variable workload, fee-for-service remuneration may be cheaper.

The Chairman of the Board of Management of the Wimmera Base Hospital explained his endorsement of the lesser cost of fee-for-service arrangements th is way:

'In a base hospital or d is tric t hospital. perhaps even some of the peripheral metropolitan hospitals where the medical s ta ff is representing various specialties, there may be one or only two, we feel th at th is is the superior method of payment. To enlarge on that: For

instance, as against sessional, including on-call, and recall and such methods of payment, the amount of work does vary from time to time. If we can take for example th is la st holiday weekend, where i f the hospital


was paying on-call and recall sessional payments and i t was a particularly quiet weekend, they would have been paying quite a considerable amount. As i t happened, and does happen, there are busy weekends and there are quiet weekends and particular nig ts . So that fee-for-service, which is paid ju s t for work done, would appear to be the most efficien t and the cheaper method. Having paid for work done on fee-for-service for c a lls th a t are actually undertaken - perhaps in contradistinction to a city hospital where there would always be a constant amount of work, th is makes a difference. It is also fa ire r to the various people in the medical s ta ff who are on-call. Some of the specialties and some of the people are called rarely; others are called quite often. I think from that point of view i t is the better system.

I think th is is really the core of our arguments.1 (Transcript, 790)

Second, under circumstances such as those described, that is in small country hospitals or in same sp ecialties, whether th is method is actually cheaper or not, the v isitin g medical officer w ill be carrying out most of the medical services and the price paid may well be 'what the market w ill bear1.

Negotiation in New South Wales for example from the doctors' viewpoint is in part, about whether the contract should be for 75 per cent or 85 per cent of the scheduled fee, since the la tte r is the rate in a ll other States.

Third, in those recognised public hospitals where sessional payments are in effect, there may be room for considerable 'tightening" of conditions - where appropriate. Thus, Tasmania indicated i t s dissatisfaction with the 'notional' session on which th e ir scheme is based, and the New South Wales

Health Commission recently negotiated new terms for v isiting radiologists, based on actual work.

Fourth, the particular question of 'call-back' and Ό η-call' payments will undoubtedly be reviewed wherever possible, since the inclusion of this under sessional arrangements is certainly costly. Western Australia.already pays sessional visiting medical officers on a fee-for-service basis for out

of hours c alls.

The Dandenong X-Ray Centre, a private provider of diagnostic services, apart from its overall support of fee-for-service, has particularly argued


for 'co n tract' fee-for service for out of hours work. Dr Ian Brand, an experienced Victorian administrator, has also indicated that an arrangement for some out of hours services to be provided on a fee-for-service basis by v isitin g medical s ta ff is cheaper than penalty payments to residents and the

Victorian Health Commission presumably is moving in that direction.

F in ally , the issue of c lin ical review is again raised by a number of submissions as a means of providing a brake on costs.

'Recent discussions between the Victorian Hospitals' Association, the Health Commission of Victoria, and the Australian Medical Association (Victorian Branch) have resulted in the formulation of c r ite r ia governing the provision of medical services and a suggested mechanism for monitoring doctors' compliance with those c rite ria which,

i f implemented, may to some extent inhibit abuse of the fee- for-service system. ' (Victoria Hospitals' Association, Submission 207 24)

The South Australian Health Commission observed:

' The approach being taken to better surveillance (of fee-for-service payments) is to standardise the format of making claims to provide for accountability, monitoring and s ta tis tic a l analysis. (South Australian Health Commission, Submission 719, 93)


On balance, sessional payments are more e fficien t for the major sp ecialties in the large hospitals during normal hours. In other contexts, the most e ffic ie n t method is open to question, and is amenable to studies to determine th is in particular cases. As with the question of u tilis a tio n ,

efficiency cannot be the only c rite ria in selecting the most appropriate method of payment, and questions of c lin ical autonomy, accountability, acceptability and the cost of review machinery, must also be considered.




This Chapter discusses the effect of current financing methods (including health insurance) on hospital u tilis a tio n . This involves defining what is meant by hospital utilisatio n , documenting trends in u tilis a tio n rates over the past decade and analysing these trends with a view to

identifying the significance of current financing methods, which are defined in broad terms. In doing so, the Commission is interested in both the level and type of hospital utilisatio n .

Measures of Hospital U tilisation

There is no simple or unambiguous best measure of hospital u tilis a tio n . Measures which are frequently used include per capita figures for the number of occupied bed days, separations, inpatients treated, outpatient occasions of service and surgical procedures, as well as average lengths of stay and

occupancy ra te s. These measures should not be considered in isolation.

Trends in the number of occupied bed days for each thousand population, for example, can most usefully be analysed in conjunction with trends in average lengths of stay. Because data on these variables is often compiled from

sources which are not s tric tly comparable, care is also needed in analysing them.

Trends in Hospital U tilisation

Trends in hospital u tilisa tio n rates in the States and T erritories between 1968-69 and 1978-79 were documented in the Interim Report. The main points raised were that over this period:

. the number of occupied bed days per capita fe ll in public hospitals, but rose in private hospitals; . the number of inpatients treated per capita increased in both public and private hospitals;


. the average length of stay for inpatients in both public and private hospitals fe ll consistently; and . there were marked differences between the levels of hospital u tilisa tio n in the States and T erritories as well as in th eir

movement over time.

The Commission therefore concluded in i t s Interim Report that there was evidence of increased hospital u tilis a tio n over th is period, with public hospitals, in particular, being used more intensively.

The Commission has decided to concentrate on the number of inpatients treated for each thousand population, the number of outpatient occasions of service for each thousand population and the number of adjusted inpatients treated for each thousand population, as appropriate measures of hospital u tilisa tio n . These figures, for public hospitals in the States and Territories between 1970-71 and 1978-79, are shown in Tables 1, 2 and 3 respectively. The Commission believes that these tables constitute a useful set of source material on hospital u tilisa tio n in Australia. Nevertheless, even th is data must be treated cautiously. For example, i t is likely that

the method of recording outpatient occasions of service has varied within and between States over th is time.


T a b le 1 : I n p a t i e n t s t r e a t e d p e r th o u sa n d p o p u la t io n P u b l i c H o s p i t a l s ,

1 9 7 0 -7 1 t o 1 9 7 8 - 7 9 ( a )




1970-71 150 114 151 119 158 128 151 190 4 142

1971-72 153 119 147 126 161 134 164 206 4 145

1972-73 160 120 149 134 167 141 167 210 4 150

1973-74 160 119 148 138 168 138 149 206 4 150

1974-75 161 118 161 140 174 137 179 203 4 153

1975-76 163 121 149 145 181 146 188 218 4 154

1976-77 173 123 155 150 185 144 188 207 4 160

1977-78(c) 174 127 153 158 192 140 189 205 4 162

1978-79 % Increase

176 130 159 168 190 137 185 207 4 165

1970-71 - 1978-79 17.3 14.0 5.3 41.2 20.1 6.6 22.5 8.9 16.2

Notes: (a)

(b) (c)


Refers to general acute hospitals (as defined by the Hospital and Allied Services Advisory Council) and excludes nursing homes, mental and dental hospitals and clin ics. Per to ta l Australian population. The data for the years 1970-71 to 1976-77 is based on material

from the Hospital and Allied Services Advisory Council: 'Uniform Statements of Cost, Sources of Funds of Hospitals and Nursing Homes, and Government Assistance to Allied Services in A ustralia' (1975-76, 1976-77 unpublished). For the years 1977-78 and 1978-79, data for each State, the Australian Capital Territory, the Northern Territory and the Repatriation Commission, was compiled using the HASAC guidelines as far as possible. P.R. Schapper, 'The Hospital Price Index and Current and Constant Price Trends in Public Hospital U tilisation and Expenditures:

Australia 1970-71 to 1978-79' (Unit of Clinical Epidemiology, Department of Medicine, University of Western Australia, November 1980, unpublished).


T a b le 2 : O u t p a t ie n t O c c a s io n s o f S e r v i c e p e r th o u s a n d p o p u l a t i o n ,

P u b li c H o s p i t a l s , 1 9 7 0 -7 1 TO 1 9 7 8 -7 9


1970-71 1078 667 1169 569 754 1125 902 1988 23 934

1971-72 1134 701 1215 608 855 1085 1001 2232 23 986

1972-73 1188 731 1258 685 914 1159 951 2200 24 1034

1973-74 1270 776 1270 770 1128 1255 1004 2159 24 1107

1974-75 1341 828 1310 825 1167 1241 1802 2337 26 1174

1975-76 1378 948 1334 909 1272 1259 1749 2323 28 1241

1976-77 1629 977 1479 1041 1491 1249 1621 2083 34 1393

1977-78 1510 1091 2011 1114 1921 1349 1629 1940 46 1520

1978-79 1785 1111 2176 1025 2073 1289 1489 1902 50 1653

% Increase

1970-71 - 65.6 66.6 86.1 80.1 174.9 14.6 65.1 -4.3 117.4 77.0


Note: 1. See Table 1.

Source: See Table 1.

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T a b le 3 : A d ju s te d I n p a t i e n t s t r e a t e d p er th o u sa n d p o p u la t io n

P u b li c H o s p i t a l s , 1 9 7 0 -7 1 t o 1 9 7 9 -7 9


1970-71 170 127 174 129 174 146 167 223 5 160

1971-72 175 131 171 137 179 152 185 245 4 164

1972-73 183 134 174 148 187 161 187 249 4 170

1973-74 185 134 174 154 192 159 171 248 5 172

1974-75 188 134 190 157 200 157 218 252 5 177

1975-76 191 140 177 164 210 168 228 272 4 179

1976-77 207 143 188 174 223 166 229 255 4 189

1977-78 207 151 199 185 240 165 232 248 5 196

1978-79 % Increase

215 155 210 195 241 161 225 250 5 203

1970-71 - 1978-79 26.5 22.0 20.7 51.2 38.5 10.3 34.7 12.1 26.9

Note: 1. See Table 1.

Source: See Table 1.


From these tables i t can be seen that between 1970-71 and 1978-79 the number of inpatients treated for each thousand population in Australian public hospitals increased by 16.2 per cent while the number of outpatient occasions of service for each thousand population increased by 77.0 per cent

The number of inpatients treated for each thousand population, adjusted for outpatient occasions of service, increased by 26.9 per cent. Of particular interest from these tables is the:

. relatively low level of u tilis a tio n in Victorian public hospitals in comparison to the re la tiv e ly high Western Australian le v e l-. small increase in the number of inpatients treated for each thousand population in Queensland public hospitals compared to that in South

Australian public hospitals' . massive increase in the number of outpatient occasions of service for each thousand population in Western Australian public hospitals, as well as the substantial increases in Queensland and South

Australian public hospitals, and below average increase in u tilis a tio n in the two largest States New South Wales and Victoria

More detailed information th at is available shows the large extent to which th is increase in hospital u tilis a tio n occurred in the teaching rather than in the non-teaching hospitals. For example, the number of adjusted inpatients treated for each thousand population increased by 51.9 per cent in teaching hospitals over th is period and by only 14.2 per cent in non teaching hospitals. In addition, the teaching hospitals accounted for much more of the increase in inpatients treated than outpatient occasions of service As most teaching hospitals are located in metropolitan areas i t is reasonable to conclude that proportionately more of th is increase in hospital u tilisa tio n occurred in the metropolitan rather than the country areas. Similar trends would probably have been reflected in most of the other data series on hospital u tilisa tio n mentioned above.


Factors Behind the Increase in U tilisation

A number of factors thought to have contributed to th is increase in hospital u tilis a tio n were brought to the attention of the Commission. These included■

. the supply, availability and distribution of hospital f a c ilitie s , services and staff· . demographic changes . the organisation and delivery of health services and in p a rtic u la r,

alternatives to hospitalisation the number and behaviour of doctors . community attitudes and expectations; and . current financing methods, especially as they influence the price of hospital services.

I t is not possible to identify the precise contribution that any of these factors may have made towards the increase in hospital u tilis a tio n over the past decade. The level and distribution of hospital u tilisa tio n is determined by a complex set of inter relationships between factors such as these. Nevertheless a considerable amount of material on th is issue was presented to the Commission. Before considering the effect of current

financing methods on hospital u tilisatio n , some of the material presented on these other factors is briefly considered

Supply, A vailability and Distribution

The notion that the provision of hospital fa c ilitie s creates a demand for th e ir use is well accepted in the health field . For example in its submission the Voluntary Health Insurance Association of Australia quoted research indicating that in Victoria:

hospitalisation is positively related in both country and metropolitan regions with numbers of general hospital beds per thousand re s id e n ts .' (Submission 805, 53)


I t appears that when beds are in short supply effo rts are made by hospital administrators and doctors to economise on th e ir use but when they are more readily available they tend to be used. In other words i t appears that attitudes to bed use vary with th e ir a v a ila b ility .

In the Interim Report i t was shown th at while the actual number of approved public hospital beds had increased between 1969 and 1979, the number of these beds for each thousand population had remained relativ ely stable On the other hand, both the actual number of approved private hospital beds and the number for each thousand population had increased. These trends conceal considerable in te rsta te variations. For example, over the same time period that hospital u tilis a tio n increased substantially in South Australia, more than 470 beds were provided a t Flinders Medical Centre.

As well as the number of beds, the number of s ta f f th eir productivity and the provision of new services and f a c ilitie s , such as high cost technology, a ll affect hospital u tilis a tio n . In th e ir study of Western Australian public hospitals between 1962 and 1977. Schapper and Hobbs found l i t t l e change in the number of beds per capita but significant increases in the number of s ta ff per bed and in the number of admissions, outpatient attendances and surgical procedures. They concluded th a t1

'there seems to be no question that the increase in hospital manpower, whether as cause or effect, is intimately linked to an increase in both admissions and outpatient services . . . the capacity of hospitals to provide services is much more dependent on s ta ff than on bed numbers. ’ (Schapper and Hobbs, 1979)

Demographic Changes

In the Hospital and Health Services Commission's 1978 ’Discussion Paper on Paying for Health C are', i t was stated that:

'medical needs of individuals constitute the major determinant of health service u se.' (32)


The determinants of these needs include age, sex, nutrition morbidity and housing which in turn are important influences on hospital u tilis a tio n . Groups such as Aboriginals, the aged the very young and women of child bearing age tend to be disproportionately high users of hospital and health

care services. To the extent that the proportions of these groups vary between the States and Territories hospital u tilis a tio n rates are expected to vary.

The ageing of the Australian population over the recent past must have contributed to the national increase in hospital u tilis a tio n . In the Interim Report i t was shown that the proportion of the population aged 65 and over had increased from 8.5 per cent in 1966 to an estimated 9.2 per cent in

1978. A continuation of this trend would have significant implications for future rates of hospital utilisation in Australia

Organisation and Delivery of Health Services

In the Interim Report i t was stated that:

'[in te rs ta te ] variations in costs, bed provision and u tilisa tio n may indicate differences in the way in which the public hospitals are administered in the States, and in the degree of budgetary control exercised within each.' (39)

Differences in the supply of approved hospital and nursing home beds in the States and T erritories at 30 June 1980 are shown in Table 4


Table 4: Approved Hospital and Nursing Home Beds per thousand population as at 30 June 1980

Approved Hospital Beds Approved Nursing Recognised Private Total Home Beds

New South Wales 5.4 1.5 6.9 5.2

Victoria 3.9 1.6 5.5 3 5

Queensland 5.4 1.8 7.2 4.6

South Australia 5.1 1.9 7.0 4.8

Western Australia 5.2 1.7 6.9 4.9

Tasmania 5.3 1.6 6.9 4.9

Northern Territory 6 1 - 6.1 0.2

ACT 4.5 0.2 4.7 1.5

Australia 4.9 1.6 6.5 4.5

Source The 1979-80 Annual Report of the Director-General of Health.

From this ta b le . i t can be seen that Victoria has a relatively low level of provision of approved hospital beds and a sim ilarly low level of provision of approved nursing home beds. This is a llie d with the relatively low levels of u tilisatio n documented above. Patterns of bed capacities and u tilis a tio n

rates are not clear in the other States, although Western Australia stands out as both a high provision and high u tilis a tio n State.

The provision of alternatives to hospitalisation (such as nursing homes, hostels domiciliary care, community health centres and so forth) clearly have an impact on admissions to hospitals and lengths of stay. The provision of these alternatives varies between and within States. The lack of alternatives to acute general hospitals in many country areas of Australia is of particular importance. For example, in a paper presented to the twelfth annual conference of the Australian College of Medical Administrators the New South Wales Health Commission Chairman, Dr R. McEwin, stated that:


A higher admission rate in country hospitals may be appropriate and simply re fle c t the re a litie s of rural practice where there are fewer alternatives to hospital care. (Factors Relating to Health Services Usage 1979, 35)

The longer lengths of stay evident in many hospitals in the rural areas of Australia must be viewed with these considerations in mind. In addition, other organisational factors such as the structure of the re fe rra l process, management a ttitu d e s to occupancy rates and the amount of waiting time affect hospital u tilis a tio n rates.

The Number and Behaviour of Doctors

Doctors have a c ritic a l role in influencing hospital u tilis a tio n rates. Their importance in the allocation of resources and the generation of expenditures in the hopsitals and health care field stems from th e ir role as p atien ts' agents and their ability to create demand for th eir own services. This is p articularly so for specialists, as the Commonwealth Department of Health noted in i t s submission:

'This demand creating role has contributed to problems of excessive u tilis a tio n and cost escalation.' (Submission 700, Part 1, 36)

Sim ilarly, in i t s submission the Voluntary Health Insurance Association of Australia noted that:

'In the metropolitan regions, hospitalisation is positively related to the number of clinical specialists per thousand population.' (Submission 805, 53)

Of particu lar in te re st are Australia's very high rates of elective surgery. In a 1979 paper, Dr McEwin observed that in New South Wales, tonsillectom ies are performed nine times as frequently as in Sweden and almost six times as frequently as in Britain. Moreover, even within New

South Wales tonsillectomy rates have been shown to vary up to five fold across geographic regions. Dr McEwin argues that th is degree of variation is too great to be solely attributable to differences in illn e ss and suspects

that i t may be p a rtia lly explained by variations in the number of surgeons.


From their analysis of Western Australian hospital data between 1972 and 1977, Opit and Hobbs also observed a close correlation between the growth in particular surgical procedures and the number of medical sp ec ia lists (Opit and Hobbs, 1979). Finally, Richardson observed a close correlation between the supply of doctors across Australia and both the per capita use of services and per capita levels of medical expenditure (Richardson, 1979). However, the relationship between doctor numbers and rates for surgical procedures should only be considered in conjunction with methods of doctor payment which is discussed elsewhere in the Report.

Community Attitudes and Expectations

As per capita real incomes increase, countries tend to devote increasing proportions of their resources to hospitals and health care services. This occurs irrespective of the system of organisation and method of financing. The range and type of health care f a c ilitie s and services provided has also tended to expand over time.

As personal expectations and attitu d es to health care have changed, so has usage of health services. On the one hand, medicine has grown in public perception both in i t s scope and a b ility to a lte r, control and cure disease processes. On the other hand, trends towards preventive medicine, healthy lifesty les and an increasing wariness of the efficacy of high cost medical technology have also been evident in recent times. The Commission has been made aware of these community attitu d e s and expectations and recognises th eir

important influence on hospital and health care u tilis a tio n and costs. Their precise effect, however, remains unquantified.

Significance of Current Financing Methods

At present, the financing of hospital services in Australia (both public and private) occurs via mechanisms such as:

. the provision of per diem government subsidies to private hospitals; . Government d e fic it financing of recognised hospitals under the terms of the hospital cost sharing agreements; . health insurance arrangements; and . the payment of doctors.

4 7 8

The effect of each of these aspects of current financing methods on hospital u tilis a tio n rates in Australia is now discussed.

Per Diem Subsidies to Private Hospitals

The Voluntary Health Insurance Association of Australia argued th at the payment of per diem subsidies for patients in private hospitals may provide some incentive to maximise u tilisatio n by, for example, increasing lengths of stay (Submission 805, 2).

Brian Abel-Smith has also argued that:

'The system of daily payment is widely regarded as unsatisfactory because of the incentive for hospitals to retain patients longer than necessary.' (Report of the International Seminar on Sharing Health Care Costs, NSHSR Research Proceedings, 8)

This incentive may well be heightened in times of decreasing occupancy rates.

The Commission has no evidence available with which to ascertain the impact of these per diem subsidies but recognises the potential for over u tilisa tio n that such a system creates.

Deficit Financing of Recognised Hospitals

There are general problems associated with the funding of public hospitals via a system of reimbursement of net expenditure which have been discussed elsewhere in th is Report in the context of cost accountability and the budgetary process. Control over the number of admissions to and

procedures within public hospitals is not always exercised although there have been some recent innovations through systems of u tilisa tio n review.

More specifically, some of the conditions of the hospital cost sharing agreements and associated health insurance arrangements appear to have had a more discernable effect on patterns of u tilisa tio n .


The hospital cost sharing agreements allow for the provision of inpatient and outpatient hospital care free of d irect charge to patients not covered by health insurance. Although i t is often argued that the availability of fu ll care provides an incentive to use health services, there is l i t t l e data available in Australia to assess the validity of th is argument. Nevertheless, the 1978 Discussion Paper on Paying for Health Care concluded that:

'I t is undoubtedly the case th at there w ill be more use of health services i f there is no cost to the patient than i f he meets the fu ll

cost, but what is unknown is the effect of varying proportions of the shares of costs borne by patient and in s u re r.1 (60)

Some studies in Canada, however, showed that d irect charges imposed upon patients did not lead to reductions in hospital admissions or lengths of stay (eg. R.F. Badgley and R.D. Smith, User Charges for Health Services, 1979, 162)

The changing pattern of use of hospital outpatient services in Australia is also of concern. The 77 per cent increase in outpatient occasions of service between 1970-71 and 1978-79 shown in Table 2 was acknowledged by many hospitals to be a cause of cost increases. I t is now widely accepted that the hospital cost sharing agreements which do not allow practitioners to charge patients for services received in outpatient departments have had a direct effect on th is increasing u tilis a tio n of outpatient services. This is despite the fact that recognised hospitals in a ll States except Queensland and Western Australia can now change privately insured patients for outpatient services. However, i t is not the hospital cost sharing agreements

alone which have contributed to increased outpatient use, but changes in health insurance arrangements which have increased the cost to individuals of attending a general practitioner. Changes in the structure of general practice regarding out of hours service (Schapper and Hobbs submission, 13) have also been influential factors.

Health Insurance Arrangements

Health insurance can affect hospital u tilis a tio n in two ways. F irst, i t can affect the distribution of that use by influencing a p a tie n t's or a doctor's decision to use one form or location of care as opposed to another.


For example, insurance conditions can influence the proportion of public and private patients in public hospitals and the relative use of public and private hospitals (Victorian Health Commission submission, 119). The exclusion of psychiatric hospitals from e lig ib ility for health benefits has

resulted in the use of public hospitals for psychiatric care (HCF submission, Section 6).

Second, the knowledge that services are available at a reduced cost at the point of delivery may influence doctor and patient behaviour. I t has already been noted that this is more important in affecting u tilis a tio n of outpatient services than inpatient services. This appears to be supported by overseas experience where i t has been shown that:

'copayment only affected the demand for primary care, not for hospital care where the main waste occurs.1 (Report of the International Seminar on Sharing Health Care Costs, NSHSR Research Proceedings, 19)

The incentive to use services resulting from the possession of health insurance is referred to as 'moral hazard'. The effect of th is incentive on u tilisa tio n depends on the relationship between the doctor and his patient:

'to some extent the professional relationship between physician and patient lim its the normal hazard in various forms of medical insurance. By certifying to the necessity of given treatment or the lack thereof, the physician acts as a controlling agent on behalf of the insurance

companies. Needless to say, i t is a far from perfect check; the physicians themselves are not under any control and i t may be convenient for them or pleasing to their patients to prescribe more expensive medication, private nurses, more frequent treatments, and other marginal variations of care. It is probably true that hospitalisation and surgery are more under the casual inspection of others than is general practice and therefore less subject to moral hazard; th is may be one

reason why insurance policies in those fields have been more widespread.' (K.J. Arrow: 'The Welfare Economics of Medical Care', Health Economics, M.H. Cooper & A.J. Culyer (Eds), 1973, 35)


An example of the potential effect th at health insurance arrangements may have on patterns of u tilis a tio n is afforded by the work of Opit and Hobbs referred to earlier.

Opit and Hobbs noted th a t the marked increase in admissions in Western Australian hospitals over the period 1972 to 1977 mainly comprised an increase in short stay admissions. There was a 50 per cent increase in stays of one day compared with a 9.1 per cent increase in stays of ten to 19 days.

The increased demand for one day admissions has also been noted in New South Wales where the Health Commission has established c rite ria for classifying such short stay admissions. Although the patient may spend less than 24 hours in hospital, the claim on the health fund is for an overnight stay. Along with the provisions in the hospital cost sharing agreements which do not allow practitioners to charge patients for services received in outpatient departments, th is is believed to have contributed to the increased

frequency of short stay admissions.

Payment of Doctors

Previous evidence in th is Chapter has pointed to the association between the number of doctors and hospital u tilis a tio n ra te s. Inextricably linked to this relationship is the method by which doctors are paid. There is some evidence which suggests th at the payment of doctors for each item of service performed offers a direct incentive for doctors to order more services than might otherwise be the case.

The Commonwealth Department of Health sees th is situation in the following terms:

'given th at, under fee for service, doctors' gross incomes are simply the product of services delivered and fees levied, i t is clear that doctors have both a great deal of a b ility and the incentive to influence the level of use of th e ir se rv ic e s.' (Commonwealth Department of Health submission, Part 1, 71)

However, there are other types of over-servicing such as:


. educational over-servicing, whereby procedures are ordered to provide training experience; . 'defensive medicine' over-servicing; . ideological over-servicing, resulting from the achievement values of

the medical profession; and . consumer led over-servicing.

These factors could lead to an increase in u tilisa tio n rates even under a salaried system of doctor payment (Legge, 1980).

The possible impact of the fee for service system on hospital u tilis a tio n may be illu strated by comparing Queensland's u tilis a tio n rates with those of other States. Queensland hospitals are staffed by doctors paid on a sessional basis and as shown previously (Table 1) their percentage

increase in the number of inpatients treated for each thousand population between 1970-71 and 1978-79 was the lowest for any State. This is not, however, to deny the influence of other factors on Queensland hospital

u tilis a tio n rates.

Finally, overseas experience with prepaid health plans supports the theory th at the method of doctor payment is a determinant of hospital use.

'Prepaid group practices such as the Kaiser health plans have . . . recorded admission rates one third to one half lower than those for comparable populations with conventional insurance coverage.' (V. Fuchs, Who Shall Live?, 97)


This Chapter has examined the relationship between rates of hospital u tilisa tio n and current financing methods, including health insurance. In so doing, the problem that there is no single measure of hospital u tilisa tio n was recognised. Measures used include occupied bed days, separations,

inpatients tre a te d , outpatient occasions of service and average lengths of stay.


Certain trends in u tilis a tio n as measured by the number of inpatients treated, the number of outpatient occasions of service and the number of adjusted inpatients treated for each thousand population, indicate that between 1970-71 and 1978-79:

. u tilisa tio n of hospital services increased in Australia; . the increase was far greater for outpatient than for inpatient services; . there were differences between the States in u tilis a tio n trends; and . proportionately more of the increase in hospital u tilisa tio n

occurred in teaching hospitals.

A number of factors which have contributed to th is increase in hospital u tilisa tio n have been id entified. These include the:

. supply, a v a ila b ility and distribution of f a c ilitie s , services and staff; . demographic ch aracteristics; . the organisation and delivery of health services; . the number and behaviour of doctors; . community attitu d es and expectations; and . current financing methods.

In the absence of appropriate data or information and because of the complex relationships between these factors, i t is not possible to attrib u te any quantitative value to them as determinants of u tilisa tio n .

The method of financing hospital services via the hospital cost sharing agreements influences u tilis a tio n indirectly, by ensuring the provision of beds, services and f a c ilitie s . Their principal effect appears to have been on increasing demand for outpatient services. Health insurance arrangements may well affect the u tilis a tio n of services by altering the effective price

paid for them whilst the method of payment of doctors may a lte r doctors' behaviour. In p articular, the level of medical benefit rebates could be expected to have an important effect on the relative attractiveness of certain specialties and procedures.


However, the Commission believes that while these current financing methods are of some importance in affecting hospital u tilisa tio n , because such methods cannot explain the variations evident between the States and T erritories, the other factors may be more important as direct determinants of u tilis a tio n .



The term 'Community Health Program' covers a ll health services delivered in a community including general practitioners and paramedical practitioners in major community health centres, domiciliary care services, day centres, school health services, mothers and babies' c lin ic s, public health services

such as immunisation, and a ll the services funded by the Commonwealth and the States under the community health program.

Community health services were established many years ago in Australia by voluntary organisations with long traditions and recognised links to the health system. The establishment of the community health program in 1973 demonstrated the Commonwealth Government's intention to expand community

health services, and the new services added to an existing array of community health services.

In June 1973 the interim committee of the Hospitals and Health Services Commission, in i t s report 'Community Health Programs for A ustralia', recommended the introduction of a national community health program which was adopted by the Commonwealth Government, with the cooperation of a ll States.

The main objectives were:

. To provide community health services in areas where there were no health services or where health services were inadequate.

. To provide community-based services which place an emphasis on factors th a t had been neglected such as prevention, early detection and treatment of illness and rehabilitation.

. To establish additional community health services as an alternative to more costly institutional care, where the alternative is practicable and appropriate.


The Government approved the implementation of an in itia l three year program subject to review at the end of the period. A second report, published in March 1976 by the Hospitals and Services Commission entitled 'Review of the Community Health Program', recommended that 'the community health program continue to be regarded as an ongoing program . . . '

Many submissions received by the Commission dealt with community health programs in one form or another. A number of a rtic le s have appeared in various journals. Morey, Williams and Maloney (1980), writing specifically about the Glebe Community Health Centre, one of the two community health centres developed by the Royal Prince Alfred Hospital, Sydney, reached the conclusion that more evaluation is required:

'Two aspects in the area of evaluation have been presented. There is no doubt that further work in the area of outcome evaluation for community health services is required. This would be a most complex task which could not proceed in isolation from evaluation of a ll

associated health and welfare services, and which must consider qualitative changes in a person's lif e over a period of time, in addition to the resolution of the presenting problem.'

Dr D.N. Everingham, MP, Minister for Health in the Government which established the community health programs, in evidence at the Brisbane hearings said, when referring to the original concept of the community health program, that education, prevention and rehabilitation were among the main aims. He also said that community involvement and control of the system, with input at a ll levels, were sought, so that eventually a ll State and community health services would be coordinated regionally, with participation by the three levels of government.

Table 1 showing community health programs in the States and Northern Territory for 1979 and 1980 indicates the wide diversity community health programs in the States. For example, the main community health centres which provide medical care represent only a small proportion of community health

services - about 6.7 per cent a t 30 June 1980 - of the to ta l community health centres. The largest group is the minor community health centre with community nursing services, which comprises about 27 per cent of the to ta l.


Table 1 continued:

Nature of project (a) NSW VIC QLD SA W A TAS NT

79 80 79 80 79 80 79 80 79 80 79 80 79 80

NAT(b) TOTAL 79 80 79 80

Specific disability/disease service

Specific counselling service

Health education

Community health service training

Special mobile health fa c ility

Coordination/Administrative Services

Research/Evaluation Team

Other Intra-State projects

National secretariat

13 14 4 4 1 1 2 2 10 8

39 41 9 9 7 7 3 4 2 2

15 16 3 3 2 2 - 2 5 5

10 11 5 3 4 4 4 4 3 2

5 2 - - 1 1 1 1 2 2

25 22 3 5 1 1 2 2 2 3

4 6 1 1 1 1 3 3 3 3

10 3 1 1 1 1 1

1 1

4 4

1 1

3 3

14 14

2 2



8 8

64 67

34 34

30 30

23 20

35 35

12 14

12 6

8 8

TOTAL 368 363 178 187 81 80 61 69 69 74 45 47 1 6 19 18 822 844

Notes: (a) The categorisation of projects has been based on the primary function of each project, as some projects have characteristics of more than one category. (b) Operate on Australia-wide basis

Sources: 1979 Annual Report of the Director-General of Health 78-79 1980 Commonwealth Department of Health.

Table 1 Community Health Program Projects, 30 June 1979 - 30 June 1980

Nature of project (a) NSW VIC QLD SA W A TAS NT NAT(b)

79 80 79 80 79 80 79 80 79 80 79 80 79 80 79 80

Main community health care (including primary medical care) 7 7 25 24 1 1 10 11 8 8 4 4

Minor community health centre (including primary medical care) - 1 9 8 - - 6 5 1 1 3 3

Main community health centre 50 49 23 33 12 13 - - 6 5 2 2

Minor community health centre/ Community nursing services 111 108 28 30 21 20 6 7 5 7 1 1

'Shop Front'/Drop In' centre 3 2 - - - - 1 1 - - - -

Day hospital/Day care centre 25 24 26 26 1 1 10 10 3 4 3 3

Hostel/Halfway house/Group home 4 4 - - 1 1 1 1 - - - -

Women's refuge 29 29 17 16 20 20 10 11 10 13 4 6

Referral/Assessment centre 3 3 3 3 3 3 - - 2 2 3 3

Domiciliary service 1 1 - - - - - 2 2 2 - -

Youth and adolescent service 2 2 1 1 5 5

Ethnic health service 1 6 1 2 - - 1 2 1 2 - -

Geriatric service 11 10 -

Maternal and child care service 2 3 3 3

Early childhood development complex - - 16 15 - - - - 4 4 - -

TOTAL 79 80

55 57

19 18

93 102

172 174

4 3

70 70

6 6

90 96

14 14

3 5

8 8

5 13

11 10

5 6

20 19

There are, however, major differences between the States in the type of community health centres. There are only seven community health centres giving primary care in New South Wales, yet there are 24 in V ictoria, 11 in South Australia and eight in Western Australia. The minor community health

centres with community nursing services to ta l 108 in New South Wales, 30 in Victoria and 20 in Queensland. New South Wales provides 41 specific counselling services, with only nine in Victoria and seven in Queensland.

The Commonwealth Department of Health in its submission (Submission 700, part 3) advised th at the main objectives of the community health program are to provide community health services, or where they are inadequate, to provide services which place an emphasis on factors such as prevention, early

detection, treatment of illness and rehabilitation and to provide the service as an alternative to the more costly in stitu tio n a l care.

The States and Territories have not provided much information, although the Queensland Department of Health did set out i ts objectives for community medicine, indicating they were similar to those of the Commonwealth Department of Health.

The Director-General of Health Services in Tasmania (Submission 714) pointed out th at a feature of Tasmanian community health services is th eir coordination and integration, which has been aided by the contraction of major voluntary providers and domiciliary care to public hospitals. The

Director-General said there has been a growing resentment towards community health services by some hospital boards and s ta ff which administer the services, mainly he thought because of the considerable re stra in t over the past few years in hospital services.

The Director of Public Health in Tasmania quoted Fraser Brokington, who in his book 'World Health', said:

'Every community must spread i t s resources, so as to achieve the greatest measure of prevention with a proper regard for the c a lls of human suffering. This is not easy but i t can be accomplished by building up strong public health services and by making hospitals agents of public h e a lth .'


Fraser Brockington also pointed out, the Director of Public Health in Tasmania said, that the f i r s t essential is to s h ift the focus of medical care to the community and to lessen the emphasis upon hospitals; to create everywhere sources for community health in terms of the family at home and at work. The dramatic appeal of the hospital for doctors and laymen alike, which the development of sc ie n tific techniques of treatment continually

fosters, must be held in check. The public health service in every country must be given f ir s t priority to develop measures to keep the community healthy. (Submission 862)

The South Australian Health Commission (Submission 719) said that from its inception i t has undertaken to give p rio rity to community health over institutional services and th a t community health centres mainly provide a base for non-medical and community workers. This submission also stated that the links between the community health services and in stitu tio n s need to be

especially strong in three principal areas: g e ria tric assessment, country hospitals and accident and emergency departments.

At the public hearings witnesses from the in s titu tio n s were generally in favour of community health services being controlled by the hospitals. Mr Williams, Chief Executive O fficer, Hornsby-Ku-ring-gai Hospital, who is also Area Executive Officer for Community Health explained th at the hospital has done perhaps as much for community health as any in A ustralia. I t has successfully coordinated and run community health services in i t s community. When asked why h° favoured control being with h o spitals, he said the

overwhelming proportion of resources now resides in hospitals. Hornsby-Ku-ring-gai Hospital diverted some of those resources.

He said an integrated control enabled the hospital to swing services from one area to another. (Transcript 175)

Witnesses who were not d irectly connected with hospitals had differing views, some supporting control by hospitals, others control outside hospitals. Dr G. MacKay-Smith, Director-General of Health Services, Tasmania, said that in Tasmania there were only two mechanisms under which community health could be established. One was the public service, which he

said was not a flexible mechanism, and the other was hospital services which

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were in stitu tio n a lly orientated. There was a third p o ssibility, legislation creating a community health authority. The Tasmanian department agreed that the service should be organised through the hospitals.(Transcript 2208)

Dr Livingstone, of the Queensland Department of Health, stated at the open hearings that his Commission's attitude was that there needed to be a close link between community health services and hospital services, even to the extent, particularly in country areas, of the community health s ta ff being based at the local hospital, but not under its control. (Transcript 1855)

Dr C. Curd, Director of Health, Northern Territory, was definite. He stated at an open hearing:

'I f the community health services were under a hospital they would degenerate and wither away.'

The s ta f f, he said, would be used to run the hospital. (Transcript 1951)

Mr 5 .J . Duckett, on behalf of the Community Health Working Group, an organisation primarily of health service providers interested in advertising and running community health services in New South Wales, was definite also in his submission and evidence. The thrust of his group's submission was

opposed to hospital control of community health services. He said his group was concerned th at hospital control would lead to undesirable emphasis being placed on p articu lar curative-oriented services. His group was arguing, he said, with community health employees that public servants in community

health should not necessarily be completely autonomous. They should retain th e ir present autonomy rather than lose some to hospitals and lose more later to guidelines imposed by the Health Commission (Transcript, 134).

Professor Pitney, Professor of Medicine, University of New South Wales, put the view th at a community health care program should function from a teaching hospital so that assessment could be made on the desirab ility for treatment of people in the program (Transcript 206-207).

4 9 3

The opinion of Professor Mitchell, Professor of Surgery, University of New South Wales, was that the community care system should be administered by the teaching hospitals or major hospitals. He said there should be a national policy rather than a State policy on community health (Transcript 208).

The Australian Association of Surgeons referred to the failure in most States and Territories to coordinate publicly-funded hospital, ambulatory and domiciliary care services (Submission 230).

The Royal Australian College of Physicians linked community health programs with rehabilitation:

'Community centres are of particular importance in the rehabilitation of patients a fte r discharge from hospitals. Unless these fa c ilitie s are available, patients w ill remain in hospital for longer times and increase costs. I f these patients are discharged home with community support, patient education f a c ilitie s etc, i t w ill not only reduce the cost of th at particular hospital, but w ill reduce the possibility of readmission because of the patient not coping with the immediate post-hospital period' (Submission 232).

The Sydney Home Nursing Service provides continuing care a fte r discharge from hospital, and claims th a t hospital s ta f f frequently f a il to recognise this need - and so do not lia se with community health (Submission 428).

The Medical Superintendents' Association of New South Wales and the Australian Capital Territory and the Benevolent Society of New South Wales both strongly support closer hospital control. The association said in its submission:

'Community health services should certainly work in very close cooperation and be coordinated with public hospitals and we would believe, in many cases, should be under the same d irect management. I t is most unsatisfactory and wasteful to have separated services . . . . '

(Submission 244)


The Benevolent Society said:

'So long as community health centres (the majority of which in New South Wales are staffed and operated by the Health Commission) operate quite separately from public hospitals, with no formal operational integration, the potential savings in overall health costs through a

rational u tilis a tio n of the respective sources w ill not be achieved.1 (Submission 416)

St Vincent's Hospital, Melbourne, put forward another interesting viewpoint:

'Many theories have yet to be tested and assessed in the community health arenas.

'The situation is very clear in that the community based health services are tending to be obsessed with conferences and planning, possibly because of their inability to find real needs for th ier e x isten c e.' (Submission 440)

Bendigo Home and Hospital for the Aged, Victoria, referred to the lack of effectiveness of community health for two other reasons:

'No incentive has been offered major teaching hospitals to encourage them to develop programs of care which are appropriate to actual health needs. In the absence of incentives, and also in the absence of good information on existing community health care needs, sophisticated and often unnecessary development takes place, even when adequate resources

are available in an adjacent h ospital.' (Submission 442)

Geelong Hospital pointed to the lack of community health resources to prevent hospital admissions:

' Some inappropriate admissions to hospitals occur either because of the lack of supporting fa c ilitie s in the community or because of the lack of knowledge by the hospital of such existing f a c i l i t i e s .' (Submission 449)


There is a marked division of opinion among those involved in health matters as to whether community centres should be controlled by hospitals or independently by the State health au th o rities. A minority suggestion was that control should be in areas, but through the hospitals.

Members of the Commission have visited community health centres in all States and T erritories. As a result of these v is its and from evidence obtained through submissions and at public hearings and from an examination of the Commonwealth Department of Health table settin g out particulars of community health programs in the States, i t is clear th a t there is no common State policy on the establishment and operation of community health programs.

Community health programs are not covered by le g is la tio n . The Commonwealth appears to have accepted that the programs would be started by the Commonwealth and then handed over to the S tates. In 1973-74 they were administered and wholly funded by the Commonwealth Government. The Community Health Branch, Health Services Division, Commonwealth Department of Health, has maintained an overseeing interest, but for a number of years the programs have been controlled by the States and T erritories which receive an annual block grant from the Commonwealth for a ll jo in tly approved programs. The Commonwealth funding has been reduced from 100 per cent, 75 per cent and

finally to 50 per cent. Percentage of funding by the Commonwealth of Community Health program are shown in Table 2. In the la s t two years, with restrictions on health funds, there seems to have been a policy of virtually no real growth.

Tables 2 to 5, drawn from the submission of the Commonwealth Department of Health also show the percentage of funding by the Commonwealth of community health programs from their commencement to the present.

4 9 6

TABLE 2: General Community Health Program Projects, Levels of Commonwealth Funding of State Projects

Capital Costs Operating Costs

% %

1973-74 100 100

1974-75 75 90

1975-76 75 90

1976-77 75 90

1977-78 50 75

1978-79 50 50

1979-80 50 50

Table 3: Women's Refuges, Levels of Commonwealth Funding of State Projects

Capital Costs Operating Costs

% %

1974-75 75 (100) (b) 90 (100) (b)

1975-76 75 (100) (b) 90 (100) (b)

1975-77 75 90

1977-78 75 90

1978-79 50 75

1979-80 50 75

Notes: (a) Commenced 1974-75 (b) 100 per cent available as a '

special measure in those States where the State Government did not contribute the balance of funds.


Table 4: Ethnic Health Workers, Levels of Commonwealth Funding of State Projects

Both Capital and Operating Costs _

1978- 79 100

1979- 80 100

Notes: Commenced during the la s t quarter

of 1978-79.

Continued funding at 75 per cent during 1980-81 and 1981-82 has been announced.

Table 5: Health Interpreters and Translators, Levels of Commonwealth Funding of State Projects

Both Capital and Operating Costs -

1979-80 100

Notes: Commenced 1979-80.

Continued funding a t 75 per cent during 1980-81 and 1981-82 has been announced.


Table 6 shows the sums spent since 1973-74 by the Commonwealth and States, excluding national programs funded wholly by the Commonwealth. Table 4 shows the sums spent on women's refuges.

Table 6 Community Health Program Commonwealth and State Expenditure $000's

Commonwealth State Total

1973-74 12840.9 0 12840.9

1974-75 25747.5 4411.7 30159.2

1975-76 47139.9 8310.0 55449.9

1976-77 65505.0 10564.6 76069.6

1977-78 66038.3 28907.0 94945.3

1978-79 49340.0 47766.4 97106.4

1979-80(a) 54180.9 51549.6 105730.5

1980-81(b) 60034.0 56740.9 116774.9

TOTAL 380826.5 208250.2 589076.7

Source: Commonwealth Department of Health

Notes: (a) Figures not audited (b) Allocations This table excludes national projects which are funded 100 per cent by the Commonwealth.

This table includes Women's Refuges, Ethnic Health Workers, Health Interpreters and Translators.

Women's refuges are funded under the Community Health Programme as a matter of departmental convenience. Expenditure by Commonwealth and State Governments on Women's refuges are shown in Table 7.


Table 7: Spending on Women's Refuges

Commonwealth State

$000's Total

1974-75 49.1 0 49.1

1975-76 678.3 101.7 780.0

1976-77 683.7 86.7 770.4

1977-78 1442.7 627.7 2070.4

1978-79 2780.8 1202.5 3983.3

1979-80 (a) 3525.0 1284.5 4809.5

1980-81 (b) 3820.0 1336.2 5156.2

TOTAL 12979.6 4639.3 17618.9

Source: Commonwealth Department of Health

Notes: (a) Figures not audited

(b) Allocations

This Commission accepts that community health programs should be under the control of the States and T erritories, because i t sees the programs as part of the overall health care responsibility of the State or Territory.

I t is clear that community health services are a desirable adjunct to constraining health costs. Perhaps more important, although to an as yet unestablished degree, they are the means whereby a large number Ά patients can be kept out of acute bed hospitals.

Another desirable feature of the community health program should be action with the hospitals to arrange for patients who have no need to be in hospital to be discharged into the care of the community health program for treatment at a more appropriate place or at home.

The Commission had strong evidence suggesting th at hospitals should control community health centres, although there is evidence which says they should continue with autonomy from control by hospitals.


In those cases where community health centres have been run by hospitals, for example, Hornsby and Gosford, they have in the view of the Commission, produced most desirable results. I t is also clear from the evidence th at more evaluation of the present system is desirable and that steps should be taken for objectives and policies to be set by the States and T erritories.

The Commission has, as a result of the evidence produced to i t , reached these conclusions:

(i) A community health program is desirable as a means of keeping a large number of people out of acute bed hospitals, provided i t can deliver help of a kind which w ill allow them to remain in their homes.

( ii) The strongest evidence shows that community health services would be b etter served under the control of hospitals, with the s ta f f serving community health programs, employed by the hospitals. This would enable the resources of the hospital to be u tilise d in the in terest of prevention. I t would allow for proper assessment of people in the

community health program as to the best means of treatment for the appropriate placing of them, and would allow the hospital, as well, to follow up and keep in touch with patients who have been discharged from hospitals in an effo rt to reduce the need for them

to return to hospital. In other words i t would serve as a means of integrating the two functions in the in terests of the patients. The argument has been put that th is could resu lt in a diminution of community health services as hospitals would tend to increase their treatment services, but the Commission believes that given the additional responsibility hospital boards would administer such

programs fairly and properly. ( i i i ) The financing of community health programs should be the responsibility of the State from funds available from whatever source agreed. This would encourage the States to produce the most

e ffic ie n t service to conserve funds and to maintain quality of care, (iv) Any objectives should be determined by the States and T erritories to meet their particular requirements.

(v) Further evaluation of the functions of community health services are required. 5 0 1

(vi) The community health service should, in conjunction with the hospitals, include the responsibility for looking a fte r the needs of the elderly and handicapped to keep them out of acute hospital beds where possible.

(v ii) Transfer of control to hospitals w ill be a long-term process and should be phased in gradually a fte r proper and adequate evaluation, (v iii) The community health program is very strongly supported by a ll who submitted evidence as a desirable service to be used in these times

of high health costs. The program has been in operation now for more than seven years and the Commission suggests th at more positive and definite action be taken by those responsible for i t s continuing development and conduct.


As a result of these conclusions the Commission RECOM M ENDS that in order to improve efficiency:

1. I t be accepted as the responsibility of each State and Territory to determine functions of the community health program to meet their special requirements.

2. Each State or Territory its e lf determines whether the community health program is attached to and controlled by a hospital or is controlled by State health authorities.

3. Each State or Territory sets up i t s own task force to evaluate the fundings of the community health program.

4. A community health program, i f not directly under the control of hospitals, should work in close conjunction with hospitals and take responsibility for looking after the needs of the elderly and handicapped so as to keep them out of acute hospital beds where possible, and to take an active part in placing elsewhere those who are unnecessarily in hospital.


5. Ways be determined by the States in which the community health program may be used to assess patients to ensure they obtain the most appropriate form of care for their condition.

6. A program of integration of hospital and community services should be prepared and put into effect in each State and Territory. This should include targ et dates for the achievement of the stages of the program and might become a condition for continued Commonwealth


7. The manner be determined in which the community can best participate in the program, with particular attention to ways in which general p ractitio n ers are used so as to assure high quality of care.

8. The support of the community be sought to a ttain the objectives of the program, even to the extent of raising capital for desired projects.

9. The States keep the Commonwealth informed by supplying such data as may be required by the Commonwealth.



A formal process of hospital accreditation was established in Australia in 1974 with the formation of the Australian Council on Hospital Standards. This followed the development of organisation arrangements and methods for conducting an accreditation program by a committee of Australian Medical Association