Media reporting that the Federal Government cut billions of dollars from public hospitals in this week’s Federal Budget are based on a misunderstanding of the difference between changes in projected expenditure (independent of government decisions) and policy decisions to increase or decrease funding, according to former senior Department of Health executive and regular Croakey contributor Charles Maskell-Knight.
Below he explains the history behind the way the Budget reports these two reasons for estimates variations and why “a decision not to spend more is not a decision to spend less”.
Charles Maskell-Knight writes:
On budget night I scanned the budget papers and wrote an article for Croakey in which I concluded that “the only contribution the health portfolio has made to the whole of Government Spending Audit is removing $50.4 million from the ‘Training for Authorised Nurse Immunisers in Residential Aged Care’ funding provided in the March 2022 Budget”.
Imagine my surprise on opening the ABC website yesterday afternoon to find an article starting “a federal government decision to slash billions of dollars from public hospitals over the next four years has enraged doctors, who argue they are ‘stunned’ the government would cut money on the back of rising inflation, a burnt-out workforce and a huge backlog of elective surgeries”.
“How could I have missed that?”, I wondered.
The answer is that I didn’t. The ABC (and several other paywalled news sites) has confused changes in estimates due to program parameters with changes due to conscious policy decisions of the government to spend – or save – money.
Program parameters vs policy decisions
The distinction between the two reasons for estimates variations was written into the budget process by Paul Keating as Treasurer in the late 1980s. The budget papers were expanded to include a detailed table setting out for each expenditure function the last published forward estimates, the current budget estimates, and the change between the two attributable to changes in economic parameters (e.g. inflation or exchange rate), other parameters (e.g. number of schoolchildren), and policy decisions of government.
The detailed reconciliation table has since been abridged, but the truncated version still exists in Budget paper 1 (in statement 3 at page 93). Its function has been partly replaced by Budget paper 2, which provides a detailed list of every policy decision taken by government affecting the budget since the last economic update.
There was not a decision to cut hospital funding in the October budget.
Two “non-decisions”
The government made two “non-decisions” not to spend more money on hospitals. It allowed the 50:50 sharing of COVID costs with the states to end in December this year – in line with the policy reflected in the March budget. And it did not adopt suggestions from the states to move to a 50:50 sharing of all hospital costs going forward.
However, these decisions did not affect estimated spending – no more than a decision not to increase Jobseeker rates affected estimated spending on Jobseeker. A decision not to spend more is not a decision to spend less.
It is true that estimated spending by the Commonwealth on public hospitals is less in the October budget than the March budget – see the table below. And it is true that the reductions over the next four years total $2.4 billion.
It is also true that the October budget projects 2025-26 spending to be 32.0 per cent higher than last year, while the March budget forecast an increase of 30.4 per cent. Where is the headline “government decides to increase growth in public hospital spending”?
Under the public hospital funding agreement between the Commonwealth and states (the National Health Reform Agreement or NHRA) Commonwealth funding is based on the level of hospital activity delivered by the states (subject to an annual cap of 6.5 per cent on the total Commonwealth contribution). The budget estimates reflect the states’ estimates of how much hospital activity their public hospitals will deliver.
The lower estimates of Commonwealth spending in the October budget compared with March reflect lower estimates by the states of hospital activity.
Understanding hospital activity
What does hospital activity mean? Broadly speaking, it means the number of hospital admissions and ED and outpatient attendances, adjusted for their relative cost. It is measured for the purpose of the NHRA in NWAU (“N-wow”, or National Weighted Activity Units).
Professor Stephen Duckett has suggested in a tweet that the reduction in forecast NWAU may reflect COVID-affected patients staying in hospital longer – hence crowding out other patients – but not long enough to attract a NWAU adjustment for the longer stay. While this may be one cause, I suspect the states may also be reducing estimated activity to reflect expected workforce supply difficulties.
But whatever the reason for the states’ reduced estimates of activity, that is why Commonwealth hospital funding for the next four years is now estimated to be lower than it was in March. It is not due to “a federal budget decision to slash billions of dollars”.
I should add – just to be clear – that I think there is a strong case for the Commonwealth to bear half of the costs of public hospitals. After all, it is the Commonwealth government that promises free public hospital care as part of Medicare.
However, even if the Commonwealth did make such a commitment it would still be up to the states to manage levels of hospital activity – with consequential impacts on Commonwealth spending if they decided to reduce earlier activity estimates.
Save the dates
- 5pm AEDT, 8 November: Health policy and the Federal Budget
- 5pm AEDT, 15 November: Health in All Policies and the Federal Budget
More details to come closer to the time.
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