Fact check: Has public hospital funding been cut by $50 billion?

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Fact check: Has public hospital funding been cut by $50 billion?

Treasurer Joe Hockey says the Federal Government’s hospital funding is unaffordable, and his recent budget shows $80 billion of savings from changes to school and hospital funding over the next 10 years.

In response, Labor has accused the Government of breaking promises. Opposition spokeswoman for health, Catherine King, says: “Instead of providing the growth funding that was promised, promised to the Australian public and promised to the states to run the public hospitals, this budget of broken promises in fact cuts a whopping $50 billion from Australia’s public hospitals.”

But Mr Hockey argues the Government is still growing funding for schools and hospitals, “just not as fast as what Labor suggested they would do”.

ABC Fact Check assesses Ms King’s claim by addressing the following points:

Where the $50 billion figure comes from

In a bid to illustrate its claim that it will achieve $80 billion of savings by changing funding arrangements to schools and hospitals over the next 10 years, the Government published the following two charts in this year’s budget overview:

While the Government has not explicitly said it will be saving $50 billion from changes to hospital funding over the next 10 years, the chart relating to hospital spending seems to roughly confirm this figure. It shows savings beginning in 2016-17, reaching about $5 billion a year in 2020-21 and rising to about $15 billion a year in 2024-25.

On June 2, health department secretary Professor Jane Halton said she thought that over $50 billion was projected to be removed from the health budget over the 10 years.

In a Senate Estimates hearing, Professor Halton was asked by Greens Senator Richard Di Natale whether it was correct that “there will be $35 billion out of health” over the next 10 years. “I think it’s $55 billion out of the $80 billion, but do not take – ” she said, before being interrupted.

Professor Halton told the committee that the calculation and payment of funding to the states had been moved from the health portfolio to the treasury portfolio under the former Labor government.

Asked by Senator Di Natale whether her department had done any modelling on the impact of the changes on public hospitals, she said: “There are a whole series of assumptions in this question about what level of funding the states will contribute over a series of periods. This does not occur for another three years. There is a whole conversation to be had.”

Pressed, she said: “We certainly do not do work that goes out to 10 years.”

A spokesman for Ms King’s office told Fact Check that of the $80 billion, Labor estimates $30 billion comes from schools and $50 billion from hospitals. The spokesman referred Fact Check to the Government’s 10 year charts in the budget overview.

In a bid to confirm the $50 billion figure, Fact Check asked Mr Hockey’s office for the data that the charts are based on.

His spokeswoman said: “We are unable to provide the raw data for these projections.” When asked whether the figures were generated by the former Labor government, she said: “The figures referred to are the Government’s projections prepared by the Treasury.”

How the Government plans to make the savings

Budget Paper No. 2 says savings to hospital funding during the four years of the standard budget cycle will be achieved by:

  • Removing funding guarantees from July 1 this year; and
  • Changing hospital indexation from July 1, 2017

“The Government will achieve savings of $1.8 billion over four years from 2014-15 by ceasing the funding guarantees under the National Health Reform Agreement 2011, and revising Commonwealth Public Hospital funding arrangements from 1 July 2017,” it says.

“From 2017-18, the Commonwealth will index its contribution to hospitals funding by a combination of the Consumer Price Index and population growth.”

Budget Paper No. 2 has a breakdown of the $1.8 billion in savings over the next four years, which shows the biggest impact will be in 2017-18 when the indexation arrangements change.

2013-14 2014-15 2015-16 2016-17 2017-18
– -$217.3m -$260.5m -$133.4m -$1,162.8m

The same budget paper shows a further $200 million in savings has been found by ceasing the National Partnership Agreement on Improving Hospital Services on July 1, 2015. This agreement was designed to improve access to public hospital services, including elective surgery and emergency department services, and sub-acute care. It was due to run until June 2017.

The Health Budget at a Glance shows this combined $2 billion in savings over four years are the main hospital items in the 2014-15 budget.

If Ms King’s figure were to be accurate, this would leave $48 billion in savings set to occur between July 2018 and June 2024.

Funding guarantees under the National Health Reform Agreement

The National Health Reform Agreements were brokered by former prime minister Julia Gillard and signed by state and territory leaders on August 2, 2011.

They form the cornerstone of the current Federal Government’s public hospital funding, and were established after the Rudd Labor government set up the National Health and Hospitals Reform Commission, which was tasked with developing a long-term health reform plan. The commission handed down a report in June 2009 which made over 120 recommendations, including a move to activity-based hospital funding. The commission recommended the Commonwealth take over 100 per cent of the hospital funding.

The former Labor government did not adopt this recommendation and instead, the states and territories remain the “system managers” of the public hospital system.

The agreements were designed to increase the Commonwealth’s share of public hospital funding through greater contribution to the costs of growth.

There are two main funding streams in the agreements:

  • The first stream provides base funding – lump sum or activity-based – to public hospitals, which is guaranteed to equal the former hospital funding agreement, the National Healthcare Specific Purpose Payment (SPP).
  • The second is “efficient growth funding”, which requires the Commonwealth to contribute 45 per cent of funding for the growth of all new services that are delivered in hospitals. An independent umpire determines whether a hospital’s growth has been made in an efficient way.

The agreements guarantee that if the efficient growth funding provided by the Commonwealth is less than $16.4 billion by 2020, “the Commonwealth will provide the remainder to the states as top-up funding”.

This commitment is also in the 2011-12 budget which said: “The Commonwealth has guaranteed that its increased contribution will be at least $16.4 billion greater than States would have received from the National Healthcare SPP between 2014-15 and 2019-20. If the amount required to fund the Commonwealth’s public hospital growth commitment over this period is less than $16.4 billion, the residual amount will be paid to fund health services that will ameliorate the growth in demand for hospital services.”

The agreements also guarantee “no state will be worse off” than what they would have been under previous hospital funding arrangements.

Mr Hockey is removing the $16.4 billion and “no state worse off” guarantees from July 1 this year. But he is keeping the base and growth funding in place until June 30, 2017, which means if hospitals grow efficiently the Commonwealth will still pay for nearly half the costs.

Fact Check asked Health Minister Peter Dutton to provide further details about the new hospital funding arrangements that would take effect from July 1, 2017. Mr Dutton’s office referred Fact Check to a quote from this year’s budget overview which says: “The changes in this budget provide a platform to consider longer-term arrangements in the context of the White Papers on the Reform of the Federation and the Reform of Australia’s Tax System.”

New indexation arrangements for hospital funding

The budget overview says the Government “is adopting sensible indexation arrangements … for hospitals from 2017-18”. Budget Paper No. 2 defines this as “a combination of the Consumer Price Index and population growth”.

This is different from the current indexation the Commonwealth applies to hospital funding.

When the new agreements were laid out in the 2011-12 budget papers, the government said the indexation arrangements would still be indexed by the former National Healthcare SPP growth factor.

The 2011-12 budget papers estimated the growth factor to be 6.82 per cent in 2011-12.

The budget’s definition of the growth factor was:

  • A health‑specific cost index (a five year average of the Australian Institute of Health and Welfare health price index);
  • The growth in population estimates weighted for hospital utilisation; and
  • A technology factor (the Productivity Commission derived index of technology growth).

Professor John Wanna, from the Australian National University, says a move to a lower indexation rate is not necessarily a cut, unless it is below CPI or actual cost pressures, noting these can be different.

So it is possible to reduce the indexation rate, or the growth of funding, without it being a cut. However, if the reduction of the indexation falls below the cost pressures of delivering a service, that can be seen as a cut.

Unlike the present indexation of hospital funding, the Government’s proposed new indexation arrangements appear not to account for the increasing cost of delivering new technology to hospitals.

Stephen Bartos, from economic consultancy firm ACIL Allen, says hospital funding will go backwards under the Government’s proposed indexation change because the cost of technology is growing faster than the CPI.

Professor Stephen Duckett, health program director at the Grattan Institute, says the new indexation arrangement announced in the budget is “the most parsimonious indexation” that could be found.

The NSW budget was handed down on June 17. Budget Paper No. 2 says “under the new arrangements, long term growth in Commonwealth health funding to New South Wales is projected to fall from 7.2 to 4.0 per cent per annum”.

It projects that health expense pressures will grow at around 6 per cent a year over the long term.

The Commonwealth’s “new formula does not recognise the additional cost pressures in health such as ageing and technology that add around 0.5 and 1.2 percentage points respectively to demand growth each year,” it says.

The following chart from the NSW budget predicts a steep decline in the Commonwealth’s share of health funding over the coming decades:

10 year budget projections: Are they fair?

Fact Check asked a number of experts whether it was fair for Mr Hockey to include a 10 year savings projection in the budget.

Professor Wanna says four-year forward estimates have been used as “real budget indicators” since the mid 1980s.

However, he says Ms Gillard and then treasurer Wayne Swan laid out 10 year spending projections “to create some high ground for themselves so that they had some social policy legacy issues to boast about and that they could complain about if the Coalition cut the very long out-years”.

He argues it is not wrong for a body like the Productivity Commission to estimate the population and cost of providing services for the National Disability Insurance Scheme over, say, 10 years, but says this is not a budget item.

“Mostly funding envelopes running out 10 years are fiction,” he said. “No-one knows what the circumstances will be so far ahead.”

Professor Duckett says there is argument for laying out 10 year projections.

“When we only had to project three years out there was an argument that governments could announce a scheme and run pilots for two or three years and then park the huge costs just beyond the forward estimates,” he said.  

A similar argument was raised by economist Judith Sloan. “Ten-year forecasts are generally fictitious,” she said. “But for programs with longer time frames, some longer term projections can be useful to make sure that there is not some fudging going on in the forward estimates and with the real commitments over the horizon (given the parameters of the program).”

Fact Check asked former finance minister Penny Wong whether Labor had a 10-year hospital funding plan. A spokeswoman for Senator Wong responded that the Labor government laid out 10-year funding plans for the NDIS and for the National Plan for School Improvement.

From Fact Check’s assessment, the former Labor government did not lay out a 10-year plan for hospital funding in any of its budgets.

Savings versus cuts

In response to Labor’s claims of $50 billion in cuts to public hospitals, Prime Minister Tony Abbott has repeatedly said that funding will be growing year-on-year in the forward estimates.

Mr Abbott recently said: “Well again, there’s a world of difference between a slower growth in funding and actually taking away funding which is already there. I just think there are fundamental differences between the two situations and obviously if funding is growing at a slower rate, at any point in the future, you can say well we would have had X rather than Y. But the point I make is that every year, under this Government, public hospital funding will grow. It will be a 9 per cent increase each year for the first three years, then it will be 6 per cent in year four and comparable increases subsequently.”

Budget Paper No. 3 shows the following increases in public hospital funding over the forward estimates to 2017-18:

2014-15 2015-16 2016-17 2017-2018
National Health Reform Funding ($m) 15,116 16,551 18,095
Public Hospital Funding ($m) 18,872

On the issue of savings versus cuts Professor Wanna says there’s no real difference. “Cuts are to budget outlays or proposed funding which appear in the forward estimates, while savings are ‘savings’ to taxpayers in the future budgets,” he said.

He says finance departments often prefer to use savings rather than cuts as it sounds better.

John Freebairn from the University of Melbourne says: “What is a cut, increase, or change really depends on one’s definition of ‘business as usual’. If new information supports a change from business as usual, then a sensible government working in the best interests of their electors should change programs.”

Mr Bartos from ACIL Allen says: “It’s a cut from the perspective of the state premiers, but because there is growth year on year it’s not a cut in the real sense, or from the government’s perspective.”

The bottom line

The Government has claimed savings of $80 billion to schools and hospitals over 10 years. Based on charts in the budget and evidence to the Senate from the health department, it appears that over 10 years the Commonwealth would be contributing $50 billion less to hospitals than if it kept Labor’s funding arrangements in place.

However Labor never produced a 10-year plan for those arrangements, and commitments in its agreements with the states and territories do not go beyond 2020, making the funding costs of the later years uncertain.

The Coalition has announced indexation changes but has given no further detail about its hospital funding plans beyond 2017. It has commissioned a White Paper next year to explore the issues, also injecting uncertainty into future hospital funding.

This makes it difficult to accept that the $50 billion figure is in any way reliable.

As for whether the changes would constitute a cut, it appears the funding will be reduced compared to the current funding arrangement.

Commonwealth hospital funding still grows each year in the forward estimates, making it difficult to call the changes a cut to spending.

However, it can be argued changes to indexation rates are cuts if indexation falls below the level of the CPI or the cost of delivering a service. Based on what the Government has said about its new indexation arrangements this may be the case.

The verdict

Ms King is using the Government’s own savings figure against it. By laying out a $80 billion “savings” plan for schools and hospitals, the Government left itself open to accusations of funding cuts.

Ms King says this budget “cuts a whopping $50 billion from Australia’s public hospitals”, but doesn’t make it clear that the forecast changes to funding are over 10 years.

In fact, the Government is only cutting $2 billion from hospitals over the forward estimates. Whether there will be a $50 billion difference to hospital funding over the next decade is impossible to verify.

It’s conjecture.

Sources