The time-bomb under every state budget.

Australia’s public hospitals cost too much and achieve too little. Soaring costs threaten to drown state finances while abandoning patients. But it doesn’t have to be like this.

In Victoria and Tasmania, hospital managers are cutting jobs so they can live within their budgets. At the Alfred, staff are being told to switch off the lights. Labor and Liberal governments are talking from the same script: become more efficient because we won’t bail you out again.

If only it was that easy. And if only those governments’ own policies hadn’t been such a potent cause of the problems that their entire health systems now face. And if only the federal government had been paying more attention.

For far too long, state governments have failed to build enough of the right hospital facilities to keep up with the ever-growing number of people needing care. This chart illustrates the problem: for the past two decades, the number of patients being admitted to the nation’s public hospitals has exceeded the supply of beds by 38%.

That was managed by reducing average lengths of stay by 22 per cent – from 4.1 days in 2001-02 to 3.2 days two decades later. At the same time, surge capacity vanished and staff had to deal with increased workloads, frantic conditions and rolling crises.

That couldn’t go on forever and the inevitable crunch point hit in about 2016. Hospitals were stretched to the limit and beyond. Lengths of stay couldn’t be reduced any further. There were no more savings to be made.

Various states are at different stages of this predicament but all are following the same trajectory. What began in Tasmania is now at full throttle in Victoria. The rest of the country is not far behind.

So what went wrong?

The funding split

Public hospitals are run by the states but draw heavily on funding from Canberra and, to a lesser extent, from private health insurance, workers’ compensation and patient fees. In 2012 the Gillard Labor government – after years of promising revolutionary reform – settled for a rejig of the way federal funding was allotted.

The core of the system, called activity-based funding, sets a figure on a new National Efficient Price (NEP), the average amount needed to treat an average patient. The Commonwealth pays 45% of that: it was supposed to rise to 50% but never has.

The idea was that it would encourage greater activity and reward efficiency. Hospitals which could treat patients for less than the National Efficient Price would get to keep the difference; those which cost more wouldn’t be bailed out.

This chart shows the relationship between the average per-patient cost, the NEP, across the nation. Theoretically, both these lines ought to be the same but the larger jurisdictions – Victoria and NSW – found they were able to do the job for less, at least for the first few years. That skews the average result.

In 2016-17, the cost of treating an average inpatient hit a low of $4,641. Most hospitals were doing the job for less than the NEP and pocketing the difference – but then that long-term decline went into reverse. Over the next five years, per-patient costs went up by 21 per cent. Short-sighted state and federal government policy, aimed at saving money by neglecting capital investment, was now doing the opposite.

It hit first in Tasmania, where the failure to build adequate hospital infrastructure has been the most neglectful and egregious. Until 2016-17, costs fell and, for a while, fell below the national average.

But it was a short-lived reprieve. The gains were not the result of genuine and systemic efficiency but by pushing more and more patients into an inadequate supply of beds. In the most recent five years for which we have data, per-patient costs rose by 44%. And because the Commonwealth refuses to fund inefficiency, the gap between the NEP and the actual cost accrued solely to the state government.

The government’s parsimony – its refusal to borrow to fund productive hospital infrastructure – has had a predictable result. They now have to borrow even more, just to pay for day-to-day recurrent costs.

Meanwhile, the shortage of beds has created constant chaos on the wards, serious bed block in emergency departments with patients needing admission kept there sometimes for days, overcrowding and lengthening delays for new emergency cases, and ambulances ramped outside.

What began in Tasmania is now happening around the nation.

It’s a similar trajectory for Victoria. In the first few years of activity-based funding, the Commonwealth paid much more than 45% of the NEP to Victoria. But that all turned around from 2016-17, as costs soared by 34% in five years.

It’s a similar story in New South Wales. Over the same five years, the average cost of treating an admitted patient rose by 23%. And the post-pandemic rise, in 2021-22, accounted for more than half of that in a single year.

 Queensland managed to suppress per-patient costs, at least until 2021-22. But even there, the increase is unmistakable.

Western Australia is a special case. That state has long run some of the least cost-effective hospitals in the country and has failed to make major inroads into those costs. There, too, the increase at the end of the series is substantial – up by 11% in a single year.

WA, because of its controversial and lucrative GST deal, can afford it – at least for now. It’s still the only jurisdiction posting a regular budget surplus.

South Australia has no such luxury, but has managed to stabilise its per-patient costs. But the outlook is not good: since 2021-22, that state has experienced the bed block, emergency chaos and ambulance ramping that go along with fast-rising costs.

The ACT, after many years of running very expensive hospitals, managed by 2017-18 to get its costs under control. But over the subsequent five years, they rose by 19%, back to the levels of a decade earlier.

The Northern Territory is the nation’s perpetual basket-case, though until 2016-17 it showed apparent progress in containing costs. But over the following six years, they went up by 25%.

Costs have now begun to increase exponentially. In just six years, the national bill for treating admitted patients in public hospitals, driven by per-patient costs and increased demand, rose by 38% – from $25 billion in 2015-16 to $35 billion in 2021-22.

More recent figures are not yet available but, on those trends, the current bill is likely to be around $45 billion. And the curve continues upwards, potentially reaching $55 billion by 2030 and $76 billion by 2035.

The National Efficient Price is calculated on the basis of old costing data. The price for 2024-25 was based on real costs for 2021-22, adjusted by 5.1% a year for inflation and to cover the superannuation guarantee.

This may not be enough. The actual costs faced by public hospitals around the country appear to be on an accelerating trajectory, and are likely to have grown faster than 5.1% annually in the past three years.

Over the three years to 2021-22, costs in Victoria increased by 14.75%, or 4.9% a year. And that was before the recent bout of inflation hit, and before the new superannuation guarantee began.

In any case, the Commonwealth still pays for only 45% of the NEP: state government have to cover the remaining 55%, as well as anything above the NEP. And they have to pay for all the costs of providing new infrastructure.

Assuming a continuation of the rates of increase in demand and per-patient costs – without any acceleration – Victoria faces a bill for acute care of $19.5 billion by 2030 and $30.1 billion by 2035.

In Tasmania, the situation is even more dire. There, the projection shows acute costs rising from $738 million in 2021-22 to $2.4 billion by 2030 and $4.9 billion by 2035.

Costs in emergency departments are being driven by bed block on specialist wards. When there are no beds for patients needing admission, they must be kept in EDs for extended periods. These are sick people who need constant care, taking staff away from attending to new presentations. And when someone is kept in the ED for longer, it costs more. Much more.

This chart shows the projected national cost of emergency department care out to 2035. The rate of increase is less than for acute care, and the exponential curve is still barely evident. But the impact on state budgets is serious and clear.

The states cannot afford this. In the ten years to 2021-22, health costs have weighed increasingly heavily on state budgets, rising by an average of 7.3% every year. To put that into perspective, state revenue has risen by 5.9%.

Why is this happening?

Costs are increasing as fast as they are for two main reasons: staff cannot work efficiently in a situation of constant crisis and chaos; and too many patients cannot be discharged because there’s nowhere else for them to go.

That’s critically important. It costs around $1,400 a day to keep someone in an acute hospital bed – but less than $300 in a nursing home style convalescent facility. If someone is recovering from, say, a hip replacement, they can’t look after themselves for a while but only need basic nursing care. Keeping that person in an expensive bed is an extraordinary waste of resources and, when those resources are short, it denies a place to someone else.

But no state has seriously examined the need to build those cheaper, step-down facilities. They don’t even conduct systematic audits of how many patients could be transferred to those facilities – if those existed.

At the Royal Hobart Hospital, senior doctors report that around a quarter of beds on medical wards on any one day are occupied by people who no longer need that level of care. On surgical wards, it’s a third.

That situation is repeated in many major hospitals around the country – but nobody knows to what extent.

All around the country, governments are paying more and getting less. The key to ending this absurdity, and to put a stop to overcrowding and constant chaos, is to build the facilities the community needs. Until that happens, patients will continue to suffer, staff to burn out and government finances drain. Because of a critical infrastructure shortfall, day-to-day recurrent costs are escalating so far and so fast that it would have been much cheaper to build in the first place.

The states bear a good deal of the responsibility for all this, but so does the Commonwealth. The feds have consistently refused to have anything substantial to do with building public hospitals, leaving it almost entirely to the cash-strapped states. Nor have they bothered to find out what sort of new facilities should be built.

We desperately need federal leadership. These cost blowouts are hitting their budget too.

In 2022-23, the Commonwealth paid $28 billion towards recurrent public hospital costs. Of that, around $16.2 billion went to acute care and another $3.3 billion to emergency.

On the basis of the projections in this post, acute care will cost the Commonwealth $25 billion by 2030 and $34 billion by 2035.

The figures for emergency will be $3.9 billion by 2030 and $5.4 billion by 2035.

It is in their interests too to head this trajectory off. Concentrating solely on recurrent costs, and neglecting to ensure adequate capital resources are in place, is a seriously  expensive and wasteful policy.

Australia’s health planners should move on from their singular focus on expensive acute beds, and create instead a more complex, responsive array of facilities that not only matches patients’ needs but which will finally control those unsupportable costs.

The alternative is more of the same. But that’s where we are clearly heading.