As a result of the cost pressures and complex intergovernmental issues surrounding public hospitals it’s not surprising that recent proposals to reform health services have focused on health funding. Perhaps the most significant and ambitious of these is the Rudd Government’s National Health and Hospitals Reform Plan. While the plan aims to achieve a negotiated approach to improving the performance of Australia’s public hospitals, the Federal Labor party has also expressed an intention to initiate a process whereby the Commonwealth would assume control of Australia’s 750 public hospitals by mid-2009 if the States have not implemented the Reform Plan and its associated goals (ALP 2007).^[7] A central question for this paper is how much such a transfer would cost the Commonwealth and how it would impact on intergovernmental financial relations in Australia.

According to the most recent AIHW (2007: 55) report into Health Expenditure in 2005–06, total public spending on public hospitals was $22.4 billion, of which the Commonwealth contributed $10.1 billion (under the National Healthcare Agreement and other SPPs), with the States contributing $12.3 billion. If the Commonwealth were to assume responsibility for public hospitals then the States could almost afford to relinquish all of their remaining non-hospital SPPs ($14.7 billion for 2005–06), given the $12.3 billion saved from existing hospital funding commitments.

While there is clearly a shortfall of $2.4 billion for 2005–06, it is important to note that the cost of running public hospitals is rising more rapidly than either revenue growth or other budget expenditures; so it is likely that if a review of public-hospital funding were to be considered in 2009, relinquishing SPP in return for the Commonwealth taking control of public Hospitals would be financially viable. As hospital costs increase, the States could be major financial beneficiaries of such a transfer (Productivity Commission 2005). So while centralised control of public hospitals would clearly offend the principle of subsidiarity and its normative commitment to decentralisation, in other important respects such a proposal has considerable merit. It would improve Australia’s VFI and would eliminate the traditional cost and blame-shifting between Federal and State governments associated with both funding public hospitals and health policy more generally. Moreover, if the States agreed to relinquish SPPs as part of the transfer then it would enhance their political and financial independence over those areas where they retained political control.