When we apply these principles to Australia’s health system, the need for a new strategic approach becomes clear. Health is as much an industry as a system. In most countries, and certainly in Australia, health is certainly not a centrally designed, or hierarchically managed system. Participants, both consumers and providers, exercise a considerable degree of independence. The health system nonetheless is dominated by government, as funder and regulator, and frequently as the provider of health services themselves. While the system should, and will, remain a mixed ‘public’ and ‘private’ system, some of the key issues surround what it is best for government to do, with the focus on regulating, funding and purchasing health services. Under a reformed system, it would continue to matter less whether services themselves were provided privately or publicly, provided these regulatory, funding and purchasing arrangements were effective and more directly accountable.

Elsewhere I have set out some of the evidence that our health system actually performs quite well, on international standards (Podger 2006a and b). However this provides no room for complacency, because the challenges continue to mount. Indeed the system is already changing in response to these challenges, which increases our need to map clearly where we want it to go, rather than risk some of our current advantages by responding in ways that are disorganised or ad hoc. There are at least five major structural problems with the current system:

Every one of these structural problems is exacerbated by the institutional framework that we currently use to run the health system, and in particular, by Australia’s current division of roles and responsibilities between the Commonwealth and the States. Therefore, even though our health system is performing pretty well on the whole, and changing the system cannot be without cost or risk, it is important to examine the options for where we want the system to end up – not as a distant pipe dream, but as a realistic alternative given practical realities and our history, culture and institutions.

Applying the principles in the last section to our current health system, two important shifts in the structure of the system become not only desirable, but probably inevitable. When we apply the subsidiarity principle, it becomes clear that the Commonwealth Government is going to continue to increase its responsibility for health policy and services, rather than reduce it. Quite apart from issues of funding, this is because of the strength of our national community interest in ensuring that there is equity throughout Australia in the availability and quality of health services; because health industries increasingly operate on a national basis, and both the health workforce and health service consumers are increasingly mobile; and because there are economies of scale to be captured in administering health services as a national system. The private health insurance industry and the pharmaceutical industry, for example, operate at the national level. Some of the services that have to be handled at a national level include cord blood banks and organ donations. Health education and medical training are national needs and are largely nationally funded. Recent crises in some state health systems over the qualifications and accreditation of health professionals highlight the increasing inappropriateness of trying to monitor and police such issues at a provincial level. If you think about who should be responsible for what, subsidiarity principles leave a great deal of responsibility with the Commonwealth.

The extent of the Commonwealth interest is then further underscored, of course, by the fact that two-thirds of all the public spending on health is already spending by the Commonwealth Government. Unlike other areas of public policy, where the Commonwealth has expanded its influence by stealth, in health it has been done by the express will of the Australian people – voting in 1946 to amend the Constitution to give the Federal Parliament power over the provision of pharmaceutical benefits, sickness benefits, hospital benefits, and medical and dental services (Constitution, section 51 (xxiiiA)). The present level of Commonwealth expenditure aligns with this historical reality, and public expectations about an efficient, seamless national health system that have only continued to strengthen.

The importance of the Commonwealth in the system is then further reinforced by pressure for movement towards a single funder arrangement. Faced with the current challenges, most economists agree that we would be better off moving from an arrangement where multiple governments provide the funds, tied to at times competing and conflicting priorities and accountabilities, to a single funder who can bring simplicity, consistency and efficiency. Most reformers in the health sector agree that a single funder would be better able to track the money so as to ensure that it follows the patient, rather than being constrained by strict functional or jurisdictional boundaries, or lost or redirected as it filters down through the system. In these ways, a single funder would facilitate more integrated and comprehensive planning, enhance the coordination of service delivery, improve value for money, increase the opportunity for seamless, patient-oriented services, and reduce cost-shifting and blame-shifting. These are highly relevant advantages for our system today.

There are four main options for who this single funder could be. The first would be to revert 100 years to a system where state governments are the single funder in their jurisdiction, but few regard this as realistic or desirable. A form of this option could work along the lines of the Canadian model, with a revenue-sharing agreement with the national government but all purchasing and delivery left to the States, but the fact is that, given all our history, we are not like Canada. Second, we could ‘pool’ Commonwealth and state funds, to then be administered by a ‘joint’ national health administration, which is a solution in the tradition of cooperative federalism, under the Council of Australian governments (COAG) framework. However, applying what we know about the strengths and weaknesses of ‘connected government’, this has all the problems of trying to have a shared arrangement for ongoing programs, which is very difficult to manage in practice, and is likely to be extremely hard to operate efficiently. The third option, involving other massive transformations of the system, is a ‘managed competition’ or voucher-based insurance system such as proposed by Scotton (2002), which I discuss elsewhere. Importantly for advocates of this option, it could not be introduced without the Commonwealth first becoming the single government funder (option four below), and then redirecting that funding into a system of insurance vouchers.

The fourth option – in my view, by far the most logical given all of the above – is that the Commonwealth Government move the relatively short distance from its current role, to that of also being the single funder. In practice, funding the entire system would mean retention by the Commonwealth of its current specific purpose grants to the States for health, plus around 37% of the $35 billion (2003-04) paid annually to the States in the form of Goods and Services Tax (GST). This could be achieved by renegotiation of the GST agreement. State governments would be left in the same financial position as currently, since they would no longer have to spend the $13 billion (2002-03) of their own-source funding currently expended annually on hospitals and other health services.

However, an important second structural shift is also implied in the evolution of our health system. Again applying the principle of subsidiarity and the other issues reviewed in the previous section, it is clear that even if we move towards a single national funder and clear Commonwealth regulatory control over the health system, the case remains for stronger regional and local involvement in the purchase and provision of these centrally-funded health services. Indeed, the case only becomes stronger. Therefore, while the subsidiarity principle translates into a very strong argument for a lot of health responsibilities to be handled at the national level, it also translates into an equally strong argument for most service delivery to be handled lower down, at the local or regional level. This includes all manner of delivery, including general practitioners, baby health clinics, pharmacies, hospitals, and nursing homes. Alongside the national government accepting the leadership role in setting the overall design principles of the system, and monitoring its performance, the problems of our current system would be addressed by introducing greater flexibility in the system at a lower level – lower than that of most of our present state governments. For these reasons, local and regional-level institutions would only become more important in the future.

Taking these two shifts together, Figure 9.2 sets out the structure of what a Commonwealth-funded public health system might look like. This structure would more clearly distinguish between who is funding the services, and the roles of purchasers and providers. It also remains a three-tiered system – national, regional and local – because local-level provision of health services remains vital. Essentially the Commonwealth would have the funding responsibilities at the national level and the oversight of the purchasing, but most purchasing would be at the regional level, and most of the services would be delivered either at the regional or local level. The major structural difference with current arrangements, in terms of service delivery, would be that these regional purchasers and/or providers, who control much of how services are designed and delivered in practice, would be unlikely to be a state government – other than perhaps in the case of Tasmania. In my view, they should be Commonwealth authorities, with a ‘region’ defined in line with the criteria already used by governments to determine the best scales at which to deliver these services.

The next section discusses what this would mean in practice. Clearly there is little value in pretending that simply restructuring the system in these terms would suddenly fix all its problems or, in itself, meet all its challenges. A range of supplementary measures would be needed to ensure that any system works well, including this one as proposed. Some of these are already under way, such as the separation of funding, purchasing and providing – in ways that reinforce the need for a larger blueprint. What is clear is that if we ignore the options for systemic and institutional reform, we limit our own capacity to improve the system, whereas by considering them, we can hope to achieve sensible reforms including national principles for purchasing; greater ability to reallocate resources across and within regions in more flexible ways; increasing local involvement in service delivery; strengthening primary health care where it is needed; increasing the investment in preventive health strategies; strengthening cost control and accountability; and maximising the benefits of competition.