How the NSW Coalition should govern health: strategies for microeconomic reform

Economics Australia New South Wales

NSW public expenditure on health represents one-third of the entire NSW budget. Despite public hospitals consuming nearly 60% of the high and rapidly growing health spending, elective waiting times have lengthened in NSW compared to other states in the last decade.

In an ever-tightening fiscal environment, the focus of NSW health policy must be microeconomic reform of the rigid public service monopoly model of public hospital care. The adoption of market or private sector methods, including greater involvement of private operators in the delivery of public health service, should be encouraged to enhance productivity and improve access to quality hospital services at the least cost.

The implementation of comprehensive structural reform stalled under the NSW Labor governments from 1995 to 2011. Fledgling privatisations of public hospital services, by experimenting with privately financed projects (PFPs), were discontinued, principally at the bidding of public sector health unions.

PFPs are one of the avenues that have the potential to fundamentally change the traditional role of the NSW government from health service funder and provider of centrally coordinated hospital services to that of health service purchaser.

A ‘purchaser-provider split’ may deliver efficiency gains by creating a contestable market for public hospital care—at least to the extent possible under Medicare. This would oblige competing providers to adopt business axioms (such as a culture of competition, innovation and more customer-focused service delivery) that are usually foreign to public hospitals. Incentives for operational efficiency would be enhanced as responsibility for a hospital’s entire budget, including financial risk for ‘core’ clinical services (covering nurses, doctors and allied health), would be carried (at least in part) by the provider instead of the purchaser (the state government).

Most importantly, effective managerial autonomy would include the freedom to hire clinical personnel on terms relevant to, and most suitable, for local conditions. Centralised control of human resources by NSW Health—the centrepiece of the restrictive public model—means that hospital managers currently lack administrative authority over their clinical workforce. Statewide nursing awards and prescribed ratios of nurses to patients, combined with the freedoms visiting medical officers (VMOs) and staff specialists may exercise over their work practices, deny managers the flexibility to secure efficient and effective care.

By default, the NSW Coalition appears destined to retain a ‘revised’ and diluted PFP model adopted by Labor in 2001. This limits future PFP outsourcing in health to projects that involve only building services and other so-called ‘non-core’ support services such as cleaning, catering, maintenance, etc.

Instead, the centrepiece of the Coalition’s design for health policy is its necessary but insufficient reform of the governance and management structure of NSW Health. This largely cosmetic restructure has re-established an administrative system of Local Health Districts (LHDs) that is virtually identical to the Local Health Networks (LHNs) the Keneally Labor government (2009–11) agreed to establish in return for additional Commonwealth funding as part of the Rudd government’s national health reforms.

The Coalition’s overhaul of health administration in NSW seems unlikely to achieve its ostensible purpose of offering health providers the benefit of genuinely independent governance. It speaks the language of authentic purchaser arrangements, but it eschews models of management and administration where there is meaningful devolution of financial accountability by way of legitimate, arm’s-length purchaser-provider split arrangements and a proper exercise of local autonomy in procuring and delivering public hospital services.

Under the Coalition’s ‘new’ district model, centralised command-and-control management prevails. Hospitals remain, via LHDs, de facto branch offices of NSW Health. LHD managerial independence is compromised because financial risk continues ultimately to be held by the state. LHDs do not have the power to borrow or incur debt; nor can they accumulate reserves as a reward for efficiency—as is the practice of Foundation Hospital Trusts in England, for instance. This restricts the scope for local innovation and competition and augurs the retention of high departmental involvement in operational matters (including service planning) as well as enforced financial control to prevent LHDs from overspending their budgets.

Furthermore, control over the health workforce remains a state responsibility, with centralised departmental control persisting over rigid statewide employment conditions. Retention of restrictive clinical work practices in the public system continues to have major implications for its capacity, productivity and cost-effectiveness.

The public health sector should no longer be quarantined from the structural reforms that have improved the performance of other government instrumentalities and sectors of the economy over the last 30 years. As a first step towards meaningful purchaser-provider relationships, NSW’s revised PFP model should be reviewed with a view to introducing new criteria incorporating a wider range of services—as has occurred in other states. New PFPs should be considered and evaluated for impending suitable hospital projects; they could offer innovative opportunities for contracting for full accountability and devolution of risk via LHDs onto private operators of public hospitals, including responsibility for all clinical, accommodation and related services.

Public provision of hospital services in NSW has long supported government jobs at attractive wages and conditions. Undoubtedly, there remains a role for government in health service supply—especially in service monitoring and quality control—but without compromising the efficiency or unreasonably intruding into every aspect of hospital operations as a source of workforce protection.

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