Hark back to December 2023. National Cabinet endorsed a historic agreement setting the parameters for future Commonwealth-state sharing of public hospital costs over the next decade.

In brief, the Commonwealth share would increase to at least 42.5% by 2030 and then continue on a “glide path” to reach 45% before 2035. All this was to be enshrined in a revised National Health Reform Agreement.

The ink was barely dry — or the digital equivalent — before it began to unravel. Progress on fleshing out detailed clauses became enmeshed with negotiations on disability funding, and an election intervened. Most importantly, though, the Commonwealth’s estimates of how much it was all going to have to pay were blown out of the water by a decision by the Independent Health and Aged Care Pricing Authority that the so-called National Efficient Price — which determines how much the Commonwealth pays states for growth in the costs of public hospital services — was to increase by 12.3% compared to an average of 4.9% over the previous three years.

Setting the National Efficient Price is a protracted process. Hospitals provide their data to their state health authority sometime after the end of the financial year, states analyse it and tidy it up and give it to IHACPA and IHACPA then has to collate and analyse it. In the end, data for 2022-23, updated by estimates of cost growth subsequently, is used to set the price for 2025-26, a three-year lag.

The states were not surprised by the big jump in the National Efficient Price – they had seen the money flowing out of their doors every fortnight as they met payroll and other costs. They saw, in real time, the reduction in the Commonwealth share, and the concomitant increased burden on state budgets.

But all this raises the question, why did costs go up so much? Was it badly negotiated enterprise agreements? Was it the costs of x-rays etc driven by international cost increases? Everybody had their pet theory. In response, the state treasurers commissioned a review of the underlying cost drivers — of which I was a co-author together with Create Health Advisory — which has now been released.

The report confirmed some obvious reasons for the cost jump, and identified important new causes.

Unsurprisingly, much of the increase can be explained by general economic trends. Healthcare wages seem to be going up in line with all other wages. Shortages of health professionals, and changed preferences for how they work, mean that there are more locums and more part-time work with increased costs and increased overheads, and hence increased costs per hour worked. These shortages were entirely foreseeable given the significant ramp-ups in disability support and changes in aged care staffing requirements.

But the big surprise was in what the report refers to as “stranded patients” – patients who no longer need acute care but are stuck in hospitals because they can’t get access to support in more appropriate locations. Some of these patients are formally re-classified as “maintenance care”, but some simply have much longer lengths of stay than would normally be expected.

These stranded patients include patients who can’t be placed in residential aged care in a reasonable time, and patients waiting for disability support.

The causes for these placement delays are complex, but include the fact that the design of the payment arrangements for aged care, for example, don’t provide sufficient incentive for private residential aged care providers to accept the types of patients waiting in public hospitals, leaving those patients stranded in an acute-care bed to the detriment of both the patients themselves and to the whole health system. An acute-care bed in a busy ward is not the right place for these patients, and it is also much more expensive for the community.

This issue has been around for a long time but has deteriorated since the start of the COVID pandemic. Data from the Productivity Commission shows that over the period 2017 to 2021, patients waiting for residential aged care took up about 800 bed equivalents every day. But there has been a big jump since then. In 2022-2023 there were about 1200 patients awaiting residential care, up 50% over those couple of years and the equivalent of a large hospital being required to provide accommodation for these patients. The number of residential aged care beds also declined over this period exacerbating the problem.

Good data is not available nationally on patients awaiting disability support, but data from the Australian Medical Association shows that in 2022 an average of about 1224 beds were taken up by these patients every day. It’s estimated from the states, that have more sophisticated monitoring of this patient cohort, that these patients occupy 10% of all acute-care beds and this figure is continuing to grow.

Because of the technicalities of how the National Efficient Price is calculated, the cost of these extra patient days drove price increases, rather than mostly showing up in increased activity.

Critically, responsibility for aged care, and disability support rests primarily with the Commonwealth. The Commonwealth is now directly bearing the cost of failures in the design of its aged care funding arrangements over the years — before the current government took office — through increases in its payments for public hospital services.

And this brings us back to Commonwealth-state negotiations. When discussions of the National Health Reform Agreement resume, they should focus on the interdependencies between Commonwealth action in aged care and disability support, and Commonwealth spending on public hospitals. The states should insist the Commonwealth lift its game in these areas of its responsibility for the benefit of both Commonwealth and state taxpayers.

The report on the drivers of increased costs in hospital care has shown how important it is for the Commonwealth and states to act together, to ensure that patients can get the right care and support in the right place in a timely matter. In addition to benefitting patients, this will also benefit Commonwealth and state finances.

The views expressed in this article may or may not reflect those of Pearls and Irritations.