Applying a market screen to NSW Health

The NSW coalition has only cosmetically reformed the structure of NSW's health system, but a move to a market-based policy within the state's health sector is urgently needed.

What is the point of electing a new government that persists with the policies of its discredited predecessor?

This is what the NSW Coalition Government is doing in health, the single largest and rapidly growing area of NSW public expenditure.

Instead of implementing comprehensive structural reform to invigorate the rigid public service monopoly model of healthcare provision, Health Minister Jillian Skinner has rebirthed the flawed policy of the discredited former Labor Government.

As promised at the 2011 election, the O’Farrell Government has replaced eight ‘huge and out of touch’ Area Health Services that formerly spanned the state with smaller health districts, each governed by their own government-appointed boards of directors.

The ostensible aim of this overhaul is to restore local control over health services and address long-standing community and clinician complaints of excessive bureaucracy and centralisation. Under the ‘Soviet-style’ command-and-control management structure that has prevailed in NSW Health, public hospitals have functioned as de facto branch offices.

The coalition’s largely cosmetic reorganisation has now established 15 Local Health Districts (LHDs) virtually identical to the 15 Local Health Networks (LHNs) the Keneally Labor government agreed to establish in 2010 as part of the Rudd government’s national health reforms.

Labor’s ‘Networks’ have been re-badged as ‘Districts’, and ‘Boards’ substitute for Labor’s ‘Governing Councils’. But even the boundaries of LHDs are precisely the same as the defunct LHNs.

Despite the Coalition’s in-principle commitment to local health service control, the much touted devolution of management remains elusive. Under the ‘new’ district model, the NSW Department of Health (now the ‘Ministry of Health’) will remain the statewide micro-manager of hospital activity, exercising high levels of scrutiny into LHD service delivery, planning and financial control.

The flaw in the Coalition’s policy is that the state is still ultimately responsible for the risk of LHD budget overruns – an arrangement which dulls financial incentives for efficiency. In England, by contrast, NHS Foundation Hospital Trusts have genuine managerial independence. They are financially accountable and their solvency is not underwritten by Treasury.

In NSW, LHDs could exercise real management authority only if they became truly financially accountable for their performance and were expected to commercially manage their affairs (with power to borrow to fund innovative activities and to retain surpluses as a reward for efficiency).

However, given that centralised control over the statewide, highly restrictive terms on which the clinical workforce is employed remains a state responsibility, the LHD model will continue to thwart innovation and efficiency.

This centre piece of public control has long provided government-guaranteed jobs to health workers at attractive wages and conditions. It has also entrenched work practices under rigid awards (such as prescribed nurse to patient ratios) inimical to productivity. Clinical services, covering the work of doctors, nurses, and allied health personnel is the largest and most critical area of a hospital’s operating budget. Without power to hire staff on terms relevant to local conditions, LHD managers have limited scope to flexibly deploy the clinical workforce to meet budget, service and efficiency targets.

So-called ‘reforms’ which neglect to fundamentally change the traditional role of NSW Health are therefore of little substance. NSW Health should shift from operating both as funder and provider of centrally-coordinated hospital services and become their arm’s-length purchaser from truly autonomous and financially independent providers.

The introduction of a ‘purchaser-provider split’, including greater involvement of private operators in the delivery of public health services would create a contestable market for public hospital services (to extent possible under Medicare) and enhance productivity by encouraging competing producers to adopt more efficient private sector methods usually foreign to public hospitals.

A first step towards a purchaser-provider model would be to revisit the use of Privately Financed Projects (PFPs) to deliver publicly-funded healthcare. Use of PFPs stalled under the Carr Labor Government after the Greiner-Fahey Government’s fledgling experiments with full privatisation of public hospital services eventually ceased at health union bidding (especially of nurses).

NSW Health, via LHDs, should be encouraged to identify suitable hospital projects that would permit contracting out full accountability for a hospital’s entire operating budget to private providers – a model with precedents in other states, but gaining prominence in Western Australia in particular. The authority of private operators must include full control over the employment and utilisation of the clinical workforce on flexible and cost-effective terms. Obvious candidates include the mooted new public hospital at French's Forest and the overdue redevelopment of the crumbling and dilapidated Hornsby District Hospital.

With spending on health already consuming one third of the NSW budget and increasing at a rate projected to consume the entire state budget by 2033, action must be taken to improve access to quality hospital services at least cost.

Market-based policies are now being adopted in other parts of the NSW public sector such as education. Quarantining public hospitals from productivity-boosting workforce reform that would improve health service performance can be delayed no longer.

David Gadiel is an independent health economist with extensive experience of the NSW health system. Jeremy Sammut is a research fellow at The Centre for Independent Studies. Their latest report, ‘How the NSW Coalition Should Govern Health: Strategies for Microeconomic Reform’ is available at

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