Cash shortfall: regional Victorian hospitals left in funding limbo

The state government committed an unprecedented $8.8 billion in hospital operational funding in its May budget, but because the system had been so seriously underfunded many services still can't balance their budgets.

But on May 7, the day Treasurer Tim Pallas handed down the budget, Health Minister Mary-Anne Thomas sent all health services a written warning that there would be no "top up" funding if they couldn't keep to their new budgets.

Nearly every health service in the state accrued historic deficits in 2023-24, with many forced to burn through the cash buffers they had saved over many years.

Many fear if they go into deficit in 2024-25 they won't be able to cover the shortfall and without top up funding would have to start laying off doctors and nurses.

One regional health service CEO said the uncertainty was affecting the mental health of many country hospital executives.

ACM asked the Health Minister if she would allow a rural health service to close, rather than provide top up funding, if it ran into deficit in 2024-25.

The Minister did not respond.

A government spokesperson said it was time to "restore financial oversight".

"We will always support our public hospitals - which is why we're reforming the way we fund our hospitals and helping them plan for the future to ensure our healthcare workers can continue doing what they do best - caring for Victorians," the spokesperson said.

But the Victorian Healthcare Association - which represents the state's hospitals - said there were deep concerns as the reality of the new funding regime became clear.

VHA chief executive Leigh Clarke said while the $8.8 billion in new money was vital, it revealed the inadequacy of the funding system.

"Last week's cash injection into the Victorian public healthcare system recognises that there is a pressing need to address the structural deficit embedded in health service budgets," Ms Clarke said.

"But as the dust settles on both federal and state budgets - we need to consider whether the current funding mechanisms are fit-for-purpose.

"The Victorian Government has opted for a broad-based increase in the price paid for healthcare across the board. When viewed within the lens of broader cost containment measures, we've heard directly from small rural health services that this will not be enough to cover their structural deficits over the long-term."

Healthcare has become much more expensive to deliver, Ms Clarke said, with everything from medical supplies, to staff wages, to insurance premiums spiking since the COVID-19 pandemic began.

She said these price rises, coupled with the enormous deficits hospitals had racked up, meant hospitals would be forced to scale back without extra funds.

"Given the fiscal pressures facing the Victorian government, it is prudent that there be some measures to contain costs - but this must not come at the expense of service delivery," she said.

"A one-size-fits all approach won't work for smaller services that are under the most financial pressure due to factors outside of their control, and we call on the government to commit to providing services with a top-up should they face any financial difficulties."

The $8.8 billion in new funding will be spread over five years, with $1.5 billion for the current financial year.

One regional health service CEO said they had calculated the extra cash would only come halfway to covering long-term cost increases.

"The overall increase for health is just 1.5 per cent compared to [the] revised forecast for 2023-24. So [it] doesn't seem much on that basis," they said.

"With minimum 3 per cent rises to accrue from [the] start of May it's difficult to see how things will improve even with the $8.8 billion.

But the Health Minister has exercised her powers under the Health Services Act 1988 to unilaterally set out the level of financial support health services will have to survive on as they try to maintain services and reduce their deficits.

This process is ordinarily negotiated and signed off by both the Minister and the board of each health service.

The CEO said the health department hadn't provided any support or clarity to health services, which were effectively in limbo with no guarantee of their future.

"Uncertainty now with no information or support from [the] Department is really starting to impact [the] mental health of a number of CEOs and other executives in rural health," the said.

The government said its new funding approach provided certainty for health services, rather than allowing them to run up large deficits and relying on bailouts at the end of the financial year.

"Now we are out of the emergency response, have delivered an $8.8 billion funding boost and increased the funding delivered for each patient treated - we are reintroducing financial oversight to ensure our hospitals are exercising financial discipline and focusing their spending on delivering care, as Victorians would rightly expect," a government spokesperson said.

Health services will by required to submit a budget management plan to the Health Department in mid-July showing their planned spending on staff, consultancies and agency or locum staff.

The Department will issue the health services with "model budgets" outlining the expected spending and services will have to get approval for particular spending beyond a certain level, especially for things like locum staff where costs have escalated dramatically.

This tighter leash may help hospitals operate effectively on tighter budgets, but Ms Clarke said planned reforms to the hospital system were the biggest unknown.

ACM revealed in April regional hospitals were bracing for the state's 76 health services to be amalgamated into just 12, with fears the mergers would lead to smaller services being hollowed out and local communities losing their voice.

Ms Clarke said the government had to guarantee that wouldn't happen.

"We look forward to seeing the evidence to support large-scale reform within the independent Expert Advisory Committee's final report to government," she said.

"Following this, should the Victorian government proceed with reform, irrespective of the design option, there will need to be greater investment into the system to support change-management and implementation.

"We know that reform of any scale will not be a cost neutral exercise."

Ms Clarke said while the system faced huge uncertainty, that wasn't an excuse for sidelining local communities.

"It's essential that there is no loss of community voice, system access and that any decisions prioritise the best interests of Victorian patients and the communities they reside in," she said.