“Who should run our public hospitals?” To judge by much recent media coverage that’s the only question that will really matter when the final report of the National Health and Hospitals Reform Commission (NHHRC) finally hits the streets. But is it so important?

Running a modern hospital is not an easy task. Budgets are inevitably tight, patients’ expectations are high and the sheer complexity of the organisation would challenge even the most capable managers. Whether those managers are State or Commonwealth employees isn’t really a big deal. Neither level of government has a monopoly on managerial (in)competence and both are equally capable of hiring good people and motivating them to deliver good services.

Good managers can’t succeed if they work in a dysfunctional environment, however, and the context in which public hospitals operate is far more significant than the level of government that owns and operates them.

Funding is key and the question of who funds public hospitals is distinct from that of who owns them, runs them and sets priorities for the services they deliver.

Public hospital budgets are set by State and Territory Governments, albeit with a sizeable supplement from the Commonwealth. They’re inevitably constrained by the overall level of resources available to States and Territories coupled with their Governments’ decisions on how to reconcile the competing demands of health, education, transport and other public services.

Commonwealth funding for health, in contrast, is largely open-ended. There isn’t a budget cap on Medicare benefits and PBS payments. What gets done gets funded.

The juxtaposition of tight budget caps for some services and uncapped subsidies for others leads, inevitably, to attempts to “cost shift” from the former to the latter. The term cost-shifting conjures up images of money passing between levels of government. In reality cost-shifting equates to patient-shifting as responsibility for the care of individuals is passed from one funder to another.

Patient-shifting is made possible by the fact that there are no well-defined borders between secondary care services that need to be delivered in (State and Territory funded) hospitals and primary care services that are provided by (Commonwealth-subsidised) GPs. The range of services that can be provided in each setting varies and is constantly evolving as new treatment technologies emerge.

The boundaries of Governments’ responsibilities are, at best, fuzzy. (That fuzziness is also, incidentally, the reason why the NHHRC’s initial and seductively simple proposal that the Commonwealth should fund all primary care would do little to end or reduce the so-call “blame game” in health.)

Splitting funding responsibility in this way isn’t just a recipe for inter-Governmental squabbling. It can also jeopardise patients’ health if the choice of service they receive is determined more by who’s paying than by what’s best for them.

It would be naïve to think that a wholly Commonwealth-funded public hospital system would be a patients’ paradise of open-ended funding.

Admittedly the NHHRC’s Interim report did suggest an approach to funding (their Option A) that would see the Commonwealth subsidising public hospitals on an uncapped fee-for-service basis but that Option would still have State and Territory budgets acting to put a brake on total spending.

No government would commit to write a blank cheque for hospital services and there’s no reason to believe the Commonwealth would prove to be a more generous funder than the States and Territories.

Progress could be made, however, by combining the current separate funding streams into one. That would mean money could be used more flexibly to respond to changing patient needs and spending could be based on an objective assessment of cost-effectiveness rather than a vague and artificial delineation of Governments’ roles.

Ironically, the result might be less, not more, money for public hospitals; but it would also be a better, more efficient and more effective health system.

Who should fund and who should manage Australia’s public health system?

Join the discussion at our health blog, Croakey.