Commonwealth and State Powers in Health
A Constitutional Diagnosis
-
KAREN WHEELWRIGHT*
INTRODUCTION
One of the fundamental influences on the way Australian health care services
are structured, funded and delivered is Australia's constitutional system.
Many of the difficulties faced by a Commonwealth government aiming to
smoothly implement a national health policy stem from the limited legislative
powers of the Commonwealth over health and the constitutional foundation
of the two central parts of Medicare on different powers. Difficulties and
tensions over service planning and provision in joint Commonwealthlstate
programs like the Medicare hospital program can be better understood by
appreciating the disparity which exists between Commonwealth and state
constitutional and fiscal powers and the practical effect this can have. The
states have comprehensive power over hospitals and other important services
without the financial resources to fully fund those services, whilst the Commonwealth has the superior funding capacity unmatched by the constitutional power to comprehensively regulate the services it finances. These
constitutional divisions are crucial to understanding the fragmentation which
exists in the regulation and delivery of health services. This fragmentation is a
major barrier to achieving 'best practice' care.'
However, the success of some important intergovernmental health programs attests to the fact that these disparities do not necessarily place insurmountable barriers in the way of the efficient planning and delivery of health
services. A good example is the joint provision of aged care services with the
Commonwealth using its funding formula to encourage nursing homes to take
only the most dependent and frail elderly persons, whilst at the same time
expanding the complementary Commonwealthlstate Home and Community
Care Program to enable the support of more elderly people in their own
homes. The practical effect of constitutional divisions can depend very much
on political factors. The fact that regulatory and financial powers are divided
*
BA, DipEd (La Trobe); LLB (Hons)(Melb), Research Fellow, Institute for Tax Law and
Policy Research, School of Law, Deakin University. The paper was written whilst the
author was undertaking research in the Law Faculty. Monash University on a vroiect
funded by the ~ u s t r a l i i nResearch Council on aspects of the legal regulatioGof-the
health system. The author gratefully acknowledgesthe invaluable contribution made by
Beth Gaze, Senior ~ e c t u r ein
r ~ a w ona
; ash ~ G v e r s i tand
~ , Jeffrey Barnes, Lecturer in
Law and Legal Studies, La Trobe University in planning this paper and commenting on
drafts.
National Health Strategy: SettingtheAgenda for Change Background Paper No 1 (November 1990) 6-7; and The Australian Health Jigsaw: Integration of Health Care
Delivery Issues Paper No 1 (July 1991) 6 (hereafter Issues Paper No 1). The Strategy was
a two year project funded by the Commonwealth government which aimed to increase
understanding of key issues in the Australian health system and assist in developing
options for its reform.
Monash University Law Review pol 21, No 1 '951
between the Commonwealth and the states exacerbates the difficulties in this
sensitive policy area when there are also substantial political differences
between Commonwealth and state g~vernments.~
Outline of Paper
The first part of the paper ('The Constitutional Connection') examines the
nature and extent of the constitutional powers which support Commonwealth
policy dominance in the health area. These are principally the 'health and
welfare power' in s 5 l(xxiii~),
the appropriations power in s 8 1 and the grants
power in s 96. It is argued that the limited nature of the Commonwealth's
direct legislative power over health, combined with the Commonwealth's
reliance on a mixture of legislative and financial powers to implement major
programs like Medicare, have contributed substantially to the lack of integration in the health system and fostered some of the difficulties which flow
from this. The paper then briefly examines the powers of the states. It highlights their historical dominance of health service provision and considers
how the constitutional division of powers between the Commonwealth and
the states has contributed to the difficulties in efficient delivery of health
programs and effective regulation of the health area.
The second part ('Constitutional Maladies') exemplifies the adverse consequences for service provision and regulation which can flow from the division
of powers between the Commonwealth and the states. Two case studies are
discussed. The first looks at the problem of cost-shifting by the states away
from public hospitals to fee-for-service Medicare. This has been identified
recently as a particular problem in Victoria. As a result of the overlap of power
and service provision between the states and the Commonwealth, there is a
strong financial incentive for the unauthorised shifting of costs between them.
This has adverse consequences for government financial planning for the
health sector and for appropriate service provision. The second case study
looks briefly at three aspects of the regulation of medical practice, namely the
controls on entrepreneurial medical practice, advertising of medical services
and mutual recognition of medical registration. This demonstrates how gaps
and inconsistencies in regulation can occur because of the limitations on
legislative power at the Commonwealth level, the different emphases in separate state regulatory schemes, and an unwillingness at state level to undertake more comprehensive regulation.
The paper concludes that the constitutional framework within which the
health system operates contributes significantly to many of the regulatory
difficulties in this crucial policy area. It acknowledges that there are other
important but less predictable factors, such as government policies on federalism and day-to-day political factors. They interact with legal factors to
impede the development of a fully integrated and properly regulated health
system.
This is exemplified most recently by the on-going criticisms about health policy, funding and service provision levelled at the Victorian government by the Commonwealth
government and vice versa.
Commonwealth and State Powers in Health
THE CONSTITUTIONAL CONNECTION
Political Context
It is impossibleto consider Commonwealth and state constitutional powers in
relation to health, with their limitations and overlaps, without becoming
aware that the constitutional division of powers is only one of many factors
which, together, produce a very complex policy and service delivery environment. The Australian health system is the product of a diverse range of
economic, social, technological, legal, constitutional and political factors,
some of which are unique to A~stralia.~
The system is also a product of the
historical evolution from the provision of care based on private philanthropy
to a system which is largely government funded and controlled." The way
health services are organised, funded and delivered is affected particularly by
the existence of federalism as a major organising principle for the distribution
of political power in A~stralia.~
This is complicated further by the philosophies of governments of different political persuasions about the role of the
state in health service provision and funding and the appropriate balance
between public and private service pr~vision.~
Governments in turn are influenced to varying degrees by powerful interest groups in the health sector,
including the organised medical profession, pharmaceutical manufacturers
and the private health insurance industry.' These political factors and influences cannot be overestimated because they have a profound influence on the
preparedness of governments, in particular the Commonwealth government,
to test their potential legal powem8
The severe fiscal imbalance in the Australian federation deserves particular
mention because of its importance in shaping the Australian health care sysThe current dominance of the Commonwealth in setting health policy
can be attributed to the substantial centralisation of revenue raising which has
occurred in the Australian federation, particularly in the postwar period. This
follows from the Commonwealth's broad taxation powers combined with its
G Palmer and S Short, Health Care and Public Policy: An Australian Analysis ( 1 989)
6.
A Crichton, Slowly Taking Control?Australian Governments and Health Care Provision
1788-1 988 (1990) 7. For a summary ofthe development of government involvement in
health service provision, see S Sax, A Strife of Interests: Politics and Policies in Australian Health Services (1 984) Pt 1.
For a brief discussion of the policies on federalism of recent Commonwealth governments, see J McMillan, Commonwealth Constitutional Power Over Health (1992)
77-87
. . --.
S Duckett, 'Financing of Health Care' in H Gardner (ed), Health Policy: Development,
Implementation and Evaluation in Australia (1992) 138-40.
See, for example, S Sax, Health Care Choices and the Public Purse (1990) ch 2;
R Mathews, 'Health Wars' in New South Wales Branch of the Australian Labour
Party, Whitlam, Wran and the Labor Tradition (1988) 42.
McMillan, op cit (fn 5) 1 .
For detailed analysis of the influence of intergovernmental relations on the health system, see J Butler, 'Health Care' in B Galligan, C Walsh and 0 Hughes (eds), Zntergovernmental Relations and Public Policy (199 1) 163; J Butler (ed), Federalism and Public
Policy: Intergovermental Grants and Health Care Financing ( 1 991).
56
Monash University Law Review [Vol 21, No 1 '951
effective control of government borrowings. Importantly, the Commonwealth has consciously used the grants power in s 96 of the Constitution to
exclude the states (practically, if not legally) from the two significant areas of
growth taxes, sales tax and income tax. The power has been used also to control substantially the way in which many health services are delivered, by
attaching detailed conditions to the grant of funds to the states for health
purposes.1° Nevertheless, the states retain a crucial role in regulating, funding
and delivering a wide range of health services, in particular public hospital
services. Accordingly, the states have considerable capacity to affect how
national health policy goals are achieved. This is true particularly when
important funding agreements are renegotiated, for example the five year
Medicare Hospital Funding Agreements, or when the Commonwealth is seeking to introduce initiatives which require state co-operation for their success.
The Constitutional Foundation of National Health Policy
Health programs implemented in pursuit of a national health policy, many of
which are funded and operated in conjunction with state and territorygovernments, are based on various heads of Commonwealth constitutional power.
For example, most direct Commonwealth programs, such as the Medicare
Benefits Scheme and the Pharmaceutical Benefits Scheme, rely on the 'health
and welfare' power in s 5 l(xxiii~),supported by the appropriations power in
s 8 1. Intergovernmental programs requiring Commonwealth funds, such as
the Medicare hospital program, are supported by the grants power in s 96.
Various other important aspects of the health system, for example the regulation of private health insurance, are based on other heads of Commonwealth legislative power.
The absence of comprehensive legislative powers over health, and the
consequent need for the Commonwealth to rely on diverse heads of constitutional power to support national health programs, is not surprising. The
concept of a national health system was foreign to the drafters of the Commonwealth Constitution. Whilst Australians today have come to expect a
comprehensive and consistent health care system across Australia, the Constitution as originally drafted gave no specific powers over health to the
Commonwealth, apart from the power to legislate for quarantine. Health care
provision was a state responsibility, constitutionally and in practice.12It was
lo
'
l2
In South Australia v Commonwealth (the First Uniform Tax case) (1942) 65 CLR 373,
the High Court upheld the validity of Commonwealth legislation postponing the rights
of state governments to demand payment of state income taxes. The legislation was a
valid exercise of the Commonwealth's taxation powers in s 51(ii) of the Constitution:
C Howard, Australia's Constitution (1978) 109-1 1 .
For example, there is a fascinating account of the difficult Commonwealth/statenegotiations for the implementation of Medibank hospital funding in 1975, in R B Scotton
and C R Macdonald, The Making ofMedibank (1993) ch 9.
The High Court confirmed that the Commonwealth Parliament 'has no general power
to legislate for social services. This general power is left to the States':Attorney-General
(Vic) ex re1 Dale v Commonwealth (the Pharmaceutical Benefits case) (1945) 71 CLR
237, 282.
Commonwealth and State Powers in Health
57
only when the Constitution was amended in 1946 to add s 5l(xxiii~)that the
Commonwealth had any direct legislative power over health and even that
was far from comprehensive.However, the liberal interpretation of the power
by the High Court has meant that detailed regulation within some major
Commonwealth programs has been possible. This includes regulation of the
health professionals whose services are subsidised by the government.
The power of the Commonwealth to provide conditional grants to the states
under s 96 is vital to the implementation of Commonwealth health policy. It
permits substantial policy control over areas which require Commonwealth
funding to ensure an adequate level of service delivery. The appropriations
power in s 8 1 supports the funding of health programs. The capacity of the
power to support programs for which there is otherwise no constitutional
authority is unclear. These matters are expanded upon in the following two
sections.
Commonwealth Legislative Powers
There is in s 5 1 of the Constitution no general head of power to legislate with
respect to health, although many heads of power will support laws that touch
on different aspects of health policy. For example, the taxation power in
s 51(ii) supports the collection of the Medicare levy and enables the imposition of sales tax on cigarettes at a level aimed to discourage smoking because
of its health risks. The insurance power in s 5 l(xiv) authorises the Commonwealth's regulation of private health insurance and the establishment of the
Health Insurance Commission. The census and statistics power in s 5 1(xi)
enables the compulsory collection of health statistics for research and planning purposes. It has been pointed out that the Commonwealth has explored
relatively few of its legislative powers to see if they will support more comprehensive regulation of the health area at Commonwealth level.13
As already noted, government health provision was undertaken historically
by the states, apart from quarantine.I4 However, the grounds for a major
increase in the involvement of the Commonwealth in health were laid with
the amendment to the Constitution in 1946. The amendment (one of the very
few to be passed by referendum) increased the Commonwealth's direct legislative powers by adding s 5 1 ( x x i i i ~ ) The
. ~ ~ new paragraph granted to the
Commonwealth power to make laws with respect to:
The provision of maternity allowances, widows' pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits,
medical and dental services (but not so as to authorize any form of civil
conscription), benefits to students and family allowances.
The section was added to enable the Commonwealth in the postwar period
l3
l4
IS
McMillan, op cit (fn 5) 2-3. An example might be the use of the corporations power in
s 5 I (xx) to support regulation of corporations providing medical services under Medicare (id 68).
Section 51(ix). The power was first exercised in the Quarantine Act 1908 (Cth).
P J Hanks, Constitutional Law in Australia (1991) 366-7. See Constitution Alteration
(Social Services) Act 1946 (Cth).
58
Monash University Law Review [Vol 21, No 1 '951
to provide a wider range of benefits than the invalid and old age pensions
authorised under s 5 l(xxiii). In common with other countries, accessto health
care in Australia was increasingly being viewed as one part of a more comprehensive social security system and was consequently being used as an
instrument to pursue more general redistributional objectives.16 The referendum was precipitated by the legal difficulties experienced by the Chifley
government in relying on the appropriations power in s 8 1 of the Constitution
to support a range of new national social welfare programs.17
It is important to consider the limitations on the power because it explains
to a large extent why the Commonwealth's own programs - Medicare, the
Pharmaceutical Benefits Scheme and aged care accommodation programs are structured as they are. The limited extent of the power also presents problems for any Commonwealth government wishing to ensure that its control
over national programs matches its financial commitment to them. Even on a
liberal reading, s 5 1(xxiii~)as enacted does not confer on the Commonwealth
a power to regulate health and social welfare services comprehensively. The
power only authorises legislation to provide 'assistance' to the public in the
form of 'a motley group' of specific services and benefits.I8In reliance on the
power, the Commonwealth has implemented several major benefits programs, in which the cost to individuals of the services of private doctors,
optometrists and nursing homes and the cost and supply of a wide range of
pharmaceuticals is heavily subsidised by the government.
Within those programs, the Commonwealth is not authorised to subsidise
the full range of services. For example, whilst 'sickness' has been held to
the term probably does not
include any form of ill health or in~apacity,'~
authorise benefits payments for health screening tests. This affects the Commonwealth's ability to act directly on health promotion and screening and
arguably reinforces the focus of the medical system in Australia on treating
illness rather than promoting health. The Commonwealth must rely on other
constitutional powers for its illness prevention and health promotion activities.20
The extent of Commonwealth control over its own direct programs is
l6
l7
l8
l9
20
As one writer has noted, the list of additions in s 5l(xxiii~)was in itself 'striking evidence of the distance which had been travelled since 1900 in terms of what people
expected from the national government, or indeed any government': Howard, op cit
(fn 10) 99.
In 1945, the High Court had held invalid the Pharmaceutical Benefits Act 1944 (Cth),
which was based on the appropriations power in s 8 1. A majority of the Court held that
the Act was not supported by the appropriations power and the incidentals power in
s 5 l(xxxix). Latham CJ, Rich and Dixon JJ held that the Act sought to regulate certain
activities of pharmacists and medical practitioners when there was no Commonwealth
power to do so: the Pharmaceutical Benefits case (1945) 7 1 CLR 237. The case is discussed in more detail below 'Financial powers' infra p 62.
Australia Final Report of the Constitutional Commission (1988) Vol 2 para 10.258.
Federal Council of the British Medical Association in Australia v Commonwealth (the
BMA case) (1949) 79 CLR 201, 230 per Latham CJ.
For example, community wide programs like cervical and breast cancer screening are
supported instead via Commonwealth grants authorised by the appropriations power
in s 81 and joint Commonwealth/state programs, eg in HIVIAIDS by grants under
s 96.
Commonwealth and State Powers in Health
59
affected by two further limitations on s 5 l(xxiii~).First, the Parliament may
legislate only for the provision by the Commonwealth of the range of benefits
and services listed and, second, any law made pursuant to the power must not
offend the 'civil conscription' proviso. The High Court has held that the purpose of the 1946constitutional amendment was to enable the Commonwealth
itselfto provide the services and benefits which s 5 l(xxiii~)mention^.^' Parliament cannot require, or proscribe, the provison of allowances, benefits or
services by others, such as pharmacists, doctors or hospitals, or the states.22It
follows that the Commonwealth lacks direct power to regulate the private
delivery of health services.23
In spite of this limitation, significant indirect regulation of the provision of
private medical services and aged accommodation services has occurred in
the last 15 years. This regulation is supported by the principle of constitutional interpretation that every legislative power carries with it the authority to regulate matters incidental or ancillary to the subject matter of the
power, the control of which is necessary to achieve its main purpose.24The
concept of what is 'necessary' has been read liberally and extends to regulation
'which may reasonably and properly be done' to fulfil the main purpose of the
power.25The principle has been applied to the health and welfare power so as
to authorise detailed laws annexing conditions to the entitlement to Commonwealth benefits, even if those conditions may have the result that a
medical or dental service must be rendered in a particular way if the benefit is
to be obtained.26On this basis, the Commonwealth has imposed, for example,
very detailed requirements over private nursing homes which receive Commonwealth benefits2' and over the provision of diagnostic services by private
practitioners in order for those services to be eligible for Medicare benefit^.^'
This increased control has been prompted by a number of factors. Under the
Medicare program, for example, the government has sought to regulate the
rapidly growing areas of diagnostic services more strictly in an attempt to
discourage practices which have contributed to cost spirals in pathology and
radiology over the last decade. Under the nursing homes program, new regulations have aimed to target this high support, high cost accommodation more
carefully to those in the community most in need, and to link funding much
more closely to service outcomes to ensure higher quality services. The Commonwealth power to regulate many aspects of private service delivery is
21
22
23
24
25
26
27
28
The BMA case (1949) 79 CLR 201,260 per Dixon J, 244 per Latham CJ.
Id 242-3,244,260 per Latham CJ, 282 per McTiernan J. The provision of benefits etc
by the states would be subject to s 109 of the Constitution.
The General Practitioners Society in Australia v Commonwealth (the GPS case) (1980)
145 CLR 532, 557 per Gibbs J; Alexandra Private Geriatric Hospital Pty Ltd v Commonwealth (1987) 162 CLR 27 1,279. See generally T Carney and P Hanks, Australian
Social Security Law, Policy and Administration (1984) 177-8.
Grannall v Marrickville Margarine Ptv Ltd (1955), 93 CLR 55. 77 oer Dixon.
McTiernan, Webb and Kitto 5.
The BMA case (1949)
McMillan,. ov
. cit
.
. 79 CLR 201. 274 oer Dixon J:, see generally
(fn 5) 22-3.
The GPS case (1980) 145 CLR 532, 557-8 per Gibbs J.
National Health Act 1953 (Cth) Pts V-VD.
Health Insurance Act 1973 (Cth) Pt I I A (Special Provisions Relating to Pathology);
Pt IIB (Special Provisions Relating to Diagnostic Imaging Services).
.
60
Monash University Law Review pol 21, No 1 '951
therefore substantial, as long as it has the necessary connection with the provision of Commonwealth benefits. It is submitted that this broad reading of
the power in s 5 l(xxiii~)is appropriate and necessary if the Commonwealth is
to have control over its direct programs commensurate with its level of funding of them. It is worth noting, however, that in practice regulation based on
eligibility for benefits, particularly under Medicare, can produce a very complex legislative scheme, with associated difficulties in ensuring compliance
with eligibility criteria.29
This power to regulate the incidents of medical practice is also circumThe
scribed by the prohibition against 'civil conscription' in s 5 l(xxiii~).~'
prohibition has been read more narrowly by the High Court since it was first
judicially considered in 1949 in the BMA case. This suggests that there is
considerable scope to regulate medical practice under s 5 l(xxiii~)without
infringing the civil conscription pr~hibition.~'
The words 'but not so as to
authorize any form of civil conscription' have been held to prevent direct
regulation by the Commonwealth. By analogy with military conscription, the
words prohibit laws which compel persons to practise as doctors or dentists or
to perform particular medical or dental services. In particular, the words prevent an imposition of a duty on medical personnel to attend patients for fees
. ~ ~ protection extends to laws beyond those for
paid by the g o ~ e r n m e n tThis
the provision of 'medical or dental services', even though the injunction in
s 5 l(xxiii~)is expressed to apply only to medical or dental services.33Whenever medical or dental services are provided pursuant to a law about the
provision of some other benefit, such as sickness or hospital benefits, that law
must not authorise any form of civil conscription of such services.34
However, the latest High Court decision to consider the prohibition has
suggested that it will not protect health professionals from laws regulating the
incidents of medical practice.35In the first case to consider the effect of the
prohibition, the BMA case, a majority of the High Court held that the prohibition prevented not only any legal compulsion upon people to engage in a
particular occupation, but also a compulsion to perform work in a particular
way. On the facts of that case, the provisions of the Pharmaceutical Benefits
Act 1947 (Cth) requiring doctors to use government supplied forms when
writing prescriptions for free medicines under the new Pharmaceutical Ben-
29
30
See further K Wheelwright, 'Controlling Pathology Expenditure Under Medicare:
A Failure of Regulation? (1994) 22 FL Rev 92.
The qualification on the power over medical and dental services was inserted on the
motion of the Leader of the Opposition at the time, R G Menzies, to prevent the
Commonwealth from nationalising medical and dental services: Parliamentary
Debates. House of Re~resentatives(Cth). 10 Aoril 1946. 12 14- 15.
The GPS case (1 980) i 45 CLR 532:
The BMA case (1949) 79 CLR 201.249-50 Der Latham CJ. 261-2 ver Dixon J.. 287 -Per
Williams J; he h case (1980)'145 CLR 532, 555 per ~ i b b Js
The BMA case, id 254-5 per Dixon J, 26 1 per McTiernan J, 281-2,286-7 per Latham
CJ; The GPS case, id 548, 563 per Gibbs J, 565-6 per Aickin J.
The BMA case, id 286-7 per Williams J; Alexandra Private Geriatric Hospital Pty Ltd v
Commonwealth (1987) 162 CLR 271, 279.
Carney and Hanks, op cit (fn 23) 178.
"
3'
32
33
34
35
Commonwealth and State Powers in Health
61
efits Scheme were held to infringe the p r ~ h i b i t i o nWhen
. ~ ~ the application of
s 5 l(xxiii~)was considered again in the GPS case, the High Court rejected
unanimously the widest reading of the prohibition adopted by three of the
judges in the BMA case, preferring the view of the minority in that case.37In
the GPS case, the Court held that the expression did not refer to any compulsion to do, in a particular way, some act in the course of carrying on a
practice or performing a service, when there is no compulsion to carry on that
practice or perform the servi~e.'~
The Court upheld the new legislative provisions regulating pathology under the Health Insurance Act 1973 (Cth) as
nothing in them compelled the performance of any medical service; they only
regulated the financial and administrative incidents of practice of a medical
practitioner who opted to deliver a service which was to be financed by the
Cornmon~ealth.~~
Nevertheless, the capacity of the Commonwealth to regulate private medical service provision remains constrained, at least theoretically, by a proposition expressed in obiter comments in the BMA case and supported by some
judicial opinion in the GPS case. The proposition is that civil conscription
might be found in a law in which there is no legal compulsion on a medical
practitioner to perform a service, but where there is 'practical compulsion',
such as economic pressure which cannot reasonably be re~isted.~'
The circumstances in which a law might be held to impose 'practical compulsion'
sufficient to infringe the prohibition cannot be predetermined and naturally
would turn on the particular circumstancesof the case. The GPScase suggests
that the pressure on medical practitioners to participate in Medicare (because
patients expect to claim benefits for medical services), and therefore submit
to detailed regulation of the incidents of their practice, is supported by
s 5 l(xxiii~)and does not constitute either legal or practical compulsion. The
same is true of detailed regulation of private nursing homes funded by the
C~mmonwealth.~'
However, the Commonwealth government would need to
bear this constraint in mind when it considers changes to its programs, for
example, moving away from the dominant fee-for-service system of payment
36
37
38
39
40
41
The BMAcase(1949) 79 CLR 201,249 per Latham CJ, 287,291 per Williams J, 293-4
per Webb J. Rich J, the other member of the majority, perhaps did not support the
broadest reading of 'civil conscription' (id 255-6).
The BMA case, id 278 per Dixon J, 283-4 per McTiernan J.
The GPScase (1980) 145 CLR 532,560 per Gibbs J (with whom Mason, Stephen and
Murphy JJ agreed), 538 per Barwick CJ, 567 per Aickin J.
The GPS case, id 558 per Gibbs J. The incidental regulation included a requirement
that a pathology practitioner be 'approved' by the Minister before his or her services
received Medicare rebates. Approved practitioners were obliged to abide by a code of
conduct which prohibited fee sharing, certain advertising of services etc.
The GPS case, id 537-8 per Barwick CJ, 550 per Gibbs J, 565 per Murphy J, 566 per
Aickin J.
Alexandra Private Geriatric Hospital Pty Ltd v Commonwealth (1987) 162 CLR
271.
62
Monash University Law Review
pol 21, No 1 '951
of medical practitioner^.^^ The traditional wariness of the medical profession
about increased government control may see the prohibition tested again.
Commonwealth Financial Powers and Health Policy
In the absence of comprehensive direct powers, the Commonwealth has
sought to support national health policies on its financial powers in s 8 1 (the
appropriations power) and s 96 (the grants power). It is not clear whether s 8 1
will support Commonwealth health and welfare programs for which there is
otherwise no constitutional authority. On the other hand, the grants power
enables the Commonwealth to substantially influence joint Commonwealthl
state programs by attaching conditions to Commonwealth funding, in particular hospital funding, to ensure that its policy aims are met. The grants
power is thus central to the Commonwealth government's control over health
Nevertheless the reliance on joint Commonwealthlstate programs
under s 96 to implement Commonwealth policy can be difficult where there
are strong political differences and strong fiscal restraint. The associated
problem, already alluded to, is the tensions arising from the fact that two main
components of Medicare are funded and controlled so differently.
The scope and legal boundaries of these financial powers are discussed
below. The problems which arise as a result of the reliance on the grants power
are explored more fully in the first case study in the next major section.
Section 81 - the Commonwealth Spending Power
The extent of the Commonwealth's power under s 81 of the Constitution,
which is the financial power upon which the Commonwealth relies to fund
health programs directly rather than through the agency of the states, is less
certain than under s 96. Section 83 of the Constitution provides that no
money shall be drawn from the Treasury of the Commonwealth except under
appropriation made by law.44Pursuant to s 8 1, the Parliament may appropriate all revenues or moneys 'for the purposes of the Commonwealth in the
manner and subject to the charges and liabilities imposed by this Constitution'. The controversial aspect of the power is the scope of the phrase
'purposes of the Commonwealth', and in particular whether the phrase authorises expenditure on programs outside the Commonwealth's direct legislative powers. Whether there are any limits on Commonwealth expenditure is
not clearly answered by the Constitution. In spite of detailed consideration by
42
43
44
The former Minister for Health refused to rule out a system 'where general practitioners
are given more autonomy with lump-sum government funding alongside fee-for-service
payments': 'SpecialistsIncomes May Be Cut' The Age (Melbourne) 15 September 1993,
4.
McMillan, op cit (fn 5) 46.
The rule that a government has no legal authority to expend monies unless Parliament
has validly authorised that expenditure is essential to our system of responsible government and has clear legal authority: see Brown v West (1990) 91 ALR 197. The High
Court remarked that ss 8 1 and 83 'assure to the people the effectivecontrol of the public
purse' (at 203).
Commonwealth and State Powers in Health
63
the High Court in Victoria v Commonwealth (the AAP case)45the question
remains unsettled.
The power in s 8 1 supports the appropriation of funds directly to a wide
range of Commonwealth health programs. Most appropriations are for programs for which there is clear constitutional authority - such as Medicare,
the Pharmaceutical Benefits Scheme and Commonwealth funded nursing
homes. Because the appropriation itself is merely a financial measure - 'it
does not supply legal authority for the Commonwealth's engagement in the
activities in connection with which the moneys are to be spent746- separate
legislative or executive action is needed to establish a framework for administering the appr~priation.~~
The appropriations power has been used frequently to implement health
and social welfare programs that are of questionable constitutional validity in
an effort to overcome the absence, until 1946, of any direct Commonwealth
power over health and welfare. There was an early Commonwealth Act providing maternity allowance^,^^ and child endowment, sickness and pharmaceutical benefits were implemented in reliance on this power.49All of the Acts
introduced direct Commonwealth spending programs, with the necessary
administrative machinery, in areas clearly outside the Commonwealth's
direct legislativepowers.50The 1944 legislation establishingthe Pharmaceutical Benefits Scheme was the first of this series of health and welfare initiatives
to be challenged as outside Commonwealth constitutional power. Relying for
its constitutional validity on s 81, supported by the incidentals power in
s 5l(xxxix), the Pharmaceutical Benefits Act 1944 (Cth) provided for the
supply by chemists of a prescribed range of medicines to the public free of
charge. The legislation imposed certain duties on medical practitioners and
chemists in respect of the prescription and supply of medicines, as well as
appropriating the neccessary funds for the scheme. In Attorney-General for
Victoria;ex re1 Dale v Commonwealth (the Pharmaceutical Benefits ~ a s e ) ,a~ '
majority of the High Court held that the Act was invalid, although for different reasons. A range of possible meanings of 'purposes of the Commonwealth' were canvassed without the matter being resolved, although the
overall effect of the judgments was to read the power quite narrowly. The
widest view of the Commonwealth's spending power was adopted by Latham
45
46
47
48
49
50
5'
(1975) 134 CLR 338.
Id 396 per Mason J.
In the case of the three major programs mentioned, the legislation is the National
Health Act 1953 (Cth) and the Health Insurance Act 1973 (Cth).
Maternity Allowance Act 1912 (Cth). The validity of this legislation was never challenged: see R Sackville, 'Social Welfare in Australia: The Constitutional Framework'
(1973) 5 FL Rev 248,249-50; C Saunders, 'The Development of the Commonwealth
Spending Power' (1978) 1 1 MULR 369,38 1.
ChildEndowment Act 1941 (Cth); WidowsPensionsAct 1942 (Cth): Unemployment and
Sickness Benefits Act 1944 ( ~ t h )and
; the Pharmaceutical Benejts Act 1-944 (Cth).
Hanks, op cit (fn 15) 277.
11945) 7 1 CLR 237 la challenge bv the Medical Societv of Victoria). Latham CJ, Rich
and dixon JJ held tde ~ cinvalid
t
because it went beyond authorising expenditure and
purported to regulate behaviour. Starke and Williams JJ held the Act invalid because it
authorised expenditure for a purpose outside s 8 1. McTiernan J dissented and held the
Act to be valid.
64
Monash University Law Review p o l 21, No 1 '951
CJ, who said it was 'for Parliament to determine whether or not a particular
purpose shall be adopted as a purpose of the Commonwealth'. McTiernan J
supported that view.52The other four judges considered that the power in s 8 1
was more narrowly confined to purposes conforming to the powers and functions entrusted to the Commonwealth as a national government under the
Constitution, although they each expressed this view somewhat differentl~.~~
With the addition to the Constitution of s 5l(xxiii~),the Commonwealth
government's need to rely on the appropriations power to support national
health and welfare programs lessened. However, the use of the appropriations
power was revived again in the 1970s with the election of a federal Labor
government 'determined to test the limits of its powers'54and was subject to
further examination by the High Court in the AAP case.55It has been argued
that the decision in this case reverses the narrowing effect of the Pharrnaceutical Benefits
Nevertheless, it failed to resolve fully some of the
fundamental issues about the scope of the appropriations power. In considering the validity of the appropriation to regional councils for social development for the purposes of the Australian Assistance Plan, McTiernan, Mason
and Murphy JJ supported a broad reading of s 8 1. They held that it was for the
Parliament to determine whether or not a particular purpose should be
This view was rejected by
adopted as a purpose of the Comrnon~ealth.~~
Banvick CJ and Gibbs J, who held that 'purposes of the Commonwealth' were
limited to 'purposes which the Commonwealth can lawfully put into effect in
the exercise of the powers and functions conferred upon it by the Constituti~n'.~~
The majority view is also claimed to be the more sensible view, and is likely
Even if a
to be endorsed if the issue arises again for judicial determinati~n.~'
more limited meaning applies to 'purposes of the Commonwealth' in s 81,
there would be practical difficulties in enforcing any restriction. Appropriation laws usually contain a brief but broad statement of purpose, and a court
would face both practical and legal difficulties in deciding whether an appro52
53
54
55
56
57
58
59
Id 254 per Latham CJ, 274 dissenting judgment of McTiernan J.
Id 266 per Starke J, 282 per Williams J, 271-2 per Dixon J with whom Rich J
agreed.
Hanks. OD cit (fn 15) 278.
(1 975)'1<4 CLR 3 3 8 . ' ~executive
~
action within the Department of Social Security, the
Australian Assistance Plan established regional councils to investigate the need for a
level.
~ Aspects of
range of social services and to foster their d&elopment at a c o m m ~ n %
the Plan would have been outside the Commonwealth's direct legislative power. The
scheme was established and supported by a one line appropriation of $5.9 million in the
Appropriation Act (No I ) 1974-1975 (Cth).
Hanks, op cit (fn 15) 280.
The AAP case (1975) 134 CLR 338, 367 per McTiernan J, 396 per Mason J, 41 7 per
Murphy J. Jacobs J held that the appropriation could not, by itself, be the subject of
legal challenge because it was a matter internal to the government of the Commonwealth. However, if it could be challenged, the present expenditure was not beyond the
'purposes of the Commonwealth' because those purposes extended to matters requiring
national rather than local planning (id 4 12- 13).
Id 373-4 per Gibbs J, Barwick CJ expressed a similar view at 362.
McMillan, op cit (fn 5) 12, citing Davis v Commonwealth (1988) 166 CLR 69,96 and
the Final Report of the Constitutional Commission, op cit (fn 18) para 11.31 1.
Commonwealth and State Powers in Health
65
priation was for a 'Commonwealth purpose'.60 In addition, there would be
undesirable consequences for the process of Parliament generally if items in
Appropriations Acts were exposed to judicial scrutiny and declarations of
invalidity, particularly after moneys appropriated had already been withdrawn and spent.6'
Although the exact scope of the words 'purposes of the Commonwealth' in
s 8 1 cannot be regarded as absolutely settled, the assumption that the phrase
ought to be interpreted broadly is probably critical to the constitutional validity of aspects of some current Commonwealth health and welfare funding
schemes which affect areas outside those of direct Commonwealth legislative
authority. These include the schemes provided for in the Homeless Persons
Assistance Act 1974 (Cth) and the Home Nursing Subsidy Act 1956 (Cth),
grants to 'health services' under s 42 of the Health Insurance Act 1973 (Cth),
and direct local government f~nding.~'
The realities of modern government
mean that the precise constitutional validity of a scheme does not necessarily
determine whether or not it is implemented, particularly when the initiatives
are uncontroversial.
Section 96 - the Commonwealth Grants Power
Section 96 of the Constitution provides as follows:
During a period of ten years after the establishment of the Commonwealth
and thereafter until the Parliament otherwiseprovides, the Parliament may
grant financial assistance to any state on such terms and conditions as the
Parliament thinks fit.
The Commonwealth's power to make conditional grants to the states and
territories is central to its policy control in major areas of activity (like education and roads), over which Commonwealth power would otherwise be
doubtful.63In health, the grants power in s 96 has been used in the 1940s, the
1970sand again since 1983to ensure that Commonwealth government policy
shapes the delivery of state public hospital services. The Chifley, Whitlam
and Hawke Labor governments all relied on intergovernmental grants under
s 96 to establish national health insurance programs guaranteeing access to
public hospital services without direct charge to the patient and without a
means test. The present Labor government, with a firm view to the medium
and longer term future of the health care system, is using the grants power to
influence heavily the traditional state area of public hospital service delivery.
Financial assistance is now tied not only to state governments ensuring universal access to their public hospital services on the basis of need, but also to
60
61
62
63
The AAP case (1975) 134 CLR 338, 394 per Mason J. In general, the validity of an
Appropriation Act is not normally susceptible to effective legal challenge: Davis v
Commonwealth, id 394 per Mason CJ, Deane and Gaudron JJ; the AAPcase, id 410 per
Jacobs J.
The AAP case, id 394 per Mason J.
McMillan, op cit (fn 5) 12.
C Saunders, 'Towards a Theory for Section 96: Part 2' (1988) 16 MULR 699.
66
Monash University Law Review [Vol 21, No 1 '951
quality control, patient rights64and efficiency measures, including casemix
funding and workforce planning. In the 1992-3 Budget papers, which introduced some specific Medicare reforms as a result of the National Health
Strategy review, the then Minister for Health, stated:
The Budget strategy is to build on Medicare to make it more than a health
financing system. From 1992-3 Medicare will be developed and
relaunched as a comprehensive health care system. This marks a significant
turning point in the approach to health services delivery in A~stralia.~'
Two interdependent factors have made this degree of centralised control
possible. First is the legal capacity of the Commonwealth to attach wide
ranging terms and conditions to financial provision to the states. Second is the
fact that the Commonwealth government raises tax revenues which are substantially larger than its own direct program expenditure commitments,
whilst state and territory governments are dependent financially on Commonwealth funds to provide the health services for which they traditionally
have had resp~nsibility.~~
This dependence is itself the result of the use of
the grants power by the Commonwealth to take over from the states their
income tax revenues and discourage them from resuming the taxation of
incomes.67
Grants for health purposes are the second largest Commonwealth payment
to the states, after ed~cation.~'
Specific purpose grants for public hospitals are
the largest component of Commonwealth health funding to the states.69
Health and welfare services were first funded this way in the 1960s, with a
much more assertive use of specific purpose grants in the early and mid- 1970s
under the Whitlam Labor Government. The extent of the use of conditional
grants by various Commonwealth governments has been affected, not surprisingly, by their position on federalism. Between 1976 and 1981, for
example, the Fraser government reduced the number of conditional grants for
public hospitals and health purposes in favour of 'identified health grants',
with no restrictions on the states' use of the money.70
The grants power in s 96 provides the basis for all general revenue grants
from the Commonwealth to the states, for grants directly to local govern-
64
65
66
67
68
69
0
'
The 1993-8 Hospital Agreements provide for the joint development of a Public
Patients' Hospital Charter and require the states to set up complaints bodies.
Budget Related Paper No 8, Health Care for All Australians: 1992-93 Reforms
(1992).
J Butler, 'Medicare Hospital Insurance: An Alternative to the Use of Intergovernmental
Grants For Providing Universal Hospital Insurance' in J Butler (ed),Intergovernmental
Grants and Health Care Policv ( 199 1) 32. About 45%of state health expenditure comes
from Commonwealth grants:~ustralianInstitute of Health and welfare Health Expenditure Bulletin No 7 (July 1992) 8.
Hanks. OD cit (fn 15) 265: The First Uniform Tax case (1942) 65 CLR 373.
~ e n e r aand
l spkcific purpdse payments tothe states for health comprised$4422 million
in 1992-3 (estimated payments of $4921 million in 1993-4): Budget Paper No 3,
Commonwealth Financial Relations With Other Levels of Government 1993-94, 82.
Hospital funding grants are estimated at $4325.3 million in 1993-4: id 88.
Hanks, op cit (fn 15) 274.
Commonwealth and State Powers in Health
67
ment7' and for a host of conditional grants for specific purpose^.^' Four
features of the grants power are important when considering how the power
affects the capacity of the Commonwealth government to influence state
health service delivery. These are: the ability to influence areas outside the
Commonwealth's direct legislative powers, the capacity to impose grant conditions, the non-coercive nature of the grants power, and the legal enforcement of grant conditions.
The High Court has given the words of s 96 a literal and consequently very
wide meaning, failing to impose any justiciable limits on the section.73In a
series of decisions dating from Victoriav Commonwealth (the Federal Roads
case) in 1 926,74the Court has amplified the power, holding that a Commonwealth Act made pursuant to s 96 will be valid, even though a state is required
to apply the money to a specific purpose, or to pay over the money to a class of
persons to fulfil a purpose pursued by the Commonwealth which is outside
the Commonwealth's power to effect directly.75A practical consequence of
the Court's interpretation has been to enlarge the Commonwealth's power at
the expense of the states, reducing them, on one view, to economic and policy
subservience. The Court rejected these arguments in 1942 in South Australia
v Commonwealth (the First Uniform Tax case), stating that the validity of
Commonwealth legislation was not to be determined by its effect, nor by its
intended effect, but by its legal operation.76Emphasis was placed on the
express wording of the Constitution, with the consequences for the federal
system being treated by the Court as matters of political rather than judicial
~oncern.'~
In spite of limited legislative powers in health and welfare, the
Commonwealth government can use tied grants to 'pursue minimum national
standards' in this program area and 'ensure the optimal provision of public
services by States from the resources a~ailable'.'~
The significance of s 96 in strengthening the Commonwealth's role in directing health policy lies in the opportunity the provision gives it to impose
conditions of financial assistance on recipient states. The terms and conditions upon which the Commonwealth Parliament may grant financial
71
72
73
74
Attorney-General (Vic); ex re1 Black v Commonwealth (1981) 146 CLR 559.
In 1993-4, the Commonwealth made total gross payments of $32.1 billion to the state/
local sector, including $10.6 billion in specific purpose payments to the states: Commonwealth Financial Relations With Other Levels of Government 1993-94 op cit
(fn 68) 8.
Hanks, op cit (fn 15) 269.
(1926) 38 CLR 399.
Victoria v Commonwealth (the Second Uniform Tax case) (1957) 99 CLR 575, 606-7
per Dixon CJ.
(1942) 65 CLR 373. Latham CJ asserted that Commonwealth legislation may be valid
even though it is intended to weaken and destroy, or does in fact weaken and destroy,
some state activity (in this case, the states' power to levy income taxes). The Court drew
a distinction between a law which offers an inducement to a state not to exercise its
powers and a law which creates or attempts to create a legal compulsion to do so (id 4 17,
423-4 and 464).
Ibid; L Zines, The High Court and the Constitution (3rd ed, 1992) 302.
Commonwealth Financial Relations With Other Levels of Government 1993-94, op cit
(fn 68) 81. The government acknowledges that the pursuit of these goals using tied
grants has to be 'weighed against concerns that these payments limit State budgetary
flexibility'.
'*
76
77
78
68
Monash University Law Review [Vol 21,No 1 '951
assistance to any state are within its discretion,"' although the conditions
must be able to be legally complied with and must not otherwise breach the
C o n s t i t u t i ~ nThe
. ~ ~ Commonwealth may attach conditions to grants in as
specify precisely the activity on which the grant is to
much detail as it wi~hes,~'
be spent, require matching state funds, induce a state to exercise its powers, or
require a state to refrain from exercising a legislative power constitutionally
available to it.82The Commonwealth has exercised its broad powers in this
respect in the Medicare Hospital Agreements to ensure that public hospital
service delivery conforms with Commonwealth policy. For example, as a
condition of financial assistance, the Agreements require each state to give
effect to the Medicare principles and commitments in the provision of public
hospital services, and they require the enactment of legislation by each state
Parliament enacting the Medicare principle^.'^ These conditions are supported by funding formulae which provide bonuses and penalties to promote
compliance with Commonwealth conditions.
Section 96 is not characterised as a coercive power. Acceptance by a state of
a grant of financial assistance is voluntary -the freedom of a state to decide
whether to accept or reject the grant is fundamental, in law, to the validity of
any Commonwealthfstateagreement under s 96.84Essentially the only option
open to a state is the political response of refusing to accept a grant, which is
problematic given the states' dependence on financial aid. Initial refusal is
used as a negotiating strategy from time to time, for example, some state
governments (both conservative and Labor) initially refused hospital funding
grants from the Whitlam Labor Government under the Medibank hospital
scheme in 1975."
Whether the conditions are legally enforceable once a grant is accepted has
not been decided in the cases on the section.86As indicated in the example of
The AAP case (1 975) 134 CLR 338.
Attorney-General (Vic);ex re1 Black v Commonwealth (198 1) 146 CLR 559. It has been
suggested in obiter statements by members of the High Court that the conditions
attached to a grant under s 96 may be subject to some of the specific restrictions upon
Commonwealth legislative power, eg Black's case, 592-3 per Gibbs J. See also W R
Moran Pty Ltd v Deputy Federal Commissioner of Taxation (NSW)(1 940) 63 CLR 338,
350(Privy Council). This raises the further problem of how such limits on the useof s 96
could be developed and applied by the courts: Hanks, op cit (fn 15) 275.
Victoria v Commonwealth (the Federal Roads case) (1926) 38 CLR 399; the Second
Uniform Tax case (1957) 99 CLR 575.
82 The Federal Roads case, id 41 7 per Latham CJ; the First Unifarm Tax case (1 942) 65
CLR 373.
83 Agreement Between the Commonwealth ofAustralia and thestateof Victoria in Relation
to the Provision ofpublic Hospital Services and Other Health Services From 1 July 1993
to 30 June 1998, cls 3.1 and 3.2. The principles and commitments appear at s 26 of the
Health Insurance Act 1973 (Cth). They reflect Commonwealth policies for free public
hospital treatment, access to treatment on the basis of clinical need and improvements
in effciency, effectiveness and quality of hospital services.
84 Attorney-General (Vic);ex re1 Black v Commonwealth ( 1 98 1 ) 146 CLR 559,659-60 per
Wilson J.
Major issues for negotiation were whether hospital grants would be offset against general revenue grants and payment arrangements for doctors treating public patients:
Scotton and Macdonald, op cit (fn I I) 159-70.
86 Saunders, op cit (fn 63) 709.
79
Commonwealth and State Powers in Health
69
cost-shifting in public hospitals discussed below,87grant conditions may not
always be complied with and the enforcement of them may pose difficulties.
This legal uncertainty is probably overridden by the practical and political
pressures which flow in both directions. A state will be obliged in practice to
ensure that its hospitals comply fairly closely with Commonwealth conditions
because non-compliance means less access to bonus funds and may make
future funding negotiations more difficult. At the same time, the Commonwealth may not be willing to sanction states by withholding funds because it
has an interest in seeing services provided and because reduced service levels
are politically and practically undesirable.
In summary, there is no doubt that s 96 permits a high degree of policy
control by a Commonwealth government in the health area (and other major
program areas) to match its fiscal dominance. At the same time, the intensely
political nature of the health area generally is exacerbated by the use by the
Commonwealth of conditional grants to the states to partially fund public
hospital systems over which the states have the primary responsibility, particularly when those state and Commonwealth governments have very different political philosophies and health policies. In a jointly funded but state
run hospital system subject to considerable financial pressures, respective
Commonwealth and state governments may blame each other when the level
and quality of hospital provision is criticised. As a result, the average observer
has considerable difficulty in determining the relative contribution of a range
of state and Commonwealth factors to the problems with primary service
provision.88It would not be unreasonable to assume that the politicisation of
the health area, encouraged by the intergovernmental funding of public hospital services, shifts the focus away from the central concern of the health
system, which is best-practice care in the interests of the community.
State and Territory Powers
Whilst the Commonwealth Parliament can legislate only in those areas enumerated in the Constitution, the states' legislative power extends to many
subjects of concurrent Commonwealth responsibility as well as to the residual
powers not enumerated in the Constitution as subjects of Commonwealth
power.89Each of the states has its own formal Constitution Act which defines
the legislative authority of the state parliaments, not by reference to specific
topics as in the Commonwealth Constitution, but in broad terms by reference
to the territory of the state.90
87
s9
90
At p 7 1 infra.
In Victoria, for example, pressure on public hospitals is attributed by the Commonwealth to the severity of state budget cuts, and by the state to the relative decline of
Commonwealth funds over the years and the decline in private health insurance, which
Commonwealth policy has allegedly failed to address: 'Victoria is a Basket Case', Sunday Age (Melbourne), 26 August 1994, 1.
Commonwealth Constitution s 107; McMillan, op cit (fn 5) 5.
Hanks, op cit (fn 15) 16. For example, the New South Wales Parliament is empowered
to 'make laws for the peace, welfare and good government of New South Wales in all
cases whatsoever': Constitution Act 1902 (NSW) s 5. A similar provision is found in the
Constitution Act 1975 (Vic) s 16. The broad terms of the states' legislative powers have
.
70
Monash University Law Review [Vol 21, No 1 '951
Each state is largely autonomous in how it carries out its health care
responsibilities and each state system is unique, influenced by its population
size, its geography and its own social and political history. The entrenchment
of intergovernmental programs in the traditional state service areas of health
and welfare has ensured greater consistency in policy and service provision
across the states over time. However, the states' reliance on Commonwealth
financial assistance does not necessarily guarantee subservience by the states,
as evidenced by the heated negotiations which precede re-negotiation of the
Medicare Hospital Agreements9' and the different degrees and timing by
which the states take up Commonwealth financial a ~ s i s t a n c e . ~ ~
The involvement of the states in the provision, administration and regulation of health care services is extensive. This includes policy and administrative responsibility for many public health programs, community health
services, child and family health services, community palliative care and drug
and alcohol services.93The states are responsible also for the regulation of
public and private institutions and agencies (principally hospitals and nursing
homes) and the regulation of health professional^.^^ This is matched by subwith the states financing or providing
stantial financial cornmitment~,~~
Together with education, health
directly a very wide range of health ser~ices.'~
is the major item in the budgets of all state^.^' Like the Commonwealth, much
of the power of state governments to influence and control both public and
private institutions and agencies derives from their power to allocate funds
and to impose conditions upon which funds will be made available. The legal
powers of the states over public hospitals, for example, enable their health
departments to influence considerably all aspects of the operations of these
institution^.^^ This influence has become more marked in recent years, with a
stronger emphasis on central planning and on accountability by hospitals and
91
92
y3
94
95
96
97
98
been confirmed by s 2(1) of the Australia Act 1986 (Cth), which declares that the legislative powers of each state Parliament include 'full power to make laws for the peace,
order and good government of that State that have extra-territorial operation'.
With respect to the pre-I993 state election negotiations between Victoria and the Commonwealth over the current agreement, see 'Medicare Deal Soon' The Age (Melbourne)
14 January 1993; 'Medicare Pact Offer of Funds to be Increased' The Age(Me1bourne)
21 January 1993, 3.
For example, the Home and Community Care program (HACC), the implementation
of which was delayed while the states negotiated their level of cost sharing, their lack of
policy control and the administrative arrangements for the Program. HACC began
operating in July 1985, but the last state, Queensland, did not sign the agreement until
April 1986: J Healy, 'Community Services Programs' in Galligan, Walsh and Hughes,
op cit (fn 9) 204.
Review of Professional Indemnity Arrangements for Health Care Professionals, Compensation and Professional Indemnity in Health Care: A Discussion Paper (1992) 21.
MacFarlane, Health Law Commentary and Materials (1 993) 2 1.
In 1991-2, state and local governments spent $8418 million on health, with the Commonwealth government spending $14 073 million: Australian Institute of Health and
Welfare, Health Expenditure Bulletin No 8, April 1993, 9.
In Victoria, for example, 1125 services and agencies are publicly funded by the Victorian state government and many more come under state government regulation:
Victorian Health System Review: Final Report Vol 1 (1992) 2 1.
Health consumes about 21% of Victoria's state budget, with 70Yo of its health budget
going to acute care hospitals: id 41.
Palmer and Short, op cit (fn 3) 81-2.
Commonwealth and State Powers in Health
71
other agencies for funding, to ensure the efficient delivery of an appropriate
mix of services.99
CONSTITUTIONAL MALADIES - TWO CASE STUDIES
The two case studies discussed below illustrate how the Commonwealth/state
division of financial and regulatory responsibility can be a barrier to the
efficient delivery of health services and to the effective regulation of the
health sector. The cost-shifting example shows the fundamental tensions
which can arise as a result of the different means of funding the medical and
hospital arms of Medicare and the difficulties for the Commonwealth in
enforcing some of the conditions attached to s 96 grants. The study of some
aspects of the regulation of the medical profession illustrates how separate
and inconsistent regulatory regimes may develop between the states and the
Commonwealth, and how there may be undesirable gaps in regulation due to
a lack of incentive at state level to regulate and a lack of legislative power on
the part of the Commonwealth to do so.
Cost-Shifting by Public Hospitals
Cost-shiftingbetween the Commonwealth and the states in the hospital sector
has been recognised as a problem since the joint funding of state hospital
services under Medibank commenced in 1975. At that time, the principle that
the Commonwealth and the states should each meet half the costs of state
hospitals posed practical problems in determining what constituted 'operating costs', and offered incentives to the states to shift costs into the 'shared'
category rather than to effect real econornie~.'~~
Today, cost-shifting occurs by exploiting the fact that under the Commonwealth's Medicare program there are two separate systems for the provision
and funding of primary medical services which exist side by side, supported
by very different heads of Commonwealth constitutional power. How services are funded, and more importantly how much money is available to fund
them, depends on whether they are provided within or outside public hospitals.lO' Commonwealth hospital funding is subject to strict funding
limitations under the Commonwealth's grants formula and to stringent
conditions, as well as being affected adversely as a result of the financial
pressures faced by the states t h e m s e l ~ e s . In
' ~ ~stark contrast, under direct
99
loo
lo'
lo*
The implementation of casemix funding formulae in Victorian public hospitals in conjunction with overall budget cuts is an illustration of the substantial financial controls
which state governments can impose on their hospitals. The effects of the changes on
the levels of patient care are hotly debated: see 'Casemix Critics' The Age (Melbourne)
I5 July 1994, 1 1 .
Scotton and Macdonald, op cit (fn 1 1 ) 156.
The example refers to public in-patients. The different public subsidies for privately
insured patients in public and private hospitals raises further complexities not
addressed in this paper.
In 1989-90, the Commonwealth paid $3966 million for hospitals and state and local
governments $4806 million: Health Expenditure Bulletin, op cit (fn 95) 23.
72
Monash University Law Review p o l 21, No 1 '951
Commonwealth programs like Medicare and the Pharmaceutical Benefits
Scheme, private medical, specialist, diagnostic and optometrical services and
many pharmaceuticals are subsidised directly by the Commonwealth government on a fee-for-service basis, and without any ostensible limits on
expenditure. lo'"
There are numerous examples of cost-shifting between programs. In some
public hospitals, cost-shifting has taken the form of reducing outpatient and
casualty services and transferring patients to non-hospital located services
funded by Medicare benefits.lo3Some hospitals 'privatised' their outpatient
services by continuing to offer them on hospital premises, but bulk-billing
Medicare for public patients and charging a moiety for private patients.lo4
Another practice identified as occurring in some Victorian hospitals has been
the billing of Medicare for pathology and radiology services provided to public in-patients.lo5Some public patients have been discharged temporarily
from hospitals in order to obtain expensive medicines on the Pharmaceutical
Benefits Scheme, rather than having them provided by the hospital itself as
part of the patients' overall medical management.'06
The way hospitals are funded for out-patient treatment has been criticised
as actively encouraging cost-shifting. Whereas private medical practitioners
or pharmacists dispensing under the Pharmaceutical Benefits Scheme are
rewarded financially for increasing their services, public hospitals do not
receive revenue for increasing outpatient provision. This is in contrast to the
incentives in the Medicare Hospital Agreements and under casemix funding
for treating greater numbers of in-patients. Instead, there is an extra marginal
cost associated with attracting out-patients.lo7It has also been suggested that
there is a lack of incentive at the state level to monitor and discourage costshifting practices.los
Cost-shiftingposes practical difficulties in two main respects. First, it may
distort budget allocations and compromise financial arrangements between
Io3
'04
Io5
'06
Io7
Io8
For the first time, the Commonwealth introduced in the 1995 Federal Budget a limit on
the number of free pathology tests which could be ordered on any one day per patient.
The estimated savings are $224 million over the next four years: The Australian (Sydney) 10 May 1995, 20.
National Health Strategy Hospital Services in Australia Access and Financing Issues
paper No 2 (August 1991) 7 1 (hereafter NHS Issues Paper No 2).
NHS Issues Paper No 1, op cit (fn 1) 28. These practices were identified as occurring
'prior to the 1988 Medicare Agreement'. It is not clear whether they are still happening.
They may be being replaced by other types of 'cost-shifting', eg hospitals giving preference to private over public patients because they generate income: 'Federal Health
Reform Plans to Stir Up States' The Age (Melbourne) 1 September 1994, 3.
Victorian Auditor-General's Office, Special Report No 21: Visiting Medical Oficer
Arrangements (April 1993) 57. His review disclosed 76 instances, involving nine public
hospitals, where medical services to public in-patients had been billed inappropriately
to Medicare rather than being borne by the hospital.
The Age (Melbourne) 12 September 1994, 9.
NHS Issues Paper No 2, op cit (fn 103) 28.
Visiting Medical Oficer Arrangements, op cit (fn 105) 58. The Victorian AuditorGeneral noted that public hospitals scrutinised carefully their Visiting Medical Officer
(VMO) claims to ensure that private in-patient costs were not inadvertently met from
the public purse. However, such diligence was not applied to identifying any claims by
VMOs to Medicare in respect of public patients for whom the VMOs were already being
reimbursed by the hospital.
Commonwealth and State Powers in Health
73
the states and the Commonwealth.Second, it has the potential to compromise
overall patient management and care. It has been noted that the incentives to
cost-shift by reducing public hospital services encourage (or reflect) a management focus on reducing costs, rather than a focus on what is desirable
medical practice from the perspective of patient care.lo9
Powers to Control Cost-Shifting
An important issue is what regulatory powers are available to the Commonwealth in particular to prevent or penalize cost-shifting in the context of
Commonwealth/state hospital arrangements. Regulatory control over public
hospitals vests, not in the Commonwealth,but in state governments by virtue
of state legislation and the financial dependence of hospitals on funds via
state health departments.l1° However, the absence of incentives in the states
to act on cost-shifting means that these powers are unlikely to be used to
address this problem."'
Given that the Commonwealth has no direct power over state public hospitals, any Commonwealth control must come less directly via conditions
attached to s 96 grants. The superior revenue raising capacity of the Commonwealth, and the power in s 96 to attach very detailed conditions to grants,
has enabled recent federal governments to fund (and consequently shape)
hospital service provision in line with a national health policy. However, the
Commonwealth's power to influence policy and attach conditions to the provision of financial assistance is not matched by any legal power to enforce
those conditions in the Agreement directed to discouraging cost-shifting practices. Such control is financial rather than legal. Financial control has its
limitations in spite of the substantial fiscal superiority of the Commonwealth
over the states.
The breadth of the Commonwealth's power to set the terms and conditions
with which states must comply is beyond doubt, but its precise nature has
been debated.Ii2First, having been conferred on Parliament by s 96 of the
Constitution, the power is presumably legislative in character.'I3Accordingly,
s 24 of the Health Insurance Act 1973 (Cth) provides for hospital funding
agreements between the Commonwealth and each state and sets out the broad
principles of Medicare which each individual agreement must reflect.'I4
Second, the power in s 96, like other legislative powers, may be delegated to
the executive. This power of delegation is vital to the process of developing
Io9
)I0
Il2
Il3
NHS Issues Paper No 2, op cit (fn 103) 72.
For example, in Victoria the Health Services Act 1988 (Vic) gives the Chief General
Manager of the Health Department extensive powers of direction, investigation and
censure over public hospitals, despite the fact that they are autonomous corporate
bodies.
The National Health Strategy was equivocal on the question of whether state governments endorsed the cost-shifting practices of some hospitals: NHS Issues Paper No 2,
op cit (fn 103) 28.
C Saunders, 'Constitutional and Legal Aspects' in Galligan, Walsh and Hughes, op cit
(fn 9) 47.
C Saunders, 'Towards a Theory for Section 96: Part 1' (1987) 16 MULR 1, 11.
Schedule 2A of the Act sets out the heads of agreement for grants.
74
Monash University Law Review wol 21, No 1 '951
Medicare Hospital Agreements, which are negotiated in detail at executive
level, although under the umbrella of the principles and commitments in the
Health Insurance Act 1973 (Cth). However, the extent to which Parliament
can delegate to the executive power to attach terms and conditions to a s 96
grant has arguably not been resolved. An analogy is the practice under the
general Appropriation Acts, whereby monies appropriated by the Parliament
for purposes which are briefly described in the Act are disbursed by the
government according to executive guidelines or conditions. The legal character of the resulting arrangement between the Commonwealth and the recipient is unclear.Il5 Finally, both the delegation itself and the exercise of the
power by the executive must be subject to parliamentary scrutiny. This is
provided for in s 29 of the Health ZnsuranceAct 1973 (Cth), which requires the
tabling of each Medicare Hospital Agreement in each House of Parliament
within 15 days. Whilst there may be some minor questions about the legal
nature of these hospital funding agreements under s 96 of the Constitution,
these do not appear to have posed any practical problems in the health area,
although they may have broader implications for executive control of government generally.'16
Enforceability of a condition by the Commonwealth against a state is complicated by the fact that, in law, an acceptance by a state of a grant offered by
the Commonwealth under s 96 is voluntary. It is not settled in law whether
this non-coercive character of an exercise of the s 96 power extends to compliance with the terms of a grant arrangement once the grant has been
accepted, or whether the terms are legally binding.'" If the latter is the case,
the question of the 'model' for enforcement arises. A Commonwealth/state
Hospital Agreement might be legally enforceable under contract law or public
law, although, as Saunders has pointed out, both of these models have difficulties in their application to Commonwealthfstate financial agreement^."^
There are also difficult questions about what remedies might be available to
enforce funding conditions and whether, in the absence of appropriate remedies, declaratory relief should be granted. The courts have been reluctant in
the past to enforce intergovernmental agreements, on the grounds that they
In the only case where they have been judicially conare not j~sticiable."~
sidered, the Medicare Hospital Agreementshave been described as 'a political
and administrative arrangement by which the Commonwealth is enabled to
implement the hospital aspects of its Medicare scheme', with the implication
Saunders, op cit (fn 113) 11; the AAPcase (1975) 134 CLR 338,387 per Stephen J. The
appropriations for the Medicare Hospital Agreements are provided for in s 30 of the
Health Insurance Act 1973 (Cth).
I l 6 I Thynne and J Goldring, Accountability and Control: Government Oficials and the
Exercise of Power (1987).
I L 7 Saunders, op cit (fn 63) 709.
I l 8 Saunders examines the application of both to s 96 financial agreements, op cit (fn 63)
712-23.
11*
Commonwealth and State Powers in Health
75
that they are not enforceable in the courts by the contracting g~vernments.'~~
This means that requirements in the current Medicare Agreements, for
example about the repayment of funds by the states in certain circumstances
and the provision by the states of data to which the Commonwealth would
otherwise lack access, are probably not legally enforceable. The Commonwealth must therefore rely on the practical persuasion which follows from its
financial superiority.12'
The Medicare Agreements have envisaged the problems posed by the coexistence of two very different funding systems for health by seeking specific
assurances from the states regarding cost-shifting. For example, each state
'agrees to ensure' that aftercare services for public patients, outpatient, accident and emergency services do not attract claims for Medicare benefits or
claims for benefits under veterans' affairs legislation. The states are required
also to 'ensure that, except in an emergency, a recognised hospital does not
issue a prescription . . . that would attract pharmaceutical benefits'.'22The
Agreements envisage enforcement of such undertakings by the states in two
ways. First, grants are provisional, pending the analysis of data about their
actual use, with financial incentives and penalties linked to the attainment of
goals set by the Commonwealth. For example, the Agreement provides that
the base grant will be reduced if the level of per capita Commonwealth Medicare benefits expenditure paid in the relevant grant year in respect of residents
of the state is greater than the national average Medicare Benefits Scheme per
capita e ~ p e n d i t u r e .A
' ~state
~
must certify in its accounts to the Commonwealth that the statistics are correct and that it has complied with the
Agreement. The difficulty which remains in spite of the financial leverage of
the Commonwealth is that any penalties in the form of grant reductions
penalizes the Commonwealth as well as the recalcitrant state. Any substantial
service reduction is difficult to support politically and reflects adversely on
the federal as well as state governments.
The second way the Agreements envisage enforcement is through cooperative management of the problem. The mechanism of intergovernmental
The Medicare Agreement was so described in obiter comments by King CJ in Blyth
District Hospital v South Australian Health Commission (1988) 49 SASR 501, 508. In
that case, the South Australian Supreme Court held that there was no public duty on the
Commission, arising out of the Medicare Hospital Agreement, to provide funds to the
plaintiff hospital for the provision of any particular category of care or treatment.
I2l P Lane, Manual ofAustralian Constitutional Law (5th ed, 1991) 388. The Commonwealth government is now more prepared to flex its financial muscle to address
cost-shifting. It estimates in the 1995-6 Budget that it will save $20 million in hospital
funding grants to the states by penalizing them for shifting costs for items such as
radiology, pathology and pharmaceuticals from the states to the Commonwealth: The
Age (Melbourne) Federal Budget Liftout, 10 May 1995, 3.
122 Victorian Medicare Hospital Agreement, cls 8.9(f) and (g). Under cl 10.4, the states may
charge out-patients for pharmaceuticals, spectacles, prostheses, dental services etc,
provided that 'no charge to the Commonwealth results'.
123 Clause 2.3 of Schedule C of the Victorian Agreement (a specific formula applies). The
penalty assumes that states where Medicare benefits rise substantially are moving their
public patients onto fee-for-service Medicare. The Commonwealth Health Minister
recently asserted that the rate of increase in fee-for-serviceMedicare in Victoria was out
of proportion to other states: 'Victoria a Basket Case' Sunday Age (Melbourne) 5 September 1994, 1.
I2O
76
Monash University Law Review pol 21, No 1 '951
co-operative efforts to address data collection generally, and cost-shifting in
particular, is an administrative and political rather than legal approach,
although it may reflect the lack of legal power by the Commonwealth to access
state hospital data. Whilst the Commonwealth Health Insurance Commission
has an extensive system to monitor claims for Medicare benefits (supported
by the inherent incidentals power in s Sl(xxiii~))and is able to detect and
penalize overservicing and fraud within that program, the Commonwealth
l ~ ~ Health Insurance Comlacks power to access state hospital r e ~ 0 r d s . The
mission surveillance system cannot monitor payments made by public hospitals to Visiting Medical Officers due to confidentialityprovisions contained
in various state Acts.I2' There are exceptions in most Acts which permit disclosure, but there may be a lack of incentive on the part of state governments
to pursue them. Similar confidentiality restrictions apply under the Health
Insurance Act 1973 (Cth), which prevent the disclosure of Medicare data to
external bodies, including state health departments and individual public
hospitals. In the case of the Commonwealth Act and most state Acts, the relevant Minister has a discretion to grant access to otherwise confidential
information, although the discretion has not been exercised. The problem of
data exchange is not a new one. In spite of recommendations since 1985 that
data cross-checking mechanisms be developed by the states in co-operation
with the Commonwealth, no such arrangements have been f0rthc0ming.l~~
The resistance by government administrations to a free flow of information is
another example of how energy is directed unproductively at avoidance
activities to'the detriment of health planning and service delivery overall.
In the context of the Hospital Agreements, the Commonwealth and states
have agreed to work towards the establishment of uniform data bases on outpatient services that will address access and equity issues, 'and also issues
concerned with the interface of the Medicare Benefits Schedule and the
Schedule of Pharmaceutical Benefits with the hospital sector and cost~hifting'.'~~
The Agreements provide for the states and the Commonwealth to
clarify links between different service providers and explore the desirability
of establishing national guidelines for appropriate levels of access for outpatient services. The states and the Commonwealth have agreed to comply
promptly with any reasonable request from the other party for statistics or
'24
Iz5
'26
12'
It cannot identify the extent of 'double-dipping' by Visiting Medical Officers, for
example in Victoria, where the Auditor-General has identified cases of hospital doctors
being paid by both Medicare and their hospital for services to public patients: Visiting
Medicai Oficer Arrangements, op cit (fn 105) 53.
Section 141 Health Services Act 1988 (Vic); s 22 Health Administration Act 1982
(NSW); s 190 Medical Practice Act 1992 (NSW); ss 64, 64d South Australian Health
Commission Act 1976 (SA); s 42 Publicand Environmental Health Act 1987 (SA); Pt IX
Tasmanian State Service Act 1984 (Tas) (but provisions emphasise personal protection
of the patient and provide various exceptions, eg to employees in the course of official
duties etc). Patient confidentiality is protected by administrative instructions and
guidelines in Queensland and Western Australia. It might be argued that these provisions, designed to protect the confidentiality of individual patients, ought not then to
be relied on to protect hospitals from providing information for financial monitoring
purposes.
Visiting Medical Oficer Arrangements, op cit (fn 105) 53.
Clause 9.3(a), Victorian Medicare Hospital Agreement.
Commonwealth and State Powers in Health
77
other information which that party requires for the purposes of the Agreement. The states are required to provide the data necessary to monitor the
implementation of the Agreements, for example data to enable the development of the casemix system and waiting list numbers. It is debatable whether
such agreements are fulfilled in the spirit in which they are expressed in
writing, given the Commonwealth/state controversies generally over hospital
funding and where the solutions to the problem lie.
In summary, the reliance by the Commonwealth on direct legislative
powers to found one arm of the national health system and the grants power in
s 96 to found the other creates inevitable tensions, particularly when the two
arms are not subject to the same funding constraints. In public hospitals, these
factors create incentives for unproductive efforts to reduce costs, rather than
fostering intergovernmental co-operation to achieve best practice care. When
the Medicare Hospital Agreements are compromised by cost-shifting onto the
Commonwealth, the legal uncertainties of Commonwealth/state grants
arrangements means that central government must rely on a shifting balance
of intergovernmental co-operation, and political and financial strength to
address these issues. The requirement in the Medicare Agreements for legislation by the states in some areas strengthens the Commonwealth's hand in
ensuring the dominance of national health policy and could be seen as a legal
strategy which overcomes some of the shortcomings of the Yedicare Agreements from the perspective of the legal enforcement of terms an4conditions.
At this stage, the states are required to ensure that the Medicare principles and
commitments and the Public Patients' Hospital Charter are enshrined in state
legislati~n.'~~
This may provide a model for more specific requirements for
legislation to be imposed upon the states as conditions of hospital funding, to
address problems like cost-shifting. Inevitably, the feasibility of such a
strategy will be assessed as a political rather than a legal question.
Regulation of Medical Practitioners
This case study looks briefly at some of the difficultiesposed by the regulation
of medical practice by the states and the Commonwealth. Government regulation of medical practitioners in Australia occurs at both Commonwealth
and state level. Regulation by each level of government is directed to different
purposes but is nevertheless interrelated. The Commonwealth is concerned
about the financial integrity of the Medicare scheme and its regulation of
doctors is directed largely at preserving this. Commonwealth regulation is
clearly supported by s 5 l(xxiii~)of the Constitution and the inherent incidentals power, because it is necessary to a scheme providing sickness benefits
that the public revenue be protected against abuses of the system under which
such benefits are p r 0 ~ i d e d . IUnder
~ ~ the Health Insurance Act 1973 (Cth),
128
129
For the implementation of the Commonwealth/stateMedicare principles and commitments, see Health Administration Act 1982 ( N S W ) Pt 4; Medicare Principles and
Commitments Act 1994 (Qld);Health (Regional Boards) Amendment (Medicare Agreement) Act 1993 (Tas); Health (Amendment) Act 1994 (ACT).
The GPS case (1980) 145 CLR 532, 549.
78
Monash University Law Review [Vol 21, No 1 '951
conditions apply to the payment of benefits for the services of doctors and
optometrists. In some cases, for example, the payment of benefits for pathology tests, doctors are subject to very detailed requirements, including the
need for written referrals for tests, detailed requirements as to record keeping,
and testing only by government approved pathology practitioners in laboratories licensed by the Comm~nwealth.'~~
Doctors are also liable to investigation by the Health Insurance Commission and the imposition of penalties
for abuses of the Medicare payments system, such as obtaining benefits by
fraud and inappropriate (or excessive) servicing.
The states have comprehensive constitutional powers to regulate medical
practice. They have enacted legislation requiring statutory registration of
doctors, to ensure that only those persons who satisfy the necessary educational and training requirements are legally entitled to practise medicine. In
addition, state registration authorities seek to ensure that high standards of
professional practice are maintained. To this end, complaints and disciplinary mechanisms have been established, and state legislation gives medical
boards or tribunals powers to investigate complaints and to impose penalties
for breach of professional standards.13' In many respects, the existence of two
systems of regulation causes no major difficulties for governments or for the
professionals involved. However, tensions can arise and they are illustrated
below.
Advertising of Medical Services
One problem arises when changes by the states to the way medical practitioners are regulated may have an impact on the Commonwealth (for example
on Commonwealth expenditure under Medicare) but that potential impact is
not taken into account when state legislation is amended. The recent liberalisation of the advertising regulations under the Medical Practice Act 1994
(Vic) is an example. Section 64(l)(b) of that Act provides that a person must
not advertise a medical practice or medical or surgical services in a manner
which
offers a discount, gift or other inducement to attract patients to a medical
practitioner or medical practice unless the advertisement also sets out the
terms and conditions of that oJS (emphasis added).
The implication here is that, as long as the details of inducements are made
clear in advertisements for medical services, such inducements are perfectly
legitimate. Such a provision raises a number of questions from the Commonwealth's perspective, such as whether such inducements are reasonable if they
create additional demand for services, or are most likely to be used by those
I3O
I3l
Health Insurance Act 1973 (Cth) Div IIA 'Special Provisions Relating to Pathology'.
Review of Professional Indemnity Arrangements for Health Care Professionals, Compensation and Profesional Indemnity in Health Care: A Discussion Paper (1992) 38.
Most states also have health complaints authorities which operate independently of
Medical Boards, eg Health Sewices (Conciliation and Review) Act 1987 (Vic); Health
Care Complaints Act 1993 (NSW);Health Rights Commission Act 199 1 (Qld); Health
Complaints Act 1993 (ACT).
Commonwealth and State Powers in Health
79
'entrepreneurial' medical practices which are already noted for the high number of services they provide to each patient.I3' These questions are, of course,
difficult due to the complexities of measuring the effect of advertising of
medical services on demand for them. The point is that the implications for
Medicare expenditure of changes at state level are apparently not considered.
The principal justification for the liberalisation of advertising in Victoria was
the public interest, defined as 'the provision of information facilitating the
ability of consumers to choose between services especially where those services are supported by public funds such as M e d i ~ a r e . "It~is~ submitted that it
is open to debate whether s 64(1)(b)merely facilitates the ability of consumers
to choose, or whether it does more than that, with financial implications for
the Commonwealth. The fact that any financial burden of this liberalisation
of advertising rules falls on the Commonwealth rather than the states means
that there is little or no incentive for a state to consider the financial implications of legislative change in this area.
Entrepreneurial Medical Practice
Conversely, the states neglect to use their superior regulatory powers to regulate medical practice in areas where direct Commonwealth power is fragmentary or uncertain. The example here is the regulation of the practice of
'entrepreneurial medicine'. This is generally understood as highly commercial medical practice in which the primary aim is the maximisation ofprofits.
In Australia, entrepreneurial medical practice received wide attention in the
1980s. Its main forms have included the ownership of large numbers of private hospital and nursing home beds by a small number of practitioners, and
of 24 hour clinics staffed by employee doctors and offering a full range of
diagnostic services from the same premises. Many of these clinics focused
primarily on expanding their business by increasing the number of patients
attended and, in particular, the number of ancillary services provided to each
patient, supported by M e d i ~ a r e .Whilst
' ~ ~ the legitimate place of commercial
considerations in medical practice is acknowledged, the concern about
entrepreneurial medical practice is the danger that the primary goal of the
welfare of the patient may be subjugated to commercial interests and that
overall quality of care may suffer.'35From the point of view of the Commonwealth, entrepreneurial medical practice means that unnecessary services are
being funded from the public purse.
'3Z
'33
'34
135
All of these matters were raised in M Carter, Review of Registration For Health Practitioners Interim Report (Health Department Victoria 1987) ch 8, without being
resolved.
Health Department Victoria, Review ofRegistration For Health Practitioners: Final
Report (1990) 15.
Health Issues Centre, Medical Business EntrepreneurialStyle (1 986); Public Accounts
Committee of the Commonwealth Parliament Report 236, Medical Fraud and Overservicing Inquiry (1986); Senate Select Committee on Private Hospitals and Nursing
Homes, Private Hospitals in Australia; Their Conduct, Administration and Ownership
(1987) ch 7.
Private Hospitals in Australia: Their Conduct, Administration and Ownership, id
304-5.
80
Monash University Law Review [Vol 21, No 1 '951
The Commonwealth's reliance on its powers under s 5 l(xxiii~)
has proved
inadequate to address the expansionary pressures on Medicare which can be
attributed, at least partially, to highly commercialised medical practice, in
particular inducements offered by pathology laboratories to general practitioners to increase their test referrals.136The experience of pathology regulation, for example, shows that making the payment of benefits conditional on
an increasingly detailed array of eligibility criteria has been ineffective in
addressing escalating rates of provision. Also, the detection and penalizing of
overservicing and those practices designed to induce increased ordering of
tests has been problematic. The complex corporate structures used make
prosecution of offences very difficult.13' The Commonwealth might use the
corporations power in s 5 l(xx) of the Constitution to regulate medical corporations more comprehensively and simply than is possible under
s 5 l(xxiii~),but there is a difficulty posed by its inability to also regulate noncorporate structures (such as partnerships) directly. This raises the problem of
basing any new regulatory approach on numerous heads of Commonwealth
power to ensure maximum, if not complete coverage. As has been pointed
out, this makes a legislative scheme more likely to be successfully
~ha1lenged.l~~
The problem of fragmentary regulatory power does not beset the states.
Some states already regulate (to some extent) the practice of medicine in corporate form, recognising that corporate aims are potentially in conflict with
the doctor's primary duty to serve the interests of his or her patient~.l~~Some
states have provisions designed to ensure that practitioners with interests in
private hospitals disclose them and do not permit them to affect their professionaljudgment. However, there is considerable inconsistency across the
states (as there is in many areas of the regulation of health professionals) and
there is nothing presently in either Victoria or the Australian Capital Territory legislation regulating medical practice through company structures. This
leaves only 'informal' regulation by the professional bodies. Wider regulation
might be contemplated which would reduce the conflicts of interest in
entrepreneurial medical practice. Limits on the range and number of health
services in which people can have an ownership interest; stipulating the extent
and type of commercial investment involvement; and more detailed and substantial declaration of interest requirements to patients, or to the public
generally, have all been suggested.140 Such steps are all within the states'
powers and could be seen as a justified extension of the regulation of doctors'
ethical practice (although the regulation would have to extend to those who
had commercial interests but were not doctors), with the potential at the same
Australian National Audit Office, Medifaud and Excessive Servicing (1992) 13.
K Wheelwright, 'Controlling Pathology Expenditure Under Medicare: A Failure of
Regulation?' (1 994) 1 FL Rev 92.
138 Macmillan, op cit (fn 5) 43.
139 For example, Medical Practitioners Act 1983 (SA) ss 37-43; Medical Act 1894 (WA)
ss 23A-V. This regulation emphasises retaining the traditional personal responsibility
of medical practitioners for their patients and ensuring that the control of the company
is in the hands of registered medical practitioners.
I4O Health Issues Centre, Medical Practice Entrepreneurial Style, op cit (fn 134) 13.
136
13'
Commonwealth and State Powers in Health
81
time of benefiting Medicare. But the direct burdens of entrepreneurial medical practice fall on the Commonwealth in the form of Medicare outlays, rather
than on the states, giving them little incentive to regulate in this way. Added
to this is the influence of the profession itself, which would be unlikely to
support greater regulation.
Mutual Recognition of Medical Registration
The third illustration of the difficulties presented by the fragmented regulation of the medical profession is inconsistency between the states, when
each state and territory regulates for the same general purpose. This can
impede the achievement of agreed national goals such as the implementation
of a scheme for the mutual recognition of professional registration by the
states and territories. Again, the problem cannot be overcome by looking to
the Commonwealth for national regulation because of the lack of comprehensive power in the Commonwealth to regulate doctors. Mutual recognition
of regulated professions, including the medical profession, is being pursued
jointly by the Commonwealth and the states as part of a general 'mutual recognition' process for regulated goods and services across Australia. The aims
are to improve the operation of the national economy and remove the artificial barriers to the mobility of labour caused by regulatory differences
among Australian states and territories.I4' Separate regulation of health care
professionals in each state has posed problems for the capacity to practise in
other states, partially overcome now by the passage of the Mutual Recognition
Act 1992 (Cth) and complementary legislation in all states except Western
Australia. The scheme permits doctors to have their registration recognised
across state borders on application and is complemented by the establishment
of a national compendium of medical registers. Two broad categories of registration are available -general registration for doctors who have unrestricted
practising rights in their state of origin, and conditional regi~trati0n.l~~
It is conditional registration which poses problems for the scheme because
of the surprisingly variable statutory provisions on what constitutes 'unprofessional conduct' in each state (in particular, the type of behaviour which
causes a doctor to have his or her registration restricted, suspended or cancelled); by what process that finding is reached; and the penalty which is
incurred. This means that a common approach to disciplinary sanctions
within each state is necessary to the integrity of the mutual recognition
scheme if it is to be more than a simple amalgamation of state medical registers. State Acts need amendment to give each state's Medical Board the power
to impose the full range of sanctions for disciplinary offences (deregistration,
suspension, fine, censure, reprimand of a doctor and dismissal of a matter)
and this is in pr0gre~s.I~~
Equally important for the integrity of the mutual
Parliamentary Debates, House of Representatives (Cth) Vol 186, 3 November 1992,
2432.
142 Review of Professional Indemnity Arrangements for Health Care Professionals, Compensation and Professional Indemnity in Health Care, Interim Report (1994) 197.
'43 Id 199.
14'
82
Manash University Law Review [Vol21, No 1 '951
recognition scheme is consistency of standards - what constitutes misconduct in one state must also do so in the others, and be penalized in the same
way. The implementation of uniform standards would also enable greater coordination between the state and Commonwealth disciplinary systems as to
which Medicare offences automatically constitute unprofessional ~ 0 n d u c t . I ~ ~
Because the Commonwealth mutual recognition legislation does not affect
the ability of professional boards to regulate the conduct of health care professionals registered under state laws, an on-going process of separate state
amendments in pursuit of uniform standards will be necessary. It will no
doubt take time and will be affected by the involvement of the state Supreme
Courts as places of appeal against the findings of state boards and tribunals.
The separate state disciplinary systems have fostered the separate development of legal principles which, whilst not necessarily inconsistent, have
different emphases.
In summary, the examples of difficulties in the regulation of some aspects
of medical practice looked at above illustrate some of the tensions which the
different regulatory capacities of the states and the Commonwealth can cause.
Commonwealth programs have significant outlays, but the Commonwealth
lacks the power under s 5 l(xxiii~)
to regulate directly to preserve the financial
integrity of the Medicare program. Conversely, the states have the power to
act to effectively address problems like those posed by entrepreneurial medicine, but lack the incentives to do so. From another perspective, the fact that
the states have developed legislative regimes which differ in important
respects impedes uniform systems which are considered necessary to foster
national competition and uniform standards. The answer may lie in the Commonwealth exploring other heads of Commonwealth power to regulate
specific areas. In the meantime, regulation will continue to be inconsistent
and less effective than it might be, to the detriment of consumers and the
public purse.
CONCLUSIONS
Many of the difficulties that exist in health service planning and delivery
result from the complex mix of Commonwealth, state, local government and
private sector involvement in the health sector. At its best, the involvement of
differentlevels of government and sectors of the community can produce well
resourced and planned services responsive to community needs. At worst,
there is a lack of integration of planning, difficulties over funding and gaps
and inconsistencies in regulation which are exacerbated by the constitutional
144
In New South Wales, the new Medical Practice Act 1992 defines as 'unsatisfactory
professional conduct' offences under ss 128A, 128B, 129, 129AA or 129AAA of the
Health Insurance Act 1973 (Cth) and medifraud offences. These offences all comprise
the making of false statements or returns in connection with the provision of or payment for medical services. This represents a clear integration of the state disciplinary
code with the findings against a practitioner under Medicare. Slightly different provisions pertain in Tasmania and the Australian Capital Territory. Other state Acts eg
Victoria and Queensland provide more generally that conviction of an indictable
offence constitutes professional misconduct.
Commonwealth and State Powers in Health
83
division in power and responsibility between the states and the Commonwealth.
The fact that both high quality health programs and programs fraught with
difficulties grow from the same constitutional system indicate that factors
other than constitutional ones fundamentally influence health programs. The
political complexion of Commonwealth and state governments and their relative positions on the federallstate balance of power are no doubt important.
These factors are aggravated by the influence on hospital funding and policy
(one of the most crucial and visible arms of the health system) of the fiscal
policies of the Commonwealth and the health of state budgets. When political
tensions between state and Commonwealth governments are high, the division between their constitutional powers and their relative resources are
highlighted. In this context, the constitutional framework for health service
delivery becomes a substantial obstacle to implementing an integrated health
system based on best practice care.
The challenge for federal governments seeking more comprehensive regulation of the health area is to explore whether Commonwealth constitutional
powers can be used more effectively. If the broadest range of health related
activities are considered, it may be true that 'Commonwealth regulation still
falls far short of the most optimistic constitutional b ~ u n d a r y ' . 'For
~ ~ example,
the corporations power in s 5 l(xx) has proven to support very detailed regulation in areas like trade practices, but its potential to regulate such areas as
high technology corporatised medicine has not yet been explored. Any use of
Commonwealth powers which reduces the inefficiencies caused by the mix of
Commonwealth/state responsibilities, particularly in such examples as costshifting between state public hospitals and Medicare, are worth considering.
At one extreme, the Commonwealth might take over responsibility for direct
funding and administration of all hospital services.'46A less radical option
might be the funding of all out-patients' departments through Medicare, to
move the focus away from cost-shifting to Medicare and back onto providing
a service in the best interests of the consumer. In the latter case, overall cost
control might still be compromised whilst Medicare fee-for-service remains
open-ended. Of course, such options may be feasible in terms of legal powers,
but have serious implications in policy and political terms and it is undeniable that such non-legal factors are important in explaining why the current
extent of Commonwealth control over health falls short of its legal potential.
It is likely that health care policy and services will remain high on the
political agenda in the foreseeable future. Whilst the division of constitutional powers may not be hotly debated politically, there is little doubt that
they will always provide the backdrop to the debate about what is possible in
health. Certainly no policy changes can be contemplated, particularly at Commonwealth level, without careful consideration of the scope and limitations
of those powers and the way they affect Commonwealthlstate relations in
health.
'45
146
McMillan, op cit (fn 5) 1 .
NHS Issues Paper N o 2, op cit (fn 103) 79.