Facebook
Twitter
LinkedIn
Grattan Institute’s recently released report, Smarter Spending: Getting Better Care for Every Hospital Dollar, and its headline figure of the $1.2 billion in avoidable hospital spending each year, has already started to spark the predictable commentary.
But to fixate on the dollar amount is to miss the real inflection point the report signals for Australian healthcare.
Australia doesn’t just have an efficiency problem.
It has a system design problem, a leadership bandwidth problem, and a productivity problem that is threatening the long-term sustainability of public hospitals.
That is the real insight emerging from the Grattan report. And the one healthcare leaders must now confront.
The Real Problem isn’t the Waste, it’s Why the Waste Persists
The report catalogues the inefficiencies that we already know about: unwarranted variation, unnecessarily long stays, redundant tests, and poor procurement practices. And they’re essential to understand. But the more important insight to realise from these findings is this:
Inefficiency and avoidable spending persists because the health system is wired to reproduce it. And because no one is rewarded for eliminating it.
Activity is what is currently funded, value is what is talked about. The system rewards throughput, not transformation. And hospital administrators carry the risk for inefficiencies, often with no levers to control them. The report is clear about this.
But the key nuance to understand here is that hospitals are not just suffering from a lack of effort or intention, they’re suffering from a lack of aligned incentives. This is why we see even highly capable organisations often sliding into inefficiency over time.
The High Cost of Variation: A System Weakness
The report points to significant unwarranted variation. For example, a $13,600 difference in the cost of a knee replacement depending on which Victorian hospital it’s performed in. Variations like this aren’t just financial red flags, they’re actually systemic signals.
Because where there is variation, there is almost always:
- Inconsistent clinical governance,
- Uneven talent distribution,
- Poor real-time performance feedback,
- And/or variable adoption of evidence-based models of care.
So reducing variation isn’t merely a costing or accountability exercise, it’s a leadership, culture, and capability exercise.
It requires transparency, courage, and meaningful engagement with clinical teams who control the levers of change.
Budgets Aren’t the Problem: Budget Behaviour Is
One of the most important insights from the report is the political complexity of hospital funding and hospital budgeting. That budgets are set too low, deficits are predictable, and end-of-year bailouts are expected. Leaders know the budget is unrealistic, governments know they will need to top it up, and no one has an incentive to break the cycle.
Accountability is non-existent from every side, whichever way you look at it.
Therefore, the report recommends recalibrated funding models, more realistic hospital budgets, better procurement, and tighter accountability. All necessary. But none will actually stick unless leaders confront a fundamental behavioural reality:
Hospitals optimise what they’re measured on, and right now, those measures are not incentivising smarter care, smarter accountability, or smarter spending.
To fix this, healthcare leaders need to focus on three behavioural shifts:
1. From volume to value mindsets
Shifting executives and clinicians from “more activity means more income” to “higher-value care means more capacity and better outcomes, and more income.”
2. From project thinking to system thinking
Not continuing to treat efficiency as a set of isolated “sustainability” initiatives, and starting to treat it as a strategic capability from a broader perspective.
3. From blame cycles to performance accountability
Moving away from “budget blowouts happen because demand is rising” to “we need structural discipline even when demand rises.”
Until these shifts occur, no financial reform, no accountability expectation and no reporting mandate, will deliver the promised gains, no matter how well-designed they may be.
Leadership Capacity Determines Whether Smarter Spending Works
One point not stated explicitly in the Grattan report but is critical for healthcare executives to keep in mind is this: Australia does not currently have the leadership bandwidth to execute system-wide reform at the scale that is suggested.
Boards, executives, and senior clinical leaders are already operating at saturation. Adding new accountability regimes, reporting expectations, benchmarking frameworks, procurement reforms, and funding restructures will only stretch them further and add more pressure, unless:
- capability uplift occurs,
- leadership pipelines are strengthened,
- and any reform is staged carefully, with genuine engagement from clinicians.
The biggest risk we see here isn’t political resistance, it’s reform fatigue. If smarter spending is to work, investment in leadership capability must match investment in system reform.
Reform that outpaces leadership capacity usually fails.
Smarter Spending Is Not Cost Cutting
The report calls for the Federal Government to increase its funding contribution – rightly so. But the more critical insight that shouldn’t be missed is that Australia must spend differently, not simply spend more.
We know that the demographic trajectory (ageing populations, chronic disease rise, workforce shortages), means demand will outpace the current funding-growth formula. But more money won’t be able to keep up unless the system works differently. And smarter spending will not be about just efficiency, but about sustainability.
Where Leaders Should Focus Now: Four Priorities
Based on the report’s data and broader sector intelligence, these are the areas where hospital and health service leaders should focus their attention over the next 24 months.
1. Redesigning care pathways to reduce length of stay – not just pushing for faster discharges
Grattan recommends rewarding shorter stays. But the real insight is that length of stay is not a discharge decision, it’s a system flow issue.
Slow diagnostics, delayed consults, workforce demarcation barriers, poor weekend coverage and overly complicated clinical pathways and unmanaged variation. These are what extends length of stay.
Fixing these requires addressing the friction points in flow, not pressuring clinicians and hospital flow teams to move patients faster.
2. Building procurement and commercial capability
Most public hospital executives will readily admit that procurement is one of the least mature capabilities in the system. This is where hundreds of millions are lost annually.
Not due to mismanagement, but because:
- procurement teams lack deep commercial expertise,
- clinical engagement is inconsistent,
- whole-of-system buying isn’t the norm,
- and there’s limited access to real-time cost benchmarking.
So without modernising procurement talent and tools, smarter spending simply won’t materialise.
3. Tackling high-variation procedures as a strategic priority
The Grattan report highlights staggering variation in procedure costs. But variation in itself is not the main issue, it’s a leadership signal.
Because where there is variation, there is almost always:
- unclear accountability,
- inconsistent clinical governance,
- weak data feedback loops,
- and capability gaps in service design.
This is why reducing variation should not be considered as just a costing exercise, but a leadership and culture exercise.
Leaders should treat high-variation procedures as a strategic focus area for unlocking quality, safety, and cost improvements simultaneously.
4. Moving to a “Transparency by Default” culture
The report calls for benchmarking. Absolutely, but benchmarking only works when it is transparent, timely, granular, and routinely shared with frontline teams.
Without a transparency mindset, high-performing health systems cannot exist. Therefore, health leaders must normalise transparent data sharing at all levels, even when the data is uncomfortable.
Data transparency will be the single most powerful accelerator of value-based care.
Reframing the Problem from a Funding Crisis to a Productivity Crisis
Yes, the Federal Government should increase its contribution.
Yes, the States must tighten accountability.
Yes, Hospitals must reduce avoidable spending where possible.
But the underlying problem that needs to be understood is not that we are running out of money, but that we are running out of productivity capability. Without system redesign, any new funding that is given will only just continue to disappear into old inefficiencies.
This is not an indictment, just a structural fact.
A Final Reflection for Healthcare Leaders
The Grattan report provides a compelling evidence base and a workable blueprint to a problem that is well known and that has been longstanding. But the value and meaning of the report lies not just in its recommendations, it lies in the decisions that healthcare leaders choose to make now.
Smarter spending should not just be about tightening belts or adding in more accountability requirements. We obviously can continue adding pressure, dollars, and reporting burdens to a system that is already fatigued and hope for different results. Or we can recognise that smarter spending is a chance to redesign the system so every dollar, every pathway, and every decision delivers genuine value. This is the transformational pivot that is needed and is long overdue.
For leaders, the question should no longer be:
“How do we save money?”
The question should be:
“How do we redesign the system so every dollar actually delivers value?”
That is the work ahead. And it will define the future sustainability of Australia’s public hospitals more than any single budget, reform, or funding agreement ever will.
For more industry analysis and healthcare intelligence Follow us on Linkedin and become an AIHE Member today.
