Funding and payment models in healthcare are designed to induce desired behaviours in those who deliver and administer services. In Australia, public hospitals are co-funded by Commonwealth and State/Territory governments through a mix of activity-based (ABF) and block funding models. These core pillars have not changed since 2011 when ABF was rolled out nationally to link the granular level of healthcare delivery with funding envelopes using clinical diagnostic pathways (DRGs) and agreed schedules of pricing (National Efficient Price).
In 2026, the reform horizon for public hospitals is shifting. The 2026−31 Addendum of the National Healthcare Reform Agenda (NRHA) has left the door open for governments to explore innovation in payment models as way to drive optimal models of care and address health system sustainability. Specifically in scope were episode-based and bundled payments (BPs) as part of a broader package of structural health reforms aimed at improving service delivery. With BPs operating as a single payment for the entire care episode – rather than for each individual activity as per ABF – this mechanism holds the potential to transform the way that hospital care is provided, and in doing so, holds further potential to lower the cost of care and increase its quality. While there is evidence for such outcomes overseas, Australia has had limited experience with this payment model to date, meaning that the implementation pathway and likely benefits have not been determined or tested.
This paper draws on a recent project (2026) funded by a government grant that explores the key design and implementation factors for BPs in Australia. It presents empirical findings from interviews with two groups of health system experts on the reform challenges and opportunities under the NHRA policy landscape (1. government executives with experience in healthcare policy and funding; 2. executive managers with experience administering payments at the local hospital and district levels). In a health system that has split funding responsibilities between the Commonwealth and the States but a collective stewardship role, this paper illuminates how funding and payment reform must contend with multiple and potentially conflicting aspirations and motivations for initiating change and in developing common objectives to guide the process and assess success. Using BPs as a case study, a core tension emerges with both practical and analytical relevance in understanding reform processes, the design of funding models and its implementation: Whether, and under what conditions, do changes in funding models stimulate desired changes in behaviour by clinicians and hospital administrators to achieve patient and system level improvements?
