The federal government says it has made "significant commitments" for public hospitals and will continue negotiations to get a deal done.
The states and territories are on a collision course with the Commonwealth over public hospital funding, with health ministers expressing white-hot anger over a letter from the prime minister demanding they rein in spending if they want a funding deal honoured.
Anthony Albanese made the request in September, writing to state and territory leaders saying they must slash growth if they want a public hospital funding commitment implemented.
"For states and territories to realise a Commonwealth contribution of 42.5 per cent of public hospital costs by 2030-31, under the capped glide path model, it will be necessary for your government to work to reduce growth in hospital activity and costs to more sustainable levels," the letter states, according to two separate sources.
The intervention has prompted an angry response from states including Queensland, which said the prime minister was trying to "pass the buck".
"Upon reading the letter, my immediate response was that it was almost beyond belief that the prime minister would write to us saying we have to work to reduce growth in hospital activity," Queensland Health Minister Tim Nicholls told the ABC.
"Demand is growing with an older and growing population with more severe acuity and presentations, it's just unrealistic to expect the states to say, 'oh, well, we can control demand'."
Other health ministers, who did not want to be identified for fear of retribution, said the letter went down like a lead balloon.
In 2023, National Cabinet agreed to a new funding deal for public hospitals, which are run by the states and territories, but partly funded by the Commonwealth.
The deal promised the federal government would increase its share of funding to 42.5 per cent by 2030, and 45 per cent by 2035.
In exchange, the states and territories would co-fund some new disability services outside the National Disability Insurance Scheme (NDIS) to ease some of the pressure on the rapidly-growing scheme.
But negotiations have stalled, with state and territory leaders last month releasing a scathing statement, suggesting the government had walked back its initial commitment.
The federal government has repeatedly insisted it wants a deal done by the end of the year, but federal Health Minister Mark Butler now faces an uphill battle to get the agreement over the line, as tensions with the states and territories continue to rise.
Tasmanian Health Minister Bridget Archer said for an agreement to happen soon, the Commonwealth would need to "come to the party".
"If there's to be a deal by the end of the year, the federal government is really going to have to step up their negotiations and have to sharpen their pencil ... is the bottom line," she said.
"We have been collectively very loud and clear that we want a new hospital agreement, but we want one that does what the federal government says they want it to do too."
South Australian Health Minister Chris Picton said while the states wanted certainty around public hospital funding, the "devil was in the detail" of the negotiations.
"Over many, many years, we've seen the federal government's share of funding those public hospitals going down and states and territories just can't agree to a deal which would see that continue to decline, particularly as we face increasing demands and increasing ageing of the population," he said.
NSW Health Minister Ryan Park said while he was determined to negotiate with the federal government, it was imperative the Commonwealth paid "its fair share".
"The Commonwealth has deeper pockets than the states," he said.
"Unless the Commonwealth honours its commitments, hospitals will be left underfunded and overstretched. Families in NSW deserve timely, quality healthcare, and that requires both levels of government pulling their weight."
'Their maths doesn't make sense to us'
The states and territories have an agreement with the Commonwealth where public hospitals are funded based on how many and what type of patients they treat, which is then adjusted for cost increases.
But to put the brakes on spending, the Commonwealth caps annual funding growth at 6.5 per cent on the previous year.
As part of the 2023 deal, National Cabinet agreed to replace that cap on funding growth with a more "generous approach".
But it has since been revealed that after a one-off catch-up year of 13 per cent, the cap will rise from 6.5 per cent to 8 per cent, with Health Department Secretary Blair Comley telling Senate Estimates last month the federal government's commitment to the broader deal was contingent on states keeping costs down.
ACT Health Minister Rachel Stephen-Smith said staying under that cap was not possible, and left states to shoulder an increasing burden of hospital costs.
"The Commonwealth is contributing nothing to a significant proportion of our activity, in effect," she said.
Ms Stephen-Smith said if the federal government did not boost the growth cap, it would never reach its agreed share of funding
"I don't understand how the Commonwealth believes that we could possibly get to 42.5 per cent and then 45 per cent with that cap in place," she said.
"Their maths doesn't make sense to us."
Mr Nicholls said the cap was "unreasonable."
"These are things that we must and are obliged to and are set up to deliver. The Commonwealth does know this -- we've been open and transparent with the funding challenges.
"And despite that, we are still being nickel and dimed away with these restrictions on growth in the forward years."
A report on the drivers of public hospital costs -- commissioned by state and territory treasurers and prepared by former federal health department boss Stephen Duckett and Create Health Advisory -- stated the 6.5 per cent funding cap had become "disconnected from inflationary and structural cost pressures" which meant that states and territories were taking on more of the public hospital funding load.
It also found a high-inflation environment, growing cohorts of stranded patients in public hospitals, national and global workforce shortages and an increasingly frail and complex public hospital patient cohort were the main factors behind cost increases.
"These pressures are persistent and largely fall outside the control of states and territories," the report stated.
It suggested the Commonwealth "take greater responsibility" for ensuring timely access to aged care, disability supports and other non-hospital services, saying they all fell under its responsibilities.
In a statement, a federal government spokesperson said the Commonwealth's most recent offer included an additional $20 billion over five years for public hospitals.
"The Commonwealth has made significant commitments to improve access to care and reduce pressures on public hospitals," they said.
"The Commonwealth is prepared to negotiate in good faith and looks forward to discussing the offer with states.