The Hawke Labor government seriously considered breaking the promise to fund the operating deficit of Calvary Hospital, which would have closed all its public beds.
Newly declassified cabinet papers reveal the proposal to ''operate Calvary as a private hospital'' was put before the expenditure review committee - cabinet's razor gang - as ministers struggled to find savings for the budget.
The saving of up to $10 million for the ACT Health Authority was considered just before the territory was granted self-government.
Ministers were told Calvary was run by an incorporated association linked to a Catholic order of nuns, the Order of the Little Company of Mary.
The Finance Department submission said: ''Savings in ACTHA outlays could be achieved by no longer funding the deficit of Calvary and requiring the association to operate Calvary as a private hospital.''
In addition, Calvary would be allowed to open an extra 100 private hospital beds and the government would close an equivalent number of public beds at Woden Valley Hospital and the Royal Canberra Hospital, then operating on the present site of the National Museum.
Ministers were told this ''would produce a better mix of private and public beds in the ACT''.
The ratio of private and public hospital beds in the ACT was one to 10, compared with one to four in NSW and and one to 2.6 in Victoria, the submission said.
''Both options would effectively transfer the costs of hospital care from the Commonwealth to people who generally have a higher capacity to pay, i.e. those patients who choose to be treated privately and are insured accordingly.''
Ministers were warned closing public hospital beds could provoke industrial action from health sector unions.
Co-ordinating comments attached to the submission showed that the ACT Health Authority did not support either option.
''[The authority] favours maintaining the existing number of public beds at Calvary Hospital while progressively opening the remainder as private beds over the next 10 years in accordance with population requirements,'' the submission said.
''If, as is possible, the Order of the Little Company of Mary does not wish to operate the hospital as a totally private facility, the government will face significant resistance in changing the existing agreement,'' it said.
''It is also relevant to note that, with the development of Gungahlin, the expanding population on the northside of Canberra will become increasingly remote from public hospital facilities if either option is implemented.''
The federal Department of Health had no objection in principle to Calvary Hospital operating as a private hospital. ''This may provide a better balance between public and private hospitals in the ACT,'' it said.
''The community could perceive that a reduction in public beds could mean even longer waiting times in the two remaining public hospitals.''
In 2010 the ACT government proposed buying and upgrading Calvary Hospital and allowing the Little Company of Mary to buy Clare Holland House, but the deal collapsed.