Proposals to improve Australian health care have a habit of ending in public slugfests over systems of hospital funding. The current dispute over the future of Calvary Hospital is a case in point. The ACT Government has offered to purchase the public hospital from its current owners, the Little Company of Mary, and complete its integration into broader ACT health services. The company, always a slightly reluctant general hospital provider, has been attracted by the prospect of shifting its attentions to Canberra's palliative care services with the full transfer of Claire Holland House and developing a private hospital.

Andrew Podger, the former secretary of the Commonwealth Department of Health, and one of the most thoughtful commentators on our health services, has disputed the case for change. The ACT should not pre-empt major reforms to governance, especially of finances, mooted by the National Hospitals and Health Reform Commission.

Whatever the commission's findings, it is unlikely that we will see swift action. The proposals for the Commonwealth to take over all health funding and organise a national system of area-based integrated health services, or a more ambitious shift to a European social insurance scheme, would take years, or based on international experience, decades, to debate and implement.

In the meantime, Podger has suggested that keeping Calvary in church hands would enable a purchaser-provider split to gain greater efficiencies and enable some diversity and choice.

The purchaser-provider model fashionable in the public administration models of the 1990s relies for its effectiveness on very clear specification of contractual aims and targets. The funding agency usually a government sets clear targets, and a separate manager (often private) works out ways to implement them. The model has fallen from fashion in recent years. It proved difficult to specify and measure outcomes in enforceable contracts.

In 2002, Mick Reid (now director-general of health in Queensland) made a scathing report on the role confusion and inefficiencies and poor accountability that had developed with the ACT's experiments in purchaser-provider arrangements. These problems were compounded by the small scale of Canberra's services, giving little scope for fragmented providers to find efficiencies.

It would be strange to return to a model that failed dismally on its last excursion to the ACT. We have recently seen the embarrassing spectacle of several of the great Melbourne public hospitals admitting they had cooked statistics to meet contractual targets. In a small jurisdiction, these complicated contractual models only create new costs and confusion.

In the meantime, there are pressing questions about the efficient management of existing services for Canberra's growing and ageing community. The Canberra region has three public hospitals, including Queanbeyan, so there is little justification for a new hospital. Demand for services, in quantity, but also complexity, is certain to rise with an ageing, affluent population. This must be met through better use of existing resources.

Calvary is currently rated as a district hospital in theory limited in the range of procedures it can carry out. In practice, demand for its services has led to a continuous pushing upward, seen in the expansion of emergency cardiology services and specialised orthopaedic work at Calvary. These services need expanded intensive care capacities best achieved by rostering and managing across the two hospitals. Separate purchaser-provider agreements would only set a new barrier to this integration of services. This is very difficult when clinical governance, and accountability for outcomes, is split between two distinct managements each with separate contractual accountabilities to the single funder. Similar problems bedevil the smooth integration of electronic patient information systems the bedrock on which improved quality and safety will rest.

One of the more useful contributions of economists is to point out that every decision has an opportunity cost the roads not taken and the possibilities foregone. Sometimes what is at first sight a parochial battle over local priorities turns out on closer scrutiny to embody more fundamental principles. The largest challenges faced by every ageing society lie outside the hospital wards finding innovative ways to enable people to manage declining capacities and remain engaged with their families and communities. Our obsession with hospitals as the heart of the health system makes it difficult to face these realities.

The Little Company of Mary, the Catholic order that has run Calvary since 1977, has never seen public hospitals as its prime business. Founded by Mary Potter in the slums of Nottingham in 1877, it took the care of the dying as its prime mission. In Australia since the mid-1880s, the order has been at the forefront of the hospice movement and innovative approaches to palliative care. Palliative care has been the strongest offering of Catholic teaching to modern health care. The concentration of efforts in this growing area would offer greater scope for innovation and leadership in contrast to managing a hospital under increasingly prescriptive contracts with ACT Health. The recent National Health and Hospitals Reform Commission interim report pointed out that palliative care, which started in treatment of terminal cancer patients, has barely touched the problems raised by other diseases, including the slow debilitating chronic illnesses of the aged, of young people and the special cultural needs of indigenous people. All of these pressures will increase over the next few decades.

Little Company of Mary is already doing pioneering work in Victoria and NSW on extending palliative care back into earlier stages of terminal disease, not leaving its special insights into both pain management and the dignity of the patient until medicine has washed its hands of a cure. The proposed change of ownership would enable the company to lead these fundamental changes in the way we deliver health care.

Dr Gillespie is deputy director, Menzies Centre for Health Policy, at The University of Sydney.