According to expert researched commissioned by the NSW Labor government, Kevin Rudd's activity-based funding model, may cause more than a quarter of Australia's hospitals to go broke.

It was suggested by the research of academic Kathy Eager, based in the University of Wollongong, that hundreds of hospitals across rural and regional Australia that have 10 or fewer beds and unpredictable workloads, would have to close if they were funded wholly on the basis of the efficient cost of each service they offered.

The key element of the Prime Minister's health reform plan which is activity-based funding designed to prevent cost blowouts, was released earlier this month. Rudd plans to get the approval of the Council of Australian Governments in the meeting to take place next month.

Right now, hospitals across Australia are funded by a combination of payments for the procedures they perform, plus block funding made up of state and federal grants.

Mr Rudd plans to take the responsibility of 60 per cent of hospital funding by taking back 30 per cent of the states' GST income. There are 209 hospitals in Australia with 10 or fewer beds, or 27.4 per cent of the total, based on the internal paper for NSW Health by Professor Eagar.

They represent 63 per cent in Tasmania, 44.6 per cent in Queensland and 42.6 per cent in Western Australia. Another additional 337 hospitals across the country makes up 44.2 per cent of the total, have between 10 and 50 beds. These hospitals are also vulnerable under the activity-based funding, said Prof Eagar.

According to the paper, small hospitals that provide acute care cannot be accommodated under a pure fee-per-service plan, due to these reasons:

They cannot achieve the economies of scale of larger hospitals; the cost of goods and services is often higher due to transport and related costs; they often need to recruit fly-in, fly-out staff; their major costs are fixed, they need to be staffed and ready, even if they have no patients at all.

The paper stated that a number of changes that could be made to the activity-based model to rescue small hospitals and they include, retaining block funding; establishing a variable efficient price that considers their circumstances; or funding them on their capacity to undertake an agreed level of activity rather than solely on the basis of activity.

Small hospitals with unpredictable workloads can't survive under a standard payment that assumes you can pay the same for a patient treated in Sydney as for one treated in the bush said Prof Eagar.

He continues by saying, The Prime Minister has recognized there needs to be special arrangements for small hospitals, but the devil is in the detail and we have not seen the nature of what they're actually proposing.