The Australian Health Care Agreements govern the relationship between the Commonwealth and States about public hospital funding. The incentives enshrined in the Agreements can shape policy priorities. Although they provide for the largest specific purpose grant a State/Territory receives, the current negotiations should not be seen as providing the only opportunity for reform of health care for the next five years. This paper argues that the negotiations should focus on two key areas where Commonwealth-State frictions are high but reform is feasible. Specifically it is suggested that the Commonwealth should contribute its funding of public hospital inpatient services on a casemix basis, and secondly, should fund outpatient services directly.