SYDNEY - Australian Prime Minister Julia Gillard has finally convinced the unbending Australian states over a historic national hospitals funding plan.

After 18 months of painful wrangling Gillard has bowed to pressure and conceded influence in the overseeing bureaucracy and the pricing of medical procedures.

The Federal Government now has the backing of all states and territories to roll out its multi-billion dollar health reform package.

The deal comes on Tuesday some 15 months after former prime minister Kevin Rudd, himself in hospital recovering from heart surgery, announced he had the support of all states, except Western Australia.

The compromise will see the federal government pay for up to half of all new costs in public hospitals from 2014-15.

Headway was made when Prime Minister Julia Gillard abandoned plans to use some states and territories' GST revenue to pay for the reforms.

The Gillard Government estimates this will be worth over 17 billion US dollars in surplus funding to the six Australian states in its first six years.

Treasury figures cited by Mr Rudd in January predict health spending in Australia will increase by more than $220 billion US dollars by 2050, or the equivalent of almost 8 per cent of GDP.

When the long-awaited reform package was first announced under Kevin Rudd's tenure with memorable promises to "end the blame game on health", the proposal was for the states to lose one third of their goods and services tax (GST) revenue to fund it, sparking protests from Western Australia (WA) and other liberal states.

The announcement of the deal is a timely win for Ms Gillard who continues to lag in polling on the back of unpopular tax reforms.