Partnership between research and health services has a long history in other countries, but has been relatively recent in Australia, with several models arising in the 1960s and 1970s as research-based specialties developed. Since the implementation of Medibank, which became Medicare, Australian Health Care Agreements have been primarily crafted on the basis of transactional numbers, ignoring the need for links with teaching and research and the need to implement new developments. Education and research have been seen as the responsibility of the federal government, and hospitals are progressively less recognised or funded for these functions by the states. Australia's teaching hospitals are in danger of falling seriously behind those in other countries and losing their capacity to monitor quality, to innovate and to branch into new strategies in partnership with primary care services. We should look at initiatives in other countries such as the United Kingdom and Canada, which are making big strides in tackling similar issues. University hospitals hold the key, if appropriately linked with other services. The current Australian Health Care Agreements are on hold. A new agency is needed to support clinical and service-related research, with a new structure and track for federal government funding, and providing oversight of research and development, of clinical governance and quality of outcomes in health care, linked with new strategies for prevention and treatment. A component of the foreshadowed additional federal government funding for health should be sequestered to set up such an agency.