Prime Minister Anthony Albanese will meet premiers and chief ministers on Friday in Sydney for a national cabinet meeting where plans to lock in a five-year hospital funding agreement are on the table.
The Albanese government in December offered $23 billion for public hospitals across five years, including $2 billion to help states manage elderly patients languishing in hospitals while they wait for aged care beds.
Current funding arrangements run out at the end of June, but South Australia's election in March means Friday's meeting is the last chance a deal can be struck before that state's government goes into caretaker mode and negotiations between states are put on hold.
Mr Butler said he was hopeful of a deal being reached.
"I'm cautiously optimistic, I know there's a lot of goodwill by all jurisdictions," he told ABC Radio on Friday.
"We are running out of time, really. Negotiations have been going on for quite a period of time. It's not easy to get national cabinet together."
Ahead of the national cabinet talks, Mr Albanese hosted state and territory leaders for dinner at Kirribilli House
States and territories have insisted the federal government stick to a 2023 agreement that the Commonwealth would increase its share of public hospital funding to 42.5 per cent by 2030 and 45 per cent by 2035.
The actual share of Commonwealth funding is understood to be well short of those targets.
But the prime minister said on Thursday the federal government was "not an ATM".
"We have to make sure that we're responsible going forward. We understand a number of state budgets are under pressure as well," he told reporters in Cairns.
The national cabinet meeting will also discuss efforts to rein in runaway spending on the National Disability Insurance Scheme, with the federal government calling on states and territories to pick up more of the spending.
The health minister said a failure to lock in an agreement on hospitals  could impact patient care.
"The cost of failure will be very significant," he said.
"There is a shared commitment not only to ensuring our hospitals run well and deal with some changes in the population, particularly the aging of the population, but also, I think all jurisdictions recognise the need to get the NDIS back on track."
Mr Butler said the $23 billion put forward by the government was a generous offer to jurisdictions.
Queensland Premier David Crisafulli this week called for a better deal, saying unless the offer presented to the states adequately dealt with the issue of stranded aged care patients, he would not sign an agreement.
South Australian counterpart Peter Malinauskas has indicated the states could be amenable to a deal if the offer is lifted enough to leave the Commonwealth share tracking towards the 42.5 per cent figure.
Australian Medical Association president Danielle McMullen said funding for hospitals could not be left on "auto-pilot".
"More funding to 'just keep pace' will not lessen wait lists ... what matters with hospital funding is the fine print," she said.
"Comparing how much you are paying for the next five years compared to the last five years is not fair or honest because the fact is, costs are rising, our population is increasing, and care is getting more complex."
Dr McMullen called for an increase of up to $40 billion to bring the federal government's contribution to 45 per cent of hospital funding by 2030.
