My understanding (although I could be totally wrong, so somebody who has researched this better might correct me), is not so much that they prioritise their own graduates, but that they prioritise Australian (and New Zealand) passport holders.
The way the Australian immigration system works as I understand it is that in order to get a visa that enables you to work there, you have to show your value to Australia, ie it may be a requirement of your work visa that you take jobs that are otherwise difficult to fulfil. ie it is not so much the hospitals saying - Oh you have a degree from an Australian medical school, we take you in preference, but saying, oh you have an Australian passport, we will take you in preference, and can only fill that job with a non-Australian if there are no Australians available to do the job.
The difference would an Australian passport holder who trained eg at a British medical school. My understanding is that such a candidate would be ranked equally to someone trained at an Australian medical school.
I know someone with an Australian passport (Australian mother) who lives in Britain and is seriously dating a young doctor (trained in England). The assumption seems to be that if she can get him an Australian passport (not so easy even if they marry, but assuming), he then would not be restricted in where he had to work.