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Activity-based funding is here


A system of activity-based funding (ABF) has been in place in some states, Victoria for example, for a while.

Now the momentum is towards a nationally consistent approach to ABF, with the national efficient price and national efficient cost (for small hospital block funding) determined by the Independent Hospital Pricing Authority (IHPA).

The AMA has been involved with the IHPA from the start, providing feedback through its Stakeholder Advisory Committee on such things as the integration of new health technologies and innovation into the ABF model, the implications of rural locations and social disadvantage for health costs, and priority areas for the refinement of ABF, including sub-acute and emergency department care.

The national efficient price for a weighted activity unit (WAU) is determined by IHPA from information provided by jurisdictions, and is approximately $5000. Every hospital admission is then allocated a number of WAU depending on its complexity, comorbidities, complications and so on, as well as taking into account whether they are an Aboriginal or Torres Strait Islander, live in a rural or remote area, or are a child. The Commonwealth then pays the State a proportion of the calculated amount, which in turn is topped up by the states to more or less than the national efficient price before the funds percolate through the health system to the hospitals providing the service.

While it might appear complex, that is actually a somewhat simplified version of ABF in action.

For a start, not all hospital costs are captured by their clinical activity. A good example is the costs of teaching, training and research, which are currently block funded.

IHPA is working through a process to determine a means, if it can be found, to measure the teaching, training and research activity and cost. Again, the AMA and our Council of Doctors in Training are involved in the group that has oversight of this work.

The effect of ABF is to translate the work done by our hospitals into a single unit price.

The concept is not unique. For example, there is a single national price for delivering an envelope of a given size and weight, no matter where in Australia it is posted or delivered. That works because Australia is treated as a single jurisdiction where the ‘winners’ and ‘losers’ are balanced out.

In health, we have eight different jurisdictions for public hospital services, so a national efficient price that assumes similar cost structures, transport costs and so on across them all is bound to have its critics.

An ‘efficient price’ may work within a relatively small area, but will struggle to be as rational across multiple jurisdictions, even when modified to take into account factors such as location, age and background. Equality of funding is not necessarily equity.

Supporters of ABF suggest it drives efficiency and productivity. A recent Grattan Institute report points to the variations in cost for a hip replacement in hospitals doing more than 200 a year:  $9700 in one hospital, $23,400 in another. Costs for a laparoscopic cholecystectomy were similarly found to vary widely, between $4100 and $7900.

The ABF system envisages there will be cost variations between individual patients – people are not a homogeneous product – but assumes that these will be averaged out across the population treated.

The assumption from the Grattan Institute is that cost variations reflect differences in ‘productivity’ but the alternative, that there are between patient differences that are not explained within ABF, needs to be explored, as does differences in coding between hospitals.

The AMA has always said it should be about having an effective price – one that recognises the need to provide quality individual health care, rather than just an ‘efficient’ price. An efficient price is touted as driving productivity, but in an industry where significant drivers of costs are labour and length of hospital stay, it is clear that increased productivity may come at a cost to health consumers of inconvenience or reduced quality of care.

Health care has much more in common with running a restaurant than a factory.

Having skilled chefs and wait staff, each with a defined and essential role, is fundamental to the customers’ restaurant experience, and cutting the staff-to-customer ratio will lead to complaints. As in health care, increasing productivity by implementing new technology and streamlining processes is possible. But such things as providing information and advising on choices take a finite time, as does the preparation of a dish. To rush risks impairing quality, as it does in health care.

The pursuit of productivity should not come at the cost of dehumanising patients, which is a risk in the search for efficiency.

Sensibly, IHPA have incorporated an evaluation of the effects of ABF into their work plan, and will be taking submissions.

The AMA will be collating advice from our members to inform our submission.

If you are aware of any adverse effects from the wider introduction of ABF, such as a loss of unfunded or under-funded patient services, or any positive effects, such as increased access to patient services, please let me know at