Issue 19 / 2 June 2014

THE federal government’s plan to abandon activity-based funding for payments to state hospitals from 2017–2018 in favour of indexation has been cautiously welcomed by a health funding expert.

Professor Johannes Stoelwinder, professor and chair of health services management at Monash University, said while he reserved judgement on the amount the federal government contributed to state hospital funding, the new funding mechanism was an improvement on the previous government’s reforms.
“It clearly places the states in the role of purchasing hospital services and removes the Commonwealth from duplicating that role”, Professor Stoelwinder told MJA InSight.

He was commenting on an MJA article by Shane Solomon, chair of the Independent Hospital Pricing Authority (IPHA), which said significant progress had been made in establishing activity-based funding since the National Health Reform Agreement was signed in 2011. (1)

Mr Solomon described activity-based funding as payment for the number and mix of patients treated, reflecting the workload and giving hospitals an incentive to provide services more efficiently.

He wrote that the former federal government had established the IHPA to determine a national efficient price (NEP) for public hospital services that were able to be funded on an activity basis.

“The NEP underpins activity-based funding and is used by the states and territories as an independent benchmarking tool to measure the efficiency of their public hospital services”, he wrote.

“Ongoing consultation, collaboration and evidence-based evaluation will improve the pricing process and create a more accurate, transparent and sustainable funding system that in turn will drive efficiency and quality and provide better value for public money”, Mr Solomon wrote.

However, a PriceWaterhouseCoopers analysis of the 2014 federal Budget’s impact on health funding has questioned the future of activity-based funding under the new state health funding arrangements. (2)

The report said the government’s planned abandonment of growth funding seemed to reduce financial incentives to ensure people were treated through less expensive primary care services and raised uncertainty about the future role of activity-based funding.

“The change … potentially undermines the significant work done to establish and monitor the National Efficient Price and raises questions as to whether there is a need for activity-based funding at all”, the report said, adding that activity-based funding helped to identify waste in the health care system.

A spokesperson for the Department of Health confirmed that under the budget measures, while activity-based funding would continue to be central to determining federal payments to local hospital networks for another 3 years, from 2017–2018, the federal contribution would be indexed by a combination of the Consumer Price Index and population growth.

“This move to new indexation arrangements by the Commonwealth will not prevent states, as system managers of public hospitals, from continuing to use activity-based funding in their public hospitals. On the contrary, given the significant share of total public hospital funding that states provide, they will have a strong incentive to continue using activity-based funding as a mechanism to drive greater efficiency in their public hospitals”, the spokesperson said.

Opposition health spokesperson Catherine King said the hospital cuts in this Budget undermined the bipartisan agreements reached with all states and territories and would take the progress towards an efficient price back by more than a decade.

“The agreements the former government reached had largely ended the ‘blame game’ between the Commonwealth and states and territories when it comes to health funding”, Ms King told MJA InSight. “These cuts reverse that. They will see greater inefficiencies in the system at a greater cost and worse outcomes for patients”, she said.

Professor Stoelwinder said he favoured allocative efficiency, where spending in the health care system is based on optimal distribution of health services for the most community benefit. “Adjusting population funding for health care risk by the Commonwealth could do that and would be more equitable”, he told MJA InSight.

He recently wrote in the MJA of his concerns about the effectiveness of activity-based funding. (3)

He told MJA InSight that activity-based funding was a good system for driving efficiency in hospitals and agreed with Mr Solomon’s view that the mechanism was only as good as the activity and costing data available.

However, Professor Stoelwinder said the idea that activity-based funding could determine the correct level of funding for all hospitals was a myth based on the assumption that all hospitals were equal.

“Different hospitals have different cost structures. If [a hospital does] a lot of work in one particular condition, it will have a lower cost structure,” he said, adding that the additional cost burden on small rural hospitals was recognised by providing grants rather than activity-based funding.

Professor Stoelwinder said in the absence of major reforms addressing the fragmented funding of Australian hospitals, risk-adjusted population-based funding would be a fairer model for Commonwealth funding of state hospitals.

1. MJA 2014; 200: 564
2. PWC: Australian federal budget 2014
3. MJA 2014; 200: 200

One thought on “Hospital funding uncertainty

  1. Simon Macklin says:

    The current funding model is focused on elective surgical work, meeting targets and providing timely access to surgical services.  The drive for efficiency and productivity is understandable and appropriate. This is responsible use of the health dollar.  Unfortunately, all these attributes are forgotten when dealing with trauma and emergency surgery, particularly when dealing with non- life or limb threatening illness when waiting times for urgent surgery become unacceptable. These patients occupy bed-spaces and are exposed to iatrogenic harm. Access to theatre is delayed by more urgent surgery and theatre occupancy is near 100% from 8am-6pm with elective surgery which cannot be halted because of the “waiting list”.  Running operating theatres for more hours in the day would seem a logical solution to this challenge but there is little desire to incur the staffing costs to allow this to happen.

    One can only hope that future funding models take into consideration the emergency workload in addition to the elective activity.

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