A National Health and Hospitals Network for Australia's Future
Chapter 7: Paying Local Hospital Networks directly for the services they provide
The Commonwealth Government will pay 60 per cent of the efficient price of every public hospital service provided to public patients.
The Commonwealth Government will directly pay Local Hospital Networks for each service they provide, according to a national efficient price determined by an independent umpire.
This transparent system of activity based funding will provide Local Hospital Networks with national consistency in their funding, and give them flexibility to shape the mix of services they deliver.
Too much inefficiency and waste
Today, the Commonwealth supports the delivery of free public hospital services through block grant funding paid to the states. Each state then determines funding for individual hospitals. There is considerable variation in mechanisms for payment to individual hospitals around the country, though many states are shifting to some form of activity based funding for acute care.The differing payment mechanisms for public hospitals often reflect the structures that have developed in particular states over a period of time and the considerable variation in costs across different hospitals. For example, small hospitals — such as rural hospitals — with variable throughput and capacity, and children’s hospitals and referral hospitals, tend to have higher costs for particular procedures than general hospitals. In addition, funding to hospitals often does not reflect service levels or local needs.
At a time when hospitals are struggling to meet current levels of demand, hospitals need to improve their efficiency — to keep downward pressure on costs, and to free up resources to meet increasing demand. The Productivity Commission estimates that some public hospitals may be running up to 20 per cent less efficiently than best practice.
Available data suggests that the efficiency of public hospitals varies substantially between states, indicating there is significant room for improvement even after taking into account geographic and population variation between states.
Figure 12: Recurrent cost for each hospital admission
Source: National Hospital Cost Data Collection, 2009. back to top
Reforming how we pay for hospitals
The Commonwealth Government will increase the efficiency and transparency of public hospital funding by directly funding Local Hospital Networks for each service provided to a patient, through activity based funding. Local Hospital Networks will work with states to determine the range and number of services each Network will provide. Local Hospital Networks will have the assurance of directly receiving payments linked to the number and type of services that they provide. These changes represent a significant departure from current arrangements, under which the Commonwealth contributes to public hospital funding through block grants, which are not explicitly tied to the efficient delivery of services.Under the new arrangements, the Commonwealth will fund 60 per cent of the efficient price of every public hospital service Local Hospital Networks provide. Currently there are constraints on growth caused by workforce, infrastructure and limits on funding. While some controls on demand for hospital services are necessary, the current constraints create waiting lists for elective surgery and waiting times for emergency departments that are out of step with clinical standards and community expectations.
By providing 60 per cent of the efficient cost of public hospital services and also holding full funding and policy responsibility for primary health care, the Commonwealth will also have a financial incentive to ensure that Australians do not unnecessarily visit hospitals when they can be cared for more appropriately in the community.
International experience suggests that activity based funding in concert with effective clinical leadership and a strong safety and quality regime can support improvements in quality and patient care. This has the capacity to slow the rate of growth in hospital costs over time, thereby increasing the long‑term sustainability of health care funding.
These reforms will help to ensure that hospital financing can dynamically adjust to:
- shifting populations;
- local demographic characteristics;
- changing costs of delivering medical services from technological and clinical innovation; and
- the complexity and location of delivering hospital services.
Once fully implemented, the majority share of the funding for every public hospital in Australia will be linked to the number and type of actual services they deliver. The implementation timeline is set out below.
An independent umpire to determine the efficient price
To ensure that the nationally efficient price is determined on a fair and equitable basis, an independent umpire will set the nationally efficient price and advise the Government on appropriate timelines and path for transition for all hospital services.In setting the nationally efficient price, the umpire will be required to strike an appropriate balance between reasonable access, clinical safety, efficiency and fiscal considerations. Price loadings will be established to recognise, for example, the particular circumstances and health care needs of people living in rural Australia and Indigenous Australians.
The umpire will determine the scope of the activity based funding system and will also provide independent arbitration on cost‑shifting and boundary issues, both between the Commonwealth and the states, and cross‑border charging between states. The objective of the umpire would be to resolve cost‑shifting issues in a definitive, lasting and nationally consistent manner. It will engage with clinicians on technical issues to ensure that the efficient price continues to reflect the actual cost of providing hospital services, and developments in best practice.
The umpire will also advise on the mechanism to provide the Commonwealth’s contribution to teaching and research (as outlined in chapter two). back to top
Driving efficiency — within Local Hospital Networks and across the system
Payments on the basis of an efficient price will help drive efficiency in all hospitals across the country.Box 6: Operational efficiency
Operational efficiency means eliminating the unnecessary use of resources in the production and delivery of services. In hospital systems, operational efficiency can be achieved by reducing length of stay, increasing quality, and looking closely at the reasons for significant variations in clinical practice.The use of activity based funding will drive increased operational efficiency across the hospitals system as it explicitly links funds allocated to services provided. It also allows for easy identification of underperforming providers so that the cause of underperformance can be remedied, while lessons from high performance can be disseminated.
The increased operational efficiency from activity based funding will provide savings for taxpayers or help fund additional services. Although the precise efficiencies from activity based funding are difficult to estimate, the NHHRC estimates that the introduction of activity based funding will lead to savings of between $0.5 billion and $1.3 billion each year.
Those Local Hospital Networks that deliver high quality services more efficiently will be able to reinvest in further innovation or more services, and have the flexibility to shape local services according to local needs. The need for payments to be passed through state and regional health bureaucracies will be avoided. This reform will give the Commonwealth and the community confidence that in the future, additional investment of scarce new health funds is being used as efficiently and effectively as possible.
States will be required to be transparent about their funding contribution for each public hospital service, using the same nationally consistent activity based funding approach.
The combination of funding for services actually provided and new national transparency measures will mean communities will have more information than ever before on how well hospitals are performing, how their hospitals are funded, and what services are provided to them.
This combination will also allow ready identification of high‑performing hospitals, as it will allow a straightforward comparison of the costs across different hospitals in providing the same hospital service. Once high‑performing hospitals are identified, they will be able to share their effective and innovative practices with other hospitals, helping to create a self‑improving hospital system. Moreover, states will be able to easily identify hospitals that are struggling and make early interventions to lift hospital performance.
How the Government will implement this reform
To minimise disruption in hospital services and ensure that states are not worse off, activity based funding will be phased in over time, so that:- From 1 July 2011, the Commonwealth will increase its funding contribution to 60 per cent of recurrent expenditure on public hospital services, research and training, and planned new capital expenditure. These payments will be made to the states.
- From 1 July 2012, the Commonwealth will progressively shift this funding to activity based funding paid directly to Local Hospital Networks, starting with admitted patient services and progressing to emergency department and outpatient services.
