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Pricing for public hospital funding

Under the National Health Reform Agreement, IHPA was established to contribute to significant reforms to improve the transparency of public hospital funding.

A vital component of these reforms is the implementation of activity based funding for Australian public hospitals.

IHPA designs the pricing systems that underpin the activity based funding approaches.

Each financial year, IHPA releases the annual National Efficient Price and National Efficient Cost Determinations.

These Determinations, in conjunction with data regarding the actual value and type of hospital services provided by states and territories, are used by the Administrator of the National Health Funding Pool to calculate the Commonwealth funding contribution to public hospitals.

Activity based funding
Activity based funding describes the system by which hospitals are paid based on the number and complexity of patients they treat.

If a hospital treats more patients, it receives more funding. This method takes into account the fact that some patients are more complicated to treat than others.

Funding for public hospital services is based on the number of weighted services provided to patients, and the price to be paid for delivering those services.

Activity based funding enables efficiency comparisons to be made between hospitals, and allows system and hospital managers to identify inefficient practices, manage costs and optimise resource allocation. It is a useful tool to measure hospital performance and to establish appropriate benchmarks.

The National Efficient Price underpins the implementation of activity based funding.

In 2018–19, national classifications were used to fund the following service categories on an activity basis:

  • admitted acute services
  • admitted mental health services
  • subacute and non–acute services
  • emergency department services
  • non–admitted services.

National Efficient Price 2019–20National Efficient Price 2019–20 $5,134 Average cost of an episode of care in a public hospital 460 Australian public hospitals receive funding based on their activity levels

The building blocks required for an activity based funding system are discussed below.

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Data collection

For activity based funding to be effective, each patient episode needs to be counted. This includes inpatient admissions, emergency department presentations and outpatient appointments, as well as a range of mental health and subacute services.

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Hospital costing focuses on the cost and mix of resources used to deliver patient care. In activity based funding it is essential to understand the total costs involved in the provision of hospital services to a patient, and assign costs based on resource consumption. IHPA collects and reports on the National Hospital Cost Data Collection annually. This information is used for developing the classification systems and for the pricing model.

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Classifications provide the healthcare sector with a nationally consistent method of classifying all types of patients, their treatment and associated costs to provide better management, measurement and funding of high‑quality and efficient health care.

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The pricing model determines how much is paid for an average patient. The pricing model adequately recognises factors that increase the cost of care that may not be picked up in the classification system example, the additional cost of providing health services in remote areas, or to children.

Further details of the activity based funding, including its requirements, are available at www.ihpa.gov.au/what‑we‑do

Activity based funding timeline

Activity based funding becomes a requirement of Commonwealth funding for public hospitals

National Health Reform Agreement signed by all Australian governments; this agreement outlines the establishment of IHPA

First National Efficient Price was established for NEP12 at $4,808

First National Efficient Cost was established for NEC13 at $4.738m

Eighth National Efficient Price was established for NEP19 at $5,134
Seventh National Efficient Cost was established for NEC19 at $5.319m

Block funding
The National Efficient Cost underpins funding for services that are not suitable for activity based funding, such as:

  • small rural and regional hospitals
  • teaching, training and research in public hospitals
  • non-admitted mental health.

The National Efficient Cost also represents the average cost of Commonwealth funding contribution on a block grant basis for small rural hospitals.

The National Efficient Cost is determined using the in‑scope activity and expenditure data for hospitals to be block funded. Hospitals are assigned to a size‑locality grouping and mean expenditure is calculated for groupings.

National Efficient CostNational Efficient Cost 2019–20 $5.319 MILLION Average cost of block funded small rural hospital 370 SMALL RURAL HOSPITALS receive a fixed amount of funding based on location, size and type of services