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 hospital services.

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

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.

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.

In 2019–20, 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 2020–21

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

Data collection

For activity based funding to be effective, each patient episode needs to be counted. This includes inpatient admissions, including mental health and subacute services, emergency department presentations and outpatient service events.

Classification

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.

Costing

In activity based funding it is essential to understand the total costs involved in providing hospital services to a patient, and assign costs based on resource consumption. IHPA compiles the National Hospital Cost Data Collection annually. This information is used for developing the classification systems and for the national pricing model.

Pricing

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 accounted for in the classification system. For 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