Categorising and funding small rural hospitals – block funding in 2013/14

1. Categorising and funding small rural hospitals – block funding in 2013/14 Dr Sharon Willcox

2. Acknowledgements • Peter Axten and Danny Millman, Aspex Consulting (who were part of the team developing and consulting on the policy approach to block funding) • Jim Pearse, Health Policy Analysis, who led a related project to analyse costing data to inform IHPA’s setting of the national efficient cost for small block funded hospitals Health Policy Solutionsaspexconsulting

3. Objective of this work • To determine how best to structure block funding for small rural hospitals, having regard to: • The factors that explain differences in costs across these hospitals • The nature of the available data on the costs of these hospitals • The need to balance criteria including: • Achieving simplicity and transparency of a funding model • Avoiding an undue reporting burden on small rural hospitals • Recognising the fixed costs of these hospitals • Providing some incentive for activity and/or a transition to ABF for the larger rural hospitals that are block funded Health Policy Solutions aspexconsulting

4. Scope of block funded hospitals • Hospitals are potentially eligible for block funding under the Block Funding criteria if they • Were metro and provided ≤ 1800 inpatient NWAU/annum • Were rural and provided ≤ 3,500 inpatient NWAU/annum • However, states can decide that some of these hospitals should instead be funded under ABF • The Block Funding model has been developed for about 410 small rural hospitals that provide acute or a mix of acute/sub-acute services • IHPA is working with states to determine block funding for other small specialised hospitals (e.g. mothercraft) and small metropolitan hospitals Health Policy Solutionsaspexconsulting

5. small rural hospitals are highly diverse • Gove: 32 acute beds, very remote, Indigenous population, about 2,200 acute inpatients, provides district medical officer service to region • Beaconsfield MPS: 4 acute beds, 18 aged care beds, outer regional, 28 acute inpatients with LOS of 23 days, no theatre, no outpatient services, GP visits 3 days/week to provide medical service • Karratha: 28 beds, remote, 3600 acute inpatients, 16,700 ED and 8,000 non-admitted services, mining and Indigenous community • Crystal Brook: 19 beds, outer regional, 550 acute patients, 1200 ED and 1700 non-admitted services, high level residential aged care under MPS program Health Policy Solutionsaspexconsulting

6. Diversity of activity and costs across small rural hospitals Health Policy Solutionsaspexconsulting

7. Designing a funding model • Consultations with states and rural health services (through the National Rural Health Alliance) to identify: • What factors are now or should be included in block funding for small rural hospitals? • What explains differences in costs across small rural hospitals? • How ‘at risk’ should funding be for small rural hospitals? Health Policy Solutionsaspexconsulting

8. Designing a funding model (2) • Responses to these issues: • Existing block funding: in most states, funding is historically determined; there is no robust ‘formula’ that pays block funding by size, location, type of services (e.g. maternity, surgery) • Cost drivers: many factors are likely to be relevant including: service mix, medical staffing model, location, travel time and distance, access to specialist services, patient factors including Indigeneity • Funding risk: simple model is paramount; most or all of the funding should not be at risk; there should be a flat ‘availability’ payment that varies by the size of the facility and reflects the fact that costs are largely fixed for small rural hospitals Health Policy Solutionsaspexconsulting

9. Grouping small rural hospitals • Hospitals were grouped into categories based on: • Size - as measured by volume of activity (total National Weighted Activity Units), resulting in 7 groups (A to G) • Location – as measured by ASGC remoteness classification – 5 groups • Theoretical total of 35 groups, but major city hospitals subject to bilateral negotiation, plus 2 cells had no hospitals, resulting in 26 groups of small rural hospitals • It was decided that ‘size’ would be assessed using 3 year average annual total NWAU • This provides greater funding stability for hospitals if there is volatility in service provision levels Health Policy Solutionsaspexconsulting

10. Key block funding concepts in 2013/14 • Availability payments: funding that recognises fixed costs of ‘keeping the doors open’; is based on funding being stable even if service provision varies (up or down) during the year • Service capability payments: funding that provides an activity-related payment for larger rural hospitals; based on total activity (NWAU) provided 3 years earlier so not at risk; intended to provide incentives for continuing service provision and growth in activity in these hospitals; potential transition to ABF or mixed ABF/block funding arrangements Health Policy Solutionsaspexconsulting

11. Funding model 2013/14 • The 410 small rural hospitals are categorised into 26 groups, based on total NWAU and ASGC • Each of the 26 groups is assigned a relative cost weight (for the availability component) • IHPA has determined the average National Efficient Cost of small rural hospitals is $4.738 million in 2013/14 • Each hospital receives block funding for availability based on multiplying their relative cost weight by the National Efficient Cost; for example: • Group A (low volume) inner regional hospitals: $1.56m • Group G (high volume) very remote hospitals: $20.51m Health Policy Solutionsaspexconsulting

12. Funding model 2013/14 (Ctd) • There are two groups of hospitals with higher activity volumes and higher costs: • Group F: provides between 1500-2649 NWAU • Group G: provides ≥ 2650 NWAU • Rural hospitals in Groups F and G also receive a Service Capability Payment • In 2013/14, this is paid at $498 for each NWAU • It is about 10% of total funding in Groups F and G hospitals • Service capability payments provide an incentive for these larger rural hospitals to maintain or increase activity with a 3 year lag; states can advise IHPA of significant, permanent changes to activity level, so that the service capability payments can be varied more rapidly Health Policy Solutionsaspexconsulting

13. Future issues • Block funding is for ‘public hospital services’ eligible for CW funding under the NHRA – this is not the same as determining a sustainable funding model for the whole entity (which might include aged care, primary care and other services) • The block funding model is neutral as to the type of services provided, or whether services are provided in particular locations – these are planning decisions made by States/LHNs Health Policy Solutionsaspexconsulting