The National Pricing Model Explained

1. The National Pricing Model Explained 2013 ABF Conference 16 May 2013 Trent Yeend Senior Advisor, Pricing & Funding IHPA

2. Overview of workshop • ABF and the National Health Reform Agreement • Introduction to the National Pricing Model • Introduction to the National Cost Model • Transformation of National Cost Model to National Pricing Model • National Pricing Model by service category • Application of the National Pricing Model

3. §1Activity Based Fundingandthe National Health Reform Agreement

4. ABF and the NHRA Under the National Health Reform Agreement, the role of the national efficient price is to: • form the basis for the calculation of the Commonwealth funding contribution; and • provide a relevant price signal to States and Local Hospital Networks. - Clause B11

5. ABF and the NHRA Two features of role (a) in ABF: • Volumes of (price) weighted activity at the Local Hospital Network (LHN) level are used to proportionally allocate each state/territory’s Commonwealth funding among their LHNs.

6. ABF and the NHRA Two features of role (a) in ABF: • Growth in price and activity over time are used to determine growth in Commonwealth funding over time. • Commonwealth funds 45% of growth from 2013-14 to 2016-17, then 50% of growth from 2016-17 onwards. 45% 45% 45% 50% 50% 50% . . . 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 CFx– Commonwealth funding in year x Px – Price in year x Vx– Volume in year x CF2 = CF1 + 45% (P2 V2 – P1 V1)

7. ABF and the NHRA Other features of the NHRA: • Scope of services • Private patients • Other Commonwealth programs

8. §2Introduction tothe National Pricing Model

9. The National Pricing Model The National Pricing Model provides the means by which IHPA prices hospital services. It comprises three parts: National Pricing Model National Efficient Price (NEP) Price Weights Adjustments Combine to define the National Weighted Activity Unit (NWAU) Price of hospital service = NEP × NWAU

10. The National Pricing Model Price Weights Adjustments Price Weights • Define a measure of relative price across all in-scope activity. • Are used to modify price relativities to account for legitimate and unavoidable variations in the costs of service delivery. • Are defined across the classification systems within each service category. Adjustments Weighted Activity (NWAU) Activity Non-Admitted Emergency Subacute Acute

11. The National Pricing Model Price Weights Adjustments Paediatric Acute admitted care Specialist Psychiatric Subacute & non-acute admitted care Indigenous Emergency care Remoteness Non-admitted care ICU Mental health care Private Patient Service Private Patient Accommodation

12. The National Pricing Model National Efficient Price (NEP) • Converts NWAU to price • The NEP is the price of 1 NWAU • Price = NEP x NWAU volume • Measures year on year change in mean price • Based on mean price of in-scope acute admitted activity • Excludes changes in mean price caused by changes in activity profile (ie. case-mix change).

13. The National Pricing Model Change in NEP and change in Price Weights Price Weights Price Weights YEAR 2 YEAR 1 Change in NEP NEP NEP Change in Price Weights Non-Admitted Subacute Non-Admitted Emergency Subacute Acute Emergency Acute

14. The National Pricing Model Example: Change in Price Weights vs Change in Price

15. The National Pricing Model This relationship extends to NWAU: For a fixed ‘basket’ of activity, after converting the activity to NWAU using two years’ pricing models, the following can be said: • NWAU increases aggregate price has grown at a rate greater than the growth in NEP • NWAU remains constant aggregate price has grown in line with growth in NEP • NWAU decreases aggregate price has grown at a rate less than the growth in NEP Property: For fixed activity, (% change in NWAU) × (% change in NEP) = % change in aggregate price. relative change (eg. 5% growth expressed as 105% change, -2% growth expressed as 98% change)

16. §3Introduction tothe National Cost Model

17. The National Cost Model • The National Pricing Model is based on cost and activity data from three years prior; eg. the 2013-14 pricing model is based on 2010-11 cost and activity data. • The cost and activity data for each of the historical years are used derive the National Cost Model for that year. • The National Cost Model is designed to ensure that the total model costs are equalised with the estimated total actual costs across ABF establishments.

18. The National Cost Model • The cost model is made up of cost parameters and adjustments: • paediatric adjustment, • specialist psychiatric age adjustment, • indigenous adjustment, • remoteness area adjustment, • and ICU adjustment • The private patient service and private patient accommodation adjustments do not form part of the cost model. • They are introduced in the pricing model to remove out of scope costs associated with private patients.

19. The National Cost Model Cost Parameters Adjustments The National Cost Model • Define a measure of cost across all in-scope activity (cost profiles). • Are used to modify modelled costs to account for legitimate and unavoidable variations in the costs of service delivery. Cost Parameters • Are defined across the classification systems within each service category Modelled cost of activity ($) Adjustments Activity Non-Admitted Emergency Subacute Acute

20. §4Transformation ofthe National Cost Modeltothe National Pricing Model

21. Transformation of NCM to NPM There are three key differences between the National Pricing Model and the National Cost Model: • The pricing model comprises an NEP (ie. a reference cost), price weights and adjustments, whereas the cost model comprises cost parameters and adjustments. • The cost model is based on costs and activity three years prior to the year of the corresponding pricing model. • The pricing model excludes costs offset by revenue from other Commonwealth programs.

22. Transformation of NCM to NPM 1. Derivation of a reference cost Cost Weight Model Reference Cost Cost Weights Adjustments Cost Model Cost Parameters Adjustments 2. Conversion of parameters to weights 3. Removal of out of scope costs 4. Indexation to reflect costs in the year of the pricing model Pricing Model NEP Price Weights Adjustments

23. Transformation of NCM to NPM Step 1: Derivation of a reference cost • The reference cost is the precursor to the NEP. • The change in reference cost over time is ‘standardised’ to ensure it is not influenced by changes in activity profile (ie. case-mix change). • cf. standardised incidence/prevalence/mortality rates controlling for differences demographic/age profile.

24. Year of activity data 2009-10 2010-11 Transformation of NCM to NPM $4,587 (B) (Z) (X) Step 1: Derivation of a reference cost $4,489 (C) $4,260 (A) (Y) A – 2009-10 reference cost (= 2009-10 mean cost) B – 2010-11 mean cost C – 2010-11 reference cost X – crude growth rate of mean cost Y – standardised growth rate Z – ‘rebasing’ factor

25. Transformation of NCM to NPM Step 2: Conversion of parameters to weights • The parameters of the cost model are divided by the reference cost, converting the parameters to cost weights and transforming the cost model to a cost weight model. • The selection of reference cost in the previous step ensures that the two consecutive years’ cost weight models give the same total weighted volume when applied to the activity data on which the standardised growth rate is derived.

26. Transformation of NCM to NPM Step 3: Removal of out of scope costs Out of scope costs can be classified as follows: • Costs associated with out of scope activity, (eg. activity delivered to out of scope patient types such as DVA), and activity not regarded as from an in-scope service type (eg. out of scope Tier 2 non-admitted service types). • Proportions of costs associated with private patients that are offset by non-government and Commonwealth revenue. • Costs associated with other Commonwealth programs(eg. Highly Specialised Drugs program, Pharmacy Reform Agreements).

27. Transformation of NCM to NPM Step 3: Removal of out of scope costs • Group 1 costs are excluded by simply restricting the cost model to in-scope activity. • Group 2 costs are excluded through the implementation of the private patient service adjustment and private patient accommodation adjustment within the pricing model. • Group 3 costs are excluded by deflating them out of the cost model.

28. Transformation of NCM to NPM Step 4: Indexation • The final step is the indexation of costs to estimate those in the year of the pricing model. • To derive this indexation rate: • the cost model is applied retrospectively to the five years of patient costed acute admitted activity data up to the year of the cost model. • Scaling factors are calculated that adjust the cost model so that model costs are equalised with each year’s actual costs. • The trend of these scaling factors is then projected forward from the year of cost model to the year of pricing model.

29. Transformation of NCM to NPM Step 4: Indexation Illustration of scaling factors required to equalise model and actual costs Year of cost model Year of pricing model

30. Transformation of NCM to NPM

31. §5National Pricing Modelby Service Category

32. National Pricing Model by Service Category • Activity is grouped into four streams (service categories) • Acute Admitted • Subacute and Non-Acute Admitted • Emergency • Non-Admitted • With mental health spanning all four streams • Classification systems are defined across all service categories, and the National Pricing Model defines prices over these classification systems.

33. National Pricing Model- Acute Admitted -

34. NPM – Acute Admitted • Classification: Australian Refined Diagnosis Related Groups (AR-DRGs) • DRGs are broken into price categories based on (ICU adjusted) length of stay: • same-day • short-stay outlier • inlier • long-stay outlier

35. NPM – Acute Admitted

36. NPM – Acute Admitted • There are seven episode-level adjustments: • paediatric adjustment • specialist psychiatric age adjustment • indigenous adjustment • remoteness area adjustment • ICU adjustment • private patient service adjustment • private patient accommodation adjustment

37. NPM – Acute Admitted Price Weight Table

38. NPM – Acute Admitted Price weights • Same-day price category makes use of same-day price weight • Short-stay outlier price category makes use of short-stay outlier base and per diem price weights • Inlier price category makes use of inlier price weight • Long-stay outlier price category makes use of inlier and long-stay outlier per diem price weights

39. NPM – Acute Admitted Basic form of DRG price weight function price weight ICU-adjusted LOS SD SSO Inlier LSO

40. Price Weight function forms DRGs NPM – Acute Admitted Price Weight function Price Categories MDCs 19&20 Remainder 28 3 Inlier 0 230 Inlier/LSO 293 15 SSO/Inlier/LSO SD/Inlier 1 0 119 1 SD/Inlier/LSO SD/SSO/Inlier/LSO 1 14

41. NPM – Acute Admitted Example of cost model DRG profile against actual costs and activity

42. NPM – Acute Admitted Application of adjustments Apply indigenous adjustment and remoteness area adjustment Apply specialist psychiatric age adjustment Apply paediatric adjustment PW Apply private patient service adjustment and private patient accommodation adjustment Apply ICU adjustment NWAU

43. National Pricing Model- Subacute & Non-Acute Admitted -

44. NPM – Subacute & Non-Acute Admitted • Classifications: • The Australian National Subacute and Non-Acute Patient (AN-SNAP) Classification • Care Type • AN-SNAP classes are broken into price categories based on length of stay: • same-day • entire episode per diem • short-stay outlier • inlier • long-stay outlier

45. NPM – Subacute & Non-Acute Admitted

46. NPM – Subacute & Non-Acute Admitted • There are five episode-level adjustments: • paediatric adjustment • indigenous adjustment • remoteness area adjustment • private patient service adjustment • private patient accommodation adjustment

47. NPM – Subacute & Non-Acute Admitted Price Weight Table

48. NPM – Subacute & Non-Acute Admitted Price Weights • Same-day price category makes use of episode price weight • Episode per diem price category makes use of outlier per diem price weight • Short-stay outlier price category makes use of outlier per diem price weight • Inlier price category makes use of episode and inlier per diem price weights • Long-stay outlier price category makes use of episode and inlier per diem and outlier per diem price weights

49. NPM – Subacute & Non-Acute Admitted Basic form of AN-SNAP price weight function price weight Episode LOS SSO Inlier LSO

50. AN-SNAP classes NPM – Subacute & Non-Acute Admitted Price Weight function Price categories 45 Same-day Price Weight function forms 13 Inlier/LSO 45 SSO/Inlier/LSO EpiPerDiem 24