Hospital funding models

1. Terry Symonds Hospital funding models

2. Introduction • Over $8 billion in funding to Health Services in 2012-13 • $6.9 billion for acute hospital services • remaining funding covers ageing, aged and home care, drug services, mental health, primary, community and dental health and public health services • National funding model for hospital services introduced this year • national funding for acute admitted, emergency department and specialist outpatient services commenced this year • national funding for subacute and mental health services to commence in 2013-14 • existing State-based funding arrangements have been retained this year as part of transition to the new national model

3. Hospital funding overview

4. Casemix (WIES) funding model overview • Budget allocation tool to support government funding objectives of transparency, accountability and efficiency • Major source of funding for Health Services • accounts for approximately 60% of Health Services’ budgets • provides funding for services provided to admitted patients • Allocates funding based on the numbers and types of patients treated and the average cost of treating patients • funds 70-80% of the costs of treating admitted patients • remaining costs are covered by specified grants and own source revenue

5. Casemix – how does it work? • Step 1: Classifying patients • Patients are grouped to a Diagnostic Related Group (DRG) • DRGs are a method of classifying patients based on similar clinical conditions and levels of resource use for treatment • Step 2: Counting patients • All admitted patient activity is reported to the Victorian Admitted Episodes Dataset (VAED) • Step 3: Costing patients • Health Services measure and report costs for each patient episode of care • Cost weights for each DRG are derived from this information, and measure the average cost of an episode of care within a DRG • Step 4: Calculate WIES = + • Step 5: Patient episode of care funding = WIES x Price DRG cost weight adjusted for a patient’s length of stay in hospital co-payment to adjust for patients with higher costs (ie ICU patients) (Weighted Inlier Equivalent Separation)

6. Future funding landscape – National Activity Based Funding ABF funds only State (Victoria) ABF and block funds National Funding Pool comprising individual state accounts Local Hospital Networks (Health Services) Commonwealth Commonwealth and State ABF Funds Department of Health • Overview of payment flows State block funds - SRHSs, subacute, mental health - Teaching Training and Research Department of Health Fund Commonwealth Block Funds - SRHSs, subacute, mental health - Teaching Training and Research

7. National activity based funding overview • National Efficient Price (NEP) • The NEP, calculated by the Independent Hospital Pricing Authority, is based on the average cost of providing acute admitted services across Australia, but also applies to emergency and non-admitted services. • All cost weights are expressed as a single unit of measure - the National Weighted Activity Unit (NWAU). The NWAU provides a scale that identifies the relative measure of resource use of each public hospital service. • The NEP has been set at $4,808 per NWAU. As this is a national average, some States’ health services deliver services below this price (e.g. Victoria) and others above. • Health Services are not paid according to the NEP, as the Commonwealth funding contribution is initially fixed. However, there will be opportunities for growth funding from 2014-15 onwards.

8. Transition arrangements • Approach in 2012-13 • Health Service budgets have been set according to existing models in 2012-13 (including WIES, NAESG, historical VACS funding levels),with some adjustments to facilitate transition to the national model. • Commonwealth funding via the National Funding pool is based on NWAUs. • State funding is based on the difference between the agreed Health Service budgets and Commonwealth funding. • Departmental targets and shadow NWAU targets form the basis of Part C and Part D in Statements of Priorities. • As the national pricing system matures, Victoria may use the NEP to determine Health Service budget allocations.

9. Victorian implementation of the IHPA funding model in 2013-14

10. Victorian Implementation

11. Victorian Implementation • A potential shift to NWAU in 2013-14 for acute admitted services • A transition from WIES to NWAU for acute admitted services (only) is being contemplated. This decision must take into account: • Whether the IHPA chooses to adopt Victoria’s recommendations in respect of the funding model • Whether funding redistribution impacts are manageable • However another year of ‘shadowing’ may not fully prepare Health Services for 2014-15 • A decision may be some weeks off given outstanding uncertainty. • Enhanced accountability measures under new unit of measure will be adopted even if model is not fully implemented. Therefore, there is a need to implement necessary systems to work in a NWAU environment

12. Victorian Implementation • Transition to NWAU – What does this involve? • Expand level of understanding equally across all Health Services through continuation of Departmental initiatives: • Road shows • Website • Forums • Liaison points in department • NHFB reconciliation reports • Departmental funding model changes • Determine transitional funding measures • Develop updated version of WIES for comparison purposes and continuity • Develop required modifications to achieve alignment with state policy priorities

13. Preparation for a transition to NWAU • Health Services to implement systems changes • Expand capacity for efficient reconciliation reporting on a monthly basis • Updating local systems and applications to monitor activity and associated funding • Health Services continue to review internal processes to develop capacity to transition to the National Funding System (as per Policy & Funding Guidelines and SoP agreements).

14. The Commonwealth is reducing its payments to Victorian health services by: $39 million in 2011-12; $67 million in 2012-13; $475 million over five years 2011-12 to 2015-16. 2011-12 reduction based on Commonwealth assumption of 0.03% population growth in 2011. The ABS estimates actual population growth was 1.4% or an additional 75,400 Victorians. 2012-13 to 2015-16 reductions based on flow through of 2011-12 population figures and a change to the five year average of the health price index (to 2.27%) which is significantly lower than the trend (3.06%). A simple apportionment of the impact in 2012-13 would see approximately $3.8 million stripped from the Royal Children’s Hospital and $4 million from Northern Health. Commonwealth funding adjustments

15. Promises vs reality from the Commonwealth Back in 2011, the Commonwealth said the National Health Reform Agreement would provide certainty of funding to public hospitals. The Commonwealth and States were to share the risk of growing hospital funding and no State would be worse off. All this was in exchange for additional reporting by states and difficult new performance targets. Instead the latest Commonwealth announcements take away certainty by clawing back $107 million half way through the 2012-13 financial year. Health services will have to find these savings in their budgets which have already been allocated for the year. This will have an impact on delivery of services to the community. In the longer term, the Commonwealth is removing $475 million over five years from Victorian health services instead of providing additional funding to health services.