Hospital cost inflation: the influence of the annual budget

The prevailing assumption has been that decisions made by doctors and hospitals have caused massive inflation in hospital costs. Data of the five Western Australian teaching hospitals over the decade 1970/71 to 1980/81 suggests that it has been funding decisions by the State Government which have had the major effect on actual cost experience. Current funding arrangements appear to give Government very effective control, but create no incentives for hospital efficiency. If efficiency is to become the dominant strategy, alternative hospital funding mechanisms must be designed.